<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (Zip Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (April 1, 1995).
Common Stock 2,626,024
Class A Stock 11,314,700
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PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1995
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three Months Ended March 31, 1995 and 1994 3
Consolidated Balance Sheet -
March 31, 1995 and December 31, 1994 4 - 5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9 - 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11 - 12
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
2
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Dollars in Thousands, Except Per Share Data)
(UNAUDITED)
1995 1994
NET SALES.................................. $220,404 $176,543
OPERATING EXPENSES:
Cost of sales............................ 134,546 105,292
Selling, general and administrative...... 66,523 54,573
Depreciation and amortization............ 5,073 4,783
206,142 164,648
OPERATING INCOME........................... 14,262 11,895
OTHER INCOME (EXPENSE):
Gain on sale of investment............... 17,051
Income from marketable securities
and other interest..................... 616 812
Interest expense......................... (961) (754)
Income (loss) from investments........... (358) 538
Miscellaneous, net....................... 273 434
(430) 18,081
INCOME BEFORE INCOME TAXES................. 13,832 29,976
INCOME TAXES............................... 5,112 12,020
NET INCOME................................. $ 8,720 $ 17,956
NET INCOME PER SHARE OF COMMON
AND CLASS A STOCK........................ $ .63 $ 1.29
CASH DIVIDENDS DECLARED PER SHARE:
Common.................................. $ .10 $ .10
Class A................................. $ .125 $ .125
AVERAGE NUMBER OF SHARES OUTSTANDING
(in thousands)........................... 13,941 13,941
See accompanying notes.
3
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995 AND DECEMBER 31, 1994
(Dollars in Thousands)
(UNAUDITED)
March 31, December 31,
1995 1994
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 6,465 $ 10,359
Marketable securities.................. 33,267 34,313
Accounts and notes receivable, less
allowance for doubtful accounts of
$7,318 and $6,348.................... 147,201 137,747
Inventories............................ 130,496 124,801
Future income tax benefits............. 19,528 17,879
Prepayments, deposits and other........ 12,072 11,805
349,029 336,904
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 24,686 24,769
Machinery and equipment................ 168,900 157,061
193,586 181,830
Less: Accumulated depreciation......... (98,998) (94,426)
94,588 87,404
Land................................... 2,369 2,369
96,957 89,773
INVESTMENTS:
Real estate and other ventures......... 55,861 56,261
Leveraged leases....................... 22,556 22,752
78,417 79,013
OTHER ASSETS:
Goodwill, less accumulated
amortization of $7,481 and $7,193.... 40,546 40,935
Other intangibles, less accumulated
amortization of $9,738 and $9,597.... 6,039 6,256
Notes receivable...................... 4,123 4,370
Miscellaneous......................... 6,013 6,036
56,721 57,597
$581,124 $563,287
See accompanying notes.
4
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995 AND DECEMBER 31, 1994
(Dollars in Thousands)
(UNAUDITED)
March 31, December 31,
1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 49,575 $ 46,232
Long-term debt due within one year...... 5,494 5,184
Dividends payable....................... 1,759 1,758
Accounts payable........................ 59,944 58,246
Accrued expenses........................ 39,057 41,391
Income taxes payable.................... 13,702 10,093
Retirement and deferred
compensation plans.................... 1,040 1,148
Unearned income......................... 5,866 5,797
176,437 169,849
LONG-TERM DEBT, less current maturities... 7,609 5,088
DEFERRED LIABILITIES:
Income taxes............................ 54,469 54,158
Other................................... 7,145 6,062
61,614 60,220
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 2,626 2,626
Class A stock......................... 11,315 11,315
Capital in excess of par value.......... 28,348 28,348
Retained earnings....................... 298,798 291,756
Cumulative marketable securities
valuation adjustment.................. (2,873) (3,050)
Cumulative foreign currency translation
adjustment............................ (2,750) (2,865)
335,464 328,130
$581,124 $563,287
See accompanying notes.
