SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Year Ended December 31, 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, Suite 700, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (ZIP Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value New York Stock Exchange
Class A Stock, $1.00 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on closing sales prices on March 17, 1997): $823,544,000.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date (March 17, 1997): Common
Stock - 3,938,832 shares outstanding; Class A Stock - 17,042,444 shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Parts I and II of this report.
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on May 8, 1997 are incorporated by reference into Part
III of this report.
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PITTWAY CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
For The Year Ended December 31, 1996
PART I Page
Item 1 Business 3- 9
Item 2 Properties 9-11
Item 3 Legal Proceedings 11-12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market For Registrant's Common Equity and Related
Stockholder Matters 12
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 13
PART III
Item 10 Directors and Executive Officers of the Registrant 13
Item 11 Executive Compensation 13
Item 12 Security Ownership of Certain Beneficial
Owners and Management 13
Item 13 Certain Relationships and Related Transactions 13
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 14
SIGNATURES 15
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PART I
Item 1. Business
(a) General Development of Business
Pittway Corporation ("Pittway" or "Registrant"), formerly Standard Shares,
Inc. ("Standard"), was incorporated under Delaware law in 1925. Pittway and
its subsidiaries are referred to herein collectively as the "Company".
The Company operates in two reportable industry segments: alarm and other
security products, and publishing.
Acquisitions and dispositions of businesses by the Company, other than the
discontinued operations discussed below, in each of the five years ended
December 31, 1996 were not significant to the Company's sales or results of
operations.
In February 1996, the Company sold 13% of its investment in USSB as part of an
initial public offering of USSB common stock. The sale resulted in an after-
tax gain of $8.1 million or $.39 per share. Also in February, Cylink Corp-
oration made an initial public offering of its common stock. The Company
increased its carrying value of this investment to reflect the increase in the
Company's equity in Cylink's net book value. An after-tax gain of $14.4
million, or $.69 per share was recorded on the increase in Cylink's equity.
See "Real Estate and Other Ventures" in Item 1(c), below.
During the first half of 1994, the Company sold its 16.67% ownership in First
Alert, Inc., a manufacturer of residential fire protection products, as part
of an initial public offering of that company's common stock. The sale
resulted in an after-tax gain of $11.8 million or $.57 per share.
In April 1993, the Company distributed its investment in AptarGroup, Inc.
(formerly known as the Seaquist Division packaging group) to stockholders in a
tax-free spin-off. AptarGroup, Inc. is a manufacturer of aerosol valves,
dispensing pumps and closures which are sold to packagers and marketers in the
personal care, fragrance/cosmetics, pharmaceutical, household products and
food industries.
In October 1992, the Company sold its Barr Company, a contract packager for
marketers of aerosol and liquid fill (non-aerosol) personal and household
products, to a Canadian packaging company. In July 1992, the Company sold its
First Alert/BRK Electronics business to a new company formed by BRK management
and an investment firm. These sales resulted in combined after-tax gains of
$16.6 million or $.80 per share.
(b) Financial Information about Industry Segments
Financial information relating to industry segments for each of the three
years ended December 31, 1996 is set forth in Note 12 ("Segment Information")
to the Consolidated Financial Statements contained in the 1996 Annual Report
to Stockholders, pages 43-44, which Note is incorporated herein by reference.
(c) Narrative Description of Business
The principal operations, products and services rendered by the Company:
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Alarm and Other Security Products Segment
This segment involves the design, manufacture and sale of an extensive line of
burglar and commercial fire alarm equipment, closed circuit television, access
control and other alarm components and systems as well as the distribution of
alarm and other security products manufactured by other companies. By
offering a broad line of alarm products needed for security systems, the
Company provides a full range of services to independent alarm dealers and
installers which range in size from one person operations to the largest
national alarm service companies. In every major domestic market area, quick
delivery is provided through the Company's computerized regional warehouses
and convenience center outlets, authorized distributors and dealers. Various
products sold through the alarm system distribution group are purchased from
non-affiliated suppliers and manufacturers to offer a broad range of products.
Some of the products purchased are resold under the Company's Ademco brand
name, others are resold under brand names owned by its suppliers. In the
Canadian and overseas markets, alarm and other security products are sold
through the Company's distribution centers, authorized distributors and sales
agents. The Company also offers AlarmNet to alarm companies in major U.S.
markets. AlarmNet is a wireless cellular-like communication network designed
to transmit security alarm signals by radio instead of over telephone lines.
The Company also offers First Alert Professional, a brand name marketing
program to independent burglar alarm dealers.
Commercial fire detectors and fire controls are sold through the Company's
regional warehouses, electrical and building supply wholesalers and alarm and
fire safety distributors.
Raw materials essential to the Company's businesses are purchased worldwide in
the ordinary course of business from numerous suppliers. The vast majority of
these materials are generally available from more than one supplier and no
serious shortages or delays have been encountered. Certain raw materials used
in producing some of the Company's products can be obtained only from one or
two suppliers, the shortage of which could adversely impact production of
alarm equipment and commercial fire detectors by the Company. The Company
believes that the loss of any other single source of supply would not have a
material adverse effect on its overall business.
Through its NESCO subsidiary the Company offers a wide variety of services to
independent distributors of its fire alarm systems products, including
assistance with system design, bonding, technical help, training, marketing
and administrative support.
Sales and marketing methods common to this industry segment include
communications through the circulation of catalogs and merchandising
bulletins, direct mail campaigns, and national and local advertising in trade
publications. The Company's principal advantages in marketing are its
reputation, broad product line, high quality products, extensive integrated
distribution network, efficient customer service, competitive prices and brand
names.
Within the industry there is competition from large and small manufacturers in
both the domestic and foreign markets. While competitors will continue to
introduce new products similar to those sold by the Company, the Company
believes that its research and development efforts and the breadth and quality
of its distribution network will permit it to remain competitive.
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Publishing Segment
This segment is a publisher of 33 national business and trade publications.
The Company's publications serve both specific industries and broad functional
markets which include specialized manufacturing, service industries, technical
and professional fields and general management. Most publications are
distributed on a monthly basis with several others distributed on a biweekly,
annual or biennial frequency. The publications are generally distributed free
through controlled circulation. The principal source of revenue is from the
sale of advertising space within the magazines. A variety of magazine-related
products and services are also offered including: directories, readership
lists, specialty publications, custom publishing, trade shows and conferences;
research and telemarketing operations; CD-ROMs, on-line computer services, and
direct-response card mailer service. Other facets of the business include:
the operation of a printing plant for the printing and production of most of
the Company's publications and those of other publishers; a national direct
mail-marketing organization serving the pharmaceutical, health care and
business services markets; and a printer which provides mailing service
capabilities to the Company's direct mail-marketing organization and to
outside customers.
Within the publishing and marketing communications fields, competition exists
in the form of other publications and media communication businesses.
Reductions in advertising schedules by domestic industrial companies due to
economic and other competitive pressures directly impacts the display
advertising levels of the Company's publishing segment. The Company competes
with one or more other magazines for advertising revenue in each of its
magazine titles. The Company's principal sales advantages include relevant
editorial content and innovative marketing complemented by specialized
multi-magazine supplements. The Company believes that its competitive
position also benefits from improvements in productivity and from cost control
programs. The Company places great emphasis on providing quality products and
services to its customers.
Real Estate and Other Ventures
The Company is involved in the marketing, sale and development of land near
Tampa, Florida for residential and commercial use. Saddlebrook Village, a
2,000 acre parcel of land nearby, is approved for development as a master
planned community. Saddlebrook Corporate Center, a nearby 450 acre parcel,
originally planned as a business park for mixed use development, was partially
converted to a residential community due to the demand for residential
housing. Principal competition comes from other residential and commercial
developments in Florida.
The Company owns 8,606,085 shares (33.6% of the shares outstanding) of Cylink
Corporation (Cylink) a leading supplier of network information security
products that enable the secure transmission of data over private local area
networks and wide area networks and public packet switched networks, such as
the Internet. Cylink further offers a line of spread spectrum radio products
that are used for wireless voice and data communications. The Company also
owns 3,781,375 shares (4.2% of the shares outstanding) of United States
Satellite Broadcasting Company Inc. (USSB), a company which provides
subscription television programming via high-power direct broadcast satellite
to households throughout the Continental U.S. Both of these companies made
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initial public offerings of their respective stocks in February of 1996.
Additionally, the Company has approximately an 8.5% interest in a joint
venture that develops wireless signaling equipment for communication between
fixed points.
The Company has a limited partnership interest in a real estate developer with
major commercial and residential high rise properties located primarily in
Chicago. See Item 7 of this Form 10-K. The Company also has invested, as a
5% limited partner, in five rental apartment complexes located in Chicago,
Indianapolis, San Jose and two near Washington, D.C. which provide certain
tax advantages. The Company is an equity participant in leveraged leases of
an aircraft and communications satellite transponders.
Other Information
Patents and Trademarks -
While the Company owns or is licensed under a number of patents which are
cumulatively important to each of its business units, the loss of any single
patent or group of patents would not have a material adverse effect on the
Company's overall business.
Products manufactured by the Company are sold primarily under its own
trademarks and tradenames. Some products purchased and resold by the
Company's alarm and security products business are sold under the Company's
tradenames while others are sold under tradenames owned by its suppliers.
Customers -
Neither of the Company's industry segments is dependent upon a single customer
or a few customers. The loss of any one or more of these customers would not
have a material adverse effect on the Company's results of operations.
