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, 1997
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. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on closing sales prices on March 19, 1998):
$1,051,398,000.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date (March 19, 1998): Common
Stock - 3,938,832 shares outstanding; Class A Stock - 17,095,468 shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 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 7, 1998 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, 1997
PART I Page
Item 1 Business 3-10
Item 2 Properties 10-12
Item 3 Legal Proceedings 12-14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market For Registrant's Common Equity and Related
Stockholder Matters 14
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8 Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 15
PART III
Item 10 Directors and Executive Officers of the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial
Owners and Management 15
Item 13 Certain Relationships and Related Transactions 15
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
SIGNATURES 17
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PART I
Item 1. Business
(a) General Development of Business
Pittway Corporation ("Pittway" or "Registrant"), 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.
In December 1997, the Company announced that 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
stockholders 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 Company expects the
transaction will be completed in the second or third quarter of 1998. See
information set forth under the heading "Supplemental Information" appearing
on pages 40-41 of the Company's 1997 Annual Report to Stockholders which is
incorporated herein by reference.
Acquisitions and dispositions of businesses by the Company, other than the
discontinued operations discussed below, in each of the five years ended
December 31, 1997 were not significant to the Company's sales or results of
operations.
In September 1997, Cylink Corporation ("Cylink"), an affiliate of the Company
(see "Real Estate and Other Ventures" in Item 1(c), below), acquired
Algorithmic Research, an information security company, for cash and Cylink
stock totaling $76.3 million. The Company increased the carrying value of its
investment in Cylink by $6.4 million and recorded a $4.0 million after-tax
gain, or $.19 per share (basic and diluted), as a result of the stock issued
in the acquisition and reduced the carrying value of its investment in Cylink
by $18.9 million and recorded an $11.8 million after-tax expense, or $.56 per
share (basic and diluted), for its equity in Cylink's write-off of "in-process
technology" acquired in the transaction. In February 1996, Cylink 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
$.69 per share ($.68 diluted) was recorded on the increase in Cylink's equity.
In February 1996, the Company sold 13% of its investment in United States
Satellite Broadcasting Company, Inc. ("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 (basic and diluted). See "Real Estate and Other
Ventures" in Item 1(c), below.
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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.
(b) Financial Information about Industry Segments
Financial information relating to industry segments for each of the three
years ended December 31, 1997 is set forth in Note 14 ("Segment Information")
to the Consolidated Financial Statements contained in the 1997 Annual Report
to Stockholders, pages 36-37, which Note is incorporated herein by reference.
(c) Narrative Description of Business
The principal operations, products and services rendered by the Company:
Alarm and Other Security Products Segment
This segment involves the design, manufacture and sale of an extensive line of
burglar and commercial fire alarm equipment, closed circuit television, access
control and other alarm components and systems as well as the distribution of
alarm, fire, security and other electrical 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 (ADI), authorized distributors and
dealers. ADI is the largest wholesale distributor of security, low voltage and
voice and data cabling products in North America specializing in burglar
alarm, fire alarm, CCTV, access control, intercom, central vacuum and sound &
communications sales. Various products sold through ADI 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, Mexican 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 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. These products are primarily sold under the
Company's Fire-Lite, Notifier, Fire Control Instruments and System Sensor
brand names.
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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.
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, trade shows and
conferences; readership lists, specialty publications, custom publishing,
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 and business services
markets and providing a complete line of services, from creative and printing
to mailing service capabilities.
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
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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 East Village, a
2,000 acre parcel of land, is approved for development as a master planned
community. A major shopping mall developer signed a contract to acquire 250
acres of this land. If the land purchase is closed (the developer could take
up to 24 months to complete the planning and permitting process), a sizeable
regional mall will be built on the site. Another developer has signed a
letter of intent to acquire the adjacent land, which it wants to use for
residential development. The West Village, formerly called 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 (29.6% 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. On March 13, 1998,
Cylink announced a pending sale of this wireless business for $60.5 million.
Cylink acquired Algorithmic Research, an information security company, in
September 1997. 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 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 and a 10% interest in a company that
enhances data transmission over cellular telephone networks.
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 six rental apartment complexes located in Chicago,
Indianapolis, San Jose and three 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.
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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 distribution 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. In 1997, the Alarm and Other Security Products Segment
developed significant national account business from several major companies
in the U.S. residential alarm market. The loss of any one 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 $24.3 million in 1997, $18.1 million in 1996 and $16.6
million in 1995. 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 was reduced by the sale of First
Alert/BRK Electronics in 1992. 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.
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, 1997, there were approximately 7,800 persons employed by the
Company, including 5,700 employed in the United States. Approximately 1,400
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
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the future could affect, the Company's actual results and could cause its
actual results in 1998 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 1997 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
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.
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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
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.
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Risks associated with potential spin-off - In December 1997, the Company
announced its Penton Publishing subsidiary had signed a letter of intent to
acquire another business media company, contingent on the Company spinning off
Penton to the Company's stockholders 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. There can be no
assurance that the acquisition will be completed, that the Company will
receive a favorable ruling from the Internal Revenue Service or that any of
the other conditions will be met. (Also see "Risks associated with
acquisition strategy," above.)
Pending litigation - The Company is a party in a lawsuit which arose out of
the development of a resort and a portion of the adjoining residential
properties owned and developed by the Company as well as a patent infringement
lawsuit (see Item 3). The Company is also, in the normal course of business,
subject to a number of lawsuits and claims, both actual and potential in
nature. If the outcome of any such litigation is unfavorable to the Company,
the Company's business and operations could be materially adversely affected.
(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 14 ("Segment Information") to the Consolidated
Financial Statements contained in the 1997 Annual Report to Stockholders,
pages 36-37, 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 310,000
Syosset, New York (2) 2014 10,000
Syosset, New York (3) 2002 14,000
Syosset, New York (1) 1999 6,000
Syosset, New York (1) 2000 33,000
Syosset, New York (2) 1998 34,000
Torrance, California (1) 1998 48,000
Miami, Florida (2) 2002 16,000
El Paso, Texas (2) 2001 19,000
El Paso, Texas (2) 2002 97,000
Louisville, Kentucky (3) 2002 7,000
Louisville, Kentucky (3) 1998 4,000
Jeffersontown, Kentucky (2) 2002 7,000
Raleigh, North Carolina (1) 1998 8,000
Northford, Connecticut (1) N/A 252,000
Lisle, Illinois (3) 2002 5,000
St. Charles, Illinois (1) 2003 158,000
St. Charles, Illinois (1) 2004 100,000
West Chicago, Illinois (1) 1998 21,000
Norcross, Georgia (3) 1998 6,000
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Principal Lease Approximate
Location Use Expiration Square Feet
Alarm and Other Security
Products Segment- (continued)
Waltham, Massachusetts (1) 2002 50,000
Melbourne, Australia (2) 1998 5,000
Sydney, Australia (2) 1998 25,000
Alleur, Belgium (2) 2000 6,000
Toronto, Canada (2) 1998 7,000
Concord, Ontario, Canada (2) 2000 11,000
Lichfield Staffs, England (4) 2014 20,000
Burgess Hill, England (4) N/A 60,000
Tyne & Wear, England (1) 1999 7,000
East Kilbride, Scotland (1) N/A 15,000
Hilden, Germany (2) 2000 8,000
Purmerend, The Netherlands (2) N/A 25,000
Xi'an, China (1) N/A 20,000
Tsuen Wan, NT, Hong Kong (2) 1999 8,000
Milan, Italy (1) N/A 14,000
Milan, Italy (2) 2001 10,000
Trieste, Italy (1) N/A 40,000
Arezzo, Italy (1) 2001 5,000
Juarez, Mexico (4) 2008 71,000
Juarez, Mexico (4) 2004 83,000
Juarez, Mexico (4) 2007 148,000
Madrid, Spain (2) 2000 11,000
Barcelona, Spain (2) 2005 6,000
Distribution Centers
Superhub Locations:
Atlanta, Georgia (2) 2007 125,000
Reno, Nevada (2) 2008 323,000
Louisville, Kentucky (2) 2007 190,000
Pine Brook, New Jersey (2) 1998 37,000
Hub Locations:
Boston, Massachusetts (2) 1999 14,000
Milford, Connecticut (2) 2008 18,000
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
Phoenix, Arizona (2) 2004 15,000
Dallas, Texas (2) 2008 76,000
Denver, Colorado (2) 1999 11,000
Detroit, Michigan (2) 2000 15,000
New Orleans, Louisiana (2) 2007 10,000
Seattle, Washington (2) 2006 25,000
Toronto, Canada (2) 2007 26,000
Montreal, Canada (2) 2000 11,000
Publishing Segment-
Cleveland, Ohio (3) 2000 179,000
Cleveland, Ohio (2) 2001 28,000
Berea, Ohio (5) N/A 100,000
Chicago, Illinois (3) 2003 9,000
New York, New York (3) 2000 10,000
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Principal Lease Approximate
Location Use Expiration Square Feet
Publishing Segment (continued)
Dunedin, Florida (3) 2000 13,000
Tampa, Florida (2) 1999 19,000
Tampa, Florida (5) 2000 15,000
Hasbrouck Heights, New Jersey (3) 2001 22,000
General Corporate-
Chicago, Illinois (3) 2001 12,000
Other properties in the alarm and other security products segment include 92
full-line convenience centers, in addition to those hub locations listed
above, which function as retail-like sales distribution outlets to serve the
North American market. These 92 centers are under leases expiring through
2008 and range in size from 1,200 to 10,000 square feet. Other properties in
the publishing segment include 14 sales and/or editorial offices under leases
expiring through 2003 located in major cities throughout the United States and
one in the United Kingdom. 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
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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 grounds 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. A
hearing took place on May 15, 1997 to determine the scope of the three issues
remaining for retrial. The trial court must rule on the scope before the
retrial can take place, which is expected to begin in 1998.
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 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 the ultimate outcome of the aforementioned lawsuit and
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.
On August 16, 1995, Interactive Technologies, Inc. ("ITI" - plaintiff)
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
13
<PAGE>
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 24, 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.
Recent Events - ITI Litigation Update
On March 9, 1998 the jury handed down a verdict against the Company awarding
damages of approximately $36 million. The jury did not award trebling of
damages because they found that the Company did not willfully infringe.
Although the verdict has been handed down, judgment on the jury's verdict is
not expected to be entered by the court until April 8, 1998. The Company
intends to file post-trial motions and appeal if the motions are unsuccessful.
The Company believes it has meritorious defenses in such 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.
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 41 of the Company's 1997 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 40 of the Company's
1997 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 42-43 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference.
14
<PAGE>
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 18, 1998, appearing on pages 23-38 of the
Company's 1997 Annual Report to Stockholders are incorporated herein by
reference. The Consolidated Financial Statements and Summary of Accounting
Policies and Notes thereto incorporated by reference in the Form 10-K should
be read in conjunction with information contained in "Recent Events - ITI
Litigation Update" included in Item 3 herein and the Form 8-K filed with the
Securities and Exchange Commission on March 10, 1998.
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, 1998.
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 7, 1998 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 7,
1998 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 7, 1998 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 7, 1998 is incorporated herein by reference.
15
<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 Schedule on page
18 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 21-23 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) On December 1, 1997, the Registrant filed a report on Form 8-K
announcing that its Penton Publishing subsidiary had signed letters
of intent to acquire three separate business media companies. One
of the acquisitions is contingent on the Registrant spinning off
Penton to the Registrant's shareholders in a tax-free distribution
which, in turn, is subject to the receipt of a favorable ruling
from the Internal Revenue Service.