5
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Dollars in Thousands)
(UNAUDITED)
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................... $ 8,720 $ 17,956
Adjustments for noncash items included in
net income:
Depreciation and amortization............... 5,073 4,783
Gain on sale of investment, net of taxes.... (10,249)
Deferred income taxes....................... (1,464) 1,796
Retirement and deferred compensation plans.. 690 346
Income/loss from investments adjusted
for cash distributions received............ 577 (424)
Provision for losses on accounts receivable. 859 695
Change in assets and liabilities, excluding
effects of acquisitions, dispositions and
foreign currency adjustments:
Increase in accounts and notes
receivable.............................. (8,066) (5,416)
Increase in inventories.................. (2,291) (8,549)
Decrease in accounts payable and accrued
expenses................................ (3,015) (351)
Increase in income taxes payable......... 3,606 2,584
Other changes, net....................... (3,009) (1,037)
Net cash provided by operating activities..... 1,680 2,134
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (12,627) (8,474)
Proceeds from the sale of
marketable securities....................... 6,028 8,356
Purchases of marketable securities............ (4,862) (8,793)
Disposition of property and equipment......... 635 71
Additions to investments...................... (8) (786)
Collections of notes receivable............... 320 176
Net cash used in investing activities......... (10,514) (9,450)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable................. 3,498 3,964
Proceeds of long-term debt.................... 3,240 3,230
Repayments of long-term debt.................. (319) (131)
Dividends paid................................ (1,676) (1,676)
Net cash provided by financing activities..... 4,743 5,387
EFFECT OF EXCHANGE RATE CHANGES ON CASH......... 197 66
NET DECREASE IN CASH AND EQUIVALENTS............ (3,894) (1,863)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD..... 10,359 1,908
CASH AND EQUIVALENTS AT END OF PERIOD........... $ 6,465 $ 45
Supplemental cash flow disclosure: 1995 1994
Interest paid................................. $ 1,016 $ 654
Income taxes paid............................. 2,968 1,429
See accompanying notes.
6
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PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Unaudited)
Note 1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Pittway Corporation and its majority-owned subsidiaries (the "Company" or
"Registrant"). Summarized financial information for the limited real
estate partnership ventures and other affiliates is omitted because, when
considered in the aggregate, they do not constitute a significant
subsidiary.
The accompanying consolidated financial statements are unaudited but
reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the financial
statements contained herein. However, the financial statements and related
notes do not include all disclosures normally provided in the Company's
Annual Report on Form 10-K. Accordingly, these financial statements and
related notes should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
Note 2. Marketable Securities
Information about the Company's available-for-sale securities at March 31,
1995 and December 31, 1994 is as follows:
March 31, December 31,
1995 1994
Adjustable Rate Preferred Stocks -
Aggregate cost $ 38,055 $ 39,396
Net unrealized holding loss (4,788) (5,083)
Aggregate fair value $ 33,267 $ 34,313
In March 1994, the Company reduced its 16.67% ownership holdings in First
Alert, Inc. by selling 1,355,000 of its 1,550,000 shares in connection with
an initial public offering of First Alert, Inc. common stock. The sale of
the shares resulted in a pretax gain of $17,051. The Company sold its
remaining 195,000 shares in April 1994, resulting in a pretax gain of
$2,455. The $24,506 proceeds from the two sales were received in April
1994. Prior to the initial public offering, the Company's equity
investment in First Alert, Inc. was recorded at a cost of $5 million.
Realized gains and losses are based upon the specific identification
method. Information about the Company's sales transactions of available-
for-sale securities for the three months ended March 31 is as follows:
7
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1995 1994
Cash proceeds $ 6,028 $ 8,356
Realized gains -
First Alert $ 17,051
Other $ 79 $ 180
Realized losses $ 253 $ 6
Note 3. Inventories
Inventories consist of the following:
March 31, December 31,
1995 1994
Raw materials $ 33,472 $ 32,520
Work in process 12,366 11,653
Finished goods -
Manufactured by the Company 46,015 43,096
Manufactured by others 38,995 37,794
Total 130,848 125,063
Less LIFO reserve (352) (262)
$130,496 $124,801
Note 4. Earnings per Share
Net income per share of common capital stock is based on the combined
weighted average number of Common and Class A shares outstanding during
each period and does not include Class A shares issuable upon exercise of
stock options because the dilutive effect is not significant.
Note 5. Legal Proceedings
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 appealed the trial court's decision granting summary
judgment based on collateral estoppel. The Company believes that the
ultimate outcome of the aforementioned lawsuit will not have a material
adverse effect on its financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 25% over the first quarter of 1994 due to higher sales in
both the alarm and publishing segments. Domestic sales increased 23%.
International sales, representing approximately 10% of total consolidated
sales, increased 37%. Gross profit grew at a slower rate than sales, 21%,
due to higher costs described below and to a higher sales contribution from
the alarm distribution business which has a lower gross profit level than
the other operations. Selling, general and administrative expenses
increased 22% primarily due to increased costs associated with the expanded
sales volume.
