SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (Zip Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (April 16,
1998).
Common Stock 3,938,832
Class A Stock 17,154,623
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PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Operations -
Three Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997 4 - 5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7 - 10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13 - 15
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited; Dollars in Thousands, Except Per Share Data)
1998 1997
NET SALES.................................. $356,624 $301,158
OPERATING EXPENSES:
Cost of sales............................ 215,653 184,091
Selling, general and administrative...... 104,510 87,698
Provision for patent litigation.......... 43,000 -
Depreciation and amortization............ 10,443 8,416
373,606 280,205
OPERATING INCOME (LOSS).................... (16,982) 20,953
OTHER INCOME (EXPENSE):
Equity in Cylink gain on divestiture..... 6,646 -
Income from marketable securities,
investments and other interest......... 1,640 1,515
Interest expense......................... (4,162) (2,614)
Miscellaneous, net....................... 31 (78)
4,155 (1,177)
INCOME (LOSS) BEFORE INCOME TAXES.......... (12,827) 19,776
PROVISION (CREDIT) FOR INCOME TAXES........ (4,832) 7,480
NET INCOME (LOSS).......................... $ (7,995) $ 12,296
NET INCOME (LOSS) PER SHARE OF COMMON
AND CLASS A STOCK
Basic................................... $ (.38) $ .59
Diluted................................. $ (.38) $ .58
CASH DIVIDENDS DECLARED PER SHARE:
Common................................... $ .067 $ .067
Class A.................................. $ .083 $ .083
AVERAGE NUMBER OF SHARES OUTSTANDING
(in thousands)........................... 21,021 20,959
AVERAGE NUMBER OF SHARES AND DILUTIVE
EQUIVALENTS OUTSTANDING (in thousands)... 21,021 21,209
See accompanying notes.
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited; Dollars in Thousands)
March 31, December 31,
1998 1997
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 25,663 $ 41,334
Marketable securities.................. 12,440 16,583
Accounts and notes receivable, less
allowance for doubtful accounts of
$12,170 and $12,097.................. 245,999 228,584
Inventories............................ 264,966 242,656
Future income tax benefits............. 19,027 18,617
Prepayments, deposits and other........ 13,869 12,709
581,964 560,483
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 44,490 44,418
Machinery and equipment................ 264,998 254,972
309,488 299,390
Less: Accumulated depreciation......... (157,528) (148,962)
151,960 150,428
Land................................... 2,718 2,733
154,678 153,161
INVESTMENTS:
Marketable securities.................. 34,741 30,015
Investment in affiliate................ 27,725 20,441
Real estate and other ventures......... 41,115 43,388
Leveraged leases....................... 18,129 18,559
121,710 112,403
OTHER ASSETS:
Goodwill, less accumulated
amortization of $13,378 and $12,410.. 125,090 125,062
Other intangibles, less accumulated
amortization of $10,983 and $10,871.. 5,272 5,351
Notes receivable....................... 9,363 7,534
Miscellaneous.......................... 7,361 7,456
147,086 145,403
$1,005,438 $971,450
See accompanying notes.
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited; Dollars in Thousands)
March 31, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 62,284 $ 64,031
Long-term debt due within one year...... 8,697 8,206
Dividends payable....................... 1,717 1,719
Accounts payable........................ 167,862 159,493
Accrued expenses........................ 56,657 60,114
Income taxes payable.................... 10,629 7,116
Retirement and deferred
compensation plans.................... 10,585 10,562
Unearned income......................... 8,215 5,203
326,646 316,444
LONG-TERM DEBT, less current maturities... 95,095 95,357
DEFERRED LIABILITIES:
Income taxes............................ 46,487 58,065
Litigation.............................. 43,000 -
Other................................... 13,700 14,450
103,187 72,515
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 3,939 3,939
Class A stock......................... 17,095 17,052
Capital in excess of par value.......... 25,644 24,523
Retained earnings....................... 430,854 440,536
Cumulative marketable securities
valuation adjustment.................. 11,696 8,823
Cumulative foreign currency translation
adjustment............................ (8,718) (7,739)
480,510 487,134
$1,005,438 $971,450
See accompanying notes.
