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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 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, Suite 700, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (ZIP Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value American Stock Exchange
Class A Stock, $1.00 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant (based on closing sales prices on March 2, 1995):
$468,343,000.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date (March 2, 1995): Common
Stock - 2,626,024 shares outstanding; Class A Stock - 11,314,700 shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1994 Annual Report to Stockholders are
incorporated by reference into Parts I and II of this report.
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on May 11, 1995 are incorporated by reference into
Part III of this report.
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PITTWAY CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
For The Year Ended December 31, 1994
PART I Page
Item 1 Business 3-7
Item 2 Properties 8-9
Item 3 Legal Proceedings 9-10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market For Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8 Financial Statements and Supplementary Data 11
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 11
PART III
Item 10 Directors and Executive Officers of the Registrant 11
Item 11 Executive Compensation 12
Item 12 Security Ownership of Certain Beneficial
Owners and Management 12
Item 13 Certain Relationships and Related Transactions 12
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 12
SIGNATURES 13
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PART I
Item 1. Business
(a) General Development of Business
Standard Shares, Inc. ("Standard") was incorporated under Delaware law
in 1925.
On December 28, 1989, Pittway Corporation ("Old Pittway"), a
Pennsylvania corporation incorporated in 1950, merged into Standard
through an exchange of stock and Standard changed its name to Pittway
Corporation ("Pittway" or "Registrant"). Prior to the merger Standard
owned 50.1% of Old Pittway. The merger was accounted for in a manner
similar to a pooling of interests, using historical book values.
Pittway and its subsidiaries are referred to herein collectively as the
"Company".
The Company operates in two reportable industry segments: alarm and
other security products, and publishing.
During the first half of 1994, the Company sold its 16.67% ownership
in First Alert, Inc., a manufacturer of residential fire protection
products, as part of an initial public offering of that company's
common stock. Financial information relating to this transaction is
set forth in Note 12 ("Fair Value of Financial Instruments") to the
Consolidated Financial Statements contained in the 1994 Annual Report
to Stockholders, page 35, which Note is incorporated herein by
reference.
In April 1993, the Company distributed its investment in the
AptarGroup, Inc. (formerly known as the Seaquist Division packaging
group) to stockholders in a tax-free spinoff. AptarGroup, Inc. is a
manufacturer of aerosol valves, dispensing pumps and closures which are
sold to packagers and marketers in the personal care,
fragrance/cosmetics, pharmaceutical, household products and food
industries. In October 1992, the Company sold its Barr Company, a
contract packager for marketers of aerosol and liquid fill (non-
aerosol) personal and household products, to a Canadian packaging
company. In July 1992, the Company sold its First Alert/BRK
Electronics business to a new company formed by BRK management and an
investment firm. Financial information relating to these transactions
is set forth in Note 1 ("Discontinued Operations") to the Consolidated
Financial Statements contained in the 1994 Annual Report to
Stockholders, page 31, which Note is incorporated herein by reference.
In 1991, the Company sold its expedited ground transportation service
business to its local management.
(b) Financial Information about Industry Segments
Financial information relating to industry segments for each of the
three years ended December 31, 1994 is set forth in Note 13 ("Segment
Information") to the Consolidated Financial Statements contained in the
1994 Annual Report to Stockholders, pages 35-36, which Note is incor-
porated herein by reference.
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(c) Narrative Description of Business
The principal operations, products and services rendered by the
Company:
Alarm and Other Security Products Segment
This segment involves the design, manufacture and sale of an extensive
line of burglar alarm, commercial fire detection and alarm components
and systems and the distribution of alarm and other security products
manufactured by other companies. By offering a broad line of alarm
products needed for security systems, the Company provides a full range
of services to independent alarm dealers and installers which range in
size from one-person operations to the largest national alarm service
companies. In every major domestic market area, quick delivery is
provided through the Company's computerized regional warehouses and
convenience center outlets, authorized distributors and dealers.
Various products sold through the alarm system distribution group are
purchased from non-affiliated suppliers and manufacturers to offer a
broad range of products. Some of the products purchased are resold
under the Company's Ademco brand name, others are resold under brand
names owned by its suppliers. In the Canadian and overseas markets,
alarm and other security products are sold through the Company's
distribution centers, authorized distributors and sales agents. The
Company also offers AlarmNet to alarm companies in major U.S. markets.
AlarmNet is a wireless cellular-like communication network designed to
transmit security alarm signals by radio instead of over telephone
lines.
Commercial fire detectors and fire controls are sold through the
Company's regional warehouses, electrical and building supply
wholesalers and alarm and fire safety distributors.
Raw materials essential to the Company's businesses are purchased
worldwide in the ordinary course of business from numerous suppliers.
The vast majority of these materials are generally available from more
than one supplier and no serious shortages or delays have been en-
countered. Certain raw materials used in producing some of the
Company's products can be obtained only from one or two suppliers, the
shortage of which could adversely impact production of alarm equipment
and commercial fire detectors by the Company. The Company believes
that the loss of any other single source of supply would not have a
material adverse effect on its overall business.
Through its NESCO subsidiary the Company offers a wide variety of
services to independent distributors of its fire alarm systems
products, including assistance with system design, bonding, technical
help, training, marketing and administrative support. The Company also
offers a brand name marketing program to independent burglar alarm
dealers.
Sales and marketing methods common to this industry segment include
communications through the circulation of catalogs and merchandising
bulletins, direct mail campaigns, and national and local advertising
in trade publications. The Company's principal advantages in marketing
are its reputation, broad product line, high quality products,
extensive integrated distribution network, efficient customer service,
competitive prices and brand names.
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Within the industry there is competition from large and small manufac-
turers in both the domestic and foreign markets. While competitors
will continue to introduce new products similar to those sold by the
Company, the Company believes that its research and development efforts
and the breadth and quality of its distribution network will permit it
to remain competitive.
Publishing Segment
This segment is a publisher of 43 national business and trade
publications with other businesses in the marketing-communications
field. The Company's publications serve both specific industries and
broad functional markets which include specialized manufacturing,
service industries, technical and professional fields and general
management. Most publications are distributed on a monthly basis with
several others distributed on a biweekly, annual or biennial frequency.
One magazine is subscription-based; the other publications are
generally distributed free through controlled circulation. The
principal source of revenue is from the sale of advertising space
within the magazines. Other facets of the business include: the
operation of a printing plant for the printing and production of most
of the Company's publications and those of other publishers; a national
mail-marketing and direct mail production organization; a majority-
owned subsidiary specializing in the design, development and conduct
of courses and conferences for managerial, professional and technical
personnel; research and telemarketing services; direct-response card
mailer service and special publications.
Within the publishing and marketing communications fields, competition
exists in the form of other publications and media communication
businesses. Reductions in advertising schedules by domestic industrial
companies due to economic and other competitive pressures directly
impacts the display advertising levels of the Company's publishing
segment. The Company competes with one or more other magazines for
advertising revenue in each of its magazine titles. The Company's
principal sales advantages include relevant editorial content and
innovative marketing complemented by specialized multi-magazine
supplements. The Company believes that its competitive position also
benefits from improvements in manufacturing productivity and from cost
control programs. The Company places great emphasis on providing
quality products and services to its customers.
Real Estate and Other Ventures
The Company is involved in the marketing and sale and development of
land near Tampa, Florida for residential and commercial use. Fairway
Village is an improved residential property being developed into single
family homes situated adjacent to a major resort. Saddlebrook Village,
a 2,000 acre parcel of land nearby, is approved for development as a
master planned community. Saddlebrook Corporate Center, a nearby 450
acre parcel, is a master planned business park for mixed use
development including light manufacturing, research and development,
distribution and warehousing, retail and other businesses. Principal
competition comes from other residential and commercial developments
in Florida.
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The Company has a limited partnership interest in a real estate
developer with major commercial and residential high rise properties
in Chicago, Dallas, Los Angeles and Boston. See Item 7 of this Form
10-K. The Company also has invested, as a 5% limited partner, in three
rental apartment complexes located in Chicago and Washington, D.C.
which provide certain tax advantages.
The Company also has a 45% interest in a leading manufacturer of
commercial data encryption, wireline, and spread spectrum wireless
products; a 5% equity interest in a satellite broadcast company which
began operations in mid-1994; and a 12% interest in a developer of
wireless signaling equipment for communication between fixed points.
Other Information
Patents and Trademarks -
While the Company owns or is licensed under a number of patents which
are cumulatively important to its business, the loss of any single
patent or group of patents would not have a material adverse effect on
the Company's overall business.
Products manufactured by the Company are sold primarily under its own
trademarks and tradenames. Some products purchased and resold by the
Company's alarm and security products business are sold under the
Company's tradenames while others are sold under tradenames owned by
its suppliers.
Customers -
Neither of the Company's industry segments is dependent upon a single
customer or a few customers. The loss of any one or more of these
customers would not have a material adverse effect on the Company's
results of operations.
Research and Development -
The Company is engaged in programs to develop and improve products as
well as develop new and improved manufacturing methods. Expenditures
for Company sponsored research and development activities in the alarm
and other security products segment were $11.8 million in 1994, $10.8
million in 1993 and $10.0 million in 1992. These costs were associated
with a number of products in varying stages of development, none of
which represents a significant item of cost or is projected to be a
significant addition to the Company's line of products.
Acquisitions and Dispositions -
Acquisitions of businesses by the Company in each of the three years
ended December 31, 1994 were not significant to the Company's sales or
results of operations. Dispositions by the Company, other than the
discontinued operations previously discussed in the "General
Development of Business" section, in each of the three years ended
December 31, 1994 were not significant to the Company's sales or
results of operations.