Research and Development -
The Company is engaged in programs to develop and improve products as well as
develop new and improved manufacturing methods. Expenditures for Company
sponsored research and development activities in the alarm and other security
products segment were $18.1 million in 1996, $16.6 million in 1995 and $11.8
million in 1994. These costs, which are expensed in the Company's
consolidated income statement, were associated with a number of products in
varying stages of development, none of which represents a significant item of
cost or is projected to be a significant addition to the Company's line of
products.
Product Liability -
Due to the nature of the fire and security alarm business, the Company has
been, and continues to be, subjected to numerous claims and lawsuits alleging
defects in its products. This exposure has been lessened by the sale of First
Alert/BRK Electronics. It is likely, due to the present litigious atmosphere
in the United States, that additional claims and lawsuits will be filed in
future years. The Company believes that it maintains sufficient insurance
to cover this exposure.
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Environmental Matters -
The Company anticipates that compliance with various laws and regulations
relating to protection of the environment will not have a material effect on
its capital expenditures, earnings or competitive position.
Employees -
At December 31, 1996, there were approximately 6,800 persons employed by the
Company, including 5,200 employed in the United States. Approximately 1,200
of the employees working in the United States were represented by labor
unions. The Company considers its relations with its employees and the unions
representing its employees to be good.
Risks and Uncertainties -
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its
actual results in 1997 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Risks associated with acquisition strategy - The Company's strategy includes
the acquisition of businesses that complement or augment the Company's
existing products and services. Promising acquisitions are difficult to
identify and complete for a number of reasons, including competition among
prospective buyers and the need for regulatory approvals, including antitrust
approvals. Any acquisitions completed by the Company may be made at
substantial premiums over the fair value of the net assets of the acquired
companies. There can be no assurance that the Company will be able to
complete future acquisitions or that the Company will be able to successfully
integrate any acquired businesses. In order to finance such acquisitions, it
may be necessary for the Company to raise additional funds through public or
private financings. Any equity or debt financing, if available at all, may be
on terms which are not favorable to the Company and, in the case of equity
financing, may result in dilution to the Company's stockholders.
Competition - The Company encounters and expects to continue to encounter
significant competition in the sale of its products and services. The
Company's competitors include a number of large multinational corporations,
some of which may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than the Company.
Competition could increase if new companies enter the market or if existing
competitors expand their product lines or intensify efforts within existing
product lines. There can be no assurance that the Company's current products,
products under development, or ability to develop new technologies will be
sufficient to enable it to compete effectively.
Risks associated with international operations - International sales account
for 14% of the Company's 1996 consolidated revenues and the Company intends to
continue to expand its presence in international markets. International
revenues are subject to a number of risks, including the following: agreements
may be difficult to enforce and receivables difficult to collect through a
foreign country's legal system; foreign customers may have longer payment
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cycles; foreign countries may impose additional withholding taxes or otherwise
tax the Company's foreign income, impose tariffs, or adopt other restrictions
on foreign trade; fluctuations in exchange rates may affect product demand and
adversely affect the profitability in U.S. dollars of products and services
provided by the Company in foreign markets where payment for the Company's
products and services is made in the local currency; U.S. export licenses may
be difficult to obtain; and the protection of intellectual property in foreign
countries may be more difficult to enforce. There can be no assurance that
any of these factors will not have a material adverse impact on the Company's
business and results of operations.
Rapid and significant technological change and new products - The markets for
the Company's products are characterized by rapid and significant
technological change, evolving industry standards and frequent new product
introductions and enhancements. Many of the Company's products and products
under development are technologically innovative, and require significant
planning, design, development and testing, at the technological, product and
manufacturing process levels. These activities can require significant
commitments of capital, personnel and other resources by the Company. In
addition, products that are competitive in the Company's markets are
frequently characterized by rapid and significant technological change due to
industry standards that may change and by the introduction of new products and
technologies that render existing products and technologies uncompetitive or
obsolete. There can be no assurance that any of the products currently being
developed by the Company, or those to be developed in the future, will be
technologically feasible or accepted by the marketplace, that any such
development will be completed in any particular time frame, or that the
Company's products or proprietary technologies will not become uncompetitive
or obsolete.
Possible adverse effect from changes in governmental regulations - The Company
competes in several markets which involve compliance by its customers with
Federal, state, local and foreign regulations. The Company develops,
configures and markets its products to meet customer needs created by such
regulations. These regulations may be amended in response to new scientific
evidence or political or economic considerations. Any significant change in
regulations could adversely affect demand for the Company's products in
regulated markets.
Risks associated with dependence on capital spending policies - The level of
capital spending by users of the Company's products can have a significant
effect on the Company's revenues. Such spending is based on a wide variety of
factors, including the resources available to make purchases, the spending
priorities among various types of equipment, public policy, and the effects of
different economic cycles. Any decrease in such spending could have a
material adverse effect on the Company's business and results of operations.
Dependence on patents and proprietary rights - The Company seeks to obtain
patents and protect trade secrets for significant new technologies, products
and processes because of the length of time and expense associated with
bringing new products through the development process and to the marketplace.
The Company's success depends in part on its ability to develop patentable
products and obtain and enforce patent protection for its products both in the
U.S. and in other countries. The Company owns numerous U.S. and foreign
patents, and intends to file additional applications for patents as
appropriate to cover its products. No assurance can be given that patents
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will issue from any pending or future patent applications owned by or licensed
to the Company or that the claims allowed under any issued patents will be
sufficiently broad to protect the Company's technology. In addition, no
assurance can be given that any issued patents owned by or licensed to the
Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company.
The Company could incur substantial costs in defending itself in suits brought
against it or in suits in which the Company may assert its patent rights
against others. If the outcome of any such litigation is unfavorable to the
Company, the Company's business and results of operations could be materially
adversely affected.
The Company relies on trade secrets and proprietary know-how which it seeks to
protect, in part, by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements
will not be breached, that the Company would have adequate remedies for any
breach or that the Company's trade secrets will not otherwise become known or
be independently developed by competitors.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Financial information concerning foreign and domestic operations and export
sales is set forth in Note 12 ("Segment Information") to the Consolidated
Financial Statements contained in the 1996 Annual Report to Stockholders,
pages 43-44, which Note is incorporated herein by reference.
Item 2. Properties
The Company's principal properties and their general characteristics are as
follows:
Principal Lease Approximate
Location Use Expiration Square Feet
Alarm and Other Security
Products Segment-
Syosset, New York (1) N/A 340,000
Syosset, New York (3) 1997 14,000
Syosset, New York (1) 1997 6,000
Syosset, New York (1) 2000 33,000
Syosset, New York (1) 2014 10,000
Torrance, California (1) 1998 48,000
Miami, Florida (2) 2000 14,000
El Paso, Texas (2) 2001 19,000
El Paso, Texas (2) 2002 74,000
Louisville, Kentucky (3) 1997 4,000
Louisville, Kentucky (3) 1998 4,000
Raleigh, North Carolina (1) 1998 8,000
Northford, Connecticut (1) N/A 240,000
St. Charles, Illinois (1) 2003 158,000
St. Charles, Illinois (1) 2004 50,000
West Chicago, Illinois (1) 1998 21,000
Norcross, Georgia (3) 1998 6,000
Melbourne, Australia (2) 1998 5,000
Sydney, Australia (2) 1998 25,000
Alleur, Belgium (2) 1997 5,000
Toronto, Canada (2) 1998 7,000
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Principal Lease Approximate
Location Use Expiration Square Feet
Alarm and Other Security
Products Segment- (continued)
Concord, Ontario, Canada (2) 1997 7,000
Brighton, England (1) 1997 24,000
Lichfield Staffs, England (4) 2014 20,000
Burgess Hill, England (4) N/A 60,000
East Kilbride, Scotland (1) N/A 15,000
Hilden, Germany (2) 1999 8,000
Purmerend, The Netherlands (2) N/A 25,000
Tsuen Wan, NT, Hong Kong (2) 1999 5,000
Milan, Italy (1) N/A 14,000
Milan, Italy (2) 2001 8,000
Trieste, Italy (1) N/A 40,000
Juarez, Mexico (4) 1997 71,000
Juarez, Mexico (4) 2004 83,000
Juarez, Mexico (4) 2007 148,000
Madrid, Spain (2) 2000 8,000
Barcelona, Spain (2) 2005 6,000
Distribution Centers
Hub Locations:
Atlanta, Georgia (2) 2005 29,000
Boston, Massachusetts (2) 1999 14,000
Los Angeles, California (2) 1999 30,000
Chicago, Illinois (2) 2005 40,000
Clearwater, Florida (2) 2004 27,000
Memphis, Tennessee (2) 2006 15,000
Richmond, Virginia (2) 2004 14,000
Louisville, Kentucky (2) 2007 190,000
Phoenix, Arizona (2) 2004 15,000
Dallas, Texas (2) 1997 21,000
Denver, Colorado (2) 1999 11,000
Detroit, Michigan (2) 2000 15,000
Pine Brook, New Jersey (2) 1998 37,000
Seattle, Washington (2) 2006 25,000
Toronto, Canada (2) 2007 26,000
Montreal, Canada (2) 2000 9,000
Publishing Segment-
Cleveland, Ohio (3) 2000 179,000
Cleveland, Ohio (2) 2001 28,000
Berea, Ohio (5) N/A 100,000
New York, New York (3) 2000 10,000
Dunedin, Florida (3) 2000 13,000
Safety Harbor, Florida (1) 1997 19,000
Tampa, Florida (2) 1999 19,000
Tampa, Florida (5) 2000 15,000
Hasbrouck Heights, New Jersey (3) 2006 22,000
General Corporate-
Chicago, Illinois (3) 2001 12,000
Other properties in the alarm and other security products segment include 85
full-line convenience centers in addition to those hub locations listed above
which function as retail-like sales distribution outlets to serve the North
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American market. These 85 centers are under leases expiring through 2006 and
range in size from 1,200 to 12,300 square feet. Other properties in the
publishing segment include 14 sales and/or editorial offices under leases
expiring through 2007 located in major cities throughout the United States.