Alarm product sales increased 28% to $171.3 million due to a combination of
overall market growth and, more significantly, increased market share. The
latter has resulted from growing customer preference for the service and
convenience offered by the Company's distribution business and for numerous
new products introduced by the Company's manufacturing units in recent
years. The success of the distribution business was partly aided by
operating difficulties experienced by a major competitor. Operating income
for the segment increased 23.5% to $13.2 million primarily because of the
expanded sales volume partially offset by costs of new product development
expenses.
Publishing sales rose 15% to $49.1 million due to a modest increase in
advertising pages and page rates and to an increase in ancillary
operations, including a direct mail production company which was purchased
in the 1994 third quarter. Operating income decreased 5.4% to $2.8 million
primarily as a result of large paper and postage cost increases in 1995 and
the inclusion in 1994 of profits from a bi-annual directory.
Included in other income in 1994 is a $17.1 million pretax gain on the sale
of 1,355,000 shares of First Alert, Inc. common stock which were included
in an initial public offering. Excluding the gain on sale of investment,
which amounted to $10.2 million after taxes or $.74 per share, other income
was less favorable in 1995 due to increased interest expense on a higher
level of debt, reduced earnings on the sale of marketable securities and a
net loss from investment in 1995 versus income in 1994. The unfavorable
swing in earnings from investments is primarily attributable to the results
of a 45%-owned affiliate which recorded a loss in 1995 due to large new
product development expenses versus income in 1994.
The effective tax rate decreased from 40% in 1994 to 37% in 1995 primarily
due to an overall lower tax rate on increased earnings at the foreign
operations.
9
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FINANCIAL CONDITION
The Company's financial condition remained strong through the first quarter
of 1995. 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 the 1995 first quarter, the primary sources of the $1.7 million cash
provided by operations were profits before depreciation and amortization.
Such cash generated was largely used to finance the net increase in working
capital items. The remaining cash generated from operations, along with a
$6.4 million net increase in debt and $2.1 million net proceeds from
marketable securities and other investing transactions, were used
principally for capital expenditures of $12.6 million and dividends of $1.7
million.
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 income tax liability accounts include approximately $15 million
at March 31, 1995 to fully cover the tax payments that would be due if
properties are sold or returned to the lenders and such events would have
no effect on net income. Any such tax payments would negatively impact the
Company's cash position. Although no payments have been made through March
31, 1995, it is expected that approximately $6.4 million will be paid for
the tax year 1995.
10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for
Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of the
adjoining residential properties owned and currently under development by
the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et
al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case
No. CA83-1860), alleges damage to plaintiffs' adjoining property caused by
surface water effects from improvements to the properties. Damages of
approximately $8 million were awarded to the plaintiffs and an injunction
was entered requiring, among other things, that Saddlebrook work with local
regulatory authorities to take corrective actions. Saddlebrook made two
motions for a new trial, based on separate grounds. One such motion was
granted on December 18, 1990. Such grant was appealed by the plaintiffs.
The other such motion was denied on February 28, 1991. Saddlebrook
appealed such denial. The appeals were consolidated, fully briefed and
heard in February 1992. Saddlebrook received a favorable ruling on March
18, 1992, dismissing the judgment and remanding the case to the Circuit
Court for a new trial. An agreed order has been entered by the Court
preserving the substance of the injunction pending final disposition of
this matter. As part of its plan to comply with the agreed order,
Saddlebrook filed applications with the regulatory agency to undertake
various remediation efforts. Plaintiffs, however, filed petitions for
administrative review of the applications, which administrative hearing was
concluded in February 1992. On March 31, 1992, the hearing officer issued
a recommended order accepting Saddlebrook's expert's testimony. The
agency's governing board was scheduled to consider this recommended order
on April 28, 1992, however, shortly before the hearing, the plaintiffs
voluntarily dismissed their petitions and withdrew their challenges to the
staff's proposal to issue a permit. At the April 28, 1992 hearing the
governing board closed its file on the matter and issued the permits.
Saddlebrook appealed the board's refusal to issue a final order. On July
9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to
the governing board for further proceedings, including entry of a final
order which was issued on October 25, 1993. The plaintiffs have appealed
the Appellate Court decision to the Florida Supreme Court and appealed the
issuance of the final order to the Second District Court of Appeals. The
Florida Supreme Court heard the appeal on May 3, 1994 and 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 filed for a rehearing which was
denied. Plaintiffs have appealed the trial court's granting of summary
judgment based on collateral estoppel.
11
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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.
12
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
27 Financial Data Schedule
(submitted only in electronic format)
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PITTWAY CORPORATION
(Registrant)
By /s/ Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 3, 1995
13
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<PERIOD-END> MAR-31-1995
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