SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (Zip Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (November 1,
1998).
Common Stock 7,877,664
Class A Stock 34,740,771
PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 4 - 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7 - 11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14 - 16
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited; Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 * 1998 1997 *
CONTINUING OPERATIONS -
NET SALES.............................. $344,488 $306,536 $974,165 $844,186
OPERATING EXPENSES:
Cost of sales......................... 217,990 195,955 618,754 539,746
Selling, general and administrative... 86,881 81,059 254,204 225,327
Provision for patent litigation....... 43,000
Depreciation and amortization......... 9,316 7,476 26,192 21,070
314,187 284,490 942,150 786,143
OPERATING INCOME....................... 30,301 22,046 32,015 58,043
OTHER INCOME (EXPENSE):
Equity in Cylink gain on divestiture.. 6,646
Equity in gain on Cylink capital
transaction.......................... 6,396 6,396
Equity in Cylink charge-off........... (18,943) (18,943)
Income from marketable securities
and other interest................... 607 740 2,076 2,413
Interest expense...................... (3,259) (2,915) (9,832) (8,335)
Income (loss) from investments........ (653) 478 5,804 1,909
Miscellaneous, net.................... (549) (603) (1,022) (894)
(3,854) (14,847) 3,672 (17,454)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................... 26,447 7,199 35,687 40,589
PROVISION FOR INCOME TAXES............. 9,413 2,089 12,724 14,194
INCOME FROM CONTINUING OPERATIONS...... 17,034 5,110 22,963 26,395
DISCONTINUED OPERATIONS -
Earnings from discontinued
operations net of income taxes of
$(266), $2,289, $4,018 and $7,686..... (373) 3,225 5,648 10,834
Provision for divestiture expenses,
net of income taxes of $(383)......... (617)
(373) 3,225 5,031 10,834
NET INCOME.............................. $ 16,661 $ 8,335 $ 27,994 $ 37,229
PER SHARE OF COMMON AND
CLASS A STOCK (NOTE 3):
Basic:
Income from continuing operations.... $ .40 $ .12 $ .54 $ .63
Income from discontinued operations.. (.01) .08 .12 .26
Net income........................... $ .39 $ .20 $ .66 $ .89
Diluted:
Income from continuing operations.... $ .39 $ .12 $ .54 $ .62
Income from discontinued operations.. (.01) .08 .11 .26
Net income........................... $ .38 $ .20 $ .65 $ .88
CASH DIVIDENDS DECLARED PER SHARE:
Common................................ $ .0217 $ .0333 $ .0884 $ .1000
Class A............................... $ .0300 $ .0416 $ .1133 $ .1250
AVERAGE SHARES OUTSTANDING (000's)...... 42,503 41,972 42,263 41,950
AVERAGE SHARES AND DILUTIVE
EQUIVALENTS OUTSTANDING (000's)........ 43,445 42,534 43,132 42,470
* Restated for discontinued operations.
See accompanying notes.
3
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited; Dollars in Thousands)
September 30, December 31,
1998 1997 *
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 18,929 $ 29,257
Marketable securities.................. 33,125 27,583
Accounts and notes receivable, less
allowance for doubtful accounts of
$11,028 and $9,691................... 247,093 199,222
Inventories............................ 258,853 240,228
Future income tax benefits............. 18,462 16,246
Prepayments, deposits and other........ 8,913 8,823
585,375 521,359
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 39,625 38,250
Machinery and equipment................ 221,900 194,479
261,525 232,729
Less: Accumulated depreciation......... (133,242) (109,118)
128,283 123,611
Land................................... 2,484 2,307
130,767 125,918
INVESTMENTS:
Marketable securities (U.S.S.B.)....... 26,706 30,015
Investment in affiliate (Cylink)....... 27,476 20,441
Real estate and other ventures......... 40,886 43,388
Leveraged leases....................... 17,518 18,559
112,586 112,403
OTHER ASSETS:
Goodwill, less accumulated
amortization of $9,048 and $7,293.... 65,564 54,964
Other intangibles, less accumulated
amortization of $5,733 and $5,489.... 3,248 3,207
Notes receivable....................... 19,136 7,534
Investment in discontinued operations.. 58,397
Miscellaneous.......................... 27,775 26,912
115,723 151,014
$944,451 $910,694
* Restated for discontinued operations.