The Company believes the above facilities are adequate for its present needs.
(1) Offices, Manufacturing and Warehousing
(2) Warehousing
(3) General Offices
(4) Manufacturing
(5) Printing
N/A Not applicable - facilities are owned by the Company
Item 3. Legal Proceedings
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for
Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose
out of the development of Saddlebrook's resort and a portion of the adjoining
residential properties owned and 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 trial court, Saddlebrook's
motion for summary judgment, based on collateral estoppel on the ground that
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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 decision
granting summary judgment. In August 1996, the appellate court affirmed all
but three issues in the trial court's summary judgment order in favor of
Saddlebrook. A hearing is set for April 4, 1997 to determine the scope of the
three issues remaining for retrial.
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.
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature including a lawsuit
claiming patent infringement that is scheduled for trial in 1997. While
management believes that resolution of the patent infringement suit and other
existing claims and lawsuits will not have a material adverse effect on the
Company's financial statements, management is unable to estimate the magnitude
of financial impact of claims and lawsuits which may be filed in the future.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market For Registrant's Common Equity and Related Stock-
holder Matters
The information set forth under the heading "Market Prices, Security Holders
and Dividend Information" appearing on page 47 of the Company's 1996 Annual
Report to Stockholders is incorporated herein by reference.
Item 6. Selected Financial Data
The information set forth under the heading "Supplemental Information -Five
Year Summary of Selected Financial Data" appearing on page 46 of the Company's
1996 Annual Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information set forth under the heading "Management's Discussion and
Analysis" appearing on pages 48-49 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Summary of Accounting
Policies and Notes thereto, together with the report thereon of Price
Waterhouse LLP dated February 19, 1997, appearing on pages 31-45 of the
Company's 1996 Annual Report to Stockholders are incorporated herein by
reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
PART III
Information required to be furnished in this part of the Form 10-K has been
omitted because the Registrant will file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A under the
Securities Exchange Act of 1934 not later than April 30, 1997.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the headings "Nominees for Election by the
Holders of Class A Stock", "Nominees for Election by the Holders of Common
Stock", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on May 8, 1997 is incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the headings "Compensation Committee
Interlocks and Insider Participation", "Compensation", "Compensation Committee
Report on Executive Compensation" and "Performance Graph" in the Registrant's
Proxy Statement for the annual meeting of stockholders to be held on May 8,
1997 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Registrant's Proxy Statement for the
annual meeting of stockholders to be held on May 8, 1997 is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the headings "Certain Transactions" (and the
information set forth under the heading "Compensation Committee Interlocks and
Insider Participation" which is cross-referenced under the heading "Certain
Transactions") in the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on May 8, 1997 is incorporated herein by reference.
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements and financial statement schedule filed as
a part of this report are listed in the Index to Consolidated
Financial Statements and Financial Statement Schedules on page
13 of this Form 10-K and are incorporated herein by reference.
Exhibits required by Item 601 of Regulation S-K are listed in
the Index to Exhibits on pages 19-20 of this Form 10-K, which is
incorporated herein by reference. Each management contract or
compensatory plan or arrangement required to be filed as an
Exhibit to this report pursuant to Item 14 (c) of Form 10-K is
so identified on the Index to Exhibits.
(b) No reports on Form 8-K have been filed during the fourth quarter
of the year for which this report is filed.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PITTWAY CORPORATION
(Registrant)
BY /s/ Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President and Treasurer
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 31, 1997.
/s/ King Harris /s/ Leo A. Guthart
King Harris, Director, President Leo A. Guthart, Director
and Chief Executive Officer
/s/ Paul R. Gauvreau /s/ Irving B. Harris
Paul R. Gauvreau, Principal Irving B. Harris, Director
Financial and Accounting Officer
/s/ Eugene L. Barnett /s/ William W. Harris
Eugene L. Barnett, Director William W. Harris, Director
/s/ Sidney Barrows /s/ Jerome Kahn, Jr.
Sidney Barrows, Director Jerome Kahn, Jr., Director
/s/ Fred Conforti /s/ Leo F. Mullin
Fred Conforti, Director Leo F. Mullin, Director
/s/ Anthony Downs
Anthony Downs, Director
15
<PAGE>
PITTWAY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as a part of this report:
Page reference in
Annual Report to
Stockholders
Financial Statements required by Item 8 of this Form:
Consolidated Balance Sheet at December 31,
1996 and 1995........................................ 32-33
For each of the three years ended December 31, 1996 -
Consolidated Statement of Income..................... 31
Consolidated Statement of Cash Flows................. 34
Consolidated Statement of Stockholders' Equity....... 35
Summary of Accounting Policies and Notes to
Consolidated Financial Statements.................... 36-44
Report of Independent Accountants...................... 45
Page reference in
Form 10-K
Financial Statement Schedule required by
Article 12 of Regulation S-X:
Report of Independent Accountants on Financial
Statement Schedule................................... 17
Consolidated Financial Statement Schedule II
Valuation and Qualifying Accounts.................... 18
The consolidated financial statements of Pittway Corporation, listed in the
above index together with the Report of Independent Accountants, which are
included in the Company's 1996 Annual Report to Stockholders, are incorporated
herein by reference.
All other schedules have been omitted because the required information is not
present, or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto. Summarized financial information for
the investment in affiliate, limited real estate partnerships and other
ventures is omitted because, when considered in the aggregate, they do not
constitute a significant subsidiary.
With the exception of the aforementioned information and information
incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7
and 8) of this Form 10-K, the Company's 1996 Annual Report to Stockholders is
not deemed to be filed as part of this report.
16
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Pittway Corporation
Our audits of the consolidated financial statements referred to
in our report dated February 19, 1997 appearing on page 45 of the 1996
Annual Report to Stockholders of Pittway Corporation (which report and
consolidated financial statements are incorporated by reference in this
Annual Report on Form 10-K) also included an audit of the Financial
Statement Schedule listed in the index on page 16 of this Form 10-K. In
our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
February 19, 1997
17
<PAGE>
<TABLE>
PITTWAY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<CAPTION>
Balance at Charges to Deductions Balance
beginning costs and from at end
of period expenses reserve (A) of period
<S> <C> <C> <C> <C>
1996
Allowance for doubtful accounts $8,493 $5,170 $3,993 $9,670
Inventory obsolescence reserve 6,613 2,686 787 8,512
1995
Allowance for doubtful accounts $6,348 $4,901 $2,756 $8,493
Inventory obsolescence reserve 6,526 1,464 1,377 6,613
1994
Allowance for doubtful accounts $5,521 $3,167 $2,340 $6,348
Inventory obsolescence reserve 5,222 1,925 621 6,526
(A) Write-off of accounts considered uncollectible, net of recoveries, or write-off of
obsolete inventory. Also includes valuation accounts of acquired or divested
companies and foreign currency translation adjustments, net.
</TABLE>
18
<PAGE>
INDEX TO EXHIBITS
Sequential
Number and Description of Exhibit Page Number***
3.1 Restated Certificate of Incorporation of Registrant,
as amended (incorporated by reference to Exhibit 3.1
of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996).
3.2 Certificate of Amendment of Restated Certificate
of Incorporation of Registrant dated December 28,
1989 (incorporated by reference to Exhibit 3.2 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
3.3 Certificate of Amendment to Restated Certificate of
Incorporation dated May 9, 1996 (incorporated by
reference to Exhibit 3.3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
3.4 Bylaws of Registrant, as amended (incorporated by
reference to Exhibit 3.3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995).
4. Composite Conformed Copy of separate Note Purchase
Agreements Dated as of December 15, 1995, each,
between the Registrant and one of Metropolitan Life
Insurance Company, Metropolitan Property and
Casualty Insurance Company, Nationwide Life
Insurance Company, Employers Life Insurance
Company of Wausau, and West Coast Life Insurance
Company without exhibits(incorporated by reference
to Exhibit 4.0 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.1 Pittway Corporation 1990 Stock Awards Plan, as
amended (incorporated by reference to Exhibit 4.4 to
the Registrant's Form S-8 Registration Statement
No. 33 - 54753 filed with the Commission on
July 27, 1994).
10.2 Pittway Corporation 1996 Director Stock Option Plan
(incorporated by reference to Exhibit 4 of
Registrant's Form S-8 Registration Statement
No. 333 - 12615 filed with the Commission on
September 25, 1996).
19
<PAGE>
INDEX TO EXHIBITS - cont'd.
Sequential
Number and Description of Exhibit Page Number***
10.3 Employment Agreement with King Harris dated as of
January 1, 1996. (incorporated by reference to
Exhibit 10.6 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).**
10.4 Employment Agreement with Leo A. Guthart dated as of
January 1, 1996. (incorporated by reference to
Exhibit 10.7 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).**
10.5 Employment Agreement with Thomas L. Kemp dated
as of July 25, 1996. (incorporated by reference
to Exhibit 10 of the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1996).**
13. 1996 Annual Report to Stockholders.*
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedule (submitted only in
electronic format).
* Such report, except to the extent incorporated herein by
reference, is being furnished for the information of the Securities
and Exchange Commission only and is not to be deemed filed as
a part of this Form 10-K.
** This document is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report
pursuant to Item 14 (c) of Form 10-K.
*** This information appears only in the manually signed original of
this Form 10-K.