On March 10, 1998, the Registrant filed a report on Form 8-K
announcing that a jury in the U.S. District Court in St. Paul,
Minnesota handed down a verdict the previous day in ITI's patent
suit against the Registrant relating to ITI's U.S. Patent
4,855,713. The patent relates to a method of entering wireless
transmitter identity codes into security system control panels.
The jury verdict awarded damages of approximately $36 million. The
Registrant intends to appeal the verdict.
16
<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, Treasurer
And Chief Financial Officer
Date: March 23, 1998
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 23, 1998.
/s/ Neison Harris /s/ E. David Coolidge III
Neison Harris, Director and E. David Coolidge III, Director
Chairman of the Board
/s/King Harris /s/ Anthony Downs
King Harris, Director, President Anthony Downs, Director
and Chief Executive Officer
/s/ Paul R. Gauvreau /s/ Leo A. Guthart
Paul R. Gauvreau, Principal Leo A. Guthart, Director
Financial and Accounting Officer
/s/ Eugene L. Barnett /s/ Irving B. Harris
Eugene L. Barnett, Director Irving B. Harris, Director
/s/ Sidney Barrows /s/ William W. Harris
Sidney Barrows, Director William W. Harris, Director
/s/ Fred Conforti /s/ Jerome Kahn, Jr.
Fred Conforti, Director Jerome Kahn, Jr., Director
17
<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,
1997 and 1996........................................ 24-25
For each of the three years ended December 31, 1997 -
Consolidated Statement of Income..................... 23
Consolidated Statement of Cash Flows................. 26
Consolidated Statement of Stockholders' Equity....... 27
Summary of Accounting Policies and Notes to
Consolidated Financial Statements.................... 28-38
Report of Independent Accountants...................... 39
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................................... 19
Consolidated Financial Statement Schedule II
Valuation and Qualifying Accounts.................... 20
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 1997 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 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 1997 Annual Report to Stockholders is
not deemed to be filed as part of this report.
18
<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 18, 1998 appearing on page 39 of the 1997
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 18 of this Form 10-K. In
our opinion, this 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 18, 1998
19
<PAGE>
<TABLE>
PITTWAY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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>
1997
Allowance for doubtful accounts $9,670 $4,960 $2,533 $12,097
Inventory obsolescence reserve 8,512 4,998 4,463 9,047
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
(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>
20
<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).
21
<PAGE>
INDEX TO EXHIBITS - cont'd.
Sequential
Number and Description of Exhibit Page Number***
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).
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).**
10.6 Employment Agreement with Daniel J. Ramella dated
as of January 1, 1997. (incorporated by reference
to Exhibit 10 of the Registrant's Quarterly Report
on Form 10-Q or the quarter ended March 31, 1997).**
13. 1997 Annual Report to Stockholders.*
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended
December 31, 1997 (submitted only in
electronic format).
27.2 Restated Financial Data Schedule for the years
ended December 31, 1995 and 1996, and
the first three quarters of 1996 (submitted
only in electronic format).
22
<PAGE>
INDEX TO EXHIBITS - cont'd.
Sequential
Number and Description of Exhibit Page Number***
27.3 Restated Financial Data Schedule for the first
three quarters of 1997 (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.
23
<PAGE>
EXHIBIT 13
PITTWAY CORPORATION
DECEMBER 31, 1997
FORM 10-K
Pittway Annual Report 97
Integration
The Key to Pittway's Future
[Cover]
<PAGE>
Performance Highlights
Record sales and operating income
- - Alarm Group sales surpass $1 billion
- - Penton sales exceed $200 million
...both for the first time
All major alarm operations increase sales, profits and market share
ADI opens its 100th convenience center location; Ademco International
acquires Castoro (Italy)
Notifier opens U.K. production facility and acquires Morley Electronic
Fire Systems Ltd. (U.K.)
Penton Publishing prepares for "spin-off" to Pittway shareholders and
acquires A/E/C SYSTEMS International, Industrial Shows of America
and Independent Exhibitions (U.K.)
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS 01
PRESIDENT'S LETTER 04
ALARM SYSTEMS 08
DISTRIBUTION 14
MEDIA SERVICES 18
FINANCIAL RESULTS 21
GROUP LOCATIONS AND
DIVISIONS 44
CORPORATE INFORMATION 46
BOARD OF DIRECTORS 47
[Inside cover]
<PAGE>
Financial Highlights
Dollars in thousands, except per share data 1997 1996 % Change
Net Sales $1,348,703 $1,111,575 21%
Operating Income 107,830 82,400 31%
Income Excluding Special Items 63,356 50,480 26%
Income (Loss) from Special Items (7,842) 22,562
Net Income 55,514 73,042 (24)%
Per Common and Class A share (Basic):
Income Excluding Special Items 3.02 2.41 25%
Income (Loss) from Special Items (.37) 1.08
Net Income 2.65 3.49 (24)%
Per Common and Class A share (Diluted):
Income Excluding Special Items 2.98 2.39 25%
Income (Loss) from Special Items (.37) 1.07
Net Income 2.61 3.46 (25)%
Depreciation and Amortization 34,660 28,166
Capital Expenditures 48,768 50,189
Working Capital 244,039 275,315
Stockholders' Equity 487,134 446,872
Stockholders' Equity per Share 23.21 21.36
Number of Employees 7,800 6,800
sales (in millions)
93 650
94 778
95 946
96 1,112
97 1,349
Operating Income (in millions)
93 34.0
94 49.9
95 59.2
96 82.4
97 107.8
Return on Equity (in percentage)
93 7.4%
94 10.7%
95 11.7%
96 13.0%
97 14.5%
Page 1
<PAGE>
PITTWAY CORPORATION
Alarm Group
SERVICES
Manufactures alarm and other controls for a wide variety of low-voltage
systems and peripheral devices which are monitored and operated by
these controls including:
- - Wireless transmitters
- - System smoke detectors
- - Passive infrared motion sensors
- - Glass break sensors
- - Audible/visible warning devices
- - Contacts, switches and connectors
- - Access controls
- - Lighting controls
Markets and sells control devices and peripheral devices to:
- - Over 40,000 alarm installation companies in North America, mostly
through alarm distribution companies
- - Over 300 engineered systems distributors in North America on a direct
basis
- - Original equipment manufacturers and distributors worldwide
Distributes alarm components and low-voltage products through company
owned centers in North America (100 locations), the United Kingdom, the
Netherlands, Italy, Spain, Australia and Hong Kong.
PERFORMANCE
HIGHLIGHTS
For eight years in a row, the Alarm Group has generated double digit
growth in sales and operating earnings. Once again, the Group
significantly increased its market share in the key areas of burglar
and fire alarm controls, space protection devices, system smoke
detectors and audible/visible devices.
Sales (in millions)
93 483
94 601
95 754
96 923
97 1,144
Operating Income (in millions)
93 33.4
94 45.2
95 54.0
96 70.4
97 89.3
Segment Sales
Alarm Group 85%
Publishing Group 15%
Page 2
<PAGE>
PITTWAY CORPORATION
Publishing Group
SERVICES
Publishes 33 magazines, including IndustryWeek, Electronic Design,
Machine Design and New Equipment Digest, as well as directories,
literature guides, card decks, CD-ROMs, websites and specialty
publications that are read by more than 2,000,000 engineers,
professionals and business people in a wide variety of fields. Nearly
all of Penton's magazines are ranked #1 or #2 in their fields.
Organizes and produces 55 U.S. and U.K.-based trade shows and
conferences related to Penton magazines or topics of current interest.
Prints all but one of Penton's magazines and 10 outside titles on high-
speed presses in Berea, Ohio.
Operates a direct mail marketing and custom printing company that
services clients in the pharmaceutical, health care and business
services markets.
PERFORMANCE
HIGHLIGHTS
Penton Publishing achieved record sales and operating earnings with 21
of 33 magazines increasing advertising pages sold.
Sales (in millions)
93 165
94 177
95 191
96 188
97 205
Operating Income (in millions)
93 7.2
94 11.0
95 11.9
96 18.7
97 25.3
Page 3
<PAGE>
President's Letter
President and Chief Executive Officer King Harris
Driven by strong gains in sales and operating income in both its alarm
and publishing businesses, Pittway achieved record results in terms of
revenue and earnings in 1997. Overall company sales increased 21% to
$1,348,703,000 and operating income jumped 31% to $107,830,000. Net
income, before special items, advanced 26% to $63,356,000 or $3.02 per
share ($2.98 diluted).
Page 4
<PAGE>
Penton and the Penton Spin-off On December 1 Pittway announced that
its Penton Publishing subsidiary had signed a Letter of Intent with a
privately held business media company to spin Penton off to Pittway
shareholders, merge with the private company and create a publicly
listed media company. The Penton spin-off/merger transaction is subject
to the completion of a definitive Combination Agreement between Penton
and the private business media company as well as a favorable ruling on
the spin-off from the Internal Revenue Service. Pittway expects the
spin-off/merger to be completed in the second or third quarter of 1998.
Pittway's major announcement capped a remarkable year of achievement at
Penton. Its revenues, up 9% to $204,931,000, and its operating income,
up 35% to $25,329,000, hit all-time highs. It acquired three
significant trade show companies - A/E/C SYSTEMS International,
Industrial Shows of America (ISOA) and Independent
Exhibitions (INDEX). It also announced other initiatives to
strengthen the company's future prospects.
Penton's aggressive expansion in the trade show/conference market - it
now operates 55 trade show and conference events - reflects a strategy
on its part to diversify its revenue streams so that it is not highly
dependent on print advertising for revenue and profit growth.
The trade show/conference companies acquired in 1997 have strong
positions in the markets they serve and are led by experienced,
entrepreneurial managers. A/E/C SYSTEMS, producer of the world's
largest conference and trade show event for computer and high-tech
solutions in the architectural, engineering and construction
industries, had an excellent first year under Penton ownership. ISOA
produces 24 industrial trade shows in the U.S. and Latin America which
focus on the machine tool, plant maintenance, logistics and
heating/venting/air conditioning markets. INDEX is an owner and
producer of eight trade shows serving the computer, manufacturing and
leisure markets in the U.K. It gives Penton a platform for exporting
successful U.S. trade shows to Europe.
Penton's willingness to move in new directions has contributed to
organic growth as well. It has announced two new magazines for 1998, IW
Growing Companies, a new edition of IndustryWeek that will be aimed at
manufacturing companies employing less than 500 people, and Penton's
Embedded Systems Development, an offshoot of Electronic Design. It will
launch an exciting new Internet venture, called Design Selector Global,
which will be run in partnership with an international consortium of
media companies led by Findlay Publications of the U.K. It also will
inaugurate a major new trade show, the International Manufacturing &
Engineering Technology Congress, in Chicago in October of 1998.
What makes Penton's future as a public company even brighter is the
ongoing success of its core magazine properties. 21 of its 33 titles
recorded increased revenue for the year. Machine Design, IndustryWeek,
American Machinist, Contracting Business, Wireless Systems Design,
Electronic Design and EEPN all turned in strong performances.
Once the Penton spin-out is complete, Pittway will be a pure alarm
system manufacturing and distribution company with a number of venture
investments in promising growth fields.