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Product Liability -
Due to the nature of the alarm security business, the Company has been,
and continues to be, subjected to numerous claims and lawsuits alleging
defects in its products. This exposure has been lessened by the sale
of First Alert/BRK Electronics. It is likely, due to the present
litigious atmosphere in the United States, that additional claims and
lawsuits will be filed in future years. The Company believes that it
maintains sufficient insurance to cover this exposure.
While it believes that resolution of existing claims and lawsuits will
not have a material adverse effect on the Company's financial
statements, management is unable to estimate the financial impact of
claims and lawsuits which may be filed in the future.
Environmental Matters -
The Company anticipates that compliance with various laws and regula-
tions relating to protection of the environment will not have a
material effect on its capital expenditures, earnings or competitive
position.
Employees -
At December 31, 1994, there were approximately 5,400 persons employed
by the Company, including 4,500 employed in the United States.
Approximately 1,100 of these employees were represented by labor
unions. The Company considers its relations with its employees and the
unions representing its employees to be good.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Financial information concerning foreign and domestic operations and
export sales is set forth in Note 13 ("Segment Information") to the
Consolidated Financial Statements contained in the 1994 Annual Report
to Stockholders, pages 35-36, which Note is incorporated herein by
reference.
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Item 2. Properties
The Company's principal properties and their general characteristics
are as follows:
Principal Lease Approximate
Location Use Expiration Square Feet
Alarm and Other Security
Products Segment-
Syosset, New York (1) N/A 360,000
Syosset, New York (3) 1997 14,000
Torrance, California (1) 1997 48,000
Northford, Connecticut (1) N/A 179,000
St. Charles, Illinois (1) 2003 158,000
St. Charles, Illinois (1) 2004 50,000
West Chicago, Illinois (1) 1998 21,000
San Antonio, Texas (3) 1995 14,000
Melbourne, Australia (2) 1995 5,000
Sydney, Australia (2) 1998 25,000
Montreal, Canada (2) 1995 8,000
Toronto, Canada (2) 1997 7,000
Brighton, England (1) 1997 24,000
Milan, Italy (1) N/A 14,000
Milan, Italy (2) 1998 8,000
Trieste, Italy (1) N/A 40,000
Juarez, Mexico (4) 1999 68,000
Madrid, Spain (2) 1998 8,000
Distribution Centers
Hub Locations:
Atlanta, Georgia (2) 1995 29,000
Boston, Massachusetts (2) 1999 14,000
Los Angeles, California (2) 1999 30,000
Chicago, Illinois (2) 2005 40,000
Clearwater, Florida (2) 2004 27,000
Dallas, Texas (2) 1996 24,000
Detroit, Michigan (2) 1995 10,000
Greensboro, North Carolina (2) 1995 7,000
Memphis, Tennessee (2) 2006 15,000
Fairfield, New Jersey (2) 1996 16,000
Pensauken, New Jersey (2) 1995 26,000
Richmond, Virginia (2) 2004 14,000
Louisville, Kentucky (2) 1999 60,000
Publishing Segment-
Cleveland, Ohio (3) 2000 179,000
Cleveland, Ohio (2) 1996 30,000
Berea, Ohio (5) N/A 100,000
New York, New York (3) 1996 10,000
Dunedin, Florida (3) 1995 8,000
Safety Harbor, Florida (1) 1995 19,000
Tampa, Florida (1) 1999 30,000
General Corporate-
Chicago, Illinois (3) 2001 12,000
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Other properties in the alarm and other security products segment
include 67 full-line convenience centers in addition to those hub
locations listed above which function as retail-like sales distribution
outlets to serve the North American market. These 67 centers are under
leases expiring through 2004 and range in size from 1,500 to 22,000
square feet. Other properties in the publishing segment include 12
sales and/or editorial offices under leases expiring through 2003
located in major cities throughout the United States. The Company
believes the above facilities are adequate for its present needs.
(1) Offices, Manufacturing and Warehousing
(2) Warehousing
(3) General Offices
(4) Manufacturing
(5) Printing
N/A Not applicable - facilities are owned by the Company
Item 3. 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
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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 denied plaintiffs' appeal. The other appeal
was voluntarily dismissed by the plaintiffs on June 17, 1994. On
remand to the trial court, Saddlebrook's motion for summary judgment,
on the ground that plaintiffs' claims were fully retried and rejected
in a related administrative proceeding was granted on December 7, 1994.
Plaintiffs have filed for a rehearing which was denied.
Until October 14, 1989, 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market For Registrant's Common Equity and Related Stock-
holder Matters
The information set forth under the heading "Market Prices, Security
Holders and Dividend Information" appearing on page 39 of the Company's
1994 Annual Report to Stockholders is incorporated herein by reference.
Item 6. Selected Financial Data
The information set forth under the heading "Supplemental Information -
Five Year Summary of Selected Financial Data" appearing on page 39 of
the Company's 1994 Annual Report to Stockholders is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information set forth under the heading "Management's Discussion
and Analysis of Consolidated Results of Operations and Financial
Condition" appearing on pages 40-41 of the Company's 1994 Annual Report
to Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Summary of
Accounting Policies and Notes thereto, together with the report thereon
of Price Waterhouse LLP dated February 22, 1995, appearing on pages 25-
38 of the Company's 1994 Annual Report to Stockholders are incorporated
herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
PART III
Information required to be furnished in this part of the Form 10-K has
been omitted because the Registrant will file with the Securities and
Exchange Commission a definitive proxy statement pursuant to Regulation
14A under the Securities Exchange Act of 1934 not later than April 30,
1995.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the headings "Nominees for Election by
the Holders of Class A Stock", "Nominees for Election by the Holders
of Common Stock", "Executive Officers" and "Section 16(a) Reports" in
the Registrant's Proxy Statement for the annual meeting of stockholders
to be held on May 11, 1995 is incorporated herein by reference.
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Item 11. Executive Compensation
The information set forth under the headings "Compensation Committee
Interlocks and Insider Participation", "Compensation", "Compensation
Committee Report on Executive Compensation" and "Performance Graph" in
the Registrant's Proxy Statement for the annual meeting of stockholders
to be held on May 11, 1995 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for the annual meeting of stockholders to be held on May 11,
1995 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the headings "Certain Transactions"
(and the information set forth under the heading "Compensation
Committee Interlocks and Insider Participation" which is cross-
referenced under the heading "Certain Transactions") in the
Registrant's Proxy Statement for the annual meeting of stockholders to
be held on May 11, 1995 is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(a) Financial statements and financial statement schedules
filed as a part of this report are listed in the Index to
Consolidated Financial Statements and Financial Statement
Schedules on pages 14-15 of this Form 10-K and are
incorporated herein by reference.
Exhibits required by Item 601 of Regulation S-K are listed
in the Index to Exhibits on pages 18-19 of this Form 10-K,
which is incorporated herein by reference. Each
management contract or compensatory plan or arrangement
required to be filed as an Exhibit to this report pursuant
to Item 14 (c) of Form 10-K is so identified on the Index
to Exhibits.
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
Date: March 24, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on March 24, 1995.
/s/ Neison Harris /s/ E. David Coolidge III
Neison Harris, Director and E. David Coolidge III, Director
Chairman of the Board
/s/ King Harris /s/ Anthony Downs
King Harris, Director, President Anthony Downs, Director
and Chief Executive Officer
/s/ Paul R. Gauvreau /s/ Leo A. Guthart
Paul R. Gauvreau, Principal Leo A. Guthart, Director
Financial and Accounting Officer
/s/ Eugene L. Barnett /s/ Irving B. Harris
Eugene L. Barnett, Director Irving B. Harris, Director
/s/ Sidney Barrows /s/ William W. Harris
Sidney Barrows, Director William W. Harris, Director
/s/ Fred Conforti /s/ Jerome Kahn, Jr.
Fred Conforti, Director Jerome Kahn, Jr., Director
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PITTWAY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report:
Page reference in
Annual Report to
Stockholders
Financial Statements required by Item 8
of this Form:
Consolidated Balance Sheet at
December 31, 1994 and 1993................ 26-27
For each of the three years ended
December 31, 1994 -
Consolidated Statement of Income........ 25
Consolidated Statement of Cash Flows.... 28
Consolidated Statement of
Stockholders' Equity.................. 29
Summary of Accounting Policies and Notes
to Consolidated Financial Statements...... 30-37
Report of Independent Accountants............. 38
Page reference in
Form 10-K
Financial Statement Schedule required by
Article 12 of Regulation S-X:
Report of Independent Accountants on
Financial Statement Schedule.............. 16
Consolidated Financial Statement Schedule -
VIII. Valuation and Qualifying Accounts.. 17
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PITTWAY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Continued -
The consolidated financial statements of Pittway Corporation, listed
in the above index together with the Report of Independent Accountants,
which are included in the Company's 1994 Annual Report to Stockholders,
are incorporated herein by reference.
All other schedules have been omitted because the required information
is not present, or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or notes thereto.
With the exception of the aforementioned information and information
incorporated by reference in Part I (in Item 1) and Part II (in Items
5, 6, 7 and 8) of this Form 10-K, the Company's 1994 Annual Report to
Stockholders is not deemed to be filed as part of this report.
The individual financial statements of the Company have been omitted
because Pittway Corporation is primarily an operating company and the
restricted net assets of subsidiaries together with the equity in
undistributed earnings of equity investees is less than 25 percent of
consolidated net assets. Summarized financial information for the
limited real estate partnerships and other ventures is omitted because,
when considered in the aggregate, they do not constitute a significant
subsidiary.