20
<PAGE>
EXHIBIT 13
PITTWAY CORPORATION
DECEMBER 31, 1996
FORM 10-K
<TABLE>
Pittway Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
For The Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net Sales $1,111,575 $945,669 $778,026
Operating Expenses:
Cost of sales 678,903 581,694 475,420
Selling, general and
administrative 322,106 283,717 232,524
Depreciation and amortization 28,166 21,014 20,160
1,029,175 886,425 728,104
Operating Income 82,400 59,244 49,922
Other Income (Expense):
Gain on sale of
investment 13,162 19,506
Gain from Cylink stock
offering 23,279
Income from marketable
securities and other interest 3,147 2,745 3,955
Interest expense (8,624) (5,778) (3,250)
Income from investments 1,766 3,828 2,506
Miscellaneous, net 350 4,039 1,206
33,080 4,834 23,923
Income Before Income Taxes 115,480 64,078 73,845
Income Taxes (Note 5):
Current 34,580 30,634 27,301
Deferred 7,858 (6,928) 1,708
42,438 23,706 29,009
Net Income $ 73,042 $ 40,372 $ 44,836
Net Income Per Share of Common
and Class A Stock (Note 7) $ 3.49 $ 1.93 $ 2.15
Average Number of Shares
Outstanding (in thousands)(Note 7) 20,921 20,912 20,911
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 31
<PAGE>
<TABLE>
Pittway Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
(Dollars in thousands, except per share)
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Current Assets:
Cash and equivalents $ 32,409 $ 31,407
Marketable securities 26,026 25,586
Accounts and notes receivable, less
allowance for doubtful accounts of
$9,670 in 1996 and $8,493 in 1995 208,182 175,432
Inventories (Note 2) 203,254 152,636
Future income tax benefits (Note 5) 19,358 16,996
Prepayments, deposits and other 10,287 11,929
499,516 413,986
Property, Plant and Equipment, at cost:
Buildings 43,413 25,797
Machinery and equipment 224,268 190,780
267,681 216,577
Less: Accumulated depreciation 132,867 109,021
134,814 107,556
Land 2,787 2,188
137,601 109,744
Investments:
Marketable securities 37,814 20,000
Investment in affiliate 31,183 7,689
Real estate and other ventures 39,242 33,874
Leveraged leases (Note 3) 19,515 21,046
127,754 82,609
Other Assets:
Goodwill, less accumulated amortization
of $9,707 in 1996 and $8,432 in 1995 54,068 48,714
Other intangibles, less accumulated
amortization of $10,668 in 1996 and
$10,360 in 1995 5,022 5,422
Notes receivable 8,070 5,892
Miscellaneous 7,062 6,607
74,222 66,635
$839,093 $672,974
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 32
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
Current Liabilities:
Notes payable (Note 4) $ 46,525 $ 32,212
Long-term debt due within one year (Note 4) 3,933 3,788
Dividends payable 1,724 1,766
Accounts payable 102,077 68,700
Accrued expenses 53,937 46,310
Income taxes payable 5,685 5,644
Retirement and deferred compensation plans 6,782 6,503
Unearned income 3,538 3,185
224,201 168,108
Long-Term Debt, less current maturities (Note 4):
Notes payable, 6.70% and 6.81%, due in annual
installments of $5 million beginning 1999
with the balance due 2005 75,000 75,000
Capitalized leases, principally at 5%-6%, due
in monthly installments through 2002 4,921 6,186
Other 7,995 4,780
87,916 85,966
Deferred Liabilities:
Income taxes (Note 5) 65,738 46,920
Other 14,366 8,954
80,104 55,874
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares;
none issued
Common capital stock, $1 par value (Note 7) -
Common stock, authorized 30,000,000 shares;
3,938,832 shares issued and outstanding 3,939 3,939
Class A stock, authorized 24,000,000 shares;
16,987,622 and 16,973,313 shares issued
and outstanding in 1996 and 1995,
respectively 16,987 16,973
Capital in excess of par value 21,714 21,423
Retained earnings 391,753 325,420
Cumulative marketable securities valuation
adjustment 12,453 (2,019)
Cumulative foreign currency translation
adjustment 26 (2,710)
446,872 363,026
$839,093 $672,974
</TABLE>
Page 33
<PAGE>
<TABLE>
Pittway Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From
Operating Activities:
Net income $ 73,042 $ 40,372 $ 44,836
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 28,166 21,014 20,160
Gain on sale of investment, net of taxes (8,149) (11,776)
Gain from Cylink stock offering,
net of taxes (14,413)
Deferred income taxes (876) (6,928) 1,708
Retirement and deferred compensation
plans 4,915 9,275 2,010
Income/loss from investments adjusted
for cash distributions received 404 2,277 (931)
Provision for losses on accounts
receivable 5,170 4,901 3,167
Gain on sale of assets (106) (2,575) (828)
Change in assets and liabilities,
excluding effects from acquisitions,
dispositions and foreign currency
adjustments:
Increase in accounts and
notes receivable (32,000) (34,229) (26,882)
Increase in inventories (48,350) (17,457) (23,669)
Decrease (increase) in prepayments
and deposits 1,482 (2,068) (3,422)
Increase in accounts payable and
accrued expenses 37,063 7,628 19,919
Increase (decrease) in income taxes
payable 114 (4,480) 7,137
Other changes, net (1,211) (3,904) 2,491
Net cash provided by operations 45,251 13,826 33,920
Cash Flows From Investing Activities:
Capital expenditures (50,189) (42,056) (28,246)
Proceeds from the sale of investment,
net of taxes of $5,013 and $9,730 10,748 14,776
Proceeds from the sale of marketable
securities 11,102 16,034 29,297
Purchases of marketable securities (10,600) (5,846) (37,261)
Dispositions of property and equipment 793 3,202 795
Additions to investments (4,566) (5,984) (10,112)
Dispositions of businesses 355 650
(Increase) decrease in notes receivable (4,351) (1,194) 4,267
Net assets of businesses acquired,
net of cash (3,263) (12,931) (5,921)
Net cash used by investing activities (50,326) (48,420) (31,755)
Cash Flows From Financing Activities:
Net increase (decrease)in notes payable 12,540 (14,090) 14,802
Proceeds of long-term debt 5,284 81,693 3,585
Repayments of long-term debt (5,338) (5,307) (5,488)
Stock options exercised 133
Dividends paid (6,752) (6,699) (6,707)
Net cash provided by financing activities 5,867 55,597 6,192
Effect of Exchange Rate Changes on Cash 210 45 94
Net Increase in Cash and Equivalents 1,002 21,048 8,451
Cash and Equivalents at Beginning of Period 31,407 10,359 1,908
Cash and Equivalents at End of Period $ 32,409 $ 31,407 $ 10,359
Supplemental Cash Flow Disclosure:
Interest paid $ 8,552 $ 5,720 $ 3,388
Income taxes paid $ 35,166 $ 35,329 $ 22,173
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 34
<PAGE>
<TABLE>
Pittway Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share)
<CAPTION>
Cumulative Cumulative
Marketable Foreign
Capital In Securities Currency
Common Stock Class A Stock Excess of Retained Valuation Translation
Shares Par Value Shares Par Value Par Value Earnings Adjustment Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 2,626,024 $2,626 11,314,700 $11,315 $28,348 $253,628 $(3,853)
Cumulative effect of change in
accounting for marketable
securities $ 141
Net income 44,836
Cash dividends declared:
Common stock - $.267 per share (1,051)
Class A stock - $.333 per share (5,657)
Marketable securities
valuation adjustment (3,191)
Currency translation adjustment 988
Balance - December 31, 1994 2,626,024 2,626 11,314,700 11,315 28,348 291,756 (3,050) (2,865)
Net income 40,372
Cash dividends declared:
Common stock - $.267 per share (1,051)
Class A stock - $.333 per share (5,657)
Shares issued pursuant to
performance awards 996 1 52
Three-for-two stock split
(Including $7 payable for
fractional shares) 1,312,808 1,313 5,657,617 5,657 (6,977)
Marketable securities
valuation adjustment 1,031
Currency translation adjustment 155
Balance - December 31, 1995 3,938,832 3,939 16,973,313 16,973 21,423 325,420 (2,019) (2,710)
Net income 73,042
Cash dividends declared:
Common stock - $.267 per share (1,051)
Class A stock - $.333 per share (5,658)
Shares issued pursuant to stock
options 14,309 14 291
Marketable securities
valuation adjustment 14,472
Currency translation adjustment 2,736
Balance - December 31, 1996 3,938,832 $3,939 16,987,622 $16,987 $21,714 $391,753 $12,453 $ 26
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 35
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
(Dollars in thousands)
Basis of Presentation
The consolidated financial statements include the accounts of
Pittway Corporation and its majority-owned subsidiaries (the "Company").
The Company follows the equity method of accounting for its investments
in greater than 20%-owned but less than majority-owned affiliates. All
share and per share data, as appropriate, reflect a 3-for-2 stock split
paid March 1, 1996 (Note 7). All significant intercompany accounts and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year classification.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents are generally comprised of highly liquid
instruments with original maturities of three months or less, such as
treasury bills, certificates of deposit, commercial paper and time
deposits.
Marketable Securities
The Company records its investments in marketable securities at
market value. Changes in market value for these securities are reported,
net of tax, in a separate component of stockholders' equity until
realized.
Inventories
Inventories are stated at cost, which is lower than market. Costs
included in inventories are raw materials, direct labor and manufacturing
overhead. Cost of substantially all domestic inventories is determined
by using the last-in, first-out (LIFO) method, while the remaining
inventories are valued primarily using the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are
depreciated over the estimated useful lives of the assets using the
straight-line method for financial reporting purposes. Depreciation
expense amounted to $25,661, $21,100 and $17,492 in 1996, 1995 and 1994,
respectively.
