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 September 30, 1996
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 (October 1,
1996).
Common Stock 3,938,832
Class A Stock 16,985,613
PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three Months and Nine Months Ended September 30, 1996
and 1995 3
Consolidated Balance Sheet -
September 30, 1996 and December 31, 1995 4 - 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7 - 9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13 - 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited; Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
NET SALES............................ $285,726 $239,131 $815,564 $694,855
OPERATING EXPENSES:
Cost of sales....................... 176,011 149,867 499,549 428,995
Selling, general and administrative. 80,622 69,400 234,523 205,228
Depreciation and amortization....... 7,393 5,417 21,272 15,844
264,026 224,684 755,344 650,067
OPERATING INCOME..................... 21,700 14,447 60,220 44,788
OTHER INCOME (EXPENSE):
Gain on sale of investment.......... 13,162
Gain from Cylink stock offering..... 23,279
Income from marketable securities,
investments and other interest.... 1,310 1,006 3,087 2,805
Interest expense.................... (2,192) (1,631) (6,237) (4,095)
Miscellaneous, net.................. (57) 606 387 1,844
(939) (19) 33,678 554
INCOME BEFORE INCOME TAXES........... 20,761 14,428 93,898 45,342
PROVISION FOR INCOME TAXES........... 8,005 5,248 35,324 16,712
NET INCOME........................... $ 12,756 $ 9,180 $ 58,574 $ 28,630
NET INCOME PER SHARE OF COMMON AND
CLASS A STOCK...................... $ .61 $ .44 $ 2.80 $ 1.37
CASH DIVIDENDS DECLARED PER SHARE:
Common............................. $ .067 $ .067 $ .20 $ .20
Class A............................ $ .083 $ .083 $ .25 $ .25
AVERAGE NUMBER OF SHARES OUTSTANDING
(in thousands)..................... 20,924 20,911 20,919 20,911
See accompanying notes.
3
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited; Dollars in Thousands)
September 30, December 31,
1996 1995
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 21,598 $ 31,407
Marketable securities.................. 20,471 25,586
Accounts and notes receivable, less
allowance for doubtful accounts of
$10,543 and $8,493................... 206,169 175,432
Inventories............................ 188,855 152,636
Future income tax benefits............. 18,948 16,996
Prepayments, deposits and other........ 14,942 11,929
470,983 413,986
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 32,540 25,797
Machinery and equipment................ 212,437 190,780
244,977 216,577
Less: Accumulated depreciation......... (127,261) (109,021)
117,716 107,556
Land................................... 2,650 2,188
120,366 109,744
INVESTMENTS:
Marketable securities.................. 96,891 20,000
Equity investment in affiliate......... 31,183 7,689
Leveraged leases....................... 19,052 21,046
Real estate and other ventures......... 38,547 33,874
185,673 82,609
OTHER ASSETS:
Goodwill, less accumulated
amortization of $9,105 and $8,432.... 53,072 48,714
Other intangibles, less accumulated
amortization of $10,505 and $10,360.. 5,111 5,422
Notes receivable....................... 9,475 5,892
Miscellaneous.......................... 7,138 6,607
74,796 66,635
$851,818 $672,974
See accompanying notes.
4
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited; Dollars in Thousands)
September 30, December 31,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 34,184 $ 32,212
Long-term debt due within one year...... 3,510 3,788
Dividends payable....................... 1,735 1,766
Accounts payable........................ 86,522 68,700
Accrued expenses........................ 53,940 46,310
Income taxes payable.................... 8,086 5,644
Retirement and deferred
compensation plans.................... 6,706 6,503
Unearned income......................... 4,059 3,185
198,742 168,108
LONG-TERM DEBT, less current maturities... 87,089 85,966
DEFERRED LIABILITIES:
Income taxes............................ 86,125 46,920
Other................................... 13,322 8,954
99,447 55,874
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 3,939 3,939
Class A stock......................... 16,985 16,973
Capital in excess of par value.......... 21,662 21,423
Retained earnings....................... 378,964 325,420
Cumulative marketable securities
valuation adjustment.................. 47,503 (2,019)
Cumulative foreign currency translation
adjustment............................ (2,513) (2,710)
466,540 363,026
$851,818 $672,974
See accompanying notes.
5
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited; Dollars in Thousands)
1996 1995
Cash Flows From Operating Activities:
Net Income....................................... $ 58,574 $ 28,630
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 21,272 15,844
Gain on sale of investment, net of taxes....... (8,149)
Gain from stock offering of affiliate,
net of taxes.................................. (14,413)
Deferred income taxes.......................... (2,359) (6,526)
Retirement and deferred compensation plans..... 4,163 5,270
Income/loss from investments adjusted
for cash distributions received............... 1,091 1,027
Provision for losses on accounts receivable.... 4,043 3,135
Change in assets and liabilities, excluding
effects from acquisitions, dispositions
and foreign currency adjustments:
Increase in accounts and notes receivable.... (28,993) (25,556)
Increase in inventories...................... (34,852) (33,142)
Increase in prepayments and deposits......... (3,121) (4,159)
Increase in accounts payable and
accrued expenses........................... 18,420 7,837
Increase (decrease) in income taxes payable.. 2,774 (4,846)
Other changes, net............................. (55) (6,202)
Net cash provided (used) by operating activities. 18,395 (18,688)
Cash Flows From Investing Activities:
Capital expenditures............................. (27,721) (29,865)
Proceeds from sale of investment, net of taxes... 10,748
Proceeds from the sale of marketable securities.. 11,065 16,034
Purchases of marketable securities............... (5,900) (5,846)
Disposition of property and equipment............ 493 1,899
Additions to investments......................... (4,066) (52)
Increase in notes receivable..................... (4,334) (2,793)
Net assets of businesses acquired, net of cash... (3,065) (7,565)
Disposition of business.......................... 177
Net cash used in investing activities............ (22,780) (28,011)
Cash Flows From Financing Activities:
Net increase in notes payable.................... 283 46,305
Proceeds of long-term debt....................... 72 3,197
Repayments of long-term debt..................... (767) (4,743)
Dividends paid................................... (5,062) (5,025)
Net cash (used) provided by financing activities. (5,474) 39,734
Effect of Exchange Rate Changes on Cash............ 50 76
Net Decrease in Cash and Equivalents............... (9,809) (6,889)
Cash and Equivalents at Beginning of Period........ 31,407 10,359
Cash and Equivalents at End of Period.............. $ 21,598 $ 3,470
Supplemental Cash Flow Disclosure: 1996 1995
Interest paid.................................... $ 6,218 $ 4,081
Income taxes paid................................ 26,418 28,150
See accompanying notes.
6
PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars in Thousands)
NOTE 1. STOCK SPLIT
In January 1996 the Board of Directors declared a 3-for-2 stock split in
the form of a 50% stock dividend on the Company's Common and Class A stock,
payable March 1, 1996 to stockholders of record on February 14, 1996. All
share and per share data, as appropriate, reflect this split.
NOTE 2. 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. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year
classification.
The accompanying consolidated financial statements are unaudited but
reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the financial
statements contained herein. However, the financial statements and related
notes do not include all disclosures normally provided in the Company's
Annual Report on Form 10-K. Accordingly, these financial statements and
related notes should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
NOTE 3. ACQUISITIONS
During the first nine months of 1996, the Company acquired a foreign
distributor of alarm systems and a manufacturer of glass break detectors
for $3,065 cash and a total of $2,619 payable over three years. The
acquisitions were accounted for as purchase transactions in the
consolidated financial statements from their respective dates of
acquisition. The impact on consolidated results of operations was not
significant.