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Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Pittway Corporation
Our audits of the consolidated financial statements referred to
in our report dated February 22, 1995 appearing on page 38 of the 1994
Annual Report to Stockholders of Pittway Corporation (which report and
consolidated financial statements are incorporated by reference in this
Annual Report on Form 10-K) also included an audit of the Financial
Statement Schedule listed in the index on page 14 of this Form 10-K.
In our opinion, the Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
As discussed in Notes 4 and 7 to the consolidated financial
statements, in 1993 the Company changed its method of accounting for
income taxes and for postretirement benefits other than pensions.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
February 22, 1995
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<TABLE>
PITTWAY CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
<CAPTION>
Balance at Charges to Deductions Balance
beginning costs and from at end
of period expenses reserve (A) of period
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts $5,521 $3,167 $2,340 $6,348
Inventory obsolescence reserve 5,222 1,925 621 6,526
Valuation allowance-deferred income taxes 5,620 (941) 4,679
1993
Allowance for doubtful accounts $5,867 $2,938 $3,284 $5,521
Inventory obsolescence reserve 4,583 2,641 2,002 5,222
Valuation allowance-deferred income taxes 4,842(B) 778 5,620
1992
Allowance for doubtful accounts $6,948 $2,806 $3,887 $5,867
Inventory obsolescence reserve 5,557 1,657 2,631 4,583
<FN>
(A) Write-off of accounts considered uncollectible, net of recoveries, or write-off of
obsolete inventory. Also includes valuation accounts of acquired or divested
companies and foreign currency translation adjustments, net.
(B) Balance established January 1, 1993 with the adoption of Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes".
</TABLE>
17
<PAGE>
INDEX TO EXHIBITS
Sequential
Number and Description of Exhibit Page Number***
3.1 Restated Certificate of Incorporation of
Registrant (incorporated by reference to
Exhibit 3.1 of the Registrant's Annual Report
on Form 10-K for the year ended February 29, 1988).
3.2 Certificate of Amendment to Restated Certificate
of Incorporation of Registrant (incorporated by
reference to Exhibit 4.2 of the Registrant's
Form S-8 Registration Statement No. 33 - 33312
filed with the Commission on February 2, 1990).
3.3 Bylaws of Registrant (incorporated by reference to
Exhibit 4.3 of the Registrant's Form S-8
Registration Statement No. 33 - 33312 filed with
the Commission on February 2, 1990).
4. The Registrant hereby agrees to provide the
Commission, upon request, copies of such
instruments defining the rights of holders of
long-term debt of the Registrant and its
subsidiaries as are specified in
Item 601(b)(4)(iii) of Regulation S-K.
10.1 Amended and Restated Merger Agreement and Plan
of Reorganization (incorporated by reference
to Exhibit 2 of the Registrant's Form S-4
Registration Statement No. 33 - 31519 filed
with the Commission on October 11, 1989).
10.2 Pittway Corporation 1990 Stock Awards Plan,
as amended, (incorporated by reference to the
Registrant's Form S-8 Registration Statement
No. 33 - 54753 filed with the Commission
on July 27, 1994).
10.3 Agreement of employment dated as of July 1,
1990 with Sal F. Marino, as amended
(incorporated by reference to Exhibit 10.5
of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992.)**
10.4 Second Extension and Amendment of Agreement of
Employment with Sal F. Marino dated
December 31, 1993 (incorporated by reference
to Exhibit 10.4 of the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1993.)**
18
<PAGE>
INDEX TO EXHIBITS - cont'd.
Sequential
Number and Description of Exhibit Page Number***
10.5 Third Extension and Amendment of Agreement of
Employment with Sal F. Marino dated
December 31, 1994.**
10.6 Agreement of Employment dated July 2, 1973 with
Leo A. Guthart, as amended (incorporated by
reference to Exhibit 10(f) of the Registrant's
Form S-4 Registration Statement No. 33-31519
filed with the Commission on October 11, 1989).**
13. 1994 Annual Report to Stockholders.*
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedule (submitted only in
electronic format).
* Such report, except to the extent incorporated herein by reference,
is being furnished for the information of the Securities and
Exchange Commission only and is not to be deemed filed as a part
of this Form 10-K.
** This document is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report
pursuant to Item 14 (c) of Form 10-K.
*** This information appears only in the manually signed original of
this Form 10-K.
19
<PAGE>
EXHIBIT 10.5
PITTWAY CORPORATION
DECEMBER 31, 1994
FORM 10-K
THIRD EXTENSION AND AMENDMENT
Reference is made to the Agreement of Employment dated July 1, 1990, as
extended and amended by the Extensions and Amendments dated as of June 30,
1992 (the "1992 Agreement") and December 31, 1993 (the "1993 Agreement"), by
and between Penton Publishing, Inc. (the "Corporation") and Sal F. Marino
("Marino").
The 1993 Agreement provides that the "term of employment" thereunder
expires on December 31, 1994 unless extended by the Corporation and Marino.
The Corporation and Marino desire to extend such "term of employment",
and in connection therewith to make certain amendments to the 1993 Agreement.
Accordingly, the Corporation and Marino hereby agree as follows:
1. Paragraph 1 of the 1993 Agreement is amended in its entirety to
read as follows:
"1. This Agreement shall become effective at 12:01 a.m.,
EDT, on the date hereof and Marino's employment by the
Corporation shall continue until December 31, 1995 (or such later
date as the Corporation and Marino may agree upon in writing
during the term of employment (as defined below)), unless
earlier terminated by Marino's death or pursuant to Paragraph 6. The
period from the date hereof to and including the first to occur of
December 31, 1995 (or such later date), the date of Marino's
death, or the date of termination pursuant to Paragraph 6, is herein
referred to as the "term of employment"."
2. The first sentence of Paragraph 3 of the 1993 Agreement is amended
in its entirety to read as follows:
"The Corporation agrees to pay Marino a salary during the term
of employment, which shall be payable in equal monthly
installments at a rate not less than THREE HUNDRED THIRTY
THOUSAND DOLLARS ($330,000.00) per year.
IN WITNESS WHEREOF, the undersigned have executed this Third Extension
and Amendment as of December 31, 1994.
PENTON PUBLISHING, INC.
By: /s/ King Harris
As Its: Vice President
/s/ Sal F. Marino
Sal F. Marino
<PAGE>
EXHIBIT 13
PITTWAY CORPORATION
DECEMBER 31, 1994
FORM 10-K
<TABLE>
Pittway Corporation and Subsidiaries
Consolidated Statement of Income
For The Years Ended December 31, 1994, 1993 and 1992
(Dollars in Thousands, Except Per Share)
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Continuing Operations:
Net Sales........................... $778,026 $650,105 $568,301
Operating Expenses:
Cost of sales..................... 475,420 398,756 346,034
Selling, general and
administrative.................. 232,524 200,088 185,369
Depreciation and amortization..... 20,160 17,249 14,829
728,104 616,093 546,232
Operating Income.................... 49,922 34,012 22,069
Other Income (Expense):
Gain on sale of investment....... 19,506
Income from marketable
securities and other interest.. 3,955 2,855 2,585
Interest expense................. (3,250) (2,789) (3,344)
Income from investments.......... 2,506 2,573 1,831
Miscellaneous, net............... 1,206 (511) (1,288)
23,923 2,128 (216)
Income From Continuing Operations
Before Income Taxes............... 73,845 36,140 21,853
Income Taxes (Note 4):
Current.......................... 27,301 8,436 4,055
Deferred......................... 1,708 6,464 5,338
29,009 14,900 9,393
Income From Continuing Operations... 44,836 21,240 12,460
Income From Discontinued Operations
(Note 1):
Earnings from discontinued
operations, net of income taxes
of $3,560 and $11,578,
respectively..................... 6,940 18,380
Net gain on sale of
discontinued operations,
net of income taxes of
$9,779........................... 16,558
Cumulative effect of change in
accounting for income taxes...... 3,106
10,046 34,938
Income Before Cumulative Effect of
Changes in Accounting Principles.... 44,836 31,286 47,398
Cumulative Effect of Changes in
Accounting For Income Taxes and
Postretirement Benefits............. 1,535
Net Income............................ $ 44,836 $ 32,821 $ 47,398
Per Share of Common and Class A Stock
(Note 5):
Income from continuing operations... $ 3.22 $ 1.52 $ .90
Income from discontinued operations. .72 2.52
Cumulative effect of changes in
accounting principles............. .11
Net income.......................... $ 3.22 $ 2.35 $ 3.42
Average number of shares
outstanding (in thousands)(Note 5).. 13,941 13,941 13,851
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 25
<PAGE>
<TABLE>
Pittway Corporation and Subsidiaries
Consolidated Balance Sheet
December 31, 1994 and 1993
(Dollars in Thousands, Except Per Share)
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
Current Assets:
Cash and equivalents......................... $ 10,359 $ 1,908
Marketable securities........................ 34,313 31,407
Accounts and notes receivable, less
allowance for doubtful accounts of
$6,348 in 1994 and $5,521 in 1993.......... 137,747 115,947
Inventories (Note 3)......................... 124,801 100,065
Future income tax benefits (Note 4).......... 17,879 15,232
Prepayments, deposits and other.............. 11,805 7,974
336,904 272,533
Property, Plant and Equipment, at cost:
Buildings.................................... 24,769 25,530
Machinery and equipment...................... 157,061 132,168
181,830 157,698
Less: Accumulated depreciation.............. 94,426 81,375
87,404 76,323
Land......................................... 2,369 2,403
89,773 78,726
Investments:
Real estate and other ventures............... 56,261 51,153
Leveraged leases (Note 9) ................... 22,752 21,954
79,013 73,107
Other Assets:
Goodwill, less accumulated amortization
of $7,193 in 1994 and $6,159 in 1993....... 40,935 40,357
Other intangibles, less accumulated
amortization of $9,597 in 1994 and
$8,288 in 1993............................. 6,256 6,658
Notes receivable............................. 4,370 5,362
Miscellaneous................................ 6,036 5,234
57,597 57,611
$563,287 $481,977
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 26
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
<S> <C> <C>
Current Liabilities:
Notes payable (Note 8)......................... $ 46,232 $ 30,859
Long-term debt due within one year (Note 8).... 5,184 5,649
Dividends payable.............................. 1,758 1,757
Accounts payable............................... 58,246 44,489
Accrued expenses............................... 41,391 33,744
Income taxes payable........................... 10,093 4,911
Retirement and deferred compensation plans..... 1,148 605
Unearned income................................ 5,797 5,320
169,849 127,334
Long-Term Debt, less current maturities (Note 8):
Capitalized leases, principally at 5%, due in
monthly installments through 2000............ 2,519
Notes payable, 8.6%, due in annual
installments through 1995.................... 3,750
Other.......................................... 2,569 2,333
5,088 6,083
Deferred Liabilities:
Income taxes (Note 4).......................... 54,158 51,883
Other.......................................... 6,062 4,613
60,220 56,496
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares;
none issued..................................