See accompanying notes.
4
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited; Dollars in Thousands)
September 30, December 31,
1998 1997 *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 40,580 $ 32,336
Long-term debt due within one year...... 5,644 5,730
Dividends payable....................... 1,238 1,719
Accounts payable........................ 164,391 151,410
Accrued expenses........................ 54,248 43,166
Income taxes payable.................... 1,566 7,175
Retirement and deferred
compensation plans.................... 3,840 10,562
271,507 252,098
LONG-TERM DEBT, less current maturities... 98,578 95,215
DEFERRED LIABILITIES:
Income taxes............................ 51,244 62,611
Litigation.............................. 43,000
Other................................... 13,598 13,636
107,842 76,247
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 7,878 3,939
Class A stock......................... 34,703 17,052
Capital in excess of par value.......... 17,682 24,523
Retained earnings....................... 404,643 440,536
Cumulative marketable securities
valuation adjustment.................. 6,795 8,823
Cumulative foreign currency translation
adjustment............................ (5,177) (7,739)
466,524 487,134
$944,451 $910,694
* Restated for discontinued operations.
See accompanying notes.
5
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30 1998 AND 1997
(Unaudited; Dollars in Thousands)
1998 1997 *
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Income from continuing operations................ $ 22,963 $ 26,395
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
operating activities:
Depreciation and amortization.................. 26,192 21,070
Equity in Cylink's gain on divestiture......... (4,154)
Gain on Cylink capital transaction............. (3,997)
Equity in Cylink acquisition charge-off........ 11,839
Deferred income taxes.......................... 1,369 275
Retirement and deferred compensation plans..... (4,995) 4,581
Income/loss from investments adjusted
for cash distributions received............... 1,220 (1,435)
Provision for losses on accounts receivable.... 3,044 2,484
Provision for patent litigation................ 26,875
Change in assets and liabilities, excluding
effects from acquisitions, dispositions
and foreign currency adjustments:
Increase in accounts and notes receivable.... (36,075) (34,721)
Increase in inventories...................... (13,150) (26,043)
Decrease (increase) in prepayments
and deposits............................... 385 (1,306)
Increase in accounts payable and accrued
expenses................................... 16,232 174
Increase (decrease) in income taxes payable.. (3,229) 1,201
Other changes, net............................. (1,976) 2,383
Net cash provided by continuing operating
activities..................................... 34,701 2,900
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (26,864) (38,149)
(Increase) decrease in marketable securities..... (5,445) 4,310
Disposition of property and equipment............ 360 569
Additions to investments......................... (2) (57)
Increase in notes receivable..................... (14,620) (1,264)
Net assets of businesses acquired, net of cash... (12,654) (20,636)
Net cash used by investing activities............ (59,225) (55,227)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable.................... 7,030 27,451
Proceeds of long-term debt....................... 5,863 8,596
Repayments of long-term debt..................... (3,360) (8,166)
Stock options exercised.......................... 5,906 956
Dividends paid................................... (5,072) (5,053)
Net cash provided by financing activities........ 10,367 23,784
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ 330 (227)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS....... 3,499 10,199
NET DECREASE IN CASH AND EQUIVALENTS............... (10,328) (18,571)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........ 29,257 32,477
CASH AND EQUIVALENTS AT END OF PERIOD.............. $ 18,929 $ 13,906
* Restated for discontinued operations.
See accompanying notes.