The Alarm Group Pittway's alarm business had its eighth straight year
of impressive growth in sales, operating income and market share. Alarm
sales surpassed one billion dollars for the first time, surging 24% to
$1,143,722,000. Operating earnings kept pace, growing 27% to a record
$89,285,000. During the 1990s Alarm Group sales and operating earnings
have had a compound growth rate of 21% and 35% respectively, far
outstripping the underlying growth rate of the worldwide alarm industry
of 7-10% per year.
Page 5
<PAGE>
The most important development affecting the Alarm Group during the
year was the addition of significant national account business from
several major players in the U.S. residential alarm market. Pittway's
Ademco Manufacturing Companies now supply equipment to a clear majority
of the leading companies in this market. Ademco's ability to provide a
full-line of wired, wireless, and wired/wireless residential and
commercial equipment on a cost effective and timely basis to these
companies has been the key to its success.
Industry experts believe that only 15-20% of all U.S. homes have alarm
systems. As consumers are made aware of all the new home control
features offered by alarm systems, penetration of such integrated
systems should grow and move into the 25-30% area. Ademco, as the
leading supplier of integrated systems to the market, will definitely
benefit from the market expansion.
Growth in the residential alarm market was not the only Ademco success
story in 1997. Ademco's commercial business expanded significantly, and
a new organizational structure was created to facilitate future growth.
A new sub-division, Ademco Commercial, was established in New York to
coordinate all of Ademco's commercial activities with those of Javelin
(closed circuit television equipment), AlarmNet (wireless data service
provider) and Xetron (access control). Ademco Commercial's future
appears to be very bright. It will begin marketing two new access
control systems in 1998 and will begin supplying a U.S. version of
Microtech's top-of-the-line Galaxy integrated burglar, fire and access
control to a major U.S. alarm company. It will also be selling a
broadened line of CCTV equipment under the Javelin brand name.
AlarmNet, now a part of the Ademco Commercial Division, expanded its
subscriber base to almost 100,000 and announced a very significant new
partnership with Aeris Communications. AlarmNet will market a new
wireless service based on Aeris's patented MicroBurst(TM) technology that
permits existing cellular telephone networks to transmit data
economically and efficiently without impacting voice traffic. Since the
cellular network is widespread, the Aeris partnership should allow
AlarmNet to offer its wireless service virtually everywhere in the
United States and Southern Canada. A new low cost radio
transmitter that incorporates Microburst(TM) technology has been designed
and will be manufactured and sold by Ademco to support this new
service.
Ademco International made solid progress throughout the year as all its
operating units increased their sales. Castoro, a large Italian alarm
distributor, was acquired in May and merged into Ademco Italia, making
Ademco the largest alarm distributor in Italy. In the area of
manufacturing, new economies were gained in the market-leading
Microtech product line by consolidating all U.K. production at Ademco's
facility in Fradley, England (near Birmingham).
ADI had another exceptional year of growth as its service center
network expanded to 100 by year end. To better support these locations,
ADI re-engineered and consolidated its distribution system from 14
shipping points to 4 super-hubs and 10 satellites. Operationally, the
highlight of the year was ADI's superb handling of a strike at a major
U.S.-based package carrier. Despite disruptions affecting both product
supply and delivery, ADI maintained its high service levels and won
additional business as a result. The breadth of ADI's business is
growing as well. It announced that it planned to enter the multi-
billion dollar structured cable/specialty wire business in 1998. ADI's
40,000 plus customer base of low voltage installers are active buyers
of communications cable and related accessories.
System Sensor continued to build its business while converting more
customers over to its rapidly growing line of Low Profile detectors. It
announced Filtrex(TM), a new, unique detector designed for installation
in dusty and dirty environments and worked with Notifier to secure key
Page 6
<PAGE>
European approvals for the revolutionary very intelligent early warning
detection system, VIEW(TM). VIEW(TM) systems continue to outperform the
best aspiration-type smoke detection systems now on the market. System
Sensor also started production at a new facility in Juarez, Mexico.
Another bright spot for System Sensor in 1997 was the performance of
its Audible/Visible and Waterflow business unit whose product sales
grew rapidly thanks to SpectrAlert(TM) horn and horn/strobe combination
devices. Easy to install and low in current consumption, SpectrAlert(TM)
products have become a big hit with installers.
Notifier/Fire-Lite and Fire Control Instruments (FCI), Pittway's fire
controls companies, had strong years.
Notifier began selling its new low cost emergency voice evacuation
panel, the Fire Command 25/50; launched the AFP-300, a low cost
intelligent control which can monitor VIEW(TM) detectors; made further
enhancements to several intelligent controls; and introduced a number
of new modules for its UniNet(TM) facilities monitoring system. It formed
a new company, Notifier Integrated Systems, to support a growing dealer
network charged with specifying, installing and servicing advanced
integrated systems such as the UniNet(TM) 2000.
In Europe Notifier began production at its new 60,000 square foot
factory at Burgess Hill, Southwest of London. It also completed work on
two new conventional fire alarm panels, made enhancements to its top-
of-the-line AFP 4000 system, and opened a new sales/distribution
operation in Sweden. In December Notifier U.K. announced that it had
purchased Morley Electronic Fire Systems Limited, a well known
manufacturer of intelligent/addressable fire alarm controls in the U.K.
Morley brings a strong engineering team, a competitive fire controls
line and a growing customer base into Pittway's European fire alarm
marketing program.
FCI, purchased by Pittway in January of 1997, moved its entire
operation into a new facility in Waltham, Massachusetts. It announced a
new voice evacuation system, the FireVac(R) 7200, as well as new Windows(R)
- -based software to run its 7200 system.
Though it is still the smallest operating entity within our Alarm
Group, MicroLite had a very successful year, increasing sales by 44%
and introducing a new line of lighting control products, the 600
Series. MicroLite continues to win nearly all the major sports stadium
contracts let out for bid and is steadily finding new applications for
its products.
Other Investments There were several developments during the year
that affected Pittway's non- operating investments.
A major shopping mall developer signed a contract to acquire
approximately 250 acres of Pittway land at Saddlebrook Village near
Tampa. If the land purchase is closed (the developer could take up to
24 months to complete the planning and
permitting process), a sizeable regional mall will be built on the
site. Another developer has signed a letter of intent to acquire the
adjacent land which it wants to use for residential development.
All in all, Pittway's non-operating investments are worth between $150
and $200 million on an after-tax basis. The two most important
investments are in the stock of Cylink Corporation (Pittway owns
8,606,085 shares) and United States Satellite Broadcasting Company,
Inc., USSB, (Pittway owns 3,781,375 shares).
King Harris President and Chief Executive Officer
February 18, 1998
Page 7
<PAGE>
Integrating Alarm Systems
Ademco's VISTA(R): Integration in the home
Pittway's remarkable growth in the 1990s can be attributed in large
part to the
success of its divisions in identifying key future needs in the markets
they serve and then developing or acquiring products and services to
meet those needs.
Pittway continues to spend a great deal of effort trying to anticipate
future market trends, and no trend is more important today than
integration as it impacts the alarm and publishing markets. success at
integration may be the key to Pittway's future.
Yesterday's fantasy - a low-cost, fully automated, integrated control
system that could operate a wide variety of devices in a home or
business - is rapidly becoming today's reality! Ademco VISTA(R) systems -
both hardwire and wireless - can already monitor remote intrusion, fire
and temperature control sensors and report their status to central
stations. They can turn lights and appliances on or off, control
access, open garage doors, regulate electronic thermostats, activate
paging systems, and be tied into audible or visible (CCTV) verification
systems. In the future they are likely to perform an even broader range
of control functions such as expanded appliance control, meter reading,
and full energy management.
Notifier integrated systems, while more upscale than their Ademco
counterparts in terms of their sophistication and capabilities, offer
significant cost savings and convenience benefits to commercial
installers and end-users. They integrate multiple fire alarm systems
into a unified and inexpensively operated UL(R) -listed platform and
provide a bridge to monitor and control existing - and future -
technologies, not only fire alarm panels, but also access
control, CCTV, security systems, lighting and other critical processes
to manage facilities locally or worldwide.
Page 8
<PAGE>
[pictures of Ademco's Two-Way Keyfob, VISTA(R) Wireless Smoke Detector and
Thermostat Module with the following captions:]
Ademco Two-Way Keyfob
Winner of the 1997 Security Industry Association's New Product Award,
the Two-Way Keyfob features wireless two-way feedback including both
visual and audible status, similar to the keypad inside the home.
Remote one-button operation gives users hand-held personal control of
their VISTA(R) security systems, lights and appliances including garage
doors.
Ademco VISTA(R) Wireless Smoke Detector
State of the art wireless smoke detection has been integrated
into standard Ademco VISTA(R) panels for residential and
commercial applications.
Ademco Thermostat Module
This new electronic set back thermostat can be tied into a VISTA(R)
system and controlled on-site or remotely over the phone with a voice
module.
Page 10
<PAGE>
Each year Ademco, Notifier, and other Pittway Alarm Group companies
broaden their integrated systems product lines. 1997 was no exception
as you can see on pages 12 and 13.
Only a small number of homes or businesses are currently taking
advantage of all the benefits that integrated control systems offer,
but this situation is likely to change by the early 21st century.
Alarm installation companies, who choose the equipment they wish to
sell to end-users, are likely to standardize on integrated lines of
equipment because they are easier to install and service, thanks to
common programming formats, a single user interface, and common
peripherals. Today's reality, which often involves different suppliers
of burglar alarm, fire alarm, access control, and CCTV equipment (and
therefore different programming languages, user interfaces, and
peripherals), as well as periodic compatibility problems, will no
longer be acceptable. These same alarm companies will also find the
added revenue and profit potential of integrated systems appealing.
End-users will increasingly ask for or specify integrated
systems because of the convenience and cost saving benefits they offer.
Whether in a home or business setting, dealing with one set of control
stations, one set of user instructions and one installing/servicing
firm is far easier than dealing with a multitude of user interfaces and
many servicing companies.
Page 11
<PAGE>
[pictures of Javelin's Q-NET Digital Video Network, ASC's Temperature
Sensor and Microtech's Galaxy Control and Keypad with the following
captions:]
Javelin Q-NET Digital Video Network
The industry's first affordable remotely based CCTV system, Q-NET
allows simultaneous operation and control of surveillance cameras,
while monitoring almost real-time video of remote facilities over a
LAN, WAN or GAN via a non-dedicated PC. Typical applications include
monitoring of plant operations, campuses, inventory in remote
warehouses, hospital high security areas, and banks. Q-NET seam-lessly
integrates with access control, burglar, fire, and other security and
building automation systems.
Ademco Sensor Company Temperature Sensor
Monitors temperature, then conveys information to a VISTA(R) control
which forwards information to a remote central station. Ideal for
protecting locations where temperature sensitive inventory is stored,
such as computer rooms, floral shops, meat lockers, and even chicken
coops (to ensure the most advantageous egg laying conditions!).
Microtech Galaxy Control & Keypad
This combination burglary (UL(R) approved), fire (UL(R) approval
pending), and access control (UL(R) approved) system - featuring sleek,
yet easy to read and easy to use keypads and a unique combination door
control module/proximity card reader - will be deployed by a major U.S.
commercial alarm installing company in 1998.
Page 12
<PAGE>
[pictures of Notifier's Integrated System UniNet(TM), Notifier and System
Sensor's VIEW(TM) System and Fire-Lite and FCI's Voice Evaluation
Controls with the following captions:]
Notifier Integrated Systems UniNet(TM)
UniNet(TM) 4.0 integrates multiple fire alarm systems into a unified and
inexpensively operated UL(R) platform for facility and campus
applications. UniNet(TM) 2000 provides a bridge to monitor and control
existing and future technologies via common event handling and a user
interface for fire, access control, video-badging, CCTV, security,
lighting and other critical processes used to manage facilities locally
or worldwide.