Common capital stock, $1 par value (Note 5) -
Common stock, authorized 30,000,000 shares;
2,626,024 shares issued and outstanding..... 2,626 2,626
Class A stock, authorized 24,000,000 shares;
11,314,700 shares issued and outstanding.... 11,315 11,315
Capital in excess of par value................. 28,348 28,348
Retained earnings.............................. 291,756 253,628
Cumulative marketable securities valuation
adjustment................................... (3,050)
Cumulative foreign currency translation
adjustment................................... (2,865) (3,853)
328,130 292,064
$563,287 $481,977
</TABLE>
Page 27
<PAGE>
<TABLE>
Pittway Corporation and Subsidiaries
Consolidated Statement of Cash Flows
For The Years Ended December 31, 1994, 1993 and 1992
(Dollars in Thousands)
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash Flows From Continuing
Operating Activities:
Income from continuing operations........... $ 44,836 $ 21,240 $ 12,460
Adjustments to reconcile income from
continuing operations to net cash
provided by continuing operations:
Depreciation and amortization............. 20,160 17,249 14,829
Gain on sale of investment, net of taxes.. (11,776)
Deferred income taxes..................... 1,708 6,464 5,338
Retirement and deferred compensation
plans.................................... 2,010 1,231 (325)
Income/loss from investments
adjusted for cash
distributions received................... (931) 330 (1,678)
Provision for losses on accounts
receivable............................... 3,167 2,938 2,806
Change in assets and liabilities,
excluding effects from acquisitions,
dispositions and foreign currency
adjustments:
Increase in accounts and
notes receivable....................... (26,882) (23,340) (16,835)
Increase in inventories................. (23,669) (13,946) (3,639)
Increase (decrease) in accounts
payable and accrued expenses........... 19,919 (930) 4,762
Increase (decrease) in income taxes
payable................................ 7,137 7,284 (6,758)
Other changes, net...................... (1,759) 2,149 (4,508)
Net cash provided by continuing
operations................................. 33,920 20,669 6,452
Cash Flows From Investing Activities:
Capital expenditures........................ (28,246) (29,478) (17,187)
Proceeds from the sale of investment,
net of taxes of $9,730..................... 14,776
Proceeds from the sale of marketable
securities................................. 29,297 39,529
Purchases of marketable securities.......... (37,261) (37,914) (32,831)
Disposition of property and equipment....... 795 585 1,256
Additions to investments.................... (10,112) (12,317) (19,370)
Dispositions of publications................ 650 100
Collections of notes receivable............. 4,267 5,434 1,630
Net assets of businesses acquired,
net of cash................................ (5,921) (3,430) (4,208)
Net cash used by investing activities....... (31,755) (37,591) (70,610)
Cash Flows From Financing Activities:
Net increase (decrease) in notes payable.... 14,802 29,200 (7,477)
Proceeds of long-term debt.................. 3,585 1,996
Repayments of long-term debt................ (5,488) (5,405) (12,201)
Dividends paid.............................. (6,707) (5,722) (17,372)
Net cash provided (used) in financing
activities................................. 6,192 20,069 (37,050)
Effect of exchange rate changes on cash...... 94 (166) (447)
Cash Flows From Discontinued Operations:
Net proceeds from divestitures, net of
income taxes of $9,779..................... 81,580
Cash used by operating, investing
and financing activities................... (4,711) (2,007)
Net cash (used) provided by discontinued
operations................................. (4,711) 79,573
Net increase (decrease) in cash and
equivalents................................. 8,451 (1,730) (22,082)
Cash and equivalents at beginning of period.. 1,908 3,638 25,720
Cash and equivalents at end of period........ $ 10,359 $ 1,908 $ 3,638
Supplemental cash flow disclosure:
Interest paid............................... $ 3,388 $ 2,804 $ 3,752
Income taxes paid........................... 22,173 8,939 31,591
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 28
<PAGE>
<TABLE>
Pittway Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
For The Years Ended December 31, 1994, 1993 and 1992
(Dollars in Thousands, Except Per Share)
<CAPTION> Cumulative Cumulative
Marketable Foreign
Capital In Securities Currency
Common Stock Class A Stock Excess of Retained Valuation Translation
Shares Par Value Shares Par Value Par Value Earnings Adjustment Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1991........ 2,626,024 $2,626 11,199,939 $11,200 $24,868 $347,666 $13,218
Net income........................ 47,398
Cash dividends declared:
Common stock - $.60 per share.... (1,576)
Class A stock - $1.10 per share.. (12,350)
Shares issued pursuant to
performance awards............... 114,761 115 3,480
Currency translation adjustment... (17,144)
Balance - December 31, 1992........ 2,626,024 2,626 11,314,700 11,315 28,348 381,138 (3,926)
Net income........................ 32,821
Cash dividends declared:
Common stock - $.45 per share.... (1,183)
Class A stock - $.55 per share... (6,222)
Distribution of AptarGroup, Inc.
common stock to stockholders..... (152,926) (90)
Currency translation adjustment... 163
Balance - December 31, 1993........ 2,626,024 2,626 11,314,700 11,315 28,348 253,628 (3,853)
Cumulative effect of change in
accounting for marketable
securities....................... $ 141
Net income........................ 44,836
Cash dividends declared:
Common stock - $.40 per share.... (1,051)
Class A stock - $.50 per share... (5,657)
Marketable securities
valuation adjustment............. (3,191)
Currency translation adjustment... 988
Balance - December 31, 1994........ 2,626,024 $2,626 11,314,700 $11,315 $28,348 $291,756 $(3,050) $(2,865)
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 29
<PAGE>
Summary of Accounting Policies
(Dollars in Thousands)
Basis of Presentation
The consolidated financial statements include the accounts of Pittway
Corporation and its majority-owned subsidiaries (the "Company"). The Company
follows the equity method of accounting for its investments in greater than
20%-owned but less than majority-owned affiliates. All significant
intercompany accounts and transactions have been eliminated. Except where
otherwise indicated, the following notes relate to continuing operations
consisting principally of alarm systems businesses and trade publishing.
Certain prior year amounts in the consolidated statement of cash flows have
been reclassified to conform to the current year classification.
Cash Equivalents
Cash equivalents are generally comprised of highly liquid instruments
with original maturities of three months or less, such as treasury bills,
certificates of deposit, commercial paper and time deposits.
Marketable Securities
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
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.
Inventories
Inventories are stated at cost, which is lower than market. Costs
included in inventories are raw materials, direct labor and manufacturing
overhead. Cost of substantially all domestic inventories is determined by
using the last-in, first-out (LIFO) method, while the remaining inventories
are valued primarily using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated
over the estimated useful lives of the assets using the straight-line method
for financial reporting purposes. Depreciation expense amounted to $17,492,
$14,664 and $12,526 in 1994, 1993 and 1992, respectively.
Investments
Real estate and other ventures - These investments consist principally
of equity interests in limited real estate partnerships, land held for
development, an affiliate that manufactures encryption and data communication
devices, a residential security products company sold in 1994 and a satellite
broadcast company. The Company's adjusted basis in certain of the limited
real estate partnerships is carried at zero, the affiliate is carried at
equity and investments in other partnerships and ventures are carried on a
cost basis. Cash distributions received from these partnerships and
ventures, other than the affiliate, were recorded as income from investments.
Leveraged leases - The Company's investment in leveraged leases consists
of the rentals receivable net of the principal and interest on the related
nonrecourse debt, estimated residual value of the leased property and
unearned income. The unearned income is recognized as income from
investments over the lease term.
Intangible Assets
Management believes that goodwill, trademarks and tradenames acquired in
purchase transactions have continuing value. It is the Company's policy to
amortize such costs over periods of up to 40 years except for the costs of
such assets acquired prior to 1970. Intangible assets of approximately
$3,356 related to pre-1970 acquisitions are not being amortized because the
Company believes there has been no diminution of value.
Other intangibles acquired in purchase transactions or developed,
consisting of non-compete agreements, customer mailing lists, patents and
software development costs, are capitalized and amortized over their
estimated useful lives.
Research and Development Expenses
Research and development costs are expensed as incurred. These costs
amounted to $11,849, $10,814 and $10,040 in 1994, 1993 and 1992,
respectively.