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited; Dollars in Thousands)
1998 1997
Cash Flows From Operating Activities:
Net Income (Loss)................................ $ (7,995) $ 12,296
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.................. 10,443 8,416
Equity in Cylink gain on divestiture, net
of taxes...................................... (4,154) -
Deferred income taxes.......................... 18 781
Retirement and deferred compensation plans..... 505 165
Income/loss from investments adjusted
for cash distributions received............... (450) (732)
Provision for losses on accounts receivable.... 952 1,191
Provision for patent litigation, net of taxes.. 26,875 -
Changes in assets and liabilities, excluding
effects from acquisitions, dispositions
and foreign currency adjustments:
Increase in accounts and notes receivable.... (15,990) (3,422)
Increase in inventories...................... (22,683) (25,843)
Increase in prepayments and deposits......... (1,172) (1,626)
Increase (decrease) in accounts payable
and accrued expenses....................... 6,122 (5,388)
Increase in income taxes payable............. 3,336 4,558
Other changes, net............................. 1,962 (609)
Net cash used by operating activities............ (2,231) (10,213)
Cash Flows From Investing Activities:
Capital expenditures............................. (11,220) (15,073)
Proceeds from the sale of marketable securities.. 7,082 8,308
Purchases of marketable securities............... (2,988) (5,081)
Disposition of property and equipment............ 162 127
Additions to investments......................... (5) -
Increase in notes receivable..................... (3,025) (1,685)
Net assets of businesses acquired, net of cash... - (33,421)
Net cash used by investing activities............ (9,994) (46,825)
Cash Flows From Financing Activities:
Net (decrease) increase in notes payable......... (2,023) 39,000
Proceeds of long-term debt....................... 2,248 492
Repayments of long-term debt..................... (1,866) (4,574)
Stock options exercised.......................... 74 878
Dividends paid................................... (1,688) (1,679)
Net cash (used) provided by financing activities. (3,255) 34,117
Effect of Exchange Rate Changes on Cash............ (191) (206)
Net Decrease in Cash and Equivalents............... (15,671) (23,127)
Cash and Equivalents at Beginning of Period........ 41,334 32,409
Cash and Equivalents at End of Period.............. $ 25,663 $ 9,282
See accompanying notes.
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PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars in Thousands)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Pittway Corporation and its majority-owned subsidiaries (the
"Company" or "Registrant").
The accompanying consolidated financial statements are unaudited but
reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the
financial statements contained herein. However, the financial
statements and related notes do not include all disclosures normally
provided in the Company's Annual Report on Form 10-K. Accordingly,
these financial statements and related notes should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
NOTE 2. CHANGE IN ACCOUNTING POLICY
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. (SFAS) 130 "Reporting
Comprehensive Income." The statement requires the addition of
comprehensive income and its components in the Company's annual
financial statements. Other comprehensive income (loss) includes
cumulative foreign currency translation adjustments and unrealized
investment gains and losses, which are not included in income under
current accounting principles. Total comprehensive income (loss) for
the quarters ended March 31 were:
1998 1997
Net income (loss) $ (7,995) $ 12,296
Other comprehensive income (loss) 1,894 (2,300)
Total comprehensive income (loss) $ (6,101) $ 9,996
NOTE 3. PENDING DIVESTITURE
In December 1997, the Company announced its Penton Publishing
subsidiary ("Penton") had signed a letter of intent to acquire another
business media company, contingent on the Company spinning off Penton
to the Company's shareholders in a tax-free distribution. The
acquisition and related spin-off are subject to the execution of a
definitive combination agreement and receipt of a favorable ruling on
the spin-off from the Internal Revenue Service, among other conditions.