6
PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars in Thousands)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Pittway Corporation and its majority-owned subsidiaries (the
"Company" or "Registrant"). Periods prior to 1998 have been restated
to reflect the discontinuation of certain businesses, as discussed in
Note 2, and certain amounts have been reclassified to conform to the
current year presentation. Except where otherwise indicated, the
following notes relate to continuing operations consisting principally
of alarm systems businesses.
The accompanying consolidated financial statements are unaudited but
reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the
financial statements contained herein. However, the financial
statements and related notes do not include all disclosures normally
provided in the Company's Annual Report on Form 10-K. Accordingly,
these financial statements and related notes should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
NOTE 2 DISCONTINUED OPERATIONS
In December 1997 the Company announced its intention to distribute its
investment in Penton Media, Inc. ("Penton"), a wholly-owned subsidiary
of the Company, to stockholders in a tax-free spin-off. The
distribution was completed on August 7, 1998. A provision was recorded
in the second quarter for divestiture expenses totaling $617 net of
taxes ($.02 per diluted share).
At December 31, 1997 the investment in the net assets of the
discontinued operations consisted of:
Dec. 31,
1997
Current assets $ 39,126
Current liabilities (64,346)
Net current assets (liabilities) (25,220)
Net property, plant and equipment 27,242
Other non-current assets 76,923
Non-current liabilities (20,548)
$ 58,397
Net sales of the discontinued operations prior to their disposition
were: $14,466 and $50,728 for the quarters and $126,137 and $153,449 for
the three quarters ended September 30, 1998 and 1997, respectively.
7
NOTE 3. EARNINGS PER SHARE AND STOCK SPLIT
Basic net income per common share amounts were calculated by dividing
earnings by the combined weighted average number of Class A and Common
shares outstanding. Diluted net income per share amounts were based on
the same reported earnings but assume the issuance of Class A stock
upon exercise of outstanding stock options and distributable as
performance and bonus share awards.
At the May 1998 annual stockholders' meeting, stockholders approved an
increase in the number of authorized shares to 100,000,000 for Class A
stock and 120,000,000 for Common stock. In July 1998 the Board of
Directors declared a 2-for-1 stock split in the form of a 100% stock
dividend on the Company's Common and Class A Common stock, payable
September 11, 1998 to stockholders of record September 1, 1998. All
share and per share data reflect this split retroactively.
NOTE 4. CHANGE IN ACCOUNTING POLICY
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. (SFAS) 130 "Reporting
Comprehensive Income." The statement requires the addition of
comprehensive income and its components in the Company's annual
financial statements. Other comprehensive income (loss) includes
cumulative foreign currency translation adjustments and unrealized
investment gains and losses, which are not included in income under
current accounting principles. Total comprehensive income for the
three and nine month periods ended September 30 was:
Three Months Nine Months
1998 1997 1998 1997
Net income $16,661 $ 8,335 $27,994 $37,229
Other comprehensive income
(loss) (7,410) (43) 534 (8,584)
Total comprehensive income $ 9,251 $ 8,292 $28,528 $28,645
NOTE 5. ACQUISITIONS
In the first nine months of 1998, the Company acquired the assets and
businesses of one domestic distributor of security equipment and five
foreign alarm businesses for stock and cash totaling $16,754. The five
foreign operations consist of two manufacturers of fire alarm controls,
one distributor of fire alarm systems and two distributors of security
products. During the same period in 1997, the Company acquired the
assets and businesses of one foreign distributor of security products
and one domestic manufacturer and distributor of fire control products
for $20,636 cash. All of these acquisitions were accounted for as
purchase transactions in the consolidated financial statements from
their respective dates of acquisition. The impact on consolidated
results of operations was not significant.