7
NOTE 4. MARKETABLE SECURITIES
Information about the Company's available-for-sale securities at
September 30, 1996 and December 31, 1995 is as follows:
Sept. 30, Dec. 31,
1996 1995
Current - Adjustable Rate Preferred Stocks -
Aggregate cost $ 23,236 $ 28,952
Net unrealized holding loss (2,765) (3,366)
Aggregate fair value $ 20,471 $ 25,586
Non-Current - USSB Common Stock -
Aggregate cost $ 17,401 $ 20,000
Unrealized holding gain 79,490 101,280
Aggregate fair value $ 96,891 $121,280
In February 1996, the Company reduced its holdings in United States
Satellite Broadcasting Company, Inc. (USSB) by selling 622,500 of its
4,789,875 shares in connection with an initial public offering of USSB's
common stock. The sale of the shares resulted in an after-tax gain of
$8,149, or $.39 per share. At December 31, 1995, prior to the initial
public offering, the Company's investment in USSB was recorded at a cost of
$20 million, or $4.175 per share.
The $79,490 unrealized gain on the 4,167,375 shares of USSB common stock
held at September 30, 1996 is included, net of $30,276 deferred taxes, in
stockholders' equity under the caption "cumulative marketable securities
valuation adjustment".
Realized gains and losses are based upon the specific identification
method. Such gains and losses on the adjustable rate preferred stock, for
the quarters ended September 30, 1996 and 1995 were not significant.
NOTE 5. INVESTMENT IN AFFILIATE
The investment in affiliate consists of the Company's interest in Cylink
Corporation (Cylink), which is carried at equity. The carrying value of
this investment was increased by $23,279 to reflect the increase in the
Company's equity in Cylink's net book value as a result of an initial public
offering in February 1996. The after-tax gain recorded on the increase in
Cylink's equity was $14,413, or $.69 per share. The quoted market value of
the Company's investment in Cylink was approximately $124 million at
September 30, 1996.
8
NOTE 6. INVENTORIES
Inventories at September 30, 1996 and December 31, 1995 consist of the
following:
Sept. 30, Dec. 31,
1996 1995
Raw materials $ 40,604 $ 34,440
Work in process 20,145 18,654
Finished goods -
Manufactured by the Company 64,691 55,523
Manufactured by others 64,837 45,007
Total 190,277 153,624
Less LIFO reserve (1,422) (988)
$188,855 $152,636
NOTE 7. 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 or for other stock awards because the dilutive effect is not
significant.
NOTE 8. 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 developed 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. In December 1994,
Saddlebrook's motion for summary judgment based on collateral estoppel was
granted on the ground that plaintiffs' claims were fully retried and
rejected in a related administrative proceeding. Plaintiffs appealed the
trial court's decision granting summary judgment. The appellate court has
affirmed in part and reversed in part the trial court's summary judgment
and remanded the case back to the trial court for further proceedings. The
Company believes that the ultimate outcome of the aforementioned lawsuit
will not have a material adverse effect on its financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
For the first nine months of 1996, sales increased 17% due to continued
expansion within the alarm and other security products segment. For the
third quarter of 1996 sales increased 19% due to higher sales in both the
alarm and publishing segments. On a year-to-date basis, domestic sales
increased 14% while international sales, representing 14% of total
consolidated sales, increased 49% reflecting further market penetration in
the Company's European and other international operations and, to a lesser
extent, acquisitions of foreign businesses. Gross profit grew at about the
same rate as sales. Selling, general and administrative expenses in 1996
increased 16% over the third quarter and 14% over the first nine months of
1995 primarily due to increased costs associated with the expanded sales
volume.
Alarm product sales, accounting for 83% of consolidated revenues in 1996 (79%
in 1995), increased 22% for the quarter and 23% year-to-date to $239.4
million and $675.3 million, respectively. These results reflect continuing
gains in market share in key product areas and ongoing expansion in the
worldwide alarm systems market. The Company's distribution business made
significant gains by expanding its outlet network, internally and through an
acquisition in November 1995. Increases at the Company's manufacturing units
reflect continued acceptance of numerous new product offerings.
Operating income for the segment increased 38% to $19.0 million for the
quarter and 29% to $51.8 million year-to-date primarily because of the
expanded sales volume partially offset by an increase in depreciation expense
from recent capital expenditures.
Publishing sales for the year-to-date declined due to the inclusion in the
prior year results of a conference and seminar business, which was sold in
June 1995. Excluding this business from the 1995 results, sales increased 6%
to $139.7 million. Sales for the quarter increased 10% to $46.3 million.
Operating income increased 127% to $3.6 million for the quarter, which is
traditionally slow for the trade publishing industry, and 43% to $12.9
million year-to-date. The improved results are a reflection primarily of
higher magazine advertising revenues and improved operating efficiency. In
addition, this business continues to build alternative revenue streams to
supplement display advertising, the primary source of revenues. Postal rates
were steady this year and paper costs declined slightly from the 1995 year
end levels.
10
Depreciation and amortization expense increased in 1996 as a result of
capital additions, principally in the alarm systems segment.
Other income (expense) for the first nine months of 1996 included a pre-tax
gain of $13,162 on the sale of 622,500 shares of USSB stock in connection
with its initial public offering and a pretax gain of $23,279 on the increase
in the Company's Cylink investment resulting from Cylink's initial public
offering. Excluding these gains, other income was less favorable in 1996
principally due to higher interest expense and reduced cash distributions
received from real estate ventures. These effects were offset somewhat by a
favorable comparison at Cylink which recorded a loss in 1995.
The effective tax rates in 1996 versus 1995 rose to 38.6% from 36.4% for the
third quarter and to 37.6% from 36.9% for the first nine months due primarily
to higher effective foreign tax rates.
ACCOUNTING CHANGE
In October 1995 SFAS No. 123, "Accounting for Stock Based Compensation", was
issued. The statement became effective for the 1996 fiscal year and
establishes a fair value based method of accounting for employee stock based
compensation plans and encourages adoption of that method. However,
companies may elect to continue to apply the method prescribed under
previously existing accounting rules, provided certain pro forma disclosures
are made. The Company has made such election and will provide the necessary
disclosures in the December 31, 1996 year-end consolidated financial
statements.
FINANCIAL CONDITION
The Company's financial condition remained strong in the first nine months of
1996. 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 first nine months of 1996, operating profits, before the gains on the
sale of USSB stock and the increase in Cylink carrying value and depreciation
and amortization, provided $57.3 million of net cash which was used primarily
to finance the net increase in working capital items. The remaining $18.4
million of cash generated from operations, along with $15.9 million of net
proceeds from the sale of USSB stock and other marketable securities and
11
available cash, were used to fund $27.7 million in capital expenditures, the
acquisition of two businesses for $3.1 million, $5.1 million of dividends
paid to stockholders, $4.1 million of additional investments in affordable
housing and other ventures, $0.4 million of net payments on borrowings and a
$4.3 million net increase in notes receivable.
Following a $1.5 million investment in the first nine months of 1996, the
Company's remaining commitment in certain affordable housing ventures through
2002 is $11.7 million at September 30, 1996. The Company will continue to
actively investigate additional investment opportunities for growth in
related areas.
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. Such events
have no effect on net income although they do have a negative impact on the
Company's cash position because significant tax payments become due when the
properties are sold or returned to the lenders. The Company has
approximately $4.4 million accrued at September 30, 1996 to fully cover the
remaining tax payments that would be due if all the properties are sold or
returned to the lenders.
In February 1996, the Company sold 622,500 shares of United States Satellite
Broadcasting ("USSB") in connection with its initial public offering and
realized net cash proceeds of $15.8 million or $10.7 million after taxes.
The Company's remaining 4,167,375 USSB shares are recorded as a non-current
investment in marketable securities. The Company intends to hold its
existing investments in preferred stocks, USSB and Cylink although occasional
sales of preferred and USSB stocks may be made selectively as conditions
warrant.
12
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 developed 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 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
13
trial court, Saddlebrook's motion for summary judgment, based on collateral
estoppel 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
appealed the trial court's decision granting summary judgment. On August
16, 1996, the appellate court affirmed in part and reversed in part the
trial court's summary judgment and remanded the case back to the trial
court for further proceedings.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
10 Employment Agreement with Thomas L. Kemp dated
as of July 25, 1996.
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.
14
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: October 25, 1996
15
EMPLOYMENT AGREEMENT
AGREEMENT made as of July 25, 1996, between Penton
Publishing, Inc., a Delaware corporation (the "Company"), which is
currently a wholly-owned subsidiary of Pittway Corporation, a
Delaware corporation ("Pittway"), and Thomas Kemp ("Executive").
In consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Employment. The Company shall employ Executive, and
Executive accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on
the date on which Executive commences full-time employment with the
Company at the Company's headquarters in Cleveland, Ohio and ending
as provided in paragraph 5 hereof (the "Employment Period").
Executive agrees to commence full-time employment with the Company at
such headquarters no later than January 2, 1997.
2. Position and Duties.
(a) During the Employment Period, Executive shall serve
as the chief executive officer of the Company and, subject to the
management of the business and affairs of the Company at the
direction of the Board of Directors of the Company (the "Board"),
shall have the normal duties, responsibilities and authority of an
executive serving in such position, including without limitation the
development of short-and long-term operating plans, the development
of operating and capital budgets, the overseeing of Company personnel
and the development of compensation proposals and proposals for
acquisitions and dispositions. Executive shall have the title
Chairman and Chief Executive Officer of the Company, subject to the
power of the Board to change such title to President or Chief
Executive Officer or some combination thereof. During the Employment
Period, Executive shall also serve as a director of the Company for
so long as the Board (or a nominating committee of the Board)
nominates him to that position and he is elected to it and as a
director of any affiliate of the Company designated by the Board for
so long as the Board causes him to be elected to such position.
(b) Executive shall report to the Board.
(c) During the Employment Period, Executive shall devote
his best efforts and his full business time and attention (except for
permitted vacation periods, reasonable periods of illness or other
incapacity, and, provided such activities do not have more than a de
minimis effect on Executive's performance of his duties under this
Agreement, participation in charitable and civic endeavors and
management of Executive's personal investments and business
interests) to the business and affairs of the Company, its
subsidiaries and affiliates. Executive shall perform his duties
and responsibilities to the best of his abilities in a diligent,
trustworthy, businesslike and efficient manner.
(d) Executive shall perform his duties and
responsibilities principally in the Cleveland, Ohio metropolitan
area, and shall not be required to travel outside that area any more
extensively than the previous chief executive officer of the Company,
Sal F. Marino, has done in the past in the ordinary course of the
business of the Company.
3. Compensation and Benefits.
(a) Salary. The Company agrees to pay Executive a salary
during the Employment Period in monthly installments. Executive's
initial salary shall be $400,000 per year. The Compensation
Committee of the Board (or, if there is no such Committee, the Board)
shall review Executive's salary annually, beginning in January of
1998, and may, in its sole discretion, increase it.
(b) Bonus(es). The Company agrees to pay Executive
bonuses during the Employment Period, as follows:
(i) Signing Bonus. for the execution and delivery of
this Agreement, a bonus of $100,000 payable within five days after
the Employment Period begins;
(ii) 1996 Bonus. for Executive's performance of his
duties and responsibilities during the remainder of 1996, and
provided the Employment Period begins no later than September 3, 1996
and continues until at least December 31, 1996, a bonus of $100,000
payable on January 2, 1997; and
(iii) Subsequent Annual Bonuses. for Executive's
performance of his duties and responsibilities during each calendar
year subsequent to 1996, a bonus pursuant to a plan for such calendar
year to be established by the Compensation Committee of the Board
(or, if there is no such Committee, the Board) during the first month
of such calendar year after consultation with Executive.
In general, the plan for each calendar year will
have potential bonus amounts, corresponding to various levels of
Company profitability at or above a threshold level, ranging from a
threshold amount to a maximum amount. Within this range
("Executive's Bonus Potential"), there shall be a target bonus amount
which shall correspond to a reasonable improvement in Company
profitability. Executive's Bonus Potential will relate to the
Company's profitability: the higher the Company's profitability, the
higher Executive's Bonus Potential; the lower the Company's
profitability, the lower Executive's Bonus Potential.
It is the intention of the parties that the plan
for 1997 will result in a bonus of $200,000 if there is a meaningful
increase in the Company's profitability in 1997 compared to full-year
1996 operations, but such bonus may be more or less than that amount
depending on the Company's profitability during 1997. If the Company
acquires or combines with another entity during the remainder of 1996
or during 1997, increase in profitability will be determined based on
year-to-year improvement in combined operations.
Any bonus payable pursuant to this (iii) at a time
when the Company is a majority-owned subsidiary of Pittway may, at
the discretion of the Compensation Committee of the Board of
Directors of Pittway (after considering any preference expressed by
Executive), be paid in cash, in the form of a Performance Shares
Award related to shares of Pittway's Class A Stock or in combination
of both. Any such Performance Shares Award would be awarded under
the Pittway Corporation 1990 Stock Awards Plan as amended (including
any further amendments, the "Pittway Plan"). Any bonus payable
pursuant to this (iii) at a time when the Company is a public company
(as defined in paragraph (c)(iv) below) may, at the discretion of the
Compensation Committee of the Board (or, if there is no such
Committee, the Board) (after considering any preference expressed by
Executive), be paid in the form of cash, a Performance Shares Award
related to shares of the Company's Common Stock or a combination of
both. Each Performance Shares Award paid pursuant to this paragraph
shall be substantially in the form of Exhibit 1 attached to this
Agreement, except that it is understood that reference to any then
existing registration statement or related plan information document
in Exhibit 1, or its equivalent, shall be included if and only if the
same exists at the time of payment and is relevant to such
Performance Shares Award.
(c) Stock Options. Executive shall also receive stock
options during the Employment Period, as follows:
(i) Initial Pittway Option. pursuant to authorization
by the Compensation Committee of the Board of Directors of Pittway,
and under the Pittway Plan, on the date on which the Employment
Period begins Executive will be granted a non-qualified option to
purchase 4,000 shares of Pittway's Class A Stock at an exercise price
per share equal to the fair market value of such a share on such
date;
(ii) 1997 Pittway Option. pursuant to authorization by
such Compensation Committee, and under the Pittway Plan, on March 31,
1997, if the Company then remains a majority-owned subsidiary of
Pittway, Executive shall be granted an additional non-qualified
option to purchase shares of Pittway's Class A stock (the number of
shares to be determined so that such option has a value of $200,000)
at an exercise price per share equal to the fair market value of such
a share on such date;
(iii) Subsequent Pittway Options. so long as the Company
remains a majority-owned subsidiary of Pittway, Executive shall be
eligible to receive additional non-qualified stock options under the
Pittway Plan during calendar years subsequent to 1997, at the
discretion of the Compensation Committee of the Board of Directors of
Pittway;
(iv) Initial Company Option(s). at the close of
business on the first date, if any, on which the Company has ceased
to be a majority-owned subsidiary of Pittway and the Company's stock
has become listed and traded on a national securities exchange or
included and traded in the National Association of Securities
Dealers' Automated Quotation system (the Company's status at such
time being referred to as that of a "public company"):
(A) Executive shall be granted a non-qualified
option to purchase shares of the Company's Common Stock (the number
of shares to be determined so that such option has a value equal to
(1) $400,000 minus (2) the aggregate of the value(s) on their
respective date(s) of grant of any options granted to Executive
under the Pittway Plan earlier in the same year) at an exercise price
per share equal to the fair market value of such a share at such
time; and
(B) provided that prior to the Company's
becoming a public company Executive shall have surrendered to
Pittway, for cancellation immediately prior to the Company's
becoming a public company, the then unexpired, unexercised portion(s)
of one or more options to purchase Pittway Class A Stock granted
pursuant to (i), (ii) or (iii) above, Executive shall be granted non-
qualified options to purchase shares of the Company's Common Stock
(the number of such shares to be determined so that such options have
an aggregate value equal to the aggregate of the value(s) as of
immediately prior to the Company's becoming a public company of such
surrendered unexpired, unexercised portion(s); and the exercisablity
provisions of each such option to correspond to the then
exercisablity of the corresponding surrendered portion) at an
exercise price equal to the fair market value of such a share at such
time; and
(v) Subsequent Company Options. if the Company is a
public company at the time, Executive shall be eligible to receive
additional non-qualified stock options to purchase shares of the
Company's Common Stock during calendar years subsequent to 1997, at
the discretion of the Compensation Committee of the Board.