At such time as the principal conditions are satisfied, subsequent
financial disclosures will reflect Penton as a discontinued operation,
including restatement of prior periods.
The following pro forma information presents the historical quarterly
results as restated to reflect Penton as a discontinued operation. The
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pro forma results are presented for informational purposes only and do
not purport to be indicative of the results of operations, which would
actually have been obtained if the transactions had occurred in such
periods, or which may exist or be obtained in the future.
March 31,
1998 1997
Net sales from continuing operations $304,138 $252,492
Income from continuing operations
Before special items $ 12,378 $ 9,570
Special items (a) (22,721) -
Income (loss) from continuing operations (10,343) 9,570
Income from discontinued operations 2,348 2,726
Net income (loss) $ (7,995) $ 12,296
Per share of Common and Class A stock:
Basic -
Income (loss) from continuing
operations $ (.49) $ .46
Income from discontinued operations .11 .13
Net income $ (.38) $ .59
Diluted -
Income (loss) from continuing
operations $ (.49) $ .45
Income from discontinued operations .11 .13
Net income $ (.38) $ .58
(a) Special items include the after-tax charge of $26,875 ($1.27
per diluted share) for patent litigation (see note 9) and the
after-tax gain of $4,154 ($.20 per diluted share) on Cylink's
divestiture of its wireless division (see note 7).
NOTE 4. ACQUISITIONS
In the first quarter of 1997, the Company acquired the assets and
businesses of a domestic manufacturer and distributor of fire controls
and a producer of trade shows and conferences. The total purchase
price for these businesses was $33,421 cash, $2,453 in notes as well as
future contingent payments up to $3,250 tied to future earnings of the
acquired companies through 1999. These acquisitions were accounted for
as purchase transactions in the consolidated financial statements from
their respective dates of acquisition. The impact on consolidated
results of operations was not significant.
NOTE 5. INVENTORIES
The recorded value of inventories at March 31, 1998 and December 31,
1997 approximate current cost and consist of the following:
Mar. 31, Dec. 31,
1998 1997
Raw materials $ 59,597 $ 59,405
Work in process 20,915 17,852
Finished goods -
Manufactured by the Company 94,375 89,771
Manufactured by others 90,079 75,628
$264,966 $242,656
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NOTE 6. MARKETABLE SECURITIES
Information about the Company's marketable securities at March 31, 1998
and December 31, 1997 is as follows:
Mar. 31, Dec. 31,
1998 1997
Current - Adjustable Rate Preferred Stocks -
Aggregate cost $ 12,502 $ 16,558
Net unrealized holding (loss) gain (62) 25
Aggregate fair value $ 12,440 $ 16,583
Non-Current - USSB Common Stock -
Aggregate cost $ 15,789 $ 15,789
Unrealized holding gain 18,952 14,226
Aggregate fair value $ 34,741 $ 30,015
Realized gains and losses are based upon the specific identification
method. Such gains and losses on the adjustable rate preferred stock,
for the quarters ended March 31, 1998 and 1997 were not significant.
NOTE 7. INVESTMENT IN AFFILIATE
The investment in affiliate consists of the Company's interest in
Cylink Corporation (Cylink), which is carried at equity. In March 1998
Cylink sold its wireless division for $60.5 million. The Company
increased the carrying value of its investment in Cylink by $6,646 and
recorded an after-tax gain of $4,154, or $.20 per diluted share, to
reflect its equity in the gain on this divestiture. At March 31, 1998,
the Company's 8.6 million shares of Cylink stock had a quoted market
value of $124,250.
The summarized results of operations of Cylink for the quarters ended
March 31, 1998 and 1997 are as follows:
Mar. 31, Mar. 31,
1998 1997
Revenue $15,829 $9,352
Gross profit 12,218 6,542
Income (loss) from continuing operations 1,082 (85)
Net income 23,706 1,107
NOTE 8. EARNINGS PER SHARE
Basic net income per common share amounts were calculated by dividing
earnings by the combined weighted average number of Class A and Common
shares outstanding. Diluted net income per share amounts were based on
the same reported earnings but assume the issuance of Class A stock
upon exercise of outstanding stock options and distributable as
performance and bonus share awards. For the first quarter of 1998
there were 410,000 potential Class A shares related to these options
and awards that were excluded from the calculation as they would have
had an anti-dilutive effect.