Advertising Expenses
Advertising costs are expensed as incurred. These costs amounted to
$15,440, $13,707 and $13,807 in 1994, 1993 and 1992, respectively.
Income Taxes
Provisions for income taxes recognize the tax effects of all
transactions entering into the determination of net income for financial
statement purposes, irrespective of when such transactions are reported for
income tax purposes. In general, depreciation is computed on a straight-line
method for financial reporting purposes and on accelerated methods for income
tax purposes. Deferred income taxes and future income tax benefits have been
recognized for all temporary differences.
Page 30
<PAGE>
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," which requires the use of the liability method of
accounting for deferred income taxes (see Note 4).
Product Liability and Workers Compensation Claims
Provisions are made for estimated losses from product liability and
workers compensation claims which are not covered by insurance.
Translation of Foreign Currencies
The functional currency of the Company's foreign operations is the local
currency. Accordingly, assets and liabilities of foreign operations are
translated to U.S. dollars at the rates of exchange on the balance sheet
date; income and expense are translated at the average rates of exchange
prevailing during the year. Translation adjustments are accumulated in a
separate section of stockholders' equity. Transaction gains and losses are
reflected in miscellaneous income and amounted to income (expense) of $373,
$(523) and $(1,020) in 1994, 1993 and 1992, respectively.
__________________________________________________________________________
Notes To Consolidated Financial Statements
(Dollars in Thousands, Except Per Share)
Note 1 - Discontinued Operations
The Company distributed its investment, carried at $153,016, in the
Seaquist packaging group (now known as AptarGroup, Inc.) to stockholders in
a tax-free spinoff on April 22, 1993.
In July 1992, the Company sold its First Alert/BRK Electronics business
to a new company formed by BRK management and an investment firm. The sale
price was $87,154 plus a 16 2/3% ownership interest (sold in 1994) in the new
company valued at $5 million. In October 1992, the Company sold its Barr
packaging division operations, excluding real estate, for $4,205 cash and a
$3,200 two-year note. The net after-tax gain on the 1992 divestitures
amounted to $16,558, or $1.20 per share.
Net sales of the discontinued operations prior to their respective
dispositions were $117,473 and $451,092 in 1993 and 1992, respectively.
Note 2 - Acquisitions and Dispositions
During 1994, the Company acquired the assets and businesses of a direct
mail production company, a designer of wide area network building control
monitoring systems, a manufacturer of glass break sensors and a designer of
closed-circuit television, access control and alarm systems. The total
purchase price for these businesses was $5,921 cash. The Company also sold
a publication for $650 cash.
During 1993, the Company acquired the assets and business of a domestic
access control manufacturer and two publications for $3,430 cash.
During 1992, the Company acquired the assets and business of a domestic
manufacturer of lighting control equipment and two publications for $4,208
cash. The Company sold a publication for $100 cash and a $400 note.
All the aforementioned acquisitions were accounted for as purchase
transactions. The impact of these acquisitions on consolidated results of
operations was not significant. These companies have been included in the
consolidated financial statements from their respective dates of acquisition
or to the dates of disposition.
Note 3 - Inventories
At December 31, 1994 and 1993 approximately 87% and 86%, respectively,
of the total inventories are accounted for by the LIFO method. At year end,
inventories consist of:
1994 1993
Raw materials........................ $ 32,520 $ 23,313
Work-in-process...................... 11,653 9,311
Finished goods -
Manufactured by the Company........ 43,096 33,912
Manufactured by others............. 37,794 34,087
Total........................... 125,063 100,623
Less LIFO reserve.................... (262) (558)
$124,801 $100,065
The LIFO reserve represents the excess of FIFO cost, which approximates
current cost, over the LIFO value of inventory.
Note 4 - Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes". The cumulative effect of the change as of January 1, 1993
was a benefit of $1,965 ($.14 per share) for continuing operations and $3,106
($.22 per share) for discontinued operations. As a result of the 1993
increase in the U.S. federal income tax rate from 34% to 35%, the effect in
1993 was to increase the federal income tax provision by $1,202 consisting of
$400 ($.03 per share) related to 1993 income and $802 ($.06 per share) to
increase prior accumulated deferred taxes.
Page 31
<PAGE>
Income from continuing operations before income taxes consists of:
1994 1993 1992
Domestic income..................... $73,204 $39,985 $23,969
Foreign income (loss)............... 641 (3,845) (2,116)
$73,845 $36,140 $21,853
The provision for income taxes consists of:
1994 1993 1992
Current -
Federal........................ $22,819 $ 5,819 $ 2,383
State and local................ 3,660 2,000 1,335
Foreign........................ 822 617 337
27,301 8,436 4,055
Deferred -
Federal........................ 1,576 7,131 5,284
Foreign........................ 132 (667) 54
1,708 6,464 5,338
$29,009 $14,900 $ 9,393
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate of 35%
in 1994 and 1993 and 34% in 1992 to income from continuing operations before
income taxes is as follows:
1994 1993 1992
Income tax at statutory rate....... $25,846 $12,649 $ 7,430
Tax effect of -
State income taxes, net of
federal benefit................. 2,379 1,300 879
U.S. income tax rate increase on
cumulative timing differences... 802
Foreign operations............... 730 1,296 1,112
Reserves no longer required...... (800)
Other items, net................. 54 (347) (28)
Actual income tax provision........ $29,009 $14,900 $ 9,393
Effective income tax rate.......... 39.3% 41.2% 43.0%
During 1992 deferred income taxes (benefits) provided for temporary
differences in the recognition of revenue and expense for tax and financial
statement purposes consisted principally of the following: purchased tax
benefit leases - $(2,556); real estate ventures - $3,775; leveraged leases -
$1,900; retirement and deferred compensation plans - $1,130; inventory
valuation - $495; and bad debts - $233.
The components of the deferred tax liabilities (assets) at December 31,
1994 and 1993 are comprised of the following:
1994 1993
Leveraged leases......................... $ 20,290 $ 16,689
Real estate ventures -
Affordable housing.................... 6,809 5,309
Other................................. 17,029 15,210
Purchased tax benefit leases............. 5,023 5,952
Depreciation............................. 1,831 2,293
State income taxes, net of
federal benefit........................ 6,007 5,354
Other ................................... 2,963 1,076
Total deferred tax liabilities........... 59,952 51,883
Inventory valuation...................... (6,254) (5,503)
Tax loss carryforwards................... (4,679) (5,620)
State income taxes, net of
federal benefit........................ (2,519) (2,420)
Bad debts................................ (2,041) (2,044)
Workers compensation..................... (2,575) (1,191)
Marketable securities valuation.......... (2,033)
Other ................................... (8,251) (4,074)
Total deferred tax assets................ (28,352) (20,852)
Valuation allowance...................... 4,679 5,620
Net deferred tax liability............... $36,279 $36,651
The valuation allowance relates to tax loss carryforwards of which $1,224 as
of December 31, 1994 will be credited to goodwill when and if utilized.
The Company's federal income tax returns have been examined through 1990
without material adjustment of reported income.
Note 5 - Capital Stock and Earnings per Share
Except for voting and dividend rights, the two classes of common capital
stock are identical. Class A stockholders are entitled to one-tenth vote per
share and have the right to elect 25% of all directors, but not less than
two. Common stockholders are entitled to one vote per share and have the
right to elect the remaining number of directors. Upon a change of control
of the Company (as defined in the Company's certificate of incorporation),
the Class A stock will automatically be changed into Common stock.
Cash dividends declared on Class A stock are required to be 2.5 cents
per share more than dividends declared on Common stock (up to a maximum of 10
cents per share per year). The 2.5 cents premium was increased to 12.5 cents
for each dividend declared in the ten quarters beginning with the third
quarter of 1990 and ending with the fourth quarter of 1992. As provided in a
1989 corporate charter amendment creating the Class A stock, the increase in
Class A dividends was required due to the relative market prices of Common
and Class A stock during the three months ended June 28, 1990. Beginning
with dividends declared in the second quarter of 1993, the quarterly
dividends on Common stock and Class A stock were reduced by $.05 as a result
of the spinoff of AptarGroup, Inc. on April 22, 1993.
Page 32
<PAGE>
Net income per share of common capital stock is based on the combined
weighted average number of Class A and Common shares outstanding which does
not include shares issuable upon exercise of outstanding non-qualified stock
options or shares distributable as performance share awards because the
dilutive effect is not significant.
Note 6 - Stock Options and Awards
The Company's 1990 stock awards plan (as amended in 1994) provides for
the issuance of up to 1,000,000 shares of Class A stock to employees pursuant
to options, performance share rights and other awards. Certain awards are
payable in the form of Class A stock or cash. Performance share rights and
non-qualified options vest ratably over terms of three years and five years
and are exercisable up to ten years from date of grant. During 1993 the
Compensation Committee amended the options then outstanding to reflect the
valuation of AptarGroup, Inc. spunoff in April 1993 by increasing the options
granted by 10,500 shares. During 1992, the Company vested and issued shares
or paid in cash all performance share rights then outstanding.
Activity in options and performance share rights for Class A stock is
summarized as follows (prices shown are per share):
1994 1993
Outstanding at beginning of year............ 149,543 10,000
Rights granted ($30.13)..................... 17,595
Options granted ($34.50 and $25.63)......... 90,184 121,948
Outstanding at end of year ($9.48 to
$34.50 and $9.48 to $30.13).............. 239,727 149,543
Exercisable at end of year.................. 0 0
Available for grant......................... 635,731 225,915
In addition, the Company has granted other awards which provide
additional deferred compensation based on the fair market value or the
increase in fair market value of the Company's Class A stock. The cost of
these compensation agreements is provided currently as it relates to prior
service and ratably over the employees' future employment as it applies to
future service. Awards of performance share rights are expensed as
compensation at the date of grant. Expense under all of these arrangements
amounted to $1,065, $1,180, and $2,098 in 1994, 1993 and 1992, respectively.