8
NOTE 6. INVENTORIES
The recorded value of inventories at September 30, 1998 and December
31, 1997 approximate current cost and consist of the following:
1998 1997
Raw materials $ 60,156 $ 58,323
Work in process 16,776 16,501
Finished goods -
Manufactured by the Company 88,463 89,776
Manufactured by others 93,458 75,628
$258,853 $240,228
NOTE 7. MARKETABLE SECURITIES
Information about the Company's marketable securities at September 30,
1998 and December 31, 1997 is as follows:
1998 1997
Current - Market Auction Preferred Stocks -
Aggregate cost $ 33,066 $ 27,558
Net unrealized holding gain 59 25
Aggregate fair value $ 33,125 $ 27,583
Non-Current - USSB Common Stock -
Aggregate cost $ 15,789 $ 15,789
Unrealized holding gain 10,917 14,226
Aggregate fair value $ 26,706 $ 30,015
Realized gains and losses are based upon the specific identification
method. Such gains and losses on the market auction preferred stocks,
for the nine months ended September 30, 1998 and 1997 were not
significant.
NOTE 8. INVESTMENT IN AFFILIATE
In March 1998 the Company's affiliate, Cylink Corporation (Cylink),
sold its wireless division for $60.5 million. The Company increased
the carrying value of its investment in Cylink by $6,646 and recorded
an after-tax gain of $4,154, or $.10 per diluted share, to reflect its
equity in the gain on this divestiture. At September 30, 1998, the
Company's 8.6 million shares of Cylink stock had a quoted market value
of $38,727.
The Company recorded an estimate of $867 for its equity in Cylink's
loss for the third quarter of 1998 based on Cylink's announcement in
October that it expected to report a loss of $.08 to $.10 per Cylink
share for the quarter. On November 5, 1998, Cylink announced that it
was conducting a review of its revenue recognition practices. Based on
preliminary results of the review, Cylink stated that it expects to
report substantial operating losses for each of the first three
9
quarters of 1998, including restated results for the first and second
quarters. The report is expected near the end of November and will be
subject to Cylink's annual audit. The adjustments to the Company's
equity in Cylink's results of operations will be reflected when Cylink
issues its report. The Company does not have sufficient information to
estimate the magnitude of such adjustment at the present time.
In September 1997, Cylink acquired Algorithmic Research, an information
security company, for cash and Cylink stock totaling $76.2 million. The
Company recorded a $4.0 million after-tax gain ($.09 per share) as a
result of the stock issued in the acquisition and an $11.8 million
after-tax expense ($.28 per share) for its equity in Cylink's write-off
of "in-process technology" acquired in the transaction.
NOTE 9. LEGAL PROCEEDINGS
In 1989 a judgment was entered against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of
the adjoining residential properties owned and developed by the
Company. The lawsuit alleged damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the properties.
Damages of approximately $8 million were awarded to the plaintiffs and
an injunction was entered requiring, among other things, that
Saddlebrook work with local regulatory authorities to take corrective
actions. In 1990 the trial court entered an order vacating the
judgment and awarding a new trial. In December 1994, Saddlebrook's
motion for summary judgment based on collateral estoppel was granted on
the ground that Plaintiffs' claims were fully retried and rejected in a
related administrative proceeding. Plaintiffs appealed the trial
court's decision granting summary judgment. In August 1996, the
appellate court affirmed all but three issues in the trial court's
summary judgment order in favor of Saddlebrook. On April 1, 1998, the
trial court entered an order limiting the scope of the retrial in light
of the appellate court's ruling. At an October 27, 1998 pretrial
conference, the parties agreed to a mediation hearing. If the hearing
is unsuccessful in settling the matter, retrial is expected to begin in
1999. The Company believes that the ultimate outcome of the
aforementioned lawsuit will not have a material adverse effect on its
financial statements.