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NOTE 9. LEGAL PROCEEDINGS
In 1989 a judgment was entered against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of
the adjoining residential properties owned and developed by the
Company. The lawsuit alleged damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the properties.
Damages of approximately $8 million were awarded to the plaintiffs and
an injunction was entered requiring, among other things, that
Saddlebrook work with local regulatory authorities to take corrective
actions. In 1990 the trial court entered an order vacating the
judgment and awarding a new trial. In December 1994, Saddlebrook's
motion for summary judgment based on collateral estoppel was granted on
the ground that Plaintiffs' claims were fully retried and rejected in a
related administrative proceeding. Plaintiffs appealed the trial
court's decision granting summary judgment. In August 1996, the
appellate court affirmed all but three issues in the trial court's
summary judgment order in favor of Saddlebrook. On April 1, 1998, the
trial court entered an order limiting the scope of the retrial in light
of the appellate court's ruling. On April 13, 1998, plaintiffs moved
for reconsideration of the trial court's April 1, 1998 order. The
trial court must rule definitively on the scope before the retrial can
take place, which is expected to begin in 1998. The Company believes
that the ultimate outcome of the aforementioned lawsuit will not have a
material adverse effect on its financial statements.
In 1995 a lawsuit was brought against the Company by Interactive
Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of
up to $66,800 on account of Company sales of products which the
plaintiff alleges infringed on its patent. The plaintiff also asserted
trebling of damages, if awarded, based upon alleged willful
infringement. The Company moved for summary judgment of non-
infringement and, in December 1997, the Court issued its order granting
the Company partial summary judgment, stating its products did not
literally infringe upon plaintiff's patent claims. In March 1998, the
jury handed down a verdict against the Company, which was entered by
the Court in April 1998, awarding damages of $35,954. The jury found
that the Company did not willfully infringe. The company has recorded a
provision of $43,000 in the first quarter of 1998 which considers the
judgment, interest and legal costs. The company strongly believes it
has meritorious defenses in its post-trial motions and, if necessary,
on appeal, and is vigorously defending itself.
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. While
management believes that resolution of 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company attained $356.6 million of sales in the first quarter of
1998, an 18 percent increase over the first quarter of 1997. Operating
income increased 24 percent and net earnings increased 20 percent
excluding two special items, an after-tax charge of $26.9 million
related to a patent lawsuit with ITI Technologies and a one-time after-
tax gain of $4.2 million from a divestiture by Cylink Corporation, a 29
percent owned affiliate of the Company. The provision for litigation
considers the Court's judgment entered on the jury's verdict awarding
damages, interest and legal costs. The revenue increase principally
reflects higher sales levels in the Company's alarm group segment. For
the quarter, domestic sales grew 18 percent while international sales
increased 22 percent. International business relates primarily to the
alarm group segment and represents 15 percent and 14 percent of total
consolidated sales for the first quarter of 1998 and 1997, respectively.
Gross profit increased in the quarter as a result of higher sales volume
and an improvement in the gross margin to 36.6% from 36.1% in 1997 as a
result of a change in sale mix toward manufactured products. Selling,
general and administrative expenses increased 19 percent in the first
quarter of 1998 as a result of increased costs associated with the
higher sales volume.