Note 7 - Retirement Plans
The Company has various noncontributory retirement plans covering
substantially all current and certain former domestic employees. Retirement
benefits for employees in foreign countries are generally provided by
national statutory programs. Benefits for domestic employees are based on
years of service and annual compensation as defined by each plan. The
Company's policy is to fund pension costs accrued.
The components of net pension cost (income) for the plans consist of:
1994 1993 1992
Service cost - benefits earned
during the year................... $ 3,618 $ 3,154 $ 3,181
Interest cost on projected benefit
obligation........................ 3,851 3,410 3,181
Actual return on plan assets........ 4,840 (12,563) (11,745)
Net amortization and deferred gains
and losses........................ (13,071) 5,165 5,567
Net pension (income) cost........... $ (762) $ (834) $ 184
In 1994 the Company increased accrued benefits for active non-union
employees for service prior to December 31, 1993 by 20%. The benefit
improvement increased the projected benefit obligation by $3,342 and reduced
the net pension income for the year by approximately $760.
In 1992 the Company recognized a curtailment gain of $1,845 resulting
from a net decrease in projected benefit obligations (less unrecognized prior
service costs) of employees of the divisions sold. This gain is included in
the net gain on disposal of discontinued operations.
The reconciliation of the funded status of the plans at year end
follows:
1994 1993
Actuarial present value of benefit
obligations -
Vested benefit obligation......... $(48,332) $(39,426)
Nonvested benefit obligation...... (1,321) (952)
Accumulated benefit obligation.. (49,653) (40,378)
Excess of projected benefit
obligation over accumulated
benefit obligation................ (9,873) (11,724)
Projected benefit obligation........ (59,526) (52,102)
Plan assets at fair value........... 78,885 86,734
Plan assets in excess of
projected benefit obligation...... 19,359 34,632
Unrecognized net gain............... (10,101) (21,969)
Unrecognized prior service cost..... 4,625 1,921
Unamortized transition net asset.... (8,790) (10,254)
Prepaid pension cost included
in the consolidated balance sheet. $ 5,093 $ 4,330
Page 33
<PAGE>
Plan assets consist primarily of U.S. government obligations, investment
grade corporate bonds and common and preferred stocks. The projected benefit
obligation was determined using an assumed discount rate of 7% and an assumed
rate of increase in compensation of 5% for both years. The expected long-
term rate of return on plan assets was 7% for both years.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions", which requires
the accrual of the expected cost of retiree medical and life insurance
benefits over the period the employee provides services to the Company.
Prior to the change, costs were charged to expense as incurred. The
cumulative effect reported in the 1993 consolidated statement of income is an
after-tax charge of $430, or $(.03) per share. The annual expense for these
postretirement benefits was not significant in 1994, 1993 or 1992.
Note 8 - Debt
The average annual interest rate on short-term notes payable was
approximately 6.1% (5.8% domestic and 10.1% foreign) and 4.3% (3.6% domestic
and 11.8% foreign) at December 31, 1994 and 1993, respectively. There are no
compensating balance or commitment fee requirements associated with these
short-term borrowings. Under the terms of the 8.6% notes payable due in
1995, retained earnings available for dividends amounted to $100,420 at
December 31, 1994. The Company has guaranteed indebtedness of $1,250
relating to real estate ventures in which it participates.
Aggregate long-term maturities due annually for the five years beginning
in 1995 are $5,184, $916, $881, $1,825, $763 and $703 thereafter.
Note 9 - Leveraged Leases
The Company is an equity participant in leveraged leases of aircraft and
communication satellite transponders. As the Company has no general
liability for the nonrecourse debt attributable to the acquisition of such
assets, the debt has been offset against the related rentals receivable. The
net investment in leveraged leases consists of:
1994 1993
Rentals receivable (net of principal
and interest on nonrecourse debt). $14,500 $15,069
Estimated residual value............ 13,205 13,641
Unearned and deferred income........ (4,953) (6,756)
Investment in leveraged leases...... 22,752 21,954
Deferred income taxes............... (20,290) (16,689)
Net investment...................... $ 2,462 $ 5,265
A summary of the components of income from leveraged leases follows:
1994 1993 1992
Income before income taxes.......... $ 1,142 $ 1,706 $ 1,414
Current income tax benefit.......... 3,201 3,711 1,700
Deferred income taxes............... (3,601) (4,183) (1,900)
Income from leveraged leases........ $ 742 $ 1,234 $ 1,214
Minimum annual rent receivable (net of principal and interest on
nonrecourse debt) under leveraged leases for the next five years beginning
with 1995 are $1,148, $469, $982, $2,065, $1,751 and an aggregate of $8,085
thereafter.
Note 10 - Lease Commitments
The Company leases certain manufacturing facilities, warehouses, office
space and equipment under noncancelable operating leases expiring at various
dates through the year 2005. Most of the leases contain renewal options and
certain equipment leases include options to purchase during or at the end of
the lease term. Minimum annual rental commitments under all noncancelable
leases for the next five years beginning with 1995 are $13,230, $12,039,
$10,652, $9,457, $8,485 and an aggregate of $12,325 thereafter. Rental
commitments are stated net of minimum sublease rentals aggregating $4,739.
Total rent expense (including taxes, insurance and maintenance when included
in the rent) amounted to $16,426, $15,484 and $14,365 in 1994, 1993 and 1992,
respectively.
Note 11 - Contingencies and Commitments
In 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 1990 the trial court
entered an order vacating the judgment and awarding a new trial. On remand
to the trial court, Saddlebrook's motion for summary judgment, on the ground
that plaintiffs' claims were fully retried and rejected in a related
administrative proceeding, was granted in December 1994. Plaintiffs have
filed for a rehearing which was denied. The Company believes that the
ultimate outcome of the aforementioned lawsuit will not have a material
adverse effect on its financial statements.
The Company has committed to invest up to a total of $7.5 million for
certain ventures through 1997.
Page 34
<PAGE>
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. While management
believes that resolution of existing claims and lawsuits will not have a
material adverse effect on the Company's financial statements, management is
unable to estimate the magnitude of financial impact of claims and lawsuits
which may be filed in the future.
Note 12 - Fair Value of Financial Instruments
The carrying amount of cash and equivalents, accounts receivable,
accounts payable, accrued expenses and notes payable approximates fair value
because of the short maturity of these instruments. The following table
presents the carrying amounts and estimated fair values of the Company's
other financial instruments at year end:
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets -
Marketable securities.......... $ 34,313 $ 34,313 $ 31,407 $ 31,642
Investment in First Alert stock 5,000 15,000
Other investments.............. 31,525 36,525 21,708 29,000
Notes receivable............... 5,047 5,569 9,321 11,021
Financial liabilities -
Long-term debt................. (10,272) (10,071) (11,732) (12,032)
The estimated fair values of marketable securities (all available-for-
sale) are based on quoted market prices. At December 31, 1994, marketable
securities consisted of adjustable rate preferred stocks, which had gross
unrealized holding losses of $5,083. At December 31, 1993, marketable
securities consisted of adjustable rate preferred stocks, which had gross
unrealized holding gains of $233 and gross unrealized holding losses of $70,
and of municipal bonds, which had gross unrealized gains of $72. Realized
gains and losses on sales of marketable securities are based upon the
specific identification method. Such gains totaled $330 and $398 in 1994 and
1993, respectively, and losses totaled $305 and $207 in 1994 and 1993,
respectively.
In 1994 the Company sold its 16.67% ownership in First Alert, Inc. as
part of an initial public offering of First Alert, Inc. common stock. The
sale resulted in a pretax gain of $19,506.
The estimated fair values of the notes receivable and long-term debt
were calculated based upon the present value of estimated cash flows using
appropriate discount rates. The estimated fair values of the Company's
investments which are considered financial instruments (investments in
affordable housing projects, a satellite broadcasting company and, in 1993,
First Alert, Inc., a residential security products company) were based upon
available financial and other information. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts and the estimates presented above may not
necessarily be indicative of the amounts that the Company could realize in a
current market exchange.
Note 13 - Segment Information
The Company operates principally in two industry segments.
The Alarm and Other Security Products segment involves the design,
manufacture and sale of an extensive line of burglar alarm and commercial
fire detection and alarm components and systems and the distribution of alarm
and other security products manufactured by other companies.
The Publishing segment is engaged in the publication of national
business magazines with other businesses in the marketing-communications
field.
Sales within and between segments and geographic areas are made at
approximate arm's-length prices. Operating income consists of sales less
operating expenses. Sales and expenses which were not related to or
identifiable with specific segments are included in General Corporate and
Other. Identifiable assets are those assets that are specifically identified
with the industry segments and geographic areas in which operations are
conducted. Eliminations include sales between segments and geographic areas
and related intercompany accounts. Export sales were not material and no
single customer accounted for ten percent of sales.