Notifier & System Sensor VIEW(TM) System
Sophisticated algorithms built into Notifier's fire control panel
firmware and System Sensor's laser smoke detector ensure integrated
operation of the Very Intelligent Early Warning system. Recent testing
at major U.S. and European telecom facilities - witnessed by major
engineering research and approval organizations - proved VIEW's(TM)
viability as one of the leading early warning fire and smoke detection
systems in the world.
Fire-Lite & FCI Voice Evaluation Controls
In anticipation of changing state and national occupancy codes, Fire-
Lite added the Fire Command 25/50 Voice Evacuation control panel and
FCI introduced the FireVac(R) 7200 Voice Evacuation control panel, both
extensions to their standard fire alarm control lines.
Page 13
<PAGE>
Integrating Distribution ADI: The vital link between 40,000 customers
and 300 suppliers
Manufacturers of alarm and other low voltage equipment face increasing
challenges in today's marketplace where products are becoming more
sophisticated, system selling more commonplace, installing dealers more
diverse, and the knowledge of basic products, software, and system
architecture growing.
Installers, for their part, face other challenges in a demanding end-
user world. They are putting in increasing numbers of new systems and
servicing larger and larger numbers and types of existing systems -
from burglar to fire to access to other low-voltage systems. They
cannot afford inventory stock-outs but want to minimize their on-hand
inventory to conserve working capital. They need both pre- and post-
sale technical assistance and support in laying out jobs, putting
systems together, and troubleshooting problems.
ADI provides the integrating link between manufacturers and installers
throughout North America. Its unmatched product supply and logistics
organization feeds products from over 300 suppliers to 40,000
installing dealers and delivers most shipments within 24 hours after
receipt of an order. Its large technical support organization, now
clustered in five regional offices, provides ordering and layout
assistance for CCTV, access control, fire alarm, burglar alarm and
other low voltage systems. Its marketing organization puts on product
expositions each year in 42 different cities which bring manufacturer
representatives and installing dealers together on a cost effective
basis. Its promotions specialists work with
Page 14
<PAGE>
[pictures of ADI's Distribution Strategy, Expos and Service Center
locations with the following captions:]
ADI Distribution Strategy
In 1997 and into 1998, ADI reengineered and consolidated its
distribution system from 14 shipping points to 4 super-hubs and 10
satellites supporting its 100 service center locations. The
strategically located super-hubs, in Atlanta (GA), Pinebrook (NJ),
Louisville (KY) and Sparks (NV) now hold increased inventory levels in
facilities ranging from 100,000 to 150,000 square feet.
ADI Expos
Hosting over 42 "mini" trade shows in 1997, ADI Expos provided a forum
for new product introductions, education, and feedback, cementing its
vital role as the integrating force for some 25,000 customers who might
not have otherwise had the opportunity to learn and interact with
suppliers.
ADI Service Center locations
Opening its 100th service center location in mid-1997, ADI is
recognized as the premier alarm and low-voltage systems supplier in
North America. Further expansion is anticipated in 1998.
Page 16
<PAGE>
manufacturers in setting up counter days, special sales events and
product category specific catalogs. No other low voltage distributor in
North America can offer as broad a range of services as ADI.
Though ADI has become the distributor of choice of nearly all the
leading alarm companies in the areas it serves, it constantly looks for
ways to improve its operations. It has upgraded its order entry and
billing systems and made them more flexible and responsive. ADI now
offers a direct electronic link from its information and order entry
system to customer locations. It has made its distribution system more
efficient through the creation of four super-hubs, which stock its full
range of 20,000 stock keeping units (SKUs). These super-hubs
significantly increase the likelihood that customer orders will be
shipped complete within 24 hours after they are received. They also
make ADI's inventory management more efficient. Frequently ordered SKUs
are stocked in all ADI branches including the super-hubs; less
frequently ordered SKUs are stocked only at the super-hubs.
These and other offerings, services, and improvements should solidify
ADI's position as the vital link between customers and suppliers for
many years.
Page 17
<PAGE>
Integrated Media Services Penton: Focusing on integrated marketing
In the late 1980s Penton realized that its primary products -
controlled circulation business-to-business magazines - were too
narrowly focused to capture the increasing amount of advertising
dollars its clients were putting into marketing and promotion vehicles
such as trade shows, direct mail, company magazines and electronic
media ventures. Penton's customers wanted to partner with media
companies that dominated information markets by providing diverse
arrays of integrated services.
In the 1990s Penton has moved aggressively to develop the integrated
media capabilities its customers want. It has launched or purchased
trade shows that fit strategically with, and add value to, its
magazines. It has added a variety of electronic media products and
services to meet the expanding information needs of its 2,000,000-plus
technical readers. It has purchased magazines in select markets to
strengthen its competitive position and services to readers. It has
disposed of magazines in markets it could not effectively dominate. It
has launched conferences related to its magazines and trade shows.
Penton's new focus on integrated product offerings can best be shown in
three of the markets it serves - the design engineering market, the
wireless segment of the electronics market, and the manufacturing
management market.
Long a core market for Penton, the design engineering group is anchored
by Machine Design and completed by an array of vertically focused
publications that include Computer-Aided Engineering,
Page 18
<PAGE>
[pictures of A/E/C Show Floor, Penton's Electronic Design Magazine
Website and IndustryWeek Magazine and CD ROM with the following
captions:]
A/E/C Show Floor
Extending Penton's reach into trade show management, A/E/C SYSTEMS
International serves users of computer applications in the
architectural, engineering, and construction markets, hosting 536
exhibitors and 30,000 attendees at its Spring and Fall shows.
Penton's Electronic Design Magazine Website
One of 26 Websites available from Penton properties, the
Electronic Design home page (www.penton.com/ed) is the
gateway for readers, advertisers, and suppliers to information
about an array of media alternatives.
IndustryWeek Manufacturing 1000
Magazine & CD ROM
Extending its brand beyond its well regarded magazine, IndustryWeek
(IW) conducted the first truly global study of manufacturers and
created specialized CD-ROM products that provide detailed industry
information in the form of searchable databases as well as companion
publications that serve significant emerging segments of IW's core
market.
Page 20
<PAGE>
Hydraulics & Pneumatics, Power Transmission Design, and The PT
Distributor. With the 1997 acquisitions of A/E/C SYSTEMS International
and Independent Exhibitions (INDEX), the launch of the International
Manufacturing & Engineering Technology Congress in October of 1998, the
continued growth of the Hydraulics & Pneumatics and Power Transmission
Design Shows, and active Websites for many of its magazines, Penton
continues to enhance its dominance of this key market.
Penton has built the same kind of "multi-media" line-up in the fast
growing wireless market. Three magazines - Microwaves & RF, Wireless
Systems Design, and Communications Products - and the annual Microwaves
& RF Product Data Directory - provide comprehensive printed
information. Two growing and successful trade show/conference events -
the Wireless Symposium and Exhibition and Portable By Design - together
host 300 exhibitors and 12,000 attendees. In the wireless market, as in
the design engineering market, online information on the group's
Websites offers users a new media choice particularly suited to the
market's innovative customers.
While trade shows are key to diversifying service to many of Penton's
markets, information users in the manufacturing management market
respond to different media. IndustryWeek magazine has successfully used
television, the Internet, and a year-round schedule of conferences to
serve its advertisers and readers, build its well-known brand name, and
expand its franchise. These and other integrated media groupings that
Penton has developed over the last few years should position it for
solid growth in the years to come.
Page 21
<PAGE>
FINANCIAL RESULTS
PITTWAY CORPORATION
CONSOLIDATED STATEMENT OF INCOME 23
CONSOLIDATED BALANCE SHEET 24
CONSOLIDATED STATEMENT OF CASH FLOWS 26
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY 27
SUMMARY OF ACCOUNTING POLICIES 28
NOTES TO CONSOLIDATED FINANICAL
STATEMENTS 30
REPORTS OF INDEPENDENT ACCOUNTANTS
AND MANAGEMENT 39
SUPPLEMENTAL INFORMATION 40
MANAGEMENT'S DISCUSSION AND
ANALYSIS 42
Page 22
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
For The Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share)
<CAPTION>
____________________________________________________________________________
1997 1996 1995
<S> <C> <C> <C>
Net Sales $1,348,703 $1,111,575 $945,669
Operating Expenses:
Cost of sales 818,107 678,903 581,694
Selling, general and
administrative 388,106 322,106 283,717
Depreciation and amortization 34,660 28,166 21,014
1,240,873 1,029,175 886,425
Operating Income 107,830 82,400 59,244
Other Income (Expense):
Gain on sale of investment 13,162
Gain on Cylink capital
transactions 6,396 23,279
Equity in Cylink acquisition
charge-off (18,943)
Income from marketable
securities and other interest 3,160 3,147 2,745
Interest expense (11,693) (8,624) (5,778)
Income from investments 2,638 1,766 3,828
Miscellaneous, net (560) 350 4,039
(19,002) 33,080 4,834
Income Before Income Taxes 88,828 115,480 64,078
Income Taxes (Note 7):
Current 38,205 34,580 30,634
Deferred (4,891) 7,858 (6,928)
33,314 42,438 23,706
Net Income $ 55,514 $ 73,042 $ 40,372
Net Income Per Share of Common
and Class A Stock (Note 12):
Basic $ 2.65 $ 3.49 $ 1.93
Diluted $ 2.61 $ 3.46 $ 1.92
Average Number of Shares
Outstanding (in thousands)
(Note 12) 20,979 20,921 20,912
Average Number of Shares and
Dilutive Equivalents Outstanding
(in thousands)(Note 12) 21,251 21,139 21,045
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 23
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
December 31, 1997 and 1996
(Dollars in thousands, except per share)
<CAPTION>
______________________________________________________________________________
ASSETS 1997 1996
<S> <C> <C>
Current Assets:
Cash and equivalents $ 41,334 $ 32,409
Marketable securities 16,583 26,026
Accounts and notes receivable, less
allowance for doubtful accounts of
$12,097 in 1997 and $9,670 in 1996 228,584 208,182
Inventories (Note 3) 242,656 203,254
Future income tax benefits (Note 7) 18,617 19,358
Prepayments, deposits and other 12,709 10,287
560,483 499,516
Property, Plant and Equipment, at cost:
Buildings 44,418 43,413
Machinery and equipment 254,972 224,268
299,390 267,681
Less: Accumulated depreciation 148,962 132,867
150,428 134,814
Land 2,733 2,787
153,161 137,601
Investments:
Marketable securities 30,015 37,814
Investment in affiliate (Note 5) 20,441 31,183
Real estate and other ventures 43,388 39,242
Leveraged leases (Note 6) 18,559 19,515
112,403 127,754
Other Assets:
Goodwill, less accumulated amortization
of $12,410 in 1997 and $9,707 in 1996 125,062 54,068
Other intangibles, less accumulated
amortization of $10,871 in 1997 and
$10,668 in 1996 5,351 5,022
Notes receivable 7,534 8,070
Miscellaneous 7,456 7,062
145,403 74,222
$971,450 $839,093
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 24
<PAGE>
<TABLE>
<CAPTION>
_____________________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Current Liabilities:
Notes payable (Note 4) $ 64,031 $ 6,815
Long-term debt due within one year (Note 4) 8,206 3,933
Dividends payable 1,719 1,724
Accounts payable 159,493 141,787
Accrued expenses 60,114 53,937
Income taxes payable 7,116 5,685