Investments
Marketable securities consist of stock in United States Satellite
Broadcasting ("USSB"), a satellite broadcast company. USSB was carried
at cost at December 31, 1995.
Investment in affiliate consists of an equity interest in Cylink
Corporation ("Cylink"), an affiliate that manufactures encryption and
data communication devices.
Real estate and other ventures consist principally of equity
interests in limited real estate partnerships and land held for
development. The Company's adjusted basis in certain of the limited real
estate partnerships is carried at zero, and investments in other
partnerships and ventures are carried on a cost basis. Cash
distributions received from these partnerships and ventures are recorded
as income from investments.
Leveraged leases consist of the rentals receivable net of the
principal and interest on the related nonrecourse debt, estimated
residual value of the leased property and unearned income. The unearned
income is recognized as income from investments over the lease term.
Intangible Assets
Management believes that goodwill, trademarks and tradenames
acquired in purchase transactions have continuing value. It is the
Company's policy to amortize such costs over periods of up to 40 years
except for the costs of such assets acquired prior to 1970. Intangible
assets of approximately $3,356 related to pre-1970 acquisitions are not
being amortized because the Company believes there has been no diminution
of value.
Other intangibles acquired in purchase transactions or developed,
consisting of non-compete agreements, customer mailing lists, patents and
software development costs are capitalized and amortized over their
estimated useful lives.
The carrying value of intangible assets is periodically reviewed by
the Company and impairment is recognized when the projected, undiscounted
net pretax cashflows derived from such intangible assets are less than
their carrying value.
Page 36
<PAGE>
Research and Development Expenses
Research and development costs are expensed as incurred. These
costs amounted to $18,077, $16,599 and $11,849 in 1996, 1995 and 1994,
respectively.
Advertising and Promotion Expenses
Advertising and promotion costs are expensed as incurred. These
costs amounted to $20,512, $17,500 and $15,440 in 1996, 1995 and 1994,
respectively.
Income Taxes
Provisions for income taxes recognize the tax effects of all
transactions entering into the determination of net income for financial
statement purposes, irrespective of when such transactions are reported
for income tax purposes. In general, depreciation is computed on a
straight-line method for financial reporting purposes and on accelerated
methods for income tax purposes. Deferred income taxes and future income
tax benefits have been recognized for all temporary differences.
The Company uses the liability method of accounting for deferred
income taxes.
Product Liability and Workers Compensation Claims
Provisions are made for estimated losses from product liability and
workers compensation claims which are not covered by insurance.
Translation of Foreign Currencies
The functional currency of the Company's foreign operations is the
local currency. Accordingly, assets and liabilities of foreign
operations are translated to U.S. dollars at the rates of exchange on the
balance sheet date; income and expense are translated at the average
rates of exchange prevailing during the year. Translation adjustments
are accumulated in a separate section of stockholders' equity.
Transaction gains and losses are reflected in miscellaneous income and
amounted to (expense) income of $(102), $(72) and $373 in 1996, 1995 and
1994, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS) No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue
accounting for stock-based compensation using the method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. Compensation cost for
other stock-based awards is based on the quoted market price of the
Company's Class A stock at the date of grant for performance and bonus
share awards and, for these awards and for stock appreciation rights, the
changes in such stock price during each subsequent reporting period.
Page 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
Note 1 - Acquisitions and Dispositions
During 1996, the Company acquired the assets and businesses of two
foreign distributors of alarm systems and a manufacturer of glass break
sensors. The total purchase price for these businesses was $3,263 cash
and $2,619 payable over three years.
During 1995, the Company acquired the assets and businesses of a
manufacturer of residential burglar/fire alarm controls, a distributor of
alarm and other security products and a foreign manufacturer of
commercial intrusion alarms and control panels. The total purchase price
for these businesses was $12,931 cash and $3,089 in notes. The Company
sold a publication for $1 million cash, received in January 1996, and the
assumption of related liabilities. The Company also sold its 51%
interest in a business offering seminars to its minority stockholders for
$354 cash and retained a $1 million note receivable due from this former
subsidiary.
During 1994, the Company acquired the assets and businesses of a
direct mail production company, a designer of wide area network building
control monitoring systems, a manufacturer of glass break sensors and a
designer of closed-circuit television, access control and alarm systems.
The total purchase price for these businesses was $5,921 cash. The
Company also sold a publication for $650 cash.
All the aforementioned acquisitions were accounted for as purchase
transactions. The impact of these acquisitions on consolidated results
of operations was not significant. These companies have been included in
the consolidated financial statements from their respective dates of
acquisition or to the dates of disposition.
Note 2 - Inventories
At December 31, 1996 and 1995 approximately 85% and 83%,
respectively, of the total inventories are accounted for by the LIFO
method. The recorded value of inventory approximates current cost. At
year end, inventories consist of:
1996 1995
Raw materials $ 41,568 $ 33,666
Work-in-process 19,560 18,521
Finished goods -
Manufactured by the Company 69,020 55,442
Manufactured by others 73,106 45,007
$203,254 $152,636
Note 3 - Leveraged Leases
The Company is an equity participant in leveraged leases of an
aircraft and communication satellite transponders. As the Company has no
general liability for the nonrecourse debt attributable to the
acquisition of such assets, the debt has been offset against the related
rentals receivable. The net investment in leveraged leases consists of:
1996 1995
Rentals receivable (net of principal
and interest on nonrecourse debt) $12,875 $13,179
Estimated residual value 11,432 12,532
Unearned and deferred income (4,792) (4,665)
Investment in leveraged leases 19,515 21,046
Deferred income taxes (19,630) (20,523)
Net investment $ (115) $ 523
A summary of the components of income from leveraged leases follows:
1996 1995 1994
Income before income taxes $ 433 $ 363 $ 1,142
Income tax benefit (cost) -
Current (911) 106 3,201
Deferred 759 (233) (3,601)
Income from leveraged leases $ 281 $ 236 $ 742
Minimum annual rentals receivable (net of principal and interest on
nonrecourse debt) under leveraged leases for the next five years
beginning with 1997 are $975, $2,065, $1,751, $3,488, $483 and an
aggregate of $4,113 thereafter.
Note 4 - Debt
The average annual interest rate on short-term notes payable was
approximately 6.6% (5.7% domestic and 11.7% foreign) and 6.5% (5.9%
domestic and 12.1% foreign) at December 31, 1996 and 1995, respectively.
There are no compensating balance or commitment fee requirements
associated with these short-term borrowings. The Company has guaranteed
indebtedness of $1,250 relating to real estate ventures in which it
participates.
The Company's capitalized lease obligations are collateralized by
certain equipment. Other long-term debt is unsecured, bearing interest
principally at 6% to 8%, with maturities through 2003. Aggregate long-term
maturities due annually for the five years beginning in 1997 are $3,933,
$5,083, $7,701, $6,859, $6,039 and $62,234 thereafter.
Page 38
<PAGE>
Note 5 - Income Taxes
Income before income taxes consists of:
1996 1995 1994
Domestic income $109,772 $60,148 $73,204
Foreign income 5,708 3,930 641
$115,480 $64,078 $73,845
The provision for income taxes consists of:
1996 1995 1994
Current -
Federal $ 27,867 $25,107 $22,819
State and local 4,251 2,857 3,660
Foreign 2,462 2,670 822
34,580 30,634 27,301
Deferred -
Federal 7,680 (6,696) 1,576
Foreign 178 (232) 132
7,858 (6,928) 1,708
$ 42,438 $23,706 $29,009
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate of
35% to income before income taxes is as follows:
1996 1995 1994
Income tax at statutory rate $40,418 $22,427 $25,846
Tax effect of -
State income taxes, net of
federal benefit 3,307 1,857 2,379
Foreign operations 642 1,062 730
Other items, net (1,929) (1,640) 54
Actual income tax provision $42,438 $23,706 $29,009
Effective income tax rate 36.7% 37.0% 39.3%
The components of the deferred tax liabilities (assets) at December
31, 1996 and 1995 are comprised of the following:
1996 1995
Deferred tax liabilities -
Leveraged leases $ 19,630 $ 20,523
Real estate ventures -
Affordable housing 13,678 10,816
Other 4,265 5,500
Investment in affiliate 9,520 211
Investment in USSB 8,389
Purchased tax benefit leases 3,612 4,056
Depreciation 2,867 2,334
State income taxes, net of
federal benefit 3,571 4,204
Other 4,072 3,964
Total deferred tax liabilities 69,604 51,608
Deferred tax assets -
Inventory valuation (7,707) (6,954)
Tax loss carryforwards (4,738) (4,275)
Deferred compensation (5,635) (4,035)
Bad debts (2,677) (2,339)
Workers compensation (1,146) (2,685)
Marketable securities (728) (1,354)
Other (5,331) (4,317)
Total deferred tax assets (27,962) (25,959)
Valuation allowance 4,738 4,275
Net deferred tax liability $ 46,380 $ 29,924
The valuation allowance relates to tax loss carryforwards of which
$1,058 as of December 31, 1996 will be credited to goodwill when and if
utilized.
The Company's federal income tax returns have been examined through
1992 without material adjustment of reported income.
Note 6 - Retirement Plans
The Company has various noncontributory retirement plans covering
substantially all current and certain former domestic employees.
Retirement benefits for employees in foreign countries are generally
provided by national statutory programs. Benefits for domestic employees
are based on years of service and annual compensation as defined by each
plan. The Company's policy is to fund pension costs accrued.