Page 35
<PAGE>
<TABLE>
<CAPTION>
Depreciation
Operating Identifiable Capital and
Industry Segments Net Sales Income Assets * Expenditures Amortization
<S> <C> <C> <C> <C> <C>
1994
Alarm and Other Security Products... $600,643 $ 45,173 $336,730 $ 20,381 $ 13,993
Publishing.......................... 176,729 11,002 87,007 7,755 5,656
General Corporate and Other......... 654 (6,253) 139,550 110 511
Consolidated........................ $778,026 $ 49,922 $563,287 $ 28,246 $ 20,160
1993
Alarm and Other Security Products... $482,787 $ 33,416 $268,151 $ 23,117 $ 11,464
Publishing.......................... 164,627 7,206 78,733 6,265 5,185
General Corporate and Other......... 2,691 (6,610) 135,093 96 600
Consolidated........................ $650,105 $ 34,012 $481,977 $ 29,478 $ 17,249
1992
Alarm and Other Security Products... $401,250 $ 23,644 $225,394 $ 12,366 $ 9,714
Publishing.......................... 163,063 6,844 76,665 4,777 4,468
General Corporate and Other......... 3,988 (8,419) 134,299 44 647
Consolidated........................ $568,301 $ 22,069 $436,358 $ 17,187 $ 14,829
Geographic Areas
1994
Domestic Operations................. $721,956 $ 48,206 $503,853
European Operations................. 48,063 119 49,580
Other Foreign Operations............ 31,238 882 10,279
Eliminations........................ (23,231) 715 (425)
Consolidated........................ $778,026 $ 49,922 $563,287
1993
Domestic Operations................. $606,199 $ 35,919 $446,244
European Operations................. 38,024 (1,094) 34,598
Other Foreign Operations............ 27,243 9 10,618
Eliminations........................ (21,361) (822) (9,483)
Consolidated........................ $650,105 $ 34,012 $481,977
1992
Domestic Operations................. $524,922 $ 23,137 $400,543
European Operations................. 37,495 (646) 31,933
Other Foreign Operations............ 24,189 (513) 10,199
Eliminations........................ (18,305) 91 (6,317)
Consolidated........................ $568,301 $ 22,069 $436,358
<FN>
* Excludes investment in discontinued operations of $137,648 in 1992.
</TABLE>
Page 36
<PAGE>
Note 14 - Quarterly Results (Unaudited)
Quarterly results of operations for the years ended December 31, 1994
and 1993 are shown below:
1994 Quarters Total
First Second Third Fourth For Year
Net Sales............... $176,543 $189,220 $202,026 $210,237 $778,026
Gross Profit............ 66,468 68,503 72,314 75,161 282,446
Income from Continuing
Operations Before Gain
on Sale of Investment. 7,707 7,882 8,296 9,175 33,060
Gain on Sale of
Investment............ 10,249 1,527 11,776
Net Income.............. 17,956 9,409 8,296 9,175 44,836
Per Share
Income from Continuing
Operations Before Gain
on Sale of Investment. .55 .56 .60 .66 2.37
Gain on Sale of
Investment............ .74 .11 .85
Net Income.............. 1.29 .67 .60 .66 3.22
1993 Quarters Total
First Second Third Fourth For Year
Net Sales............... $151,777 $158,414 $165,296 $174,618 $650,105
Gross Profit............ 55,356 56,583 58,309 63,852 234,100
Income from Continuing
Operations ........... 5,169 4,477 5,159 6,435 21,240
Income (Loss) from
Discontinued
Operations............ 9,459(a) 1,267 (680)(b) 10,046
Cumulative Effect of
Accounting Changes.... 1,535 1,535
Net Income.............. 16,163 5,744 5,159 5,755 32,821
Per Share
Income from Continuing
Operations............ .37 .32 .37 .46 1.52
Income (Loss) from
Discontinued
Operations............ .68(a) .09 (.05)(b) .72
Cumulative Effect of
Accounting Changes.... .11 .11
Net Income.............. 1.16 .41 .37 .41 2.35
(a) Includes a $3,106 benefit ($.22 per share) for a change in accounting
for income taxes.
(b) Represents additional estimated settlement costs of outstanding claims.
Page 37
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Pittway Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of cash flows and of stockholders'
equity present fairly, in all material respects, the financial position of
Pittway Corporation and its subsidiaries at December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Pittway Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 4 and 7 to the consolidated financial statements,
in 1993 the Company changed its method of accounting for income taxes and for
postretirement benefits other than pensions.
/s/ Price Waterhouse LLP
Chicago, Illinois
February 22, 1995
Management's Responsibility for Financial Statements
The financial statements of Pittway Corporation and its consolidated
subsidiaries, and all other information presented in this Annual Report, are
the responsibility of the management of the Company. These statements have
been prepared in accordance with generally accepted accounting principles and
reflect in all material respects the substance of events and transactions
that should be included.
Management is responsible for the accuracy and objectivity of the
financial statements, including estimates and judgments reflected therein,
and fulfills this responsibility primarily by establishing and maintaining
accounting systems and practices adequately supported by internal accounting
controls. Management believes that the internal accounting controls in use
are satisfactory to provide reasonable assurance that the Company's assets
are safeguarded, that transactions are executed in accordance with
management's authorizations, and that the financial records are reliable for
the purpose of preparing financial statements.
Independent accountants were selected by the Board of Directors, upon
the recommendation of the Audit Committee, to audit the financial statements
in accordance with generally accepted auditing standards. Their audits, as
well as those of the Company's internal audit department, include a review of
internal accounting control policies and procedures and selective tests of
transactions.
The Audit Committee of the Board of Directors, which consists of three
directors who are not officers or employees of the Company, meets regularly
with management, the internal auditors and the independent accountants to
review matters relating to financial reporting, internal accounting controls,
and auditing. The independent accountants have unrestricted access to the
Audit Committee.
/s/ King Harris /s/ Paul R. Gauvreau
President and Chief Executive Officer Financial Vice President and Treasurer
Page 38
<PAGE>
<TABLE>
Supplemental Information
(Dollars in Thousands, Except Per Share Data)
Five Year Summary of Selected Financial Data
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales of Continuing Operations... $778,026 $650,105 $568,301 $516,343 $505,243
Operating Income from Continuing
Operations......................... 49,922 34,012 22,069 11,621 16,192
Income from Continuing Operations.... 44,836(a) 21,240 12,460 4,371 10,596
Income from Discontinued Operations.. 10,046 34,938(b) 21,145 13,467
Cumulative Effect of Changes in
Accounting Principles.............. 1,535
Net Income........................... 44,836(a) 32,821 47,398(b) 25,516 24,063
Per Share:
Income from Continuing Operations.. 3.22(a) 1.52 .90 .32 .77
Income from Discontinued Operations .72 2.52(b) 1.53 .97
Cumulative Effect of Changes in
Accounting Principles............ .11
Net Income......................... 3.22(a) 2.35 3.42(b) 1.85 1.74
Cash Dividends Declared Per Share:
Common............................. .40 .45 .60 .60 .60
Class A............................ .50 .55 1.10 1.10 .90
Capital Expenditures................. 28,246 29,478 17,187 13,872 14,813
Depreciation and Amortization........ 20,160 17,249 14,829 13,783 13,567
At Year End
Assets of Continuing Operations...... 563,287 481,977 436,358 371,375 346,121
Investment in Discontinued Operations 137,648 198,433 199,832
Total Assets......................... 563,287 481,977 574,006 569,808 545,955
Long-Term Debt....................... 5,088 6,083 9,601 21,584 27,149
Stockholders' Equity(c).............. 328,130 292,064 419,501 399,578 388,277
Per Share(c)....................... 23.54 20.95 30.09 28.90 28.13
Market Price Per Share (c):
Common............................. 39.00 34.00 38.00 33.13 23.00
Class A............................ 40.25 32.25 34.50 29.38 17.38
<FN>
(a) Includes net gain on sale of First Alert stock of $11,776, or $.85 per share.
(b) Includes net gain on disposal of discontinued operations of $16,558, or $1.20 per share.
(c) Stockholders' equity and market prices at December 31, 1994 and 1993 reflect the spinoff of AptarGroup, Inc. in April 1993.
</TABLE>
<PAGE>
Market Prices, Security Holders and Dividend Information
The Company's Common (ticker symbol PRY) and Class A (ticker symbol PRYA)
stock are traded on the American Stock Exchange. As of December 31, 1994,
stockholders of record totaled approximately 600 for Common and 1,200 for Class
A.
The following table sets forth, on a quarterly basis, the high and low
prices for the Common and Class A stock on the American Stock Exchange, along
with the cash dividends declared.
<TABLE>
<CAPTION>
Common Class A Dividends Declared
High Low High Low Common Class A
<S> <C> <C> <C> <C> <C> <C>
1994
Quarter:
First........ $39 $31 1/2 $34 3/4 $31 3/8 $ .10 $.125
Second....... 40 3/4 34 38 1/8 33 1/2 .10 .125
Third........ 39 1/2 35 1/4 38 3/8 33 3/4 .10 .125
Fourth....... 40 36 1/2 40 5/8 35 5/8 .10 .125
</TABLE>
<TABLE>
<CAPTION>
Common Class A Dividends Declared(a)
High Low High Low Common Class A
<S> <C> <C> <C> <C> <C> <C>
1993
Quarter:
First........ $44 $37 7/8 $39 1/8 $33 7/8 $ .15 $.175
Second....... 43 1/4 18 1/2 38 1/2 17 7/8 .10 .125
Third........ 28 1/2 24 26 5/8 21 7/8 .10 .125
Fourth....... 34 25 32 3/8 24 3/8 .10 .125
<FN>
(a) Dividends were reduced in the second quarter of 1993 as a result of the
spinoff of AptarGroup, Inc. in April 1993.