Retirement and deferred compensation plans 10,562 6,782
Unearned income 5,203 3,538
316,444 224,201
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 5.0%-7.6%,
due in monthly installments through 2004 9,191 4,921
Other 11,166 7,995
95,357 87,916
Deferred Liabilities:
Income taxes (Note 7) 58,065 65,738
Other 14,450 14,366
72,515 80,104
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares;
none issued
Common capital stock, $1 par value (Note 12) -
Common stock, authorized 42,000,000 shares;
3,938,832 shares issued and outstanding 3,939 3,939
Class A stock, authorized 36,000,000 shares;
17,052,543 and 16,987,622 shares issued
and outstanding in 1997 and 1996,
respectively 17,052 16,987
Capital in excess of par value 24,523 21,714
Retained earnings 440,536 391,753
Cumulative marketable securities valuation
adjustment 8,823 12,453
Cumulative foreign currency translation
adjustment (7,739) 26
487,134 446,872
$971,450 $839,093
</TABLE>
Page 25
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 55,514 $ 73,042 $ 40,372
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 34,660 28,166 21,014
Gain on sale of investment, net of taxes (8,149)
Gain on Cylink capital transactions,
net of taxes (3,997) (14,413)
Equity in Cylink acquisition charge-off,
net of taxes 11,839
Deferred income taxes (186) (876) (6,928)
Retirement and deferred compensation plans 5,060 4,915 9,275
Income/loss from investments adjusted
for cash distributions received (1,513) 404 2,277
Provision for losses on accounts
receivable 4,960 5,170 4,901
Gain on sale of assets (582) (106) (2,575)
Change in current assets and liabilities,
excluding effects from acquisitions,
dispositions and foreign currency
adjustments:
Increase in accounts and
notes receivable (26,316) (32,000) (34,229)
Increase in inventories (38,982) (48,350) (17,457)
(Increase) decrease in prepayments
and deposits (824) 1,482 (2,068)
Increase in accounts payable and
accrued expenses 18,442 47,873 16,528
Increase (decrease) in income taxes
payable 1,858 114 (4,480)
Other changes, net (1,553) (1,211) (3,904)
Net cash provided by operating activities 58,380 56,061 22,726
Cash Flows From Investing Activities:
Capital expenditures (48,768) (50,189) (42,056)
Proceeds from the sale of investment,
net of taxes of $5,013 10,748
Proceeds from the sale of marketable
securities 30,186 11,102 16,034
Purchases of marketable securities (18,595) (10,600) (5,846)
Dispositions of property and equipment 263 793 3,202
Additions to investments (3,592) (4,566) (5,984)
Dispositions of businesses 991 355
Decrease (increase) in notes receivable 2,947 (4,351) (1,194)
Net assets of businesses acquired,
net of cash (69,417) (3,263) (12,931)
Net cash used by investing activities (105,985) (50,326) (48,420)
Cash Flows From Financing Activities:
Net increase (decrease)in notes payable 58,644 1,730 (22,990)
Proceeds of long-term debt 12,269 5,284 81,693
Repayments of long-term debt (8,437) (5,338) (5,307)
Stock options exercised 1,060 133
Dividends paid (6,736) (6,752) (6,699)
Net cash provided (used) by financing
activities 56,800 (4,943) 46,697
Effect of Exchange Rate Changes on Cash (270) 210 45
Net Increase in Cash and Equivalents 8,925 1,002 21,048
Cash and Equivalents at Beginning of Year 32,409 31,407 10,359
Cash and Equivalents at End of Year $ 41,334 $ 32,409 $ 31,407
Supplemental Cash Flow Disclosure:
Interest paid $ 11,791 $ 8,552 $ 5,720
Income taxes paid $ 36,249 $ 35,166 $ 35,329
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 26
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1997, 1996 and 1995
(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, 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 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
Net income 55,514
Cash dividends declared:
Common stock - $.267 per share (1,051)
Class A stock - $.333 per share (5,680)
Shares issued pursuant to stock
options and awards 64,921 65 2,809
Marketable securities
valuation adjustment (3,630)
Currency translation adjustment (7,765)
Balance - December 31, 1997 3,938,832 $3,939 17,052,543 $17,052 $24,523 $440,536 $ 8,823 $(7,739)
<FN>
See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
Page 27
<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 12). 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
Current marketable securities consist principally of adjustable rate
preferred stocks. Non-current marketable securities consist of stock in
United States Satellite Broadcasting Company, Inc. ("USSB"), a satellite
broadcast company. 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 $31,168,
$25,661 and $21,100 in 1997, 1996 and 1995, respectively.
Investments
Investment in affiliate consists of an equity interest in Cylink
Corporation ("Cylink"), a manufacturer of encryption and data communication
devices. The Company accounts for its investment in Cylink under the equity
method.
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 accruing 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.
Page 28
<PAGE>
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.
Research and Development Expenses
Research and development costs are expensed as incurred. These costs
amounted to $24,316, $18,077 and $16,599 in 1997, 1996 and 1995,
respectively.
Advertising and Promotion Expenses
Advertising and promotion costs are expensed as incurred. These costs
amounted to $20,332, $20,512 and $17,500 in 1997, 1996 and 1995,
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. Deferred income taxes and future income tax benefits
have been recognized for all temporary differences.
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 net expenses of $1,041,
$102 and $72 in 1997, 1996 and 1995, 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 Class A 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 certain of
these awards and stock appreciation rights, the changes in such stock price
during each subsequent reporting period.
Page 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
Note 1 - Pending Divestiture
In December 1997, the Company announced that 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 stockholders 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.
Note 2 - Acquisitions and Dispositions
During 1997, the Company acquired the assets and businesses of a
foreign distributor of alarm and other security products, one domestic and
one foreign manufacturer and distributor of fire control products, two
domestic trade show companies and one foreign trade show company. The total
purchase price for these businesses was $69,417 cash paid, principally
financed through short-term bank borrowings, $6,976 of future payments,
certain liabilities assumed as well as future contingent payments up to
$13,882 tied to future earnings of the acquired companies through 2003. The
excess of the aggregate purchase price over the fair market value of net
assets acquired of $75,061 is being amortized over 40 years. Also in 1997,
the Company sold one publication for $991 cash.
During 1996, the Company acquired the assets and businesses of two
foreign distributors of alarm systems and a domestic 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 $1,000 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 $355 cash and retained a
$1,000 note receivable due from this former subsidiary.
All the aforementioned acquisitions were accounted for as purchase
transactions. The impact of these acquisitions on consolidated results of
operations was not significant. These companies have been included in the
consolidated financial statements from their respective dates of acquisition
or to the dates of disposition.
Note 3 - Inventories
At December 31, 1997 and 1996 approximately 84% and 85%, 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:
1997 1996
Raw materials $ 59,405 $ 41,568
Work-in-process 17,852 19,560
Finished goods -
Manufactured by the Company 89,771 69,020
Manufactured by others 75,628 73,106
$242,656 $203,254
Note 4 - Debt
The average annual interest rate on short-term notes payable was
approximately 6.9% (6.2% domestic and 8.1% foreign) and 6.6% (5.7% domestic
and 11.7% foreign) at December 31, 1997 and 1996, 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 bears interest principally at 4% to
7%, with maturities through 2009. Aggregate long-term maturities due
annually for the five years beginning in 1998 are $8,206, $10,736, $8,486,
$7,541, $8,076 and $60,518 thereafter.
Page 30
<PAGE>
Note 5 - Investment in Affiliate
The Company's investment in Cylink consists of 8,606,085 shares of
common stock. See Note 13 regarding the fair value of the investment. In
September 1997, Cylink acquired Algorithmic Research, an information
security company, for cash and Cylink stock totaling $76,263. The Company
increased the carrying value of its investment in Cylink by $6,396 and
recorded a $3,997 after-tax gain, or $.19 per share (basic and diluted), as
a result of the stock issued in the acquisition and reduced the carrying
value of its investment in Cylink by $18,943 and recorded an $11,839 after-
tax expense, or $.56 per share (basic and diluted), for its equity in
Cylink's write-off of "in-process technology" acquired in the transaction.
In 1996, the carrying value of the investment in Cylink was increased by
$23,279 to reflect the increase in the Company's equity in Cylink's net
book value as a result of an initial public offering in February 1996. The
after-tax gain recorded on the increase in Cylink's equity was $14,413, or
$.69 per share ($.68 diluted).
The summarized results of operations of Cylink for the year ended
December 31, 1997 are as follows: sales - $80,599; gross profit - $53,153;
write-off of "in-process technology" - ($63,920); net loss - ($58,777).
Summarized balance sheet information at December 31, 1997 is: current
assets - $63,472; non-current assets - $19,121; current liabilities - $13,222;
non-current liabilities - $269.
Note 6 - 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:
1997 1996
Rentals receivable (net of principal
and interest on nonrecourse debt) $11,900 $12,875
Estimated residual value 11,432 11,432
Unearned and deferred income (4,773) (4,792)
Investment in leveraged leases 18,559 19,515
Deferred income taxes (18,597) (19,630)
Net investment $ (38) $ (115)
A summary of the components of income from leveraged leases follows:
1997 1996 1995
Income (loss) before income taxes $ (81) $ 433 $ 363
Income tax benefit (cost) -
Current (1,005) (911) 106
Deferred 1,033 759 (233)
Income (loss) from leveraged leases $ (53) $ 281 $ 236
Minimum annual rentals receivable (net of principal and interest on
nonrecourse debt) under leveraged leases for the next five years beginning
with 1998 are $2,065, $1,751, $3,488, $483, $98 and an aggregate of $4,015
thereafter.
Page 31
<PAGE>
Note 7 - Income Taxes
Income before income taxes consists of:
1997 1996 1995
Domestic income $ 84,640 $109,772 $60,148
Foreign income 4,188 5,708 3,930
$ 88,828 $115,480 $64,078
The provision for income taxes consists of:
1997 1996 1995
Current -
Federal $ 31,023 $27,867 $25,107
State and local 4,492 4,251 2,857
Foreign 2,690 2,462 2,670
38,205 34,580 30,634
Deferred -
Federal (4,724) 7,680 (6,696)
Foreign (167) 178 (232)
(4,891) 7,858 (6,928)
$ 33,314 $42,438 $23,706
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:
1997 1996 1995
Income tax at statutory rate $31,090 $40,418 $22,427
Tax effect of -
State income taxes, net of
federal benefit 2,751 3,307 1,857
Other items, net (527) (1,287) (578)
Actual income tax provision $33,314 $42,438 $23,706
Effective income tax rate 37.5% 36.7% 37.0%
The components of the deferred tax liabilities (assets) at December 31,
1997 and 1996 are comprised of the following:
1997 1996
Deferred tax liabilities -
Leveraged leases $ 18,597 $ 19,630
Real estate ventures -
Affordable housing 16,799 13,678
Other 4,308 4,265
Investment in affiliate 5,760 9,520
Investment in USSB 5,418 8,389
Purchased tax benefit leases 3,091 3,612
Depreciation 2,820 2,867
State income taxes, net of
federal benefit 3,800 3,571
Other 5,033 4,072
Total deferred tax liabilities 65,626 69,604
Deferred tax assets -
Inventory valuation (9,179) (7,707)
Tax loss carryforwards (4,967) (4,738)
Deferred compensation (7,541) (5,635)
Bad debts (2,953) (2,677)
Workers compensation (1,511) (1,146)
Other (4,994) (6,059)
Total deferred tax assets (31,145) (27,962)
Valuation allowance 4,967 4,738
Net deferred tax liability $ 39,448 $ 46,380
The valuation allowance relates to tax loss carryforwards of which $975
as of December 31, 1997 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.