For purposes of (ii) and (iv) above, the value of a
non-qualified option to purchase shares of Pittway's Class A Stock
shall be determined by the Compensation Committee of the Board of
Directors of Pittway, on a basis consistent with that used by such
Committee in making similar determinations. For purposes of (iv)
above, the value of a non-qualified option to purchase shares of the
Company's Common Stock shall be determined by the Compensation
Committee of the Board (or, if there is no such Committee, the
Board), on a basis consistent with that used by such Committee (or
the Board) in making similar determinations.
Each option to be granted pursuant to (i), (ii) or
(iv) above shall be substantially in the form of Exhibit 2 attached
to this Agreement, except that it is understood that reference to any
then existing registration statement or related plan information
document in Exhibit 2, or its equivalent, shall be included if and
only if the same exists at the time of grant and is relevant to such
option.
If at the time an option to purchase shares of the
Company's Common Stock is to be granted pursuant to (iv) or (v) above
the Company has in effect an equity awards or stock option plan (as
amended from time to time, the "Company Plan") and such option can be
granted under the Company Plan, and provided the grant of such option
has been authorized by the Compensation Committee of the Board (or,
if there is no such Committee, the Board), such option shall be
granted under the Company Plan; otherwise such option shall be
granted independent of the Company Plan.
If, at the time of the grant of any option pursuant to
this paragraph (c), the issuance of shares upon exercise thereof has
not been registered under the Securities Act of 1933, as amended, it
shall be a condition to such grant that Executive execute and deliver
to Pittway or the Company, as applicable, a certificate confirming
that Executive is an accredited investor (as such term is used in
Regulation D under such Act) and including transfer restrictions and
other provisions customary in connection with grants under such
circumstances.
(d) Relocation Expense Reimbursement. Subject to the
Company's requirements with respect to reporting and documentation of
such expenses, the Company shall reimburse Executive for the
following expenses related to Executive's relocation from Tiburon,
California to the Cleveland, Ohio metropolitan area (which relocation
Executive agrees to pursue with reasonable diligence):
(i) Moving Expenses. all reasonable expenses related
to moving the household possessions of Executive and his immediate
family as a part of such relocation;
(ii) Air Travel Expenses. reasonable air travel
expenses (at coach fare) incurred by Executive and his wife related
to such relocation, up to a maximum of $8,000;
(iii) Temporary Housing Expenses. rent (including
electricity and heating expense) of a furnished apartment in the
Cleveland, Ohio metropolitan area for up to the first six months of
the Employment Period, up to a maximum of $2,500 per month; and
(iv) Residence Sale Net Loss. up to $100,000 (net after
taxes on the receipt of such reimbursement) of any loss (i.e.,
shortfall of net sale price, after deduction of Executive's sales
commission and closing costs, as compared to $1,086,445) incurred by
Executive on the sale of his existing residence in Tiburon,
California (which sale Executive agrees to commence not later than
October 1, 1996); provided that in the event Executive is entitled to
any tax benefit on account of such loss, the $100,000 amount shall be
reduced by the amount of such tax benefit.
(e) Other Expense Reimbursement. The Company shall
reimburse Executive for all reasonable expenses incurred by him
during the Employment Period in the course of performing his duties
under this Agreement which are consistent with the Company's policies
in effect from time to time with respect to travel, entertainment and
other business expenses, subject to the Company's requirements with
respect to reporting and documentation of such expenses. Executive
acknowledges that under the Company's current air travel
reimbursement policy, reimbursement is limited to coach fare (plus
Executive's cost of any upgrade certificates used to upgrade to first
class) on travel within the United States and is limited to business
class fare on travel to and from foreign cities.
(f) Standard Executive Benefits Package. In addition to
the salary, bonus(es), stock options and expense reimbursements
payable to Executive pursuant to this paragraph 2, Executive shall be
entitled during the Employment Period to participate, on the same
basis as other executives of the Company, in the Company's Standard
Executive Benefits Package. The Company's "Standard Executive
Benefits Package" means those benefits (including insurance,
vacation, company car or car allowance and/or other benefits) for
which substantially all of the executives of the Company are from
time to time generally eligible, as determined from time to time by
the Board. On the date on which the Employment Period begins,
Executive shall be credited with 22 years of service for purposes of
vacation benefits included in the Standard Executive Benefits
Package. Notwithstanding the foregoing, except to the extent
expressly provided in (c) above, Executive shall not be entitled
during the Employment Period to participate in the Pittway Plan or
the Company Plan, but Executive shall be entitled to participate in
any other executive equity award or stock option plan of Pittway or
the Company, as applicable, which may be established.
(g) Additional Benefits. In addition to participation in
the Company's Standard Executive Benefits Package pursuant to this
paragraph 2, Executive shall be entitled during the Employment Period
to:
(i) additional term life insurance coverage in an
amount equal to Executive's salary; but only if and so long as such
additional coverage is available at standard rates from the insurer
providing term life insurance coverage under the Standard Executive
Benefits Package or from a comparable insurer acceptable to the
Company;
(ii) supplementary long-term disability coverage in an
amount which will increase maximum covered annual compensation to
$330,000 and the maximum monthly payments to $18,333; but only if and
so long as such supplementary coverage is available at standard rates
from the insurer providing long-term disability coverage under the
Standard Executive Benefits Package or a comparable insurer
acceptable to the Company;
(iii) in the event the Employment Period ends prior to
five years after the beginning thereof and as a result Executive is
not entitled to all of the benefits under the tax-qualified pension
plan and tax-qualified defined contribution plan (401(k) plan) of
Pittway included in the Standard Executive Benefits Package to which
he would have been entitled had he been fully vested under such plans
at the beginning of the Employment Period, a supplemental payment
(independent of any plan) promptly following the end of the
Employment Period equal to the sum of (A) the discounted present
value of his accrued but unvested future payments (on a straight life
basis) under such pension plan, calculated using the discount rate
and actuarial methods and procedures then utilized under such plan
and (B) the unvested portion of his account under such defined
contribution plan; and
(iv) pursuant to authorization by the Compensation
Committee of the Board of Directors of Pittway, participation in the
Pittway Corporation Supplemental Executive Retirement Plan effective
January 1, 1996, as currently in effect, except that (A) the
beginning date for accrual of a benefit shall be the date on which
the Employment Period begins and (B) no benefit shall be payable
thereunder unless the Employment Period shall end five years or more
after the beginning thereof (or, if the Employment Period ends early
pursuant to paragraph 5 hereof within such five years on account of a
Termination without Cause or a Termination by Executive for Good
Reason, unless the date on which (without any extension thereof) the
Employment Period is then scheduled to end shall be five years or
more after the beginning thereof) (the "Pittway SERP").
In the event the Company ceases to be a majority-
owned subsidiary of Pittway and establishes a Supplemental Executive
Retirement Plan with terms at least as favorable to Executive as
those under the Pittway SERP (the "Company SERP"), Executive shall
cease participation in the Pittway SERP and shall instead
participate in the Company SERP. As used herein, "SERP" refers to
whichever of the Pittway SERP or the Company SERP Executive is
participating in at the time.
(h) Indemnification. With respect to Executive's acts or
failures to act during the Employment Period in his capacity as a
director, officer, employee or agent of the Company, Executive shall
be entitled to indemnification from the Company, and to liability
insurance coverage (if any), on the same basis as other directors and
officers of the Company.
4. Adjustments. Notwithstanding any other provision of
this Agreement, it is expressly understood and agreed that if there
is a significant reduction in the level of the business to which
Executive's duties under this Agreement relate, or if all or any
significant part of such business is disposed of by the Company
and/or its subsidiaries or affiliates during the Employment Period
but Executive thereafter remains an employee of the Company, the
Board may make adjustments in "Executive's Reference Salary" (i.e.,
Executive's initial salary or, in the event the Employment Period has
been extended pursuant to paragraph 5(b) hereof, Executive's salary on
the date on which the most recent such extension occurred) and/or
Executive's Bonus Potential as the Board deems appropriate to reflect
such reduction or disposition.