</TABLE>
Page 39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF CONTINUING OPERATIONS
Sales increased 20% in 1994 and 14% in 1993 principally due to
higher sales levels in the Company's alarm systems segment. Domestic
sales increased 19% in 1994 and 15% in 1993. International sales,
representing 10% of total consolidated sales in 1994 and 1993, relate to
the alarm segment and increased 22% in 1994 and 6% in 1993. The larger
increase in 1994 is primarily attributable to the expansion of European
operations. Gross profit increased 21% in 1994 and 13% in 1993
principally due to the increased sales levels. Selling, general and
administrative expenses increased 16% in 1994 and 8% in 1993 due to
increased costs associated with the expanded sales volume.
Alarm product sales accounted for 77% of consolidated revenues in
1994 (74% in 1993) and increased 24% in 1994 and 20% in 1993. The
increases were due to a combination of overall market growth and, more
significantly, increased market share. The latter has resulted from
increasing customer preference for the service, systems and convenience
offered by ADI, the Company's distribution business, and for numerous new
products introduced by the Company's manufacturing units in recent years.
In addition, ADI has benefitted from weakness at one of its major
competitors.
Operating income for the segment increased 35% in 1994 and 41% in
1993 primarily because of the expanded sales volume and manufacturing
efficiencies. Research and development expense amounted to $11.8 million
and $10.8 million in 1994 and 1993, respectively, reflecting continuing
development and expansion of the Company's burglar and fire alarm
products and systems.
Publishing sales increased 7% in 1994 primarily due to a modest
increase in the number of advertising pages sold coupled with a firming
of advertising page rates and to higher ancillary product revenues.
Sales for 1993 remained relatively unchanged from the 1992 level due to
the media recession. Operating income increased 53% in 1994 and 5% in
1993 due to higher profits from non-advertising-page revenues and
improved operating efficiencies in both years, in addition to increased
advertising revenues for 1994.
Depreciation and amortization expense increased both in 1994 and
1993 as a result of capital additions, principally in the alarm segment.
Other income (expense) in 1994 included a $19.5 million pretax gain
on the sale of First Alert, Inc. common stock. Excluding this gain,
other income increased over 1993 primarily due to higher yields on
marketable securities, a $896,000 favorable swing in foreign currency
transaction effects, a gain on the sale of a publication and higher
miscellaneous income. These favorable comparisons were partially offset
by reduced income from leveraged leases and from an affiliate and higher
interest expense. The effect of increased rates on a higher level of
short-term borrowings was partly offset by lower long-term debt. Other
income (expense) was more favorable in 1993 than in 1992 because of
reduced translation losses, increased income from an affiliate and from
leveraged leases, and reduced interest expense. While total borrowings
increased in 1993, lower interest rates on short-term notes payable and
the reduction in long-term debt resulted in a decrease in interest
expense.
Effective tax rates were 39.3% in 1994, 41.2% in 1993 and 43.0% in
1992. An analysis of the Company's effective tax rate appears in Note 4
to the Consolidated Financial Statements. The effect of the increase in
the U.S. federal income tax rate from 34% to 35% in 1993 was to increase
the federal income tax provision by $1.2 million ($.4 million related to
1993 income and $.8 million to increase prior accumulated deferred
taxes).
ACCOUNTING CHANGES
Effective January 1, 1993 the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions", and No. 109,
"Accounting for Income Taxes". The cumulative effect on prior years of
the changes in accounting principles as of January 1, 1993 was a $1.9
million benefit for income taxes and a $.4 million after-tax charge for
postretirement benefits.
Page 40
<PAGE>
DISCONTINUED OPERATIONS
Earnings from discontinued operations in 1993 is not comparable to
1992 due to the disposition of the Company's First Alert/BRK business in
July 1992, the sale of the Barr packaging division in October 1992 and
the spinoff of AptarGroup, Inc. in April 1993. Income from discontinued
operations in 1993 was favorably impacted by a $3.1 million benefit from
the adoption of SFAS No. 109.
A net after-tax gain of $16.6 million was recorded on the 1992
divestitures.
FINANCIAL CONDITION
The Company's financial condition remained strong through 1994.
Management anticipates that operations, borrowings and marketable
securities will continue to be the primary source of funds needed to meet
ongoing programs for capital expenditures, to finance acquisitions and
investments and to pay dividends.
In 1994 the primary sources of the $33.9 million net cash provided
by continuing operations were operating profits before depreciation and
amortization. Such cash generated was partially used to finance the net
increase in working capital items. The remaining cash generated from
operations, along with a $12.9 million net increase in debt and $14.8
million net, after-tax proceeds from the sale of the First Alert
investment, were used principally for capital expenditures of $28.2
million, additional investments of $10.1 million, dividends of $6.7
million, business acquisitions of $5.9 million and $8.0 million in net
purchases of marketable securities. Indebtedness of approximately $3
million in 1994 arose from a sale-leaseback transaction on certain
production equipment.
Dividend payments were lower in 1993 than in 1992 because: the
quarterly dividend normally paid in January was paid in December 1992;
the dividends on Class A stock in 1992 included an extra $.10 per share
per quarter related to the 1989 merger of Pittway and Standard Shares,
Inc.; and quarterly dividends were reduced by $.05 per share in 1993 due
to the spinoff of AptarGroup, Inc.
The Company is continually investigating investment opportunities
for growth in related areas and is presently committed to invest
approximately $7.5 million in certain affordable housing ventures through
1997.
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 total amount of such deferred taxes amounted to
approximately $15 million at December 31, 1994 after payment of $1.5
million in 1994 related to property turned over to lenders. The extent
and timing of any additional payments is not readily determinable.
Increases in the general level of interest rates in the U.S.
occurring in 1994 and other market conditions adversely affected the
market value of the Company's investment in marketable securities. As a
result, the Company has recorded after-tax unrealized holding losses on
marketable securities of $3 million as a reduction of stockholders'
equity at December 31, 1994. The Company believes this decline is
temporary and intends to hold the existing securities, although
occasional sales and new purchases may be made selectively as conditions
warrant.
The impact of inflation on the Company's results of operations has
lessened in recent years, although inflation does increase the Company's
cost of doing business. The Company attempts to offset the impact of
inflation through productivity and technological improvements, cost
containment programs and by increasing its selling prices over time as
allowed by market conditions. In addition, substantially all domestic
inventories are valued on the last-in, first-out (LIFO) method, which
generally results in reporting the cost of goods sold at approximately
current costs.
Page 41
<PAGE>
EXHIBIT 21
PITTWAY CORPORATION
DECEMBER 31, 1994
FORM 10-K
Approximate
Percentage of
State or Voting Securities
Country of Owned by
Name of Company Incorporation Immediate Parent
Pittway Corporation
Ademco Distribution, Inc. Delaware 100
ADI-Lenox Club, Inc. Delaware 100
Automation Leasing Corp. New York 100
Ademconet, Inc. Delaware 100
Radscan, Inc. Delaware 100
FBX Corporation Delaware 100
Fire Burglary Instruments, Inc. New York 100
Ademco Security Group, Inc. California 100
Ademco Communications Partners, Inc. Delaware 100
Fire-Lite Alarms, Inc. Connecticut 100
Notifier Engineered Systems Company Delaware 100
MicroLite Corporation California 90
Penton Publishing, Inc. Delaware 100
Penton Learning Systems, Inc. Delaware 51
Quality Alert Institute, Inc. Delaware 100
Links Guide, Inc. Delaware 80
Curtin & Pease/Peneco, Inc. Florida 100
Pittway Real Estate, Inc. Florida 100
Chilpub, Inc. Delaware 100
Xetron Corporation Texas 100
Final Frontier Pittway I, Inc. Illinois 100
Final Frontier Pittway II, Inc. Illinois 100
Pittway Corporation of Canada Canada 100
Pittway Fire Safety, Inc. Delaware 100
Ademco de Juarez, S.A. de C.V. Mexico 100
ADI of Puerto Rico, Inc. Puerto Rico 100
Ademco Italia S.p.A. Italy 100
Ademco (Hong Kong) Limited Hong Kong 100
Pittway Foreign Sales Corp. U.S. Virgin Islands 100
<PAGE>
EXHIBIT 21
PITTWAY CORPORATION
DECEMBER 31, 1994
FORM 10-K
Approximate
Percentage of
State or Voting Securities
Country of Owned by
Name of Company Incorporation Immediate Parent
Pittway Corporation (continued)
Pittway International, Ltd. Delaware 100
Notifier Espana, S.A. Spain 100
Notifier (Benelux) S.A. Belgium 100
Notifier Deutschland, GmbH Germany 100
Notifier, Ltd. (Singapore) Delaware 100
System Sensor, Ltd. (China) Delaware 100
Xi'an System Sensor
Electronics, Ltd. China 55
Pittway UK Limited England 100
Notifier Limited (U.K.) England 100
System Sensor Limited (U.K.) England 100
Ademco-Sontrix Limited England 100
Pittway Australia Pty., Ltd. Australia 100
Ademco-Sontrix Espana, S.A. Spain 100
Pittway Electronics Italy S.r.l. Italy 100
Notifier Italia S.r.l. Italy 100
Pittway Tecnologica S.p.A. Italy 100
Notes: All of the above subsidiaries are included in the Registrant's
consolidated financial statements. Parent-subsidiary or affiliate
relationships are shown by marginal indentation.
<PAGE>
EXHIBIT 23
PITTWAY CORPORATION
DECEMBER 31, 1994
FORM 10-K
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 33-35168 and 33-54753) of
Pittway Corporation of our report dated February 22, 1995 appearing on
page 38 of the Annual Report to Stockholders which is incorporated in
this Annual Report on Form 10-K. We also consent to the incorporation
by reference of our report on the Financial Statement Schedule, which
appears on page 16 of this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
March 24, 1995
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