Page 32
<PAGE>
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.
Activity in options, performance and bonus share awards under the 1990
plan is summarized as follows:
1997 1996 1995
Outstanding at beginning of year 845,726 594,116 359,581
Awards and options granted 269,964 275,425 239,247
Shares issued for awards and for options
exercised (64,921) (14,349) (1,494)
Awards and options redeemed for cash (5,633) (8,466) (1,072)
Awards and options cancelled (1,000) (1,000) (2,146)
Outstanding at end of year 1,044,136 845,726 594,116
Exercisable at end of year 343,547 196,782 30,750
Shares available for grant 187,939 451,270 717,229
Weighted average exercise price information follows:
1997 1996 1995
Outstanding at beginning of year $29.66 $22.84 $18.75
Awards and options granted 54.72 43.00 28.88
Shares issued for awards and for options
exercised 28.66 7.86 20.08
Awards and options redeemed for cash 20.08 20.08 17.09
Awards and options cancelled 43.25 43.25 17.09
Outstanding at end of year 36.24 29.66 22.84
Exercisable at end of year 20.13 16.58 7.95
Outstanding awards at December 31, 1997 include 165,264 performance and
bonus share awards, of which 40,025 are issuable in 1998, and the following
non-qualified options:
Range of Outstanding Exercisable
Exercise Average Average Average
Prices Shares Price Life (yrs) Shares Price
$43-$55 420,700 $49.44 8.7
$23-$30 289,922 $26.64 6.7 135,272 $23.00
$ 9-$17 168,250 $16.35 5.3 168,250 $16.35
The Company's 1996 stock option plan for non-employee directors
provides for the issuance of up to 30,000 shares of Class A stock which are
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 12,000 shares are exercisable at December 31, 1997 and options
for 5,000 shares become exercisable in each of the next two years. Options
for 2,000 shares were cancelled in 1997. 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.
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<PAGE>
The fair value of options at date of grant was $23.29 in 1997, $18.87
in 1996 and $12.72 in 1995 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 1997, 1996 and 1995,
respectively: interest rate of 5.6%, 6.4% and 7.1%; volatility of 27%, 27%
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 $5,127, $5,680, and $5,748 in 1997,
1996 and 1995, respectively. If the Company had adopted SFAS No. 123 with
respect to options, net income would have been $53,112, or $2.53 per share
($2.50 diluted) in 1997, $71,685, or $3.43 per share ($3.39 diluted) in 1996
and $39,940, or $1.91 per share ($1.90 diluted) in 1995. The pro forma
effect on net income in 1996 and 1995 is not representative of the effect in
future years because it does not take into consideration options granted
prior to 1995.
Note 9 - Retirement Plans
The Company has various noncontributory retirement plans covering
substantially all current and certain former domestic employees. Retirement
benefits for employees in foreign countries are generally provided by
national statutory programs. Benefits for domestic employees are based on
years of service and annual compensation as defined by each plan. The
Company's policy is to fund pension costs accrued.
The components of net pension income for the plans consist of:
1997 1996 1995
Service cost - benefits earned
during the year $ 5,115 $ 4,562 $ 4,005
Interest cost on projected benefit
obligation 4,584 4,265 4,042
Actual return on plan assets (17,864) (13,804) (27,286)
Net amortization and deferred gains
and losses 7,713 4,477 18,439
Net pension income $ (452) $ (500) $ (800)
The reconciliation of the funded status of the plans at year end
follows:
1997 1996
Actuarial present value of benefit
obligations -
Vested benefit obligation $(58,432) $(53,089)
Nonvested benefit obligation (3,773) (3,300)
Accumulated benefit obligation (62,205) (56,389)
Excess of projected benefit
obligation over accumulated
benefit obligation (10,894) (9,616)
Projected benefit obligation (73,099) (66,005)
Plan assets at fair value 123,187 109,287
Plan assets in excess of
projected benefit obligation 50,088 43,282
Unrecognized net gain (41,683) (34,460)
Unrecognized prior service cost 2,835 3,431
Unamortized transition net asset (4,395) (5,860)
Prepaid pension cost included
in the consolidated balance sheet $ 6,845 $ 6,393
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 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 1998 are $25,263, $23,427,
$20,204, $12,411, $9,973 and an aggregate of $25,486 thereafter. Rental
commitments are stated net of minimum sublease rentals aggregating $3,320.
Total rent expense (including taxes, insurance and maintenance when included
in the rent) amounted to $22,515, $18,350 and $16,930 in 1997, 1996 and
1995, respectively.
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<PAGE>
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. In
1990 the trial court entered an order vacating the judgment and awarding a
new trial. A hearing took place in 1997 to determine the scope of the
issues remaining for retrial. The trial court must rule on the scope
before the retrial can take place, which is expected to begin in 1998.
In 1995 a lawsuit was brought against the Company, seeking lost
profits and royalty damages of up to $66.8 million on account of Company
sales of products which the plaintiff alleges infringed on its patent. The
plaintiff is also asserting 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 an order granting
the Company partial summary judgment, stating that its products did not
literally infringe upon the plaintiff's patent claims. Trial of this case
is currently in progress. The Company strongly believes it has meritorious
defenses 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 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.
The Company has committed to invest up to a total of $23.3 million in
certain affordable housing real estate ventures through 2005.
Note 12 - 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).
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
awards.
Page 35
<PAGE>
Note 13 - 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:
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets -
Current marketable securities $ 16,583 $ 16,583 $ 26,026 $ 26,026
Investment in USSB 30,015 30,015 37,814 37,814
Investment in Cylink 20,441 83,909 31,183 111,879
Affordable housing investments 22,542 22,542 20,342 20,342
Notes receivable 8,092 8,074 10,887 10,722
Financial liabilities -
Long-term debt (103,563) (102,052) (91,849) (88,288)
The estimated fair values of marketable securities, the investment in
USSB and the investment in affiliate are based on quoted market prices. 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, 1997 and 1996, current marketable securities consisted
of adjustable rate preferred stocks, which had gross unrealized holding
gains (losses) of $25 and ($1,911), respectively. Realized gains and losses
on sales of marketable securities are based upon the specific identification
method. Such gains totaled $331 and $63 in 1997 and 1996, respectively, and
losses totaled $79 and $576 in 1997 and 1996, 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 (basic and diluted). 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 (basic and diluted). Unrealized holding gains in this investment
were $14,226 and $22,025 at December 31, 1997 and 1996, respectively.
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 14 - 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.
Page 36
<PAGE>
<TABLE>
<CAPTION>
Depreciation
Operating Identifiable Capital and
Industry Segments Net Sales Income Assets Expenditures Amortization
<S> <C> <C> <C> <C>
1997
Alarm and Other Security Products $1,143,722 $ 89,285 $649,471 $ 43,201 $ 27,912
Publishing 204,931 25,329 136,374 5,450 6,519
General Corporate and Other 50 (6,784) 185,605 117 229
Consolidated $1,348,703 $107,830 $971,450 $ 48,768 $ 34,660
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
</TABLE>
<TABLE>
<CAPTION>
Operating Identifiable
Geographic Areas Net Sales Income Assets
<S> <C> <C> <C>
1997
Domestic Operations $1,204,687 $ 99,751 $793,311
European Operations 114,478 5,766 158,540
Other Foreign Operations 73,560 2,783 34,993
Eliminations (44,022) (470) (15,394)
Consolidated $1,348,703 $107,830 $971,450
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
</TABLE>
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<PAGE>
Note 15 - Quarterly Results (Unaudited)
Quarterly results of operations for the years ended December 31, 1997 and
1996 are shown below:
<TABLE>
<CAPTION>
1997 Quarters Total
First Second Third Fourth For Year
<S> <C> <C> <C> <C> <C>
Net Sales $301,158 $339,213 $357,264 $351,068 $1,348,703
Gross Profit 108,651 124,617 127,243 135,425 495,936
Net Income 12,296 16,598 8,335 (a) 18,285 55,514
Net Income per Share:
Basic .59 .79 .39 (a) .87 2.65
Diluted .58 .78 .39 (a) .86 2.61
</TABLE>
<TABLE>
<CAPTION>
1996 Quarters Total
First Second Third Fourth For Year
<S> <C> <C> <C> <C> <C>
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
Net Income 33,288 (b) 12,530 12,756 14,468 (c) 73,042
Net Income per Share:
Basic 1.59 (b) .60 .61 .69 (c) 3.49
Diluted 1.58 (b) .59 .60 .68 (c) 3.46
(a) Net income for the 1997 third quarter includes a $3,997 after-tax gain on Cylink capital
transactions and an $11,839 after-tax expense for the Company's equity in Cylink's write-off of
"acquired in-process technology." These items decreased net income by $7,842, or $.37 per share
(basic and diluted).
(b) Net income for the 1996 first quarter includes an $8,149 after-tax gain on the sale of
shares of USSB stock and a $14,507 after-tax gain from Cylink's initial public offering. These
items increased net income by $22,656, or $1.08 per share (basic and diluted). The after-tax
gain from Cylink's initial public offering was reduced by $94 in the 1996 second quarter.
(c) Net income for the 1996 fourth quarter includes a tax benefit of $849, or $.04 per share
(basic and diluted) for a charitable contribution of appreciated securities.
</TABLE>
Page 38
<PAGE>
Reports of Independent Accountants and Management
Report of Independent Accountants [PW Logo]
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, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1997, 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 18, 1998
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 39
<PAGE>
Supplemental Information
Five Year Summary of Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales of Continuing Operations $1,348,703 $1,111,575 $945,669 $778,026 $650,105
Operating Income from Continuing
Operations 107,830 82,400 59,244 49,922 34,012
Income from Continuing Operations 55,514 (a) 73,042(b) 40,372 44,836(d) 21,240
Income from Discontinued Operations 10,046
Cumulative Effect of Changes in
Accounting Principles 1,535
Net Income 55,514(a) 73,042(b) 40,372 44,836(d) 32,821
Per Share (c):
Basic -
Income from Continuing Operations 2.65(a) 3.49(b) 1.93 2.15(d) 1.02
Income from Discontinued Operations .48
Cumulative Effect of Changes in
Accounting Principles .07
Net Income 2.65(a) 3.49(b) 1.93 2.15(d) 1.57
Diluted -
Income from Continuing Operations 2.61(a) 3.46(b) 1.92 2.14(d) 1.02
Income from Discontinued Operations .48
Cumulative Effect of Changes in
Accounting Principles .07
Net Income 2.61(a) 3.46(b) 1.92 2.14(d) 1.57
Cash Dividends Declared Per Share (c):
Common .267 .267 .267 .267 .30
Class A .333 .333 .333 .333 .367
Capital Expenditures 48,768 50,189 42,056 28,246 29,478
Depreciation and Amortization 34,660 28,166 21,014 20,160 17,249
At Year End
Total Assets 971,450 839,093 672,974 563,287 481,977
Long-Term Debt 95,357 87,916 85,966 5,088 6,083
Stockholders' Equity 487,134 446,872 363,026 328,130 292,064
Per Outstanding Share (c) 23.21 21.36 17.36 15.69 13.97
Market Price Per Share (c):
Common 68.94 52.13 44.25 26.00 22.67
Class A 69.63 53.50 45.17 26.83 21.50
(a) Includes the after-tax gain on Cylink capital transactions of $3,997 and the after-tax expense for the Company's
equity in Cylink's write-off of "acquired in-process technology" of $11,839. These items decreased net income by
$7,842, or $.37 per share (basic and diluted).