In 1995 a lawsuit was brought against the Company by Interactive
Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of
up to $66,800 on account of Company sales of products which the
plaintiff alleges infringed on its patent. The plaintiff also asserted
trebling of damages, if awarded, based upon alleged willful
infringement. The Company moved for summary judgment of non-
infringement and, in December 1997, the Court issued its order granting
the Company partial summary judgment, stating its products did not
literally infringe upon plaintiff's patent claims. In March 1998, the
jury handed down a verdict against the Company, which was entered by
10
the Court in April 1998, awarding damages of $35,954. The jury found
that the Company did not willfully infringe. The company has recorded a
provision of $43,000 in the first quarter of 1998 which considers the
judgment and interest. The company has appealed the verdict.
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. While
management believes that resolution of other existing claims and
lawsuits will not have a material adverse effect on the Company's
financial statements, management is unable to estimate the magnitude of
financial impact of claims and lawsuits which may be filed in the
future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
Continuing operations primarily represent the Company's alarm
manufacturing and distribution operations. For the third quarter and
first nine months of 1998, sales increased 12% to $344.5 million and 15%
to $974.2 million over the respective periods in 1997. Domestic and
international sales grew 12% and 15%, respectively, for the quarter and
15% and 17%, respectively, for the first nine months over the same
periods last year. International business represents approximately 17%
of total revenues from continuing operations in 1998 and 1997. Gross
profit increased at a slightly higher rate than sales due to reduced
material costs and to improved manufacturing techniques. Selling,
general and administrative expenses increased 7% in the third quarter
and 13% in the first nine months of 1998 primarily as a result of
increased costs associated with the higher sales volume. Operating
income increased 37% for the quarter to $30.3 million and 29% year to
date to $75.0 million, excluding a charge of $43.0 million in the first
quarter related to a patent lawsuit.
Sales and operating income gains were achieved in spite of the Asian
economic problems that continue to impact international markets. The
Company's domestic manufacturing operations achieved increased revenues
as a result of national account business, new product introductions and
expanded market share. Improved operating efficiencies also had a
positive impact on operating income. The Company's domestic
distribution operations achieved double digit revenue and profit growth
despite pricing pressure related to ongoing consolidation in the alarm
installation market. Part of the increase also resulted from an
acquisition in April 1998. Acquisitions had a slight impact on
international revenues.
Depreciation and amortization expense increased 25% in the third quarter
and 24% for the first nine months, mainly as a result of capital
additions in the manufacturing operations.
11
Excluding the Company's equity in Cylink's gain on divestiture,
acquisition charge-off and capital transactions, other income (expense)
was more favorable year-to-date in 1998 compared to 1997. The change
was due to increased cash distributions from real estate ventures and a
gain on the sale of an investment in the second quarter of 1998
partially offset by increased interest expense on higher borrowing
levels and the Company's equity in Cylink's third quarter operating
loss. Other income (expense) was less favorable in the current quarter
compared to 1997 because of higher interest expense and the Cylink loss.
Effective tax rates were 35.6% and 35.7% for the third quarter and first
nine months of 1998 and 29.0% and 35.0% for the third quarter and first
nine months of 1997. The lower rate in the 1997 third quarter resulted
from favorable tax credits spread over a lower level of income.
DISCONTINUED OPERATIONS
Earnings from discontinued operations in the third quarter and nine
months decreased from 1997 due to period costs related to trade shows
acquired at the end of 1997, higher interest and amortization expenses
related to these acquisitions, costs related to the spin-off and
inclusion of operating results only through the August 7, 1998 spin-off
date.
PRO FORMA INFORMATION
Following are pro forma operating results after excluding (a)
discontinued operations, (b) the provision for patent litigation, (c)
the Company's equity in Cylink's gain, charge-off and capital
transactions and (d) related income tax effects:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net sales $344,488 $306,536 $974,165 $844,186
Operating income 30,301 22,046 75,015 58,043
Income before income taxes 26,447 19,746 72,041 53,136
Provision for income taxes 9,413 6,794 26,357 18,899
Net income $ 17,034 $ 12,952 $ 45,684 $ 34,237
Net income per diluted share $ 0.39 $ 0.31 $ 1.06 $ 0.81
FINANCIAL CONDITION
The Company's financial condition remained strong during the first nine
months of 1998. Net working capital at September 30, 1998 was $313.9
million, up from $269.3 million at December 31, 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.