Alarm Group sales increased 20 percent during the quarter to $304.1
million while operating income - excluding the provision for patent
litigation - increased 29 percent to $23.2 million. Double-digit sales
increases were recorded by all of the major alarm operations. Ademco's
growth reflected the full impact of major account business which
increased sharply in 1997 but was relatively small during the first
quarter of last year. Improvements in operational efficiency helped
Ademco and ADI offset to some degree the narrower margins from this
major account business. Both System Sensor and Notifier/Fire-Lite, the
two major operations within the Pittway Systems Technology Group, posted
significant increases in sales and profits compared to last year's first
quarter despite weakened international business impacted by currency and
other economic problems in Asia and selected other third world markets.
Publishing revenues increased 8 percent to $52.5 million. Operating
income decreased 4 percent to $4.7 million, reflecting period costs
incurred by the newly acquired trade show businesses without any
significant contribution of revenue. These companies will have a
favorable impact on Penton's results, primarily in the fourth quarter
when the majority of the larger shows are held. The Company expects the
previously announced spin-off of the publishing business to be completed
either late in the second or early in the third quarter, subject to
signing a definitive combination agreement with a merger partner and
receiving a favorable tax ruling from the Internal Revenue Service,
among other conditions.
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Depreciation and amortization expense increased 24 percent in 1997
mainly as a result of capital additions in the alarm segment, and to a
lesser extent, intangible assets acquired in the 1997 acquisitions.
Other income (expense) in 1998 included a pretax gain of $6.4 million
resulting from Pittway's equity in a gain recorded by Cylink Corporation
(a 29% owned affiliate) on the divestiture of its wireless division. In
the first quarter of 1998, interest expense increased over the 1997
first quarter, reflecting higher borrowing levels while earnings
recorded on the Company's investments were slightly higher.
Effective tax rates were 37.7% and 37.8% in the first quarter of 1998
and 1997, respectively.
FINANCIAL CONDITION
The Company's financial condition remained strong during the first
quarter of 1998. Management anticipates that operations, borrowings and
marketable securities will continue to be the primary source of funds
needed to meet ongoing programs for capital expenditures, to finance
acquisitions and investments and to pay dividends.
In the first quarter of 1998, income before depreciation, amortization
the net gain on the Cylink divestiture, and the net provision for patent
litigation provided $25.2 million of net cash which was primarily used,
in addition to $2.2 million of cash, to finance the net increase in
working capital items. Additional cash of $13.3 million along with $4.1
million of net proceeds from the sale of marketable securities and $0.4
million of net proceeds from long-term debt and $.1 million of proceeds
from the exercise of stock options were used to fund $11.2 million in
capital expenditures, a net increase of $3.0 million in notes receivable
from customers, the net repayment of $2.0 million in notes payable and
$1.7 million of dividends paid to stockholders.
The Company continually investigates investment opportunities for growth
in related areas and is presently committed to invest up to $23.3
million in certain affordable housing ventures through 2005.
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. 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
March 31, 1998 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.
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ACCOUNTING CHANGES
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The statement requires the
Company to report financial and descriptive information about its
reportable segments, determined using the management approach (i.e.,
internal management reporting). The statement is effective for fiscal
years beginning after December 15, 1997. The Company will disclose
information of its segments as determined under methods prescribed by
SFAS No. 131 in its 1998 annual report.
****
This quarterly report, other than historical financial information,
contains forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, 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, 1997. These include risks and
uncertainties relating to the potential spin-off of the Company's
publishing business, pending litigation, government regulation,
competition and technological change, intellectual property rights,
capital spending, international operations, and the Company's
acquisition strategies.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Property Damage Claim
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.
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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 plaintiffs'
claims were fully retried and rejected in a related administrative
proceeding was granted on December 7, 1994. Plaintiffs filed for a
rehearing which was denied. Plaintiffs appealed the trial court's
decision granting summary judgment. In August 1996, the appellate court
affirmed all but three issues in the trial court's summary judgment
order in favor of Saddlebrook. On April 1, 1998, the trial court
entered an order limiting the scope of a retrial in light of the
appellate court's ruling. On April 13, 1998, plaintiffs moved for
reconsideration of the trial court's April 1, 1998 order. The trial
court has not yet ruled on plaintiffs' motion for consideration.