5. Employment Period.
(a) Except as hereinafter provided, the Employment Period
shall continue until, and shall end upon, the third anniversary of the
date on which the Employment Period begins.
(b) On each anniversary of the date on which the
Employment Period begins which precedes Executive's sixty-fifth birthday
by more than two years, unless the Employment Period shall have ended
early pursuant to (c) below or either party shall have given the other
party written notice that the extension provision in this sentence shall
no longer apply, the Employment Period shall be extended for an
additional calendar year (unless Executive's sixty-fifth birthday occurs
during such additional calendar year, in which event the Employment
Period shall be extended only until such birthday). In no event shall
the Employment Period be extended beyond the Executive's sixty-fifth
birthday except by mutual written agreement of the Company and
Executive.
(c) Notwithstanding (a) and (b) above, the Employment
Period shall end early upon the first to occur of any of the following
events:
(i) Executive's death;
(ii) Executive's retirement upon or after reaching age 65
("Retirement");
(iii) the Company's termination of Executive's employment
on account of Executive's having become unable (as determined by the
Board in good faith) to regularly perform his duties hereunder by reason
of illness or incapacity for a period of more than six (6) consecutive
months ("Termination for Disability");
(iv) the Company's termination of Executive's employment
for Cause ("Termination for Cause");
(v) the Company's termination of Executive's employment
other than a Termination for Disability or a Termination for Cause
("Termination without Cause");
(vi) Executive's termination of Executive's employment for
Good Reason, by means of advance written notice to the Company at least
thirty (30) days prior to the effective date of such termination
identifying such termination as a Termination by Executive for Good
Reason and identifying the Good Reason ("Termination by Executive for
Good Reason") (it being expressly understood that Executive's giving
notice that the extension provision in the first sentence of paragraph 5
(b) hereof shall no longer apply shall not constitute a "Termination by
Executive for Good Reason"); provided that if the Good Reason identified
in such notice is the Good Reason set forth in paragraph 5(e)(ii)
hereof, the Company may, at its option, defer the effective date of such
termination for up to ninety (90) additional days; or
(vii) Executive's termination of Executive's employment for
any reason other than Good Reason, by means of advance written notice to
the Company at least one hundred twenty (120) days prior to the
effective date of such termination identifying such termination as a
Termination by Executive with Advance Notice ("Termination by Executive
with Advance Notice") (it being expressly understood that Executive's
giving notice that the extension provision in the first sentence of
paragraph 5 (b) hereof shall no longer apply shall not constitute a
"Termination by Executive with Advance Notice").
(d) For purposes of this Agreement, "Cause" shall mean:
(i) the commission by Executive of a felony or a crime
involving moral turpitude;
(ii) the commission by Executive of a fraud;
(iii) the commission by Executive of any act involving
dishonesty or disloyalty with respect to the Company or any of its
subsidiaries or affiliates which harms or damages any of them to any
extent;
(iv) conduct by Executive that brings the Company or any
of its subsidiaries or affiliates into substantial public disgrace or
disrepute;
(v) gross negligence or willful misconduct by Executive
with respect to the Company or any of its subsidiaries or affiliates;
(vi) repudiation of this Agreement by Executive or
Executive's abandonment of his employment with the Company (it being
expressly understood that a Termination by Executive for Good Reason or
a Termination by Executive with Advance Notice shall not constitute such
a repudiation or abandonment);
(vii) breach by Executive of any of the agreements in
paragraph 8 hereof; or
(viii) any other breach by Executive of this Agreement which
is material and which is not cured within thirty (30) days after written
notice thereof to Executive from the Company.
(e) For purposes of this Agreement, "Good Reason" shall
mean:
(i) any downward adjustment by the Board in Executive's
Reference Salary and/or Executive's Bonus Potential pursuant to
paragraph 4 hereof; or
(ii) the Company's giving notice that the extension
provision in the first sentence of paragraph 5(b) hereof shall no longer
apply; or
(iii) any breach by the Company of this Agreement which is
material and which is not cured within thirty (30) days after written
notice thereof to the Company from Executive.
6. Post-Employment Period Payment.
(a) If the Employment Period ends on the date on which
(without any extension thereof) it is then scheduled to end pursuant to
paragraph 5 hereof, or if the Employment Period ends early pursuant to
paragraph 5 hereof for any reason, Executive shall cease to have any
rights to salary, bonus (if any), options, expense reimbursements or
other benefits other than: (i) any salary which has accrued but is
unpaid, any reimbursable expenses which have been incurred but are
unpaid, and any unexpired vacation days which have accrued under the
Company's vacation policy but are unused, as of the end of the
Employment Period, (ii) (but only to the extent provided in any option
theretofore granted to Executive or in the SERP or any other benefit
plan in which Executive has participated as an employee of the Company)
any option rights or plan benefits which by their terms extend beyond
termination of Executive's employment, (iii) any benefits to which
Executive is entitled under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), and (iv) any other
amounts(s) payable pursuant to the succeeding provisions of this
paragraph 6.
(b) If the Employment Period ends pursuant to paragraph 5
hereof on Executive's sixty-fifth birthday, or if the Employment Period
ends early pursuant to paragraph 5 hereof on account of Executive's
death, Retirement or Termination for Disability, the Company shall make
no further payments to Executive except as contemplated in (a) (i), (ii)
and (iii) above.
(c) If the Employment Period ends early pursuant to
paragraph 5 hereof on account of Termination for Cause, the Company
shall pay Executive an amount equal to that Executive would have
received as salary (based on Executive's salary then in effect) had the
Employment Period remained in effect until the later of the effective
date of the Company's termination of Executive's employment or the date
thirty days after the Company's notice to Executive of such termination.
(d) If the Employment Period ends early pursuant to
paragraph 5 hereof on account of a Termination without Cause or a
Termination by Executive for Good Reason, the Company shall pay to
Executive amounts equal to the amounts Executive would have received as
salary (based on Executive's salary then in effect or, if greater,
Executive's Reference Salary) had the Employment Period remained in
effect until the date on which (without any extension thereof) it was
then scheduled to end, at the times such amounts would have been paid
(in the event Executive is entitled during the payment period to any
payments under any disability benefit plan or the like in which
Executive has participated as an employee of the Company, less such
payments); provided, however, that in the event of Executive's death
during the payment period, the Company shall pay any subsequent such
amounts to Executive's estate (or such person or persons as Executive
may designate in a written instrument signed by him and delivered to the
Company prior to his death) or, if so elected by the payee(s) by written
notice to the Company within the period of sixty (60) days after the
date of Executive's death, shall pay to such payee(s) a lump sum amount
equivalent to the discounted present value of such amounts, discounted
at the publicly announced reference rate for commercial lending of Bank
of America Illinois in effect at the date of notice to the Company of
such election, with said amount to be paid on a date no later than
thirty (30) days following the date of notice to the Company of such
election. In addition, the Company shall reimburse Executive (net after
taxes on the receipt of such reimbursement) for any premiums paid by
Executive for health insurance provided to Executive (for Executive and
his dependents) by the Company subsequent to the end of the Employment
Period pursuant to the requirements of COBRA as in effect on the date of
this Agreement. It is expressly understood that the Company's payment
obligations under this (d) shall cease in the event Executive breaches
any of his agreements in paragraph 7 or 8 hereof.
(e) If the Employment Period ends early pursuant to
paragraph 5 hereof on account of a Termination by Executive with Advance
Notice, the Company shall make no further payments to Executive except
as contemplated in (a) (i), (ii) and (iii) above.
7. Confidential Information. Executive acknowledges that
the information, observations and data obtained by him while employed by
the Company pursuant to this Agreement concerning the business or
affairs of the Company or any of its subsidiaries or affiliates or any
predecessor thereof (unless and except to the extent the foregoing
become generally known to and available for use by the public other than
as a result of Executive's acts or omissions to act, "Confidential
Information") are the property of the Company or such subsidiary or
affiliate. Therefore, Executive agrees that he shall not disclose any
Confidential Information without the prior written consent of the Board
unless and except to the extent that such disclosure is (i) made in the
ordinary course of Executive's performance of his duties under this
Agreement or (ii) required by any subpoena or other legal process (in
which event Executive will give the Company prompt notice of such
subpoena or other legal process in order to permit the Company to seek
appropriate protective orders), and that he shall not use any
Confidential Information for his own account without the prior written
consent of the Board. Executive shall deliver to the Company at the
termination of the Employment Period, or at any other time the Company
may request, all memoranda, notes, plans, records, reports, computer
tapes and software and other documents and data (and copies thereof)
relating to the Confidential Information, work product or the business
of the Company or any of its subsidiaries or affiliates which he may
then possess or have under his control.
8. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of his
employment with the Company pursuant to this Agreement he will become
familiar with trade secrets and customer lists of and other confidential
information concerning the Company and its subsidiaries and affiliates
and predecessors thereof and that his services will be of special,
unique and extraordinary value to the Company.
(b) Executive agrees (i) that during the Employment Period
he shall not in any manner, directly or indirectly, through any person,
firm or corporation, alone or as a member of a partnership or as an
officer, director, stockholder, investor or employee of or in any other
corporation or enterprise or otherwise, engage or be engaged in, or
assist any other person, firm, corporation or enterprise in engaging or
being engaged in, any business then actively being conducted by the
Company or any of its subsidiaries or affiliates, and (ii) that for two
years after the Employment Period he shall not in any manner, directly
or indirectly, through any person, firm or corporation, alone or as a
member of a partnership or as an officer, director, stockholder,
investor or employee of or in any other corporation or enterprise or
otherwise, assist Reed-Elsevier PLC or Chilton Company (a division of
Capital Cities/ABC, Inc.) or any subsidiary or affiliate of either of
them, or any successor or assign of any of them, in engaging or being
engaged in the business activity of publishing a magazine or
electronic media product that directly competes with any magazine or
electronic media product then being published by, conducting a trade
show that directly competes with any trade show then being conducted by,
or creating or disseminating any other product that competes directly
with any product then being created or disseminated by, the Company or
any of its subsidiaries or affiliates.
(c) Executive further agrees that during the Employment
Period and for two years thereafter he shall not in any manner, directly
or indirectly, induce or attempt to induce any employee of the Company
or of any of its subsidiaries or affiliates to quit or abandon his
employ.
(d) Nothing in this paragraph 8 shall prohibit Executive
from being: (i) a stockholder in a mutual fund or a diversified
investment company or (ii) a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly
traded, so long as Executive has no active participation in the business
of such corporation.
(e) If, at the time of enforcement of this paragraph, a
court holds that the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum
period, scope or geographical area reasonable under such circumstances
shall be substituted for the stated period, scope or area and that the
court shall be allowed to revise the restrictions contained herein to
cover the maximum period, scope and area permitted by law.
9. Enforcement. Because Executive's services are unique
and because Executive has access to Confidential Information and work
product, the parties hereto agree that the Company would be damaged
irreparably in the event any of the provisions of paragraph 8 hereof
were not performed in accordance with their specific terms or were
otherwise breached and that money damages would be an inadequate remedy
for any such non-performance or breach. Therefore, the Company or its
successors or assigns shall be entitled, in addition to other rights and
remedies existing in their favor, to an injunction or injunctions to
prevent any breach or threatened breach of any of such provisions and to
enforce such provisions specifically (without posting a bond or other
security).
10. Executive Representations. Executive represents and
warrants to the Company that (i) the execution, delivery and performance
of this Agreement by Executive does not and will not conflict with,
breach, violate or cause a default under any contract, agreement,
instrument, order, judgment or decree to which Executive is a party or
by which he is bound, (ii) Executive is not a party to or bound by any
employment agreement, noncompete agreement or confidentiality agreement
with any other person or entity other than a letter agreement dated
January 1, 1992 between Miller Freeman, Inc. and Executive and (iii)
upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of Executive,
enforceable in accordance with its terms.
11. Survival. Paragraphs 7 and 8 hereof shall survive and
continue in full force in accordance with their terms notwithstanding
any termination of the Employment Period.
12. Notices. Any notice provided for in this Agreement
shall be in writing and shall be either personally delivered, or mailed
by first class mail, return receipt requested, to the recipient at the
address below indicated:
Notices to Executive:
Mr. Thomas Kemp
81 Paseo Mirasol
Tiburon, CA 94920
Notices to the Company:
c/o Mr. King Harris
Pittway Corporation
200 South Wacker Drive, Suite 700
Chicago, IL 60606-5802
or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the
sending party. Any notice under this Agreement will be deemed to have
been given when so delivered or mailed.
13. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement is
held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality
or unenforceability shall not affect any other provision or any other
jurisdiction, but this Agreement shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
14. Payment of Certain Costs and Expenses.
(a) Executive's Front-End Attorneys' Fees. Subject to
documentation thereof in reasonable detail, the Company shall reimburse
Executive for up to $6,000 of attorneys' fees incurred by him in
connection with the negotiation of this Agreement.
(b) Prevailing Party's Litigation Expenses. In the event of
litigation between the Company and Executive related to this Agreement,
the non-prevailing party shall reimburse the prevailing party for any
costs and expenses (including without limitation attorneys' fees)
reasonably incurred by the prevailing party in connection therewith.
(c) Change of Control of the Company. Without limiting the
generality of (b) above, in the event that there is a Change of Control
of the Company, if the Company thereafter wrongfully withholds from
Executive any amount payable to Executive pursuant to this Agreement or
the SERP and Executive obtains a final judgment against the Company for
such amount, the Company shall reimburse Executive for any costs and
expenses (including without limitation attorneys' fees) reasonably
incurred by Executive in obtaining such judgment and shall pay Executive
interest on the amount of each such cost or expense from the date of
payment thereof by Executive to the date of reimbursement by the Company
at a floating rate per annum equal to the publicly announced reference
rate for commercial lending of Bank of America Illinois in effect from
time to time. For purposes of the foregoing, a "Change of Control of
the Company" will be deemed to have occurred if but only if, for
purposes of Section 13(d) of the Securities Exchange Act of 1934, as
amended, a person or group other than (i) Pittway, or (ii) one or more
members of the Harris Group (as currently defined in Pittway's Restated
Certificate of Incorporation, as amended) becomes the beneficial owner
of stock of the Company possessing a majority of the voting power under
ordinary circumstances with respect to the election of directors.
15. Complete Agreement. This Agreement embodies the
complete agreement and understanding between the parties with respect to
the subject matter hereof and effective as of its date supersedes and
preempts any prior understandings, agreements or representations by or
between the parties, written or oral, which may have related to the
subject matter hereof in any way.
16. Counterparts. This Agreement may be executed in
separate counterparts, each of which shall be deemed to be an original
and both of which taken together shall constitute one and the same
agreement.
17. Successors and Assigns. This Agreement shall bind and
inure to the benefit of and be enforceable by Executive, the Company and
their respective heirs, executors, personal representatives, successors
and assigns, except that neither party may assign any of his or its
rights or delegate any of his or its obligations hereunder without the
prior written consent of the other party. Executive hereby consents to
the assignment by the Company of all of its rights and obligations
hereunder to: (i) Pittway or any subsidiary or affiliate thereof in the
event all or any substantial part of the business to which Executive's
duties under this Agreement relate are transferred thereto and (ii) any
successor to the Company by merger or consolidation or purchase of all
or substantially all of the Company's assets; in each case provided such
transferee or successor assumes the liabilities of the Company
hereunder.
18. Choice of Law. This Agreement shall be governed by the
internal law, and not the laws of conflicts, of the State of Ohio.
19. Amendment and Waiver. The provisions of this Agreement
may be amended or waived only with the prior written consent of the
Company and Executive, and no course of conduct or failure or delay in
enforcing the provisions of this Agreement shall affect the validity,
binding effect or enforceability of this Agreement.