12
In the first nine months of 1998, the $72.5 million generated from net
income from continuing operations excluding depreciation, amortization,
the net gain from the Cylink divestiture, the provision for patent
litigation and other non-cash items was partially used to fund the $37.8
million net increase in inventories, receivables and other working
capital items. The $34.7 million net cash generated from operating
activities, together with short-term borrowings of $7.0 million, net
proceeds from the increase in long term debt of $2.5 million, $5.9
million received on the exercise of stock options and $3.5 million from
discontinued operations were used to finance six acquisitions completed
in the period totaling $12.6 million (in addition to $4.1 million of
Pittway Class A Stock), $26.9 million of capital expenditures, a $14.6
million increase in notes receivable, $5.4 million of net purchases of
marketable securities and $5.1 million of dividends.
The Company continually investigates investment opportunities for growth
in related areas and is presently committed to invest up to $29.5
million in certain affordable housing ventures through 2005.
The Company has real estate investments in various limited partnerships
with interests in commercial rental properties carried at a zero basis
which are being offered for sale. Cash distributions received from
these ventures are recorded as other income. The company has
approximately $3.8 million accrued at September 30, 1998 to cover the
deferred income tax liability that would be due if all the properties
were sold.
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 FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The statement requires the
Company to report financial and descriptive information about its
reportable segments, determined using the management approach (i.e.,
internal management reporting). The statement is effective for fiscal
years beginning after December 15, 1997. The Company will disclose
segment information as determined under methods prescribed by SFAS No.
131 in its 1998 annual report.
YEAR 2000 ISSUE
All work necessary to upgrade the Company's systems for Year 2000 (Y2K)
compliance is expected to be completed in a timely fashion and should
not involve a significant amount of the Company's resources. The
Company's Y2K project is proceeding on schedule. Although the Company
expects its critical systems to be compliant, there is no guarantee that
these results will be achieved. Specific factors that give rise to this
uncertainty include a possible loss of technical resources to perform
the work, failure to identify all susceptible systems, noncompliance by
13
third parties whose systems and operations impact the Company, and other
similar uncertainties. Due to the general uncertainty inherent in the
Y2K problem, resulting in part from the uncertainty of Y2K readiness of
customers, third-party suppliers and other vendors, such as utilities,
the Company is unable to determine at this time whether the consequences
of Y2K failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
****
This quarterly report, other than historical financial information,
contains forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, that involve a number of risks
and uncertainties. Important factors that could cause actual results to
differ materially from those indicated by such forward-looking
statements are set forth in Item 1 of the Company's annual report on
Form 10-K for the year ended December 31, 1997. These include risks and
uncertainties relating to pending litigation, government regulation,
competition and technological change, intellectual property rights,
capital spending, international operations, and the Company's
acquisition strategies.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Property Damage Claim
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and
for Pasco County, Florida, entered a judgment against Saddlebrook
Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a
lawsuit which arose out of the development of Saddlebrook's resort and a
portion of the adjoining residential properties owned and developed by
the Company. The lawsuit (James H. Porter and Martha Porter, Trustees,
et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida;
Case No. CA83-1860), alleges damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the properties.
Damages of approximately $8 million were awarded to the plaintiffs and
an injunction was entered requiring, among other things, that
Saddlebrook work with local regulatory authorities to take corrective
actions. Saddlebrook made two motions for a new trial, based on
separate grounds. One such motion was granted on December 18, 1990.
Such grant was appealed by the plaintiffs. The other such motion was
denied on February 28, 1991. Saddlebrook appealed such denial.
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
14
substance of the injunction pending final disposition of this matter.