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.
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Patent Infringement Claim
On August 16, 1995, Interactive Technologies, Inc. commenced a lawsuit
in U.S. District Court against the Company alleging patent
infringement. The plaintiff claimed the Company infringed on their
patent by making, using and selling certain security system products in
the United States, and that the infringement was willful. Plaintiff
initially sought unspecified damages, and an injunction. The Company
denied infringement, maintaining the plaintiff's patent was invalid, as
well as unenforceable because the plaintiff committed inequitable
conduct before the Patent Office when applying for the patent. During
discovery, the plaintiff informed the Company it was seeking damages
measured by its lost profits or not less than a reasonable royalty on
sales of the Company. Fact discovery in the action closed on January
17, 1997. The Court conducted a Markman hearing in October 1997 to
construe the patent claims asserted by plaintiff and issued its Order
interpreting the claims on October 14, 1997. The Company moved for
summary judgment of non-infringement. On December 2, 1997 the Court
issued its Order granting partial summary judgment that the Company's
products did not literally infringe the patent claims, and denying
summary judgment of no infringement. Jury trial started on January 7,
1998. During the trial, the plaintiff indicated it was seeking lost
profits and royalty damages of up to $66.8 million. The plaintiff also
asserted trebling of damages, if awarded, based upon alleged willful
infringement. On March 9, 1998 the jury handed down a verdict against
the Company awarding damages of $36.0 million. The jury found that the
Company did not willfully infringe. The Court entered judgment on the
jury's verdict on April 9, 1998. Consequently, the company recorded a
provision of $43.0 million in the first quarter of 1998, which
considers the judgment, interest and legal costs. The Company filed
post-trial motions on April 20, 1998 for judgment as a matter of law in
favor of the Company and alternatively, for a new trial. If the
motions are unsuccessful the Company will appeal. The Company believes
it has meritorious defense in its post-trial motions and appeal. The
ultimate outcome of this matter is uncertain but will result in
significant damages should the Company lose the appeal.
Other
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. While
management believes that resolution of 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.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
27 Financial Data Schedule
(submitted only in electronic format)
(b) On March 10, 1998, the Registrant filed a report on Form 8-K
which contained a press release announcing that a jury
handed down a verdict the previous day in a patent suit
against the Registrant awarding damages of approximately
$36 million. The Registrant stated that it intends to
appeal the verdict.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PITTWAY CORPORATION
(Registrant)
By /s/ Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: April 28, 1998
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 25,663
<SECURITIES> 12,440
<RECEIVABLES> 258,169
<ALLOWANCES> 12,170
<INVENTORY> 264,966
<CURRENT-ASSETS> 581,964
<PP&E> 312,206
<DEPRECIATION> 157,528
<TOTAL-ASSETS> 1,005,438
<CURRENT-LIABILITIES> 326,646
<BONDS> 95,095
0
0
<COMMON> 21,034
<OTHER-SE> 459,476
<TOTAL-LIABILITY-AND-EQUITY> 1,005,438
<SALES> 356,624
<TOTAL-REVENUES> 356,624
<CGS> 215,653
<TOTAL-COSTS> 215,653
<OTHER-EXPENSES> 10,443
<LOSS-PROVISION> 952
<INTEREST-EXPENSE> 4,162
<INCOME-PRETAX> (12,827)
<INCOME-TAX> (4,832)
<INCOME-CONTINUING> (7,995)<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,995)<F1>
<EPS-PRIMARY> (.38)<F1>
<EPS-DILUTED> (.38)<F1>
<FN>
<F1>Excluding a net after-tax charge of $26.9 million ($1.27 per diluted share)
from patent litigation and an after-tax gain of $4.2 million ($.20 per diluted
share) from a divestiture by Cylink Corporation, a 29 percent owned affiliate
of the Company, net income would have been $14.7 million ($.69 per diluted
share).
</FN>
</TABLE>