20. Company Option. Executive has advised the Company that,
under the terms of the letter agreement referred to in paragraph 10,
unless Miller Freeman, Inc. agrees otherwise, Executive must give Miller
Freeman, Inc. twelve months' notice in order to terminate his employment
thereunder. Executive agrees to use his best efforts to obtain the
written agreement of Miller Freeman, Inc. to the termination of his
employment under such letter agreement effective as of a date prior to
September 3, 1996. In the event Executive shall not have provided the
Company with such a written agreement, in form and substance acceptable
to the Company, by August 31, 1996, the Company may, at its option, at
any time prior to September 15, 1996, declare this Agreement null and
void. In any event, and notwithstanding the final sentence of paragraph
1, Executive shall not be required to commence full-time employment with
the Company at a time prior to the termination of his employment under
the letter agreement referred to in paragraph 10.
* * * *
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
PENTON PUBLISHING, INC.
By /s/ Sal F. Marino
Its Chairman/CEO
/s/ Thomas L. Kemp
THOMAS KEMP
The undersigned hereby agrees that in the event the Company
defaults, at any time when the Company is a majority-owned subsidiary of
the undersigned, in the payment of any amount payable to Executive
pursuant to the terms of the foregoing Employment Agreement, the
undersigned, promptly following receipt of demand therefor from
Executive, shall pay Executive an amount equal to the defaulted amount
in return for an assignment to the undersigned by Executive of his claim
against the Company for the defaulted amount.
PITTWAY CORPORATION
By /s/ King Harris
Its President
(Part of Exhibit 10
Form 10-Q
September 30, 1996)
Exhibit 1
PERFORMANCE SHARES AWARD AGREEMENT
Name __________________________ __________________, 19__
Division ________________________
This will confirm that the Compensation Committee (the "Committee")
of the Board of Directors of Pittway Corporation, a Delaware
corporation (the "Company"), has on the date hereof granted you a
Performance Shares Award under the Pittway Corporation 1990 Stock
Awards Plan (which Plan, as amended and as the same may hereafter be
amended from time to time, is referred to as the "Plan").
The Performance Shares Award ("your Award") relates to ______ shares
of the Company's Class A Stock, of the par value of $1 per share
("Class A Stock").
Your Award will vest on a cumulative basis of 33 1/3% per year on
each successive anniversary of the date hereof; provided that (a)
your Award will vest 100% in the event your employment with the
Company and its subsidiaries terminates prior to the third
anniversary of the date hereof on account of Retirement, Termination
for Disability, Termination without Cause or Termination by Executive
for Good Reason (in each case, as defined in the Employment Agreement
dated as of July 25, 1996 between Penton Publishing, Inc., a Delaware
corporation, and you ("Your Employment Agreement"); and (b) in the
event your employment terminates on account of a Termination for
Cause (as defined in Your Employment Agreement), all rights under
your Award which have not yet vested as of the date of termination
will be canceled.
Your Award will be paid, to the extent vested, by the issuance of
shares of Class A Stock within 45 days after vesting in full or
earlier termination of your employment.
As such time, if any, as shares of Class A Stock are issued in
payment of your Award, you will also be paid in cash: (a) an amount
equal to the quarterly dividends which would have been paid on such
shares through such time had such shares been issued to you on the
date hereof; plus (b) interest on the amount of each such dividend,
compounded at the end of each calendar year and at the time of
payment of your Award, at a rate per annum equal to the Company's
average money market investment or borrowing rate, as the case may
be, during such calendar year or during the year-to-date period ended
the last day of the most recently completed month, respectively.
Your award is subject to the terms, conditions and provisions of the
Plan, including without limitation the provision that interpretations
of the Plan by the Committee will be conclusive and binding on you.
Without limiting the generality of the foregoing, your Award is
subject to the following:
1. The issuance of share of Class A Stock in payment of your
Award has been registered by the Company under the Securities Act of
1933 on the Company's Form S-8 Registration Statement No. 33-54753
(the "Registration Statement"). By signing this Agreement, you
acknowledge that you have received a copy of the Company's Plan
Information Document dated February 15, 1996, which is a part of the
Registration Statement, and a copy of the Company's most recent
Annual Report to its stockholders. By signing this Agreement you
agree that you will not reoffer, resell or otherwise dispose of any
shares issued to you in payment of your Award in any manner which
would violate such Securities Act or any other federal or state
securities law, and further agree to reimburse the Company for any
loss, damage or expense of any kind which it may suffer by reason of
any breach of such agreement. You further acknowledge that the
Company has no obligation to keep the Registration Statement
effective or current or to file or keep effective or current any
other registration statement concerning any shares subject to your
Award.
2. The Committee may suspend the issuance of shares of Class A
Stock in payment of your Award if it determines that securities
exchange listing or registration or qualification under any
securities laws is required in connection therewith and has not been
completed on terms acceptable to the Committee.
3. The Company may withhold, or require you to remit to the
Company, an amount sufficient to satisfy any withholding or other tax
due with respect to any amount payable and/or shares issuable
pursuant to your Award, and the Committee may defer such payment or
issuance unless indemnified to its satisfaction.
4. You will have no rights as a holder of any of the shares
of Class A Stock subject to your Award, including without limitation
voting rights and rights to receive dividends, unless and until the
certificates representing such shares are issued to you.
5. Neither your Award nor any interest therein is transferable
by you other than by will or the laws of descent and distribution.
Any purported transfer contrary to this provision will nullify your
Award.
6. Nothing in the Plan or your Award shall interfere with or
limit in any way the right of the Company or any of its subsidiaries
to terminate your employment at any time or confer upon you any right
to continue in the employ or the Company or any of its subsidiaries
for any period of time or to continue your present or any other rate
of compensation; nor shall the grant of your Award give you any right
to any additional Performance Shares Award.
This Agreement will be binding upon and inure to the benefit of any
successor of the Company.
Please acknowledge your Award by signing the extra copy of this
Agreement in the space provided and returning the same to the
Financial Vice President of the Company.
PITTWAY CORPORATION
BY______________________
President
The undersigned hereby acknowledges the foregoing Award, and agrees
to be bound by the provisions of the foregoing Agreement and the
Plan.
_________________________
(Name of Recipient)
Date: ______________, 19__
(Part of Exhibit 10
Form 10-Q
September 30,1996)
Exhibit 2
PITTWAY CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
_ ___________________________________
[Insert Date of Grant]
[Name of Employee]
[Business Address]
Dear _______________:
I am pleased to advise you that the Committee for the Pittway
Corporation 1990 Stock Awards Plan (which Plan, as amended and as the
same may hereafter be amended from time to time, is referred to as the
"Plan") has on the date hereof (the "Grant Date") authorized the grant
of the following option effective immediately:
1. You are hereby granted the right and option to purchase,
on the terms and conditions hereinafter set forth, all or any part of an
aggregate of ____ shares of the Company's Class A Stock (herein the
"Option Shares") at a purchase price of $____ per Option Share. The
term "Class A Stock" as used herein means the Company's Class A Stock,
of the par value of $1.00 per share (or, from and after any change of
such Class A Stock into the Company's Common Stock, of the par value of
$1.00 per share ("Common Stock"), on a share-for-share basis pursuant to
the Company's Restated Certificate of Incorporation, as amended, Common
Stock). Your option is not intended to be, and will not be treated as,
an "incentive stock option" as such term is defined in Section 422A(b)
of the Internal Revenue Code of 1986, as amended.
2. Your option is irrevocable and is intended to conform in
all respects with the Plan as presently written. Inconsistencies
between your option and the Plan will be resolved according to the
terms of the Plan, a copy of which has been supplied to you.
3. Your option will be exercisable in whole at any time and
in part from time to time after the third anniversary of the Grant Date
but prior to the tenth anniversary of the Grant Date; provided, however
that:
(a) in the event that your employment with the Company and
its subsidiaries terminates prior to the third anniversary of the Grant
Date on account of your death or on account of Retirement, Termination
for Disability, Termination without Cause or Termination by Executive
for Good Reason (in each case, as defined in the Employment Agreement
dated as of July 25, 1996 between Penton Publishing, Inc., a Delaware
corporation, and you ("Your Employment Agreement"), your option will
thereupon become exercisable immediately with respect to all of the
Option Shares; and
(b) in the event that your employment with the Company and
its subsidiaries terminates prior to the third anniversary of the Grant
Date other than on account of your death and other than on account of
Retirement, Termination for Disability, Termination without Cause or
Termination by Executive for Good Reason (in each case, as defined in
Your Employment Agreement), your option will thereupon become
exercisable immediately (i) as to 33 1/3% of the Option Shares if such
termination occurs on or after the first anniversary of the Grant Date
but prior to the second anniversary of the Grant Date, and (ii) as to 66
2/3% of the Option Shares if such termination occurs on or after the
second anniversary of the Grant Date but prior to the third anniversary
of the Grant Date.