Page 39
<PAGE>
The components of net pension income for the plans consist of:
1996 1995 1994
Service cost - benefits earned
during the year $ 4,562 $ 4,005 $ 3,618
Interest cost on projected benefit
obligation 4,265 4,042 3,851
Actual return on plan assets (13,804) (27,286) 4,840
Net amortization and deferred gains
and losses 4,477 18,439 (13,071)
Net pension income $ (500) $ (800) $ (762)
The reconciliation of the funded status of the plans at year end
follows:
1996 1995
Actuarial present value of benefit
obligations -
Vested benefit obligation $(53,089) $(50,883)
Nonvested benefit obligation (3,300) (3,044)
Accumulated benefit obligation (56,389) (53,927)
Excess of projected benefit
obligation over accumulated
benefit obligation (9,616) (7,892)
Projected benefit obligation (66,005) (61,819)
Plan assets at fair value 109,287 101,548
Plan assets in excess of
projected benefit obligation 43,282 39,729
Unrecognized net gain (34,460) (30,538)
Unrecognized prior service cost 3,431 4,027
Unamortized transition net asset (5,860) (7,325)
Prepaid pension cost included
in the consolidated balance sheet $ 6,393 $ 5,893
Plan assets consist primarily of U.S. government obligations,
investment grade corporate bonds and common and preferred stocks. The
projected benefit obligation was determined using an assumed discount
rate of 7% and an assumed rate of increase in compensation of 5% for both
years. The expected long-term rate of return on plan assets was 7% for
both years.
Note 7 - Capital Stock and Earnings per Share
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 February
14, 1996. All share and per share data, as appropriate, reflect this
split. The effect of the split is presented retroactively within
stockholders' equity at December 31, 1995 by transferring the par value
for the additional shares issued from the capital in excess of par value
account to the common stock accounts.
Except for voting and dividend rights, the two classes of common
capital stock are identical. Class A stockholders are entitled to one-
tenth vote per share and have the right to elect 25% of all directors,
but not less than two. Common stockholders are entitled to one vote per
share and have the right to elect the remaining number of directors.
Upon a change of control of the Company (as defined in the Company's
certificate of incorporation), the Class A stock will automatically be
changed into Common stock.
Cash dividends declared on Class A stock are required to be 1 2/3 cents
per share more than dividends declared on Common stock (up to a maximum
of 6 2/3 cents per share per year).
Net income per share of common capital stock is based on the
combined weighted average number of Class A and Common shares outstanding
which does not include shares issuable upon exercise of outstanding stock
options or shares distributable as performance share awards because the
dilutive effect is not significant.
Note 8 - Stock Options and Awards
The Company's 1990 stock awards plan (as amended in 1994) provides
for the issuance of up to 1,500,000 shares of Class A stock to employees
pursuant to options, performance and bonus share awards, stock
appreciation rights ("SARs") and other awards. Certain awards are
payable in the form of Class A stock or cash. Performance share awards,
SARs and options vest ratably over terms of five years or less. Options
and SARS are exercisable up to ten years from date of grant. Shares are
issued or cash is paid pursuant to performance and bonus share awards
upon specified maturity dates.
In 1996, stockholders approved a stock option plan for non-employee
directors. Options to acquire a maximum of 30,000 shares of Class A
stock can be awarded at the market value on the date of the award. In
1996, options for 24,000 shares were granted at an exercise price of
$47.50 per share. Options for 6,000 shares are exercisable at December
31, 1996 and options for 6,000 shares become exercisable in each of the
next three years. Options expire at the earlier of ten years from the
date of grant or five years after the optionee ceases to be a member of
the Board.
Page 40
<PAGE>
Activity in options and performance and bonus share awards under the
plan is summarized as follows:
1996 1995 1994
Outstanding at beginning of year 594,128 359,590 224,314
Awards and options granted 275,425 239,250 135,276
Shares issued for awards and for options
exercised (14,349) (1,494)
Awards and options redeemed for cash (8,466) (1,072)
Awards and options cancelled (1,000) (2,146)
Outstanding at end of year 845,738 594,128 359,590
Exercisable at end of year 283,618 81,600 0
Shares available for grant 451,267 717,226 953,258
Weighted average exercise price information follows:
1996 1995 1994
Outstanding at beginning of year $22.84 $18.75 $16.19
Awards and options granted 43.00 28.88 23.00
Shares issued for awards and for options
exercised 7.86 20.08
Awards and options redeemed for cash 20.08 17.09
Awards and options cancelled 43.25 17.09
Outstanding at end of year 29.66 22.84 18.75
Exercisable at end of year 21.51 19.40
Significant option and performance and bonus award groups
outstanding at December 31, 1996 and related weighted average exercise
prices and remaining contractual life are as follows:
Year of Vested or Average Remaining
Grant Outstanding Exercisable Price Life (yrs)
Non-qualified
options -
1996 213,350 $43.32 9
1995 166,650 29.83 8
1994 135,275 23.00 7
1993 161,905 161,905 17.09 6
1990 18,450 18,450 9.04 3
Performance and
bonus awards -
1996 61,075 35,980 41.87 4
1995 72,600 50,850 26.71 3
1993 16,433 16,433 20.08 1
The fair value of options at date of grant was $18.87 in 1996,
$12.72 in 1995 and $7.94 in 1994 for the 1990 plan and $21.47 in 1996 for
the director's plan. These values were determined by the Black-Scholes
model with the following weighted average assumptions for 1996, 1995 and
1994, respectively: interest rate of 6.4%, 7.1% and 5.3%; volatility of
27%, 25% and 25%; annual dividends of $.33 per share and an expected life
of 8 years for all three years.
Total expense under these plans was $5,680, $5,748, and $1,065 in
1996, 1995 and 1994, respectively. If the Company had adopted SFAS No.
123 with respect to options, net income would have been $71,685 ($3.43
per share) in 1996 and $39,940 ($1.91 per share) in 1995. The pro forma
effect on net income is not representative of the effect in future years
because it does not take into consideration options granted prior to
1995.
Note 9 - Fair Value of Financial Instruments
The carrying amount of cash and equivalents, accounts receivable,
accounts payable, accrued expenses and notes payable approximates fair
value because of the short maturity of these instruments. The following
table presents the carrying amounts and estimated fair values of the
Company's other financial instruments at year end:
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets -
Current marketable securities $ 26,026 $ 26,026 $ 25,586 $ 25,586
Investment in USSB 37,814 37,814 20,000 121,280
Investment in affiliate 31,183 111,879 7,689 168,000
Affordable housing investments 20,342 20,342 17,325 17,325
Notes receivable 10,887 10,722 6,536 6,634
Financial liabilities -
Long-term debt (91,849) (88,288) (89,754) (89,138)
Page 41
<PAGE>
The estimated fair values of marketable securities, the investment
in USSB and the investment in affiliate are based on quoted market
prices. The December 31, 1995 estimated fair value of the investment in
USSB and investment in affiliate are priced at the public offering sales
prices for their respective offerings in February 1996. The estimated
fair values of the Company's investments in affordable housing projects
were based upon available financial and other information. The estimated
fair values of the notes receivable and long-term debt were calculated
based upon the present value of estimated cash flows using appropriate
discount rates.
At December 31, 1996 and 1995, current marketable securities
consisted of adjustable rate preferred stocks, which had gross unrealized
holding losses of $1,911 and $3,366, respectively. Realized gains and
losses on sales of marketable securities are based upon the specific
identification method. Such gains totaled $63 and $198 in 1996 and 1995,
respectively, and losses totaled $576 and $453 in 1996 and 1995,
respectively.
In February 1996 the Company sold 13% of its investment in USSB as
part of an initial public offering of USSB common stock. The sale
resulted in an after-tax gain of $8,149, or $.39 per share. The Company
recorded a charitable donation of appreciated shares of USSB stock in the
fourth quarter of 1996 resulting in a tax benefit of $849, or $.04 per
share. Unrealized holding gains, in this investment, were $22,025 at
December 31, 1996.
The carrying value of the investment in affiliate 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 use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts and the estimates presented above may not necessarily be
indicative of the amounts that the Company could realize in a current
market exchange.
Note 10 - Lease Commitments
The Company leases certain manufacturing facilities, warehouses,
office space and equipment under noncancelable operating leases expiring
at various dates through the year 2014. Most of the leases contain
renewal options and certain equipment leases include options to purchase
during or at the end of the lease term. Minimum annual rental
commitments under all noncancelable leases for the next five years
beginning with 1997 are $19,632, $16,818, $15,245, $12,570, $5,581 and an
aggregate of $16,079 thereafter. Rental commitments are stated net of
minimum sublease rentals aggregating $2,895. Total rent expense
(including taxes, insurance and maintenance when included in the rent)
amounted to $18,350, $16,930 and $15,661 in 1996, 1995 and 1994,
respectively.
Note 11 - Contingencies and Commitments
In 1989 a judgment was entered against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of the
adjoining residential properties owned and 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 have appealed the trial court's decision granting summary
judgment. In August 1996, the appellate court affirmed all but three
issues in the trial court's summary judgment order in favor of
Saddlebrook. A hearing is set for April 4, 1997 to determine the scope of
the three issues remaining for retrial. The Company believes that the
ultimate outcome of the aforementioned lawsuit will not have a material
adverse effect on its financial statements.
The Company in the normal course of business is subject to a number
of lawsuits and claims both actual and potential in nature including a
lawsuit claiming patent infringement that is scheduled for trial in 1997.
While management believes that resolution of the patent infringement suit
and other existing claims and lawsuits will not have a material adverse
effect on the Company's financial statements, management is unable to
estimate the magnitude of financial impact of claims and lawsuits which
may be filed in the future.