As part of its plan to comply with the agreed order, Saddlebrook filed
applications with the regulatory agency to undertake various remediation
efforts. Plaintiffs, however, filed petitions for administrative review
of the applications, which administrative hearing was concluded in
February 1992. On March 31, 1992, the hearing officer issued a
recommended order accepting Saddlebrook's expert's testimony. The
agency's governing board was scheduled to consider this recommended
order on April 28, 1992, however, shortly before the hearing, the
plaintiffs voluntarily dismissed their petitions and withdrew their
challenges to the staff's proposal to issue a permit.
At the April 28, 1992 hearing the governing board closed its file on the
matter and issued the permits. Saddlebrook appealed the board's refusal
to issue a final order. On July 9, 1993 a decision was rendered for
Saddlebrook remanding jurisdiction to the governing board for further
proceedings, including entry of a final order which was issued on
October 25, 1993. The plaintiffs appealed the Appellate Court decision
to the Florida Supreme Court and appealed the issuance of the final
order to the Second District Court of Appeals. The Florida Supreme
Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal.
The other appeal was voluntarily dismissed by the plaintiffs on June 17,
1994. On remand to the trial court, Saddlebrook's motion for summary
judgment, based on collateral estoppel on the ground that plaintiffs'
claims were fully retried and rejected in a related administrative
proceeding was granted on December 7, 1994. Plaintiffs filed for a
rehearing which was denied. Plaintiffs appealed the trial court's
decision granting summary judgment. In August 1996, the appellate court
affirmed all but three issues in the trial court's summary judgment
order in favor of Saddlebrook. On April 1, 1998, the trial court
entered an order limiting the scope of a retrial in light of the
appellate court's ruling. At an October 27, 1998 pretrial conference,
the parties agreed to a mediation hearing. If the hearing is
unsuccessful in settling the matter, retrial is expected to begin in
1999.
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.
The Company believes that the ultimate outcome of the aforementioned
lawsuit will not have a material adverse effect on its financial
statements.
15
Patent Infringement Claim
On August 16, 1995, Interactive Technologies, Inc. commenced a lawsuit
in U.S. District Court against the Company alleging patent
infringement. The plaintiff claimed the Company infringed on their
patent by making, using and selling certain security system products in
the United States, and that the infringement was willful. Plaintiff
initially sought unspecified damages, and an injunction. The Company
denied infringement, maintaining the plaintiff's patent was invalid, as
well as unenforceable because the plaintiff committed inequitable
conduct before the Patent Office when applying for the patent. During
discovery, the plaintiff informed the Company it was seeking damages
measured by its lost profits or not less than a reasonable royalty on
sales of the Company. Fact discovery in the action closed on January
17, 1997. The Court conducted a Markman hearing in October 1997 to
construe the patent claims asserted by plaintiff and issued its Order
interpreting the claims on October 14, 1997. The Company moved for
summary judgment of non-infringement. On December 2, 1997 the Court
issued its Order granting partial summary judgment that the Company's
products did not literally infringe the patent claims, and denying
summary judgment of no infringement. Jury trial started on January 7,
1998. During the trial, the plaintiff indicated it was seeking lost
profits and royalty damages of up to $66.8 million. The plaintiff also
asserted trebling of damages, if awarded, based upon alleged willful
infringement. On March 9, 1998 the jury handed down a verdict against
the Company awarding damages of $36.0 million. The jury found that the
Company did not willfully infringe. The Court entered judgment on the
jury's verdict on April 9, 1998. Consequently, the company recorded a
provision of $43.0 million in the first quarter of 1998, which
considers the judgment and interest. The Company filed post-trial
motions on April 20, 1998 for judgment as a matter of law in favor of
the Company which were denied. The Company has appealed the verdict.
The ultimate outcome of this matter is uncertain but will result in
significant damages should the Company lose the appeal.
Other
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. While
management believes that resolution of other existing claims and
lawsuits will not have a material adverse effect on the Company's
financial statements, management is unable to estimate the magnitude of
financial impact of claims and lawsuits which may be filed in the
future.