Notwithstanding the foregoing: (A) in the event that your
employment terminates on account of a Termination for Cause (as defined
in Your Employment Agreement), your option will cease to be exercisable
to the extent exercisable as of such termination and will not become
exercisable after such termination; (B) your option may not be exercised
during the first six months after the Grant Date, except in the event
your employment terminates on account of your death, or on account of a
Termination for Disability (as defined in Your Employment Agreement),
prior to the expiration of such six-month period; (C) in the event that
your employment with the Company and its subsidiaries terminates
(whether prior to, on or after the third anniversary of the Grant Date)
on account of your death or on account of a Termination for Disability
(as defined in Your Employment Agreement), your option will cease to be
exercisable upon the earlier of twelve (12) months after such
termination or three (3) months after the tenth anniversary of the Grant
Date; (D) in the event that your employment with the Company and its
subsidiaries terminates (whether prior to, on or after the third
anniversary of the Grant Date) on account of a Termination without Cause
or a Termination by Executive for Good Reason (each as defined in Your
Employment Agreement), your option will cease to be exercisable upon the
earlier of twelve (12) months after such termination or the tenth
anniversary of the Date of Grant; (E) in the event that your employment
with the Company and its subsidiaries terminates (whether prior to, on
or after the third anniversary of the Grant Date) for any reason other
than on account of a reason described in (A), (C) or (D) above, your
option (1) will not become exercisable after such termination as to any
shares in addition to those as to which it is exercisable at the time of
such termination, and (2) will cease to be exercisable upon the earlier
of three (3) months after such termination (subject to extension by the
Committee to up to twelve (12) months if the Committee so determines
prior to the expiration of your option) or the tenth anniversary of the
Grant Date; and (F) if at any time you take an authorized leave of
absence, the Committee may (but need not) determine that for this
purpose you will be deemed to continue in the employment of the Company
or a subsidiary of the Company.
Each time you wish to exercise your option to purchase Option
Shares, you must give the Company written notice of exercise (attention
Treasurer), which notice must specify the number of full Option Shares
to be purchased and the purchase price to be paid therefor. You may
exercise your option with respect to all or any part of the Option
Shares as to which your option has become exercisable, but you may not
exercise your option as to a fraction of a full share. In the event of
your death, your option may be exercised in accordance with this
paragraph 3 by your estate or by the person who acquired the right to
exercise your option by bequest or inheritance or by reason of the laws
of descent and distribution. In the event of your permanent disability,
your option may be exercised in accordance with this paragraph 3 by you
or your legal representative. Written notice of exercise must be
accompanied by payment in full of the purchase price, in the form of (A)
cash or a check, bank draft or money order payable to the order of the
Company, (B) shares of Class A Stock already owned by you (valued at the
fair market value thereof on the date of exercise), (C) shares of Common
Stock already owned by you (valued at the fair market value thereof on
the date of exercise), or (D) a combination thereof. Fair market value
for all purposes of this Agreement will be determined by the Committee.
4. Exercise of your option may be suspended if the Board of
Directors or the Committee determines that securities exchange listing
or registration or qualification under any securities laws is required
in connection therewith and has not been completed on terms acceptable
to the Board of Directors or the Committee.
5. The issuance of Class A Stock to you in the event you
exercise your option has been registered by the Company under the
Securities Act of 1933 on the Company's Form S-8 Registration Statement
No. 33-54753 (the "Registration Statement"). By executing this
Agreement, you acknowledge that you have received a copy of the
Company's Plan Information Document dated February 15, 1996, which is a
part of the Registration Statement, and a copy of the Company's most
recent Annual Report to its stockholders. By executing this Agreement
you agree that you will not reoffer, resell or otherwise dispose of any
Option Shares in any manner which would violate the Securities Act of
1933 or any other federal or state securities law, and further agree to
reimburse the Company for any loss, damage or expense of any kind which
it may suffer by reason of any breach at any time of such agreement,
including but not limited to any liabilities which the Company may have
under the Securities Act of 1933 or any other federal or state
securities law. You hereby agree that the Company will have no
obligation to you to keep effective or current its existing Registration
Statement, or to file or keep effective or current any additional
registration statement concerning any Option Shares.
6. (a) In the event of any reorganization,
recapitalization, reclassification, merger, consolidation, or sale of
all or substantially all of the Company's assets followed by
liquidation, which is effected in such a way that holders of the Class A
Stock are entitled to receive securities or other assets with respect to
or in exchange for the Class A Stock (an "Organic Change"), the
Committee shall make appropriate changes to insure that your option
thereafter represents the right to acquire, in lieu of or in addition to
the shares of the Class A Stock immediately theretofore acquirable upon
exercise, such securities or assets as may be issued or payable with
respect to or in exchange for an equivalent number of shares of Class A
Stock; and in the event of any stock dividend, stock split or
combination of shares, the Board of Directors shall make appropriate
changes in the number of shares authorized by the Plan to be delivered
thereafter, and the Committee shall make appropriate changes in the
number of shares covered by your option and the exercise price specified
herein (and in the event of a spinoff, the Committee may make similar
changes), in order to prevent the dilution or enlargement of your option
rights. However, no right to purchase or receive a fraction of a share
shall be created; and if, as a result of any such change, a fractional
share would result or the right to purchase or receive the same would
result, the number of shares in question shall be decreased to the next
lower whole number of shares.
(b) As used in this Agreement, the term "Option Shares"
includes, in addition to the shares described in paragraph 1 hereof as
the shares subject to your option, any other shares or other securities
which may be issued as a result of subparagraph (a).
7. Your option will not be assignable or transferable by
you other than by will or by the laws of descent and distribution, and
during your lifetime will be exercisable only by you or your legal
representative.
8. Any notice to be given to the Company under the terms of
this Agreement will be addressed to the Company in care of its Treasurer
at 200 South Wacker Drive, Suite 700, Chicago, Illinois 60606-5802, and
any notice to be given to you will be addressed to you at the address
given beneath your signature hereto, or at such other address as you may
direct in writing. Any such notice will be deemed to have been duly
given if and when enclosed in a properly sealed envelope addressed as
aforesaid, registered and deposited, postage and registry fee prepaid,
in a post office or branch post office regularly maintained by the
United States Government.
9. The Company may withhold from any amount owed to you by
the Company (or may require a subsidiary or other Affiliate (as defined
in the Plan) to withhold from any amount owed to you by it and remit to
the Company), or may require you to remit to the Company, an amount
sufficient to satisfy any withholding or other tax due with respect to
any shares to be issued by the Company upon the exercise of your option,
and the Committee may defer the issuance of such shares unless
indemnified to its satisfaction.
10. Nothing in this Agreement confers any right on you to
continue in the employ of the Company or any subsidiary or other
Affiliate or affects in any way the right of the Company or any
subsidiary or other Affiliate, as the case may be, to terminate your
employment at any time.
11. This Agreement will be binding upon and inure to the
benefit of any successor or successors of the Company.
In order to evidence the grant of your option, please execute
the extra copy of this Agreement in the space provided and return the
same to the Company, whereupon this Agreement will constitute a binding
option agreement between us.
Very truly yours,
PITTWAY CORPORATION
By _______________________________
[Name, Title]
The undersigned hereby acknowledges that the undersigned has
carefully read all of the provisions in this Agreement, including,
without limitation, the provision of paragraph 5 hereof regarding the
effect of the undersigned's execution of this Agreement. The
undersigned hereby agrees to be bound by all provisions set forth in
this Agreement and the Plan.
NAME: _________________________
ADDRESS: _________________________
_________________________
SOCIAL SECURITY #: _________________________
DATED: _________________________
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0
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