Page 42
<PAGE>
The Company has committed to invest up to a total of $11.1 million
in certain affordable housing ventures through 2003.
Note 12 - Segment Information
The Company operates principally in two industry segments.
The Alarm and Other Security Products segment designs, manufactures and
sells an extensive line of burglar and commercial fire alarm equipment and
distributes alarm and other security products manufactured by other companies.
The Publishing segment produces national business magazines and related
products, trade shows and conferences, and direct mail marketing programs.
Sales within and between segments and geographic areas are made at
approximate arm's-length prices. Operating income consists of sales less
operating expenses. Sales and expenses which are not related to or
identifiable with specific segments are included in General Corporate and
Other. Identifiable assets are those assets that are specifically identified
with the industry segments and geographic areas in which operations are
conducted. Eliminations include sales between segments and geographic areas
and related intercompany accounts. Export sales were not material and no
single customer accounted for ten percent of sales.
<TABLE>
<CAPTION>
Depreciation
Operating Identifiable Capital and
Industry Segments Net Sales Income Assets Expenditures Amortization
<S> <C> <C> <C> <C> <C>
1996
Alarm and Other Security Products $ 922,869 $ 70,366 $538,967 $ 45,187 $ 22,051
Publishing 188,122 18,695 87,357 4,822 5,878
General Corporate and Other 584 (6,661) 212,769 180 237
Consolidated $1,111,575 $ 82,400 $839,093 $ 50,189 $ 28,166
1995
Alarm and Other Security Products $ 754,003 $ 54,021 $420,738 $ 36,835 $ 15,008
Publishing 191,263 11,941 88,721 5,154 5,788
General Corporate and Other 403 (6,718) 163,515 67 218
Consolidated $ 945,669 $ 59,244 $672,974 $ 42,056 $ 21,014
1994
Alarm and Other Security Products $ 600,643 $ 45,173 $327,677 $ 20,381 $ 13,993
Publishing 176,729 11,002 86,966 7,755 5,656
General Corporate and Other 654 (6,253) 148,644 110 511
Consolidated $ 778,026 $ 49,922 $563,287 $ 28,246 $ 20,160
</TABLE>
Page 43
<PAGE>
Operating Identifiable
Geographic Areas Net Sales Income Assets
1996
Domestic Operations $ 985,696 $ 73,511 $716,356
European Operations 104,352 5,491 116,493
Other Foreign Operations 56,153 3,123 29,216
Eliminations (34,626) 275 (22,972)
Consolidated $1,111,575 $ 82,400 $839,093
1995
Domestic Operations $ 860,687 $ 53,032 $590,063
European Operations 70,302 4,041 77,302
Other Foreign Operations 40,943 2,199 20,999
Eliminations (26,263) (28) (15,390)
Consolidated $ 945,669 $ 59,244 $672,974
1994
Domestic Operations $ 721,956 $ 48,206 $513,001
European Operations 48,063 119 49,666
Other Foreign Operations 31,238 882 10,308
Eliminations (23,231) 715 (9,688)
Consolidated $ 778,026 $ 49,922 $563,287
Note 13 - Quarterly Results (Unaudited)
Quarterly results of operations for the years ended December 31,
1996 and 1995 are shown below:
1996 Quarters Total
First Second Third Fourth For Year
Net Sales $257,477 $272,361 $285,726 $296,011 $1,111,575
Gross Profit 93,030 99,391 102,322 109,763 404,506
Income, Excluding
Investment Gains 10,632 12,624 12,756 14,468 (a) 50,480
Gain on Sale of
Investment 8,149 8,149
Gain from Cylink Stock
Offering 14,507 (94) 14,413
Net Income 33,288 12,530 12,756 14,468 (a) 73,042
Per Share -
Income, Excluding
Investment Gains .51 .60 .61 .69 (a) 2.41
Gain on Sale of
Investment .39 .39
Gain from Cylink Stock
Offering .69 .69
Net Income 1.59 .60 .61 .69 (a) 3.49
1995 Quarters Total
First Second Third Fourth For Year
Net Sales $220,404 $235,320 $239,131 $250,814 $ 945,669
Gross Profit 80,785 85,384 83,847 92,945 342,961
Net Income 8,720 10,730 9,180 11,742 (b) 40,372
Net Income Per Share .42 .51 .44 .56 (b) 1.93
(a) Net income for the 1996 fourth quarter includes a tax benefit of
$849, or $.04 per share for a charitable contribution of appreciated
securities.
(b) Net income for the 1995 fourth quarter includes cash distributions
received from real estate limited partnerships, a gain on the sale of a
publication and insurance proceeds, less accruals related to certain
litigation. The net after-tax effect of these items increased net income
by $1,671, or $.08 per share.
Page 44
<PAGE>
REPORTS OF INDEPENDENT ACCOUNTANTS AND MANAGEMENT
Report of Independent Accountants
To the Board of Directors and Stockholders of Pittway Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of cash flows and of
stockholders' equity present fairly, in all material respects, the
financial position of Pittway Corporation and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Pittway Corporation's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
February 19, 1997
Management's Responsibility for Financial Statements
The financial statements of Pittway Corporation and its consolidated
subsidiaries, and all other information presented in this Annual Report,
are the responsibility of the management of the Company. These
statements have been prepared in accordance with generally accepted
accounting principles and reflect in all material respects the substance
of events and transactions that should be included.
Management is responsible for the accuracy and objectivity of the
financial statements, including estimates and judgments reflected
therein, and fulfills this responsibility primarily by establishing and
maintaining accounting systems and practices adequately supported by
internal accounting controls. Management believes that the internal
accounting controls in use are satisfactory to provide reasonable
assurance that the Company's assets are safeguarded, that transactions
are executed in accordance with management's authorizations, and that the
financial records are reliable for the purpose of preparing financial
statements.
Independent accountants were selected by the Board of Directors,
upon the recommendation of the Audit Committee, to audit the financial
statements in accordance with generally accepted auditing standards.
Their audits, as well as those of the Company's internal audit
department, include a review of internal accounting control policies and
procedures and selective tests of transactions.
The Audit Committee of the Board of Directors, which consists of
three directors who are not officers or employees of the Company, meets
regularly with management, the internal auditors and the independent
accountants to review matters relating to financial reporting, internal
accounting controls, and auditing. The independent accountants have
unrestricted access to the Audit Committee.
/s/ King Harris /s/ Paul R. Gauvreau
King Harris Paul R. Gauvreau
President and Chief Executive Officer Financial Vice President and Treasurer
Page 45
<PAGE>
SUPPLEMENTAL INFORMATION
Five Year Summary of Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales of Continuing Operations $1,111,575 $945,669 $778,026 $650,105 $568,301
Operating Income from Continuing
Operations 82,400 59,244 49,922 34,012 22,069
Income from Continuing Operations 73,042 (a) 40,372 44,836(c) 21,240 12,460
Income from Discontinued Operations 10,046 34,938(d)
Cumulative Effect of Changes in
Accounting Principles 1,535
Net Income 73,042 (a) 40,372 44,836(c) 32,821 47,398(d)
Per Share (b):
Income from Continuing Operations 3.49 (a) 1.93 2.15(c) 1.02 .60
Income from Discontinued Operations .48 1.68(d)
Cumulative Effect of Changes in
Accounting Principles .07
Net Income 3.49 (a) 1.93 2.15(c) 1.57 2.28(d)
Cash Dividends Declared Per Share (b):
Common .267 .267 .267 .30 .40
Class A .333 .333 .333 .367 .733
Capital Expenditures 50,189 42,056 28,246 29,478 17,187
Depreciation and Amortization 28,166 21,014 20,160 17,249 14,829
At Year End
Assets of Continuing Operations 839,093 672,974 563,287 481,977 436,358
Investment in Discontinued Operations 137,648
Total Assets 839,093 672,974 563,287 481,977 574,006
Long-Term Debt 87,916 85,966 5,088 6,083 9,601
Stockholders' Equity(e) 446,872 363,026 328,130 292,064 419,501
Per Share(b)(e) 21.36 17.36 15.69 13.97 20.06
Market Price Per Share (b)(e):
Common 52.13 44.25 26.00 22.67 25.33
Class A 53.50 45.17 26.83 21.50 23.00
(a) Includes the after-tax gain on the sale of investment in USSB and gain from Cylink stock offering of $8,149
($.39 per share) and $14,413 ($.69 per share), respectively.
(b) Per share data reflect the 3-for-2 stock split declared in January 1996.
(c) Includes net gain on sale of First Alert stock of $11,776, or $.57 per share.
(d) Includes net gain on disposal of discontinued operations of $16,558, or $.80 per share.
(e) Stockholders' equity and market prices after December 31, 1992 reflect the spinoff of AptarGroup, Inc. in April
1993.
</TABLE>
Page 46
<PAGE>
Market Prices, Security Holders and Dividend Information
The Company's Common stock (ticker symbol PRY) and Class A stock (ticker
symbol PRYA) are traded on the New York Stock Exchange (American Stock Exchange
prior to October 4, 1996). As of December 31, 1996, stockholders of record
totaled approximately 500 for Common and 1,000 for Class A.
The following table sets forth, on a quarterly basis, the high and low
prices for the Common and Class A stock on the New York Stock Exchange or
American Stock Exchange, along with the cash dividends declared, adjusted to
reflect the three-for-two stock split declared in January 1996.