(b) Includes the after-tax gain on the sale of investment in USSB and gain from Cylink stock offering of $8,149, or $.39
per share (basic and diluted) and $14,413, or $.69 per share ($.68 diluted), respectively.
(c) Per share data reflect the 3-for-2 stock split declared in January 1996.
(d) Includes net gain on sale of First Alert stock of $11,776, or $.57 per share (basic and diluted).
</TABLE>
Page 40
<PAGE>
Pro Forma Presentation for Pending Divestiture
The following pro forma information presents historical amounts as
restated to reflect Penton as a discontinued operation (See Note 1 to
consolidated financial statements). The 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.
1997 1996 1995
Net sales from continuing operations $1,143,772 $923,453 $754,406
Income from continuing operations
before special items $ 48,176 $ 38,873 $ 31,542
Special items (7,842)(a) 22,562(b)
Income from continuing operations 40,334 61,435 31,542
Earnings from discontinued operations 15,180 11,607 8,830
Provision for expenses related
to divestiture (618)
Income from discontinued operations 14,562 11,607 8,830
Net income $ 54,896 $ 73,042 $ 40,372
Income Per Share of Common
and Class A Stock:
Basic -
Income from continuing
operations $ 1.92 $ 2.94 $ 1.51
Income from discontinued
operations .70 .55 .42
Net Income $ 2.62 $ 3.49 $ 1.93
Diluted -
Income from continuing
operations $ 1.90 $ 2.91 $ 1.50
Income from discontinued
operations .68 .55 .42
Net Income $ 2.58 $ 3.46 $ 1.92
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, 1997,
stockholders of record totaled approximately 450 for Common and 850 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
1997 Quarter:
First $55.25 $49.88 $55.00 $48.50 $.0667 $.0833
Second 55.88 49.50 57.12 48.62 .0667 .0833
Third 64.50 50.25 65.00 50.00 .0667 .0833
Fourth 69.00 59.88 70.00 60.00 .0667 .0833
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
Page 41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Sales increased in 1997 to $1.35 billion, a 21% increase over 1996 sales
which were 18% higher than 1995. Domestic sales grew 22% in 1997 and 15%
in 1996 while international sales increased 17% in 1997 and 44% in 1996.
International business, substantially all of which derives from alarm
operations, represents 14% of total consolidated sales in both 1997 and
1996. Most of the foreign sales growth in 1997 is derived from
expansion of European operations. Approximately one-third of the
foreign sales growth in 1996 resulted from two European acquisitions
late in 1995 and early in 1996. Gross profit increased 23% in 1997 and
18% in 1996 principally due to the expanded sales levels. Selling,
general and administrative expenses increased 20% in 1997 and 14% in
1996 principally as a result of increased costs associated with the
higher sales volume and, in 1997, temporarily increased distribution
costs at ADI as a result of a strike at a major U.S.-based package
carrier and reengineering of ADI's distribution hub system.
Alarm product sales accounted for 85% of consolidated revenues in 1997
(83% in 1996) and increased 24% in 1997 and 22% in 1996. Virtually
every business unit recorded increased sales. The largest increases in
both amounts and percentages occurred in domestic burglar alarm
manufacturing, aided by major new accounts, and in security equipment
distribution. The domestic distribution business made significant gains
in 1997 and 1996 by expanding its outlet network internally, adding
major new accounts, expanding its product offerings, acquiring a
business in November 1995 and by capitalizing on the early 1995
bankruptcy of a major competitor. The volume at all of the
manufacturing units benefited in 1997 and 1996 from the continued
acceptance of numerous new product offerings, from expanded worldwide
distribution capabilities and, to a lesser extent, from acquisitions.
Operating income for the segment increased 27% in 1997 and 30% in 1996
primarily because of the expanded sales volume. Research and
development expense increased 35% to $24.3 million in 1997 and increased
9% to $18.1 million in 1996 as the Company expended record amounts on
research and new product development.
Publishing sales increased 9% in 1997 and operating income increased
35%. These favorable results were achieved through a combination of
increased magazine advertising revenues, a newly acquired trade show
held in the second quarter of 1997, and containment of operating costs.
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
reflecting increases in both ad pages and page rates on an improved mix
of magazines. The Company expects the spin-off of its publishing
business to be completed in the second or third quarter of 1998.
Depreciation and amortization expense increased both in 1997 and 1996,
principally as a result of capital additions associated with the
expansion of the alarm business.
Other income (expense) in 1997 includes two special items recorded in
connection with an acquisition made by the Company's Cylink affiliate: a
$6.4 million pretax gain as a result of the stock issued in the
acquisition and an $18.9 million pretax expense for the Company's equity
in Cylink's write-off of "acquired in-process technology." 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 special items in both years, other income
(expense) was less favorable in 1997 principally due to increased
interest expense from higher borrowing levels and increased foreign
currency transaction losses from the strong U.S. dollar and UK pound
against other key international currencies, partially offset by the
Company's equity in increased operating earnings at Cylink.
Effective tax rates were 37.5% in 1997, 36.7% in 1996, and 37.0% in
1995. An analysis of the Company's effective tax rate appears in Note 7
to the Consolidated Financial Statements.
Page 42
<PAGE>
FINANCIAL CONDITION
The Company's financial condition remained strong through 1997.
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 1997, income before depreciation, amortization and the special items
recorded in connection with the acquisition made by the Company's Cylink
affiliate provided $98.0 million of net cash which was used primarily to
finance a $39.0 million increase in inventory balances and a $26.7
million increase in accounts receivable. The remaining net cash
generated from operations ($58.4 million), along with $11.6 million of
net proceeds from the sale of marketable securities, $2.9 million of
payments received on notes receivable, $1.0 million of proceeds on the
sale of a publication, $1.1 million of proceeds from the exercise of
stock options, and $3.8 million of net proceeds on long-term debt were
used to finance $48.8 million of capital additions, $6.7 million of
dividends paid to stockholders, and $3.6 million of affordable housing
investments. Acquisitions of six companies were completed during the
year at a combined purchase price of $69.4 million which was financed
principally through the $58.6 million increase in short-term borrowings.
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 real estate 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
December 31, 1997 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.
ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income." The statement requires
the addition of comprehensive income and its components in the primary
financial statements. Comprehensive income includes cumulative foreign
currency translation adjustments and unrealized investment gains and
losses, which are not included in income under current accounting
principles. The statement is effective for fiscal years beginning after
December 15, 1997, and requires comparative amounts in financial
statements for earlier periods presented.
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 has not yet
determined the impact that SFAS No. 131 will have on its financial
statements.
INFLATION
The impact of inflation on the Company's results of operations has not
been significant in recent years.
YEAR 2000 ISSUE
All work necessary to upgrade the Company's systems for Year 2000
compliance is expected to be completed in a timely fashion and should
not involve a significant amount of the Company's resources.
****
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, 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.
Page 43
<PAGE>
Group Locations and Divisions
Pittway Security Group
165 Eileen Way
Syosset, Long Island NY 11791
Tel. 516/921-6704
Leo A. Guthart, Chairman and CEO
Ademco Distribution, Inc. (ADI)
Steven I. Roth, President
Executive Vice Presidents:
Michael Cannata
Joseph Cappelletti
Vice Presidents:
Dennis Babcock
Sheri Bram
Tom Braun
John Burton
Anthony Caputo
Pat Comunale
George Ehrlinger
Mark Ingram
Chris Lanier
Stan Martin
Martin Mueller
James W. Rothstein
Arthur Shaw
Warren Stillwell
Jordan Thomasson
Ademco Distribution International
Etobicoke, Ontario, Canada
Ken Hall, Vice President and
Managing Director
Alarm Device Manufacturing Company (ADEMCO)
Roger B. Fradin, President
Executive Vice Presidents:
Ben Cornett
Martin Higgins
Alvin Silver
Senior Vice Presidents:
Edward Freeman
Herbert Lustig
Vice Presidents:
Steven Amodeo
Mark Chekos
Kathy Engel
Gordon Hope
Charles A. LaCarrubba
John Lorenty
Frank Marino
Kevin O'Connor
Martin Raphael
Ron Rothman
Joe Sausa
Ademco Sensor Company (ASC)
Louisville, Kentucky
Ben Cornett, President
Tom Polson, Vice President
Apex
Raleigh, North Carolina
Jim Filer, President
Commercial Systems Division
John Sasso, President
Tam Hulusi, Vice President
First Alert Professional
Ivan Scharer, President
Vice Presidents:
Ken Weinstein
Jeffrey Vollmar
Subsidiaries:
Fire Burglary Instruments (FBII)
Theodore Simon, Senior Vice President
Javelin Systems
Torrance, California
Graham Wallis, President
Ray Payne, Executive Vice President
Ron Levy, Vice President
Radscan, Inc. (AlarmNet)
Steven Winick, President
Xetron
West Chicago, Illinois
Dennis Charlebois, President
International Subsidiaries:
Ademco International
Andreas Kramvis, President
Vice Presidents:
Paul Brennan
Allen Frederick
Alan Wachtel
Ademco Australia Pty. Ltd.
Barry Whitton, Managing Director
Ademco MicroTech Limited
United Kingdom
Jim Green, Managing Director
Jim Gemmill, Director
Robert Ebrey, Director
Ademco-Sontrix Espana, S.A.
Pedro de Ibarrando, Managing Director
Ademco-Italia S.p.A.
Giordano Picchi, Managing Director
Stefano Fratini, Director
Ademco Hong Kong Limited
N.H. Lam, General Manager
Security House
The Netherlands
Jos Mathot, Managing Director
Ademco-Canada
J.P. Chalmin, President
Affiliate:
Cylink Corporation
Sunnyvale, California
Leo A. Guthart, Chairman
Fernand Sarrat, President
Page 44
<PAGE>
Pittway Systems Technology Group
4225 Naperville Road, Suite 155
Lisle, IL 60532
Tel. 630/577-3700
Fred Conforti, President and CEO
George Schoenfelder, Vice President
Notifier/Fire-Lite Alarms, Inc.
Northford, Connecticut
Mark S. Levy, President
Senior Vice Presidents:
Donald D. Anderson
W. Allen Fritts
Vice Presidents:
Fabian J. Skretta
David M. DeMeo
Paul L. Harris
John Chetelat
Notifier Engineered Systems Company (NESCO)
Atlanta, Georgia
Kenneth A. Plummer, Vice President
Notifier Integrated Systems (NIS)
Atlanta, Georgia
Nicholas G. Martello, General Manager
Notifier Network Technologies
Company (NETCO)
Louisville, Kentucky
George J. Zamiar, General Manager
Notifier International
Notifier Canada
Toronto, Canada
Ivan Spiegel, Managing Director
Notifier Far East
Kowloon, Hong Kong
Steve Higgins, Managing Director
Notifier Middle East
Amman, Jordan
Knud Kikkenborg, Managing Director
Notifier Latin America
Sao Paulo, Brazil
George Clark, Managing Director
Notifier Australia
Victoria, Australia
Chris Lovett, Director
Geoff Hellewell, Director
Notifier Europe
Notifier Limited
Burgess Hill, U.K.
Richard B. Marshall, Managing Director
Notifier Italia S.r.L.
Milan, Italy
Franco Dischi, General Manager
Notifier Benelux S.A.
Alleur, Belgium
Philippe Boumal, General Manager
Notifier Espana S.A.
Barcelona, Spain
Miguel Moreno, General Manager
Notifier Deutschland GmbH
Dusseldorf, Germany
Holger Hesse, General Manager
Notifier AB
Huddinge, Sweden
Lennart Person, General Manager
Morley Electronic Fire Systems
Tyne & Wear, U.K.
Ray Hope, Managing Director
System Sensor Division
St. Charles, Illinois
Ronald Zegarski, Chairman
John W. Hakanson, President and CEO
Gary L. Lederer, Senior Vice President
Vice Presidents:
Nicholas Bellavia
James B. Brown
Aroon Chaddha
Donald Malaker
Robert R. Nelson
Audible/Visible & Waterflow Division
John Strauss, Vice President & General Manager
System Sensor Canada
Mississauga, Canada
Peter Collier, Managing Director
System Sensor Europe
System Sensor Ltd.
Horsham, U.K.
David C. Harvey, Managing Director
Pittway Tecnologica S.p.A.
Trieste, Italy
Vincenzo Nesta, President
Xi'an System Sensor Electronics, Ltd.
Xi'an, China
Li Ning, General Manager
MICROLITE CORPORATION
West Chicago, Illinois
Richard LeBlanc, President
Darrell Chelcun, Vice President
FIRE CONTROL INSTRUMENTS
(FCI)
Waltham, Massachusetts
Frank H. Carideo, President
Arthur S. Appel, Executive Vice
President and CEO
Vice Presidents:
Gregory Fowler
Carl Hagarty
Page 45
<PAGE>
Penton Publishing, Inc.
1100 Superior Avenue
Cleveland, OH 44114
Tel. 216/696-7000
Thomas L. Kemp, Chairman and CEO
Daniel J. Ramella, President and COO
Group Presidents:
James D. Atherton
Jerome C. Neff
James W. Zaremba
Preston L. Vice, Senior Vice President
Vice Presidents:
Russell S. Carson
Andrew C. DeSarle
Joseph M. DiFranco
John G. French
Charles T. Griesemer
Susan J. Grimm
Robert S. Martin
Katherine P. Torgerson
A/E/C Systems International
Exton, Pennsylvania
Michael Hough, Managing Director
George Borkovich,
International Marketing Director
Industrial Shows of America (ISOA)
Hunt Valley, Maryland
Susan J. Donahue, President
Industrial Shows of
America/International
Hunt Valley, Maryland
Charles E. Cross, President
Penton Media, Ltd.
Independent Exhibitions, Ltd. (INDEX)
Surrey, U.K.
Andrew Dedman, Managing Director
Subsidiaries:
Curtin & Pease/Peneco, Inc.
Dunedin, Florida
Robert Wilson, President and CEO
Fred Hipp, Executive Vice President
Pittway Real Estate
Wesley Chapel, Florida
Tel. 813/973-3685
Paul R. Gauvreau, President
Harold E. Rice, Jr., Vice President
Administration and Finance
CORPORATE INFORMATION
General Offices
200 South Wacker Drive, Suite 700
Chicago, Illinois 60606-5802
Tel. 312/831-1070
Stock Transfer Agent and Registrar
Harris Trust and Savings Bank
P.O. Box A-3504
Chicago, Illinois 60690-3504
Tel. 312/461-5360
Counsel
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Independent Accountants
Price Waterhouse LLP
200 East Randolph Drive
Chicago, Illinois 60601
Pittway Common and Class A stocks are
listed on the New York Stock Exchange.
A copy of the Company's December 31, 1997 Annual Report to the
Securities and Exchange Commission on Form 10-K (excluding exhibits)
will be furnished without charge to shareholders upon written request
to the Secretary of the Company.
Page 46
<PAGE>
Board of Directors
Eugene L. Barnett (a)
Chairman of the Audit Committee;
Consultant, former Chairman
of The Brand Companies
Sidney Barrows (c)
Vice Chairman of the Board;
Of counsel, Leonard, Street and
Deinard, Minneapolis, Minnesota
(attorneys at law)
Fred Conforti
Vice President;
President and CEO of the
Pittway Systems Technology Group
E. David Coolidge III (a)(d)(e)
Managing Director of William Blair & Company (investment banker)
Anthony Downs (a)(b)
Chairman of the
Compensation Committee;
Senior Fellow, Brookings Institution (non-profit social policy research
center)
Leo A. Guthart (c)(d)
Vice Chairman of the Board;
Chairman of the
Pittway Security Group;
Chairman of the Board
of Cylink Corporation
Irving B. Harris (c)(d)
Chairman of the Executive
and Investment Committees;
Chairman of the Board of The Acorn Investment Trust (mutual funds)
King Harris (c)(e)
President and CEO
Neison Harris (c)
Chairman of the Board
William W. Harris (b)(c)(e)
Chairman of the
Nominating Committee;
Private Investor; Treasurer of KidsPac
(political action committee)
Jerome Kahn, Jr. (b)
Vice President of William
Harris Investors, Inc.
(investment advisors)
(a) Member of the
Audit Committee
(b) Member of the
Compensation Committee
(c) Member of the
Executive Committee
(d) Member of the
Investment Committee
(e) Member of the
Nominating Committee
Officers
Neison Harris, (82)
Chairman of the Board
Irving B. Harris, (87)
Chairman of the Executive Committee
King Harris, (54)
President and CEO
Sidney Barrows, (79)
Vice Chairman of the Board
Leo A. Guthart, (60)
Vice Chairman of the Board
Fred Conforti, (56)
Vice President
Thomas L. Kemp, (46)
Vice President
Daniel J. Ramella, (45)
Vice President
Edward J. Schwartz, (56)
Vice President
Paul R. Gauvreau, (58)
Financial Vice President and Treasurer
James F. Vondrak, (53)
Corporate Secretary
Philip McCanna, (50)
Controller
www:pittway.com
[Inside back cover]
<PAGE>
Pittway Corporation
200 South Wacker Drive
Suite 700
Chicago, IL 60606-5802
[Back cover]
<PAGE>
EXHIBIT 21
PITTWAY CORPORATION
DECEMBER 31, 1997
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
Penton Media, Ltd. England 100
Independent Exhibitions Ltd. England 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
EXHIBIT 21 - cont'd
PITTWAY CORPORATION
DECEMBER 31, 1997
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
Morley Electronic Fire Systems 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, 1997
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 18, 1998 appearing on page 39 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 20, 1998
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 41,334
<SECURITIES> 16,583
<RECEIVABLES> 240,681
<ALLOWANCES> 12,097
<INVENTORY> 242,656
<CURRENT-ASSETS> 560,483
<PP&E> 302,123
<DEPRECIATION> 148,962
<TOTAL-ASSETS> 971,450
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0
0
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<CGS> 818,107
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<FN>
<F1>Excluding net after-tax charges of $7.842 million, or $.37 per share (basic and
diluted), resulting from an acquisition by the Company's affiliate, Cylink
Corporation, net income was $63.356 million, or $3.02 per share ($2.98
diluted).
</FN>
</TABLE>
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<ARTICLE> 5
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<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
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DEC-31-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996
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<CASH> 31,407 47,002 19,817 21,598
32,409
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26,026
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217,852
<ALLOWANCES> 8,493 9,039 9,598 10,543
9,670
<INVENTORY> 152,636 162,836 172,815 188,855
203,254
<CURRENT-ASSETS> 413,986 448,043 441,994 470,983
499,516
<PP&E> 218,765 227,677 239,493 247,627
270,468
<DEPRECIATION> 109,021 114,842 121,215 127,261
132,867
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<CURRENT-LIABILITIES> 168,108 187,747 177,486 198,742
224,201
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87,916
0 0 0 0
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0 0 0 0
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<COMMON> 20,912 20,912 20,924 20,924
20,926
<OTHER-SE> 342,114 447,196 460,224 445,616
425,946
<TOTAL-LIABILITY-AND-EQUITY> 672,974 855,375 858,807 851,818
839,093
<SALES> 945,669 257,477 529,838 815,464
1,111,575
<TOTAL-REVENUES> 945,669 257,477 529,538 815,564
1,111,575
<CGS> 581,694 157,637 323,538 499,549
678,903
<TOTAL-COSTS> 581,694 157,637 323,538 499,549
678,903
<OTHER-EXPENSES> 21,014 6,810 13,879 21,272
28,166
<LOSS-PROVISION> 4,901 1,168 2,443 4,043
5,170
<INTEREST-EXPENSE> 5,778 1,990 4,045 6,237
8,624
<INCOME-PRETAX> 64,078 53,045 73,137 93,898
115,480
<INCOME-TAX> 23,706 19,757 27,319 35,324
42,438
<INCOME-CONTINUING> 40,372 33,288 45,818 58,574
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<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
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0
<NET-INCOME> 40,372 33,288 45,818 58,574
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<EPS-PRIMARY> 1.93 1.59 2.19 2.80
3.49
<EPS-DILUTED> 1.92<F1> 1.58<F1> 2.17<F1>
2.77<F1> 3.46<F1>
<FN>
<F1>In accordance with Financial Accounting Standards No. 128, "Earnings per
Share", the Company is presenting net income per share on both a basic and
diluted basis. This financial data schedule has been restated to present EPS
on a diluted basis.
</FN>
</TABLE>
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<ARTICLE> 5
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<S> <C> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 9,282 15,170 20,693
<SECURITIES> 24,033 19,287 15,612
<RECEIVABLES> 223,272 238,150 253,156
<ALLOWANCES> 10,654 11,042 11,420
<INVENTORY> 230,052 231,355 230,826
<CURRENT-ASSETS> 506,349 526,040 541,414
<PP&E> 284,772 298,693 295,821
<DEPRECIATION> 140,835 148,128 142,860
<TOTAL-ASSETS> 885,484 909,452 916,387
<CURRENT-LIABILITIES> 263,271 276,498 278,959
<BONDS> 84,499 91,142 90,225
0 0 0
0 0 0
<COMMON> 20,981 20,984 20,987
<OTHER-SE> 436,776 445,518 452,219
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<SALES> 301,158 640,371 997,635
<TOTAL-REVENUES> 301,158 640,371 997,635
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<TOTAL-COSTS> 184,091 390,162 611,031
<OTHER-EXPENSES> 8,416 16,941 26,093
<LOSS-PROVISION> 1,191 2,296 3,159
<INTEREST-EXPENSE> 2,614 5,835 8,957
<INCOME-PRETAX> 19,776 46,396 59,109
<INCOME-TAX> 7,480 17,502 21,880
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<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 12,296 28,894 37,229<F2>
<EPS-PRIMARY> .59 1.38 1.77<F2>
<EPS-DILUTED> .58<F1> 1.36<F1> 1.75<F1><F2>
<FN>
<F1>In accordance with Financial Accounting Standards No. 128, "Earnings per
Share", the Company is presenting net income per share on both a basic and
diluted basis. This financial data schedule has been restated to present EPS
on a diluted basis.
<F2>Excluding net after-tax charges of $7.842 million, or $.37 per share (basic and
diluted), resulting from an acquisition by the Company's affiliate, Cylink
Corporation, net income was $45.071 million, or $2.15 per share ($2.12
diluted).
</FN>
</TABLE>