16
ITEM 5. OTHER INFORMATION
Pursuant to an amendment to Securities Exchange Act Rule 14a-4(c)(1)
which became effective June 29, 1998, the persons acting under proxies
solicited by the Company's Board of Directors in connection with the
Company's 1999 annual meeting of stockholders will have discretionary
authority to vote the shares represented thereby on any matter properly
presented by a stockholder at such meeting that is not specifically set
forth in the notice of such meeting if the Company does not have notice
of such matter on or before February 15, 1999 (unless the date of the
1999 annual meeting is changed by more than 30 days from May 7, 1999 in
which event such persons will have such discretionary authority if the
Company does not have notice of such matter a reasonable time before
the Company mails its proxy materials for such meeting).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
27.1 Financial Data Schedule for the quarter ended
September 30, 1998 (submitted only in electronic
format).
27.2 Restated Financial Data Schedule for the quarters
ended March 31, 1998 and June 30, 1998 (submitted
only in electronic format).
27.3 Restated Financial Data Schedule for the years
ended December 31, 1996 and 1997 and the first
three quarters of 1997 (submitted only in
electronic format).
(b) Reports on Form 8-K.
On August 11, 1998, the Registrant filed a Form 8-K under item 2
reporting that on August 7, 1998 it completed the previously
announced tax-free spin-off of Penton Media, Inc. to the
Registrant's stockholders as part of an agreement by Penton to
acquire Donohue Meehan Publishing Company for Penton stock and
cash. The filing also reported under item 5 that the Registrant
declared a 2-for-1 stock split in the form of a 100% stock
dividend on its Common and Class A Common stock payable
September 11, 1998 to stockholders of record September 1, 1998.
The filing included an unaudited Pro Forma Condensed Consolidated
Balance Sheet as of June 30, 1998 and unaudited Pro Forma
Condensed Consolidated Statements of Income for the six month
period ended June 30, 1998 and the year ended December 31, 1997
giving effect to the spin-off and stock split.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PITTWAY CORPORATION
(Registrant)
By /s/ Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 10, 1998
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,929
<SECURITIES> 33,125
<RECEIVABLES> 258,121
<ALLOWANCES> 11,028
<INVENTORY> 258,853
<CURRENT-ASSETS> 585,375
<PP&E> 264,009
<DEPRECIATION> 133,242
<TOTAL-ASSETS> 944,451
<CURRENT-LIABILITIES> 271,507
<BONDS> 98,578
0
0
<COMMON> 42,581
<OTHER-SE> 423,943
<TOTAL-LIABILITY-AND-EQUITY> 944,451
<SALES> 974,165
<TOTAL-REVENUES> 974,165
<CGS> 618,754
<TOTAL-COSTS> 618,754
<OTHER-EXPENSES> 26,192
<LOSS-PROVISION> 3,044
<INTEREST-EXPENSE> 9,832
<INCOME-PRETAX> 35,687
<INCOME-TAX> 12,724
<INCOME-CONTINUING> 22,963<F1>
<DISCONTINUED> 5,031
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,994
<EPS-PRIMARY> .66
<EPS-DILUTED> .65
<FN>
<F1>Excluding a net after-tax charge of $26.9 million ($.62 per diluted share)
from patent litigation and an after-tax gain of $4.2 million ($.10 per diluted
share) from a divestiture by Cylink Corporation, a 29 percent owned affiliate
of the Company, income from continuing operations would have been $45.7 million
($1.06 per diluted share).
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule is restated to reflect the effects of a two-for-one
stock split paid in September 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998
<CASH> 9,796 20,925
<SECURITIES> 27,940 28,415
<RECEIVABLES> 223,689 241,643
<ALLOWANCES> 9,802 10,423
<INVENTORY> 261,308 262,163
<CURRENT-ASSETS> 538,234