Common Class A Dividends Declared
High Low High Low Common Class A
1996 Quarter:
First $50.00 $40.63 $49.75 $38.63 $.0667 $.0833
Second 49.75 43.50 50.50 41.63 .0667 .0833
Third 47.88 39.00 49.25 38.25 .0667 .0833
Fourth 53.50 42.25 55.75 44.38 .0667 .0833
1995 Quarter:
First $30.67 $25.00 $31.00 $25.00 $.0667 $.0833
Second 31.17 28.00 30.75 28.25 .0667 .0833
Third 41.33 28.58 41.50 29.33 .0667 .0833
Fourth 44.92 38.17 46.00 37.58 .0667 .0833
Page 47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
In 1996, the Company achieved sales of $1.1 billion, an 18%
increase over 1995 sales which were 22% higher than 1994. The
increases principally reflect higher sales levels in the
Company's alarm systems segment. Domestic sales grew 15% in 1996
and 19% in 1995 while international sales increased 44% in 1996
and 40% in 1995. International business relates to the alarm
segment and represents 14% of total consolidated sales in 1996
and 12% in 1995. Approximately one-third of the foreign sales
growth in 1996 results from two European acquisitions late in
1995 and early in 1996. Such growth in 1995 was mainly
attributable to the expansion of existing European operations.
Gross profit increased 18% in 1996 and 21% in 1995 principally
due to the expanded sales levels. Selling, general and
administrative expenses increased 14% in 1996 and 22% in 1995 as
a result of increased costs associated with the higher sales
volume and, in 1995, deferred compensation accruals related to
outstanding stock-based awards.
Alarm product sales accounted for 83% of consolidated revenues in
1996 (80% in 1995) and increased 22% in 1996 and 26% in 1995.
The increases were due to continued market growth and market
share gains in key product categories and ongoing expansion in
the worldwide alarm systems market. The Company's domestic
distribution business made significant gains by expanding its
outlet network internally, through an acquisition in November
1995 and by capitalizing on the early 1995 bankruptcy of a major
competitor. The Company's manufacturing units benefited from the
continued acceptance of numerous new product offerings and from
expanded worldwide distribution capabilities.
Operating income for the segment increased 30% in 1996 and 20% in
1995 primarily because of the expanded sales volume. Research and
development expense increased 9% to $18.1 million in 1996 and
increased 40% to $16.6 million in 1995 as the Company expended
record amounts on research and new product development.
Publishing sales declined 2% in 1996 due to the inclusion in the
prior year results of a seminar business, which was sold in June
1995. Excluding this business, 1996 sales increased 5% to $188
million. In 1996, total magazine advertising revenue increased
6% reflecting increases in both ad pages and page rates on an
improved mix of magazines. In 1995 sales increased 8% resulting
from modest increases in advertising pages and page rates, and
higher ancillary product revenues.
Operating income increased 66% in 1996, excluding the seminar
business sold in 1995, and increased 9% in 1995. The gains are
attributable to increased advertising revenues, higher profits
from ancillary revenues and significant gains from improved
operating efficiencies. Postal rates were steady in 1996 and
paper prices declined slightly from 1995 year end levels.
Operating income in 1995 was adversely impacted by significantly
higher paper costs, postage costs, and the aforementioned
deferred compensation costs.
Depreciation and amortization expense increased both in 1996 and
1995 as a result of capital additions, principally in the alarm
segment.
Other income (expense) in 1996 included a pretax gain of $13.2
million on the sale of 622,500 shares of USSB stock in connection
with its initial public offering and a pretax gain of $23.3
million on the increase in the Company's investment in Cylink
resulting from its initial public offering. Excluding these
gains, other income was less in 1996 because of higher interest
expense, partially offset by the Company's equity in increased
earnings at Cylink, and because 1995's results included
significant gains from the sale of a magazine, settlement of an
insurance claim and higher real estate distributions.
Other income was lower in 1995 compared to 1994 due to the
inclusion of a $19.5 million pretax gain on the sale of the
Company's 16.7% ownership in First Alert, Inc. common stock in
1994. Excluding this gain, other income was slightly greater due
to increased cash distributions from real estate ventures, a
larger gain on the sale of publications and insurance proceeds
partially offset by higher interest expense, reduced income from
marketable securities and leveraged leases and a greater loss at
Cylink.
Page 48
<PAGE>
Effective tax rates were 36.7% in 1996, 37.0% in 1995, and 39.3%
in 1994. An analysis of the Company's effective tax rate appears
in Note 5 to the Consolidated Financial Statements.
FINANCIAL CONDITION
The Company's financial condition remained strong through 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 1996, income before the USSB and Cylink gains and before
depreciation and amortization provided $78.6 million of net cash
which was partially used to finance the net increase in working
capital items. The remaining $45.3 million of cash generated
from operations, along with $12.5 million net increases in short-
term borrowings and $11.2 million of net proceeds from the sale
of USSB stock and other marketable securities, were used to fund
$50.2 million in capital expenditures, the acquisition of three
businesses for $3.3 million, $6.8 million of dividends paid to
stockholders, $4.6 million of additional investments in
affordable housing and other ventures and a $4.4 million net
increase in notes receivable.
The Company continually investigates investment opportunities for
growth in related areas and is presently committed to invest up
to $11.1 million in certain affordable housing ventures through
2003.
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 weak commercial
real estate market of the past several years. Such events have no
effect on net income although they do have a negative impact on
the Company's cash position because tax payments become due when
the properties are sold or returned to the lenders. The Company
has approximately $4.3 million accrued at December 31, 1996 to
fully cover the remaining tax payments that would be due if all
the properties were sold or returned to the lenders.
The Company presently 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. In January 1997, the Company paid approximately $36
million to acquire two businesses. The acquisitions were
financed by short-term bank borrowings.
The impact of inflation on the Company's results of operations
has lessened in recent years, although inflation does increase
the Company's cost of doing business. The Company attempts to
offset the impact of inflation through productivity and
technological improvements, cost containment programs and by
increasing its selling prices over time as allowed by market
conditions. In addition, substantially all domestic inventories
are valued on the last-in, first-out (LIFO) method, which
generally results in reporting the cost of goods sold at
approximately current costs.
****
This annual report, other than historical financial information,
contains forward-looking statements that involve a number of
risks and uncertainties. Important factors that could cause
actual results to differ materially from those indicated by such
forward-looking statements are set forth in Item 1 of the
Company's annual report on Form 10-K for the year ended December
31, 1996. These include risks and uncertainties relating to
government regulation, competition and technological change,
intellectual property rights, capital spending, international
operations, and risks associated with the Company's acquisition
strategies.
Page 49
EXHIBIT 21
PITTWAY CORPORATION
DECEMBER 31, 1996
FORM 10-K
Approximate
Percentage of
State or Voting Securities
Country of Owned by
Name of Company Incorporation Immediate Parent
Pittway Corporation
Ademco Distribution, Inc. Delaware 100
ADI-Lenox Club, Inc. Delaware 100
Ademconet, Inc. Delaware 100
Radscan, Inc. Delaware 100
Fire Burglary Instruments, Inc. New York 100
Ademco Security Group, Inc. California 100
Ademco Communications Partners, Inc. Delaware 100
Fire-Lite Alarms, Inc. Connecticut 100
Notifier Engineered Systems Company Delaware 100
MicroLite Corporation California 100
Penton Publishing, Inc. Delaware 100
Curtin & Pease/Peneco, Inc. Florida 100
Chilpub, Inc. Delaware 100
Final Frontier Pittway I, Inc. Illinois 100
Final Frontier Pittway II, Inc. Illinois 100
Pittway Corporation of Canada Canada 100
Pittway Fire Safety, Inc. Delaware 100
Ademco de Juarez, S.A. de C.V. Mexico 100
ADI of Puerto Rico, Inc. Puerto Rico 100
Ademco Italia S.p.A. Italy 100
Ademco (Hong Kong) Limited Hong Kong 100
Pittway Foreign Sales Corp. U.S. Virgin Islands 100
Fire Control Instruments, Inc. * Delaware 100
* This company was acquired in January 1997.
EXHIBIT 21 - cont'd
PITTWAY CORPORATION
DECEMBER 31, 1996
FORM 10-K
Approximate
Percentage of
State or Voting Securities
Country of Owned by
Name of Company Incorporation Immediate Parent
Pittway Corporation (continued)
Pittway International, Ltd. Delaware 100
ADI de Mexico S.A. de C.V. Mexico 100
Notifier de Mexico S.A. de C.V. Mexico 100
System Sensor de Mexico S.A. de C.V. Mexico 100
Notifier Espana S.A. Spain 100
Notifier (Benelux) S.A. Belgium 100
Notifier Deutschland GmbH Germany 100
Notifier, Ltd. (Singapore) Delaware 100
System Sensor, Ltd. Delaware 100
Xi'an System Sensor Electronics, Ltd. China 55
Pittway UK Limited England 100
Notifier Limited England 100
System Sensor Europe Limited England 100
Ademco Microtech Limited England 100
Pittway Australia Pty., Ltd. Australia 100
Ademco-Sontrix Espana, S.A. Spain 100
Notifier Italia S.r.l. Italy 100
Pittway Tecnologica S.p.A. Italy 100
Ademco Security and Communications Group, B.V. Netherlands 100
Notifier Australia Pty., Ltd. Australia 60
Notes: All of the above subsidiaries are included in the Registrant's
consolidated financial statements. Parent-subsidiary or affiliate
relationships are shown by marginal indentation.
EXHIBIT 23
PITTWAY CORPORATION
DECEMBER 31, 1996
FORM 10-K
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-35168, 33-54753 and 333-12615) of Pittway
Corporation of our report dated February 19, 1997 appearing on page 45 of
the Annual Report to Stockholders which is incorporated in this Annual
Report on Form 10-K. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears on page 17 of
this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
March 27, 1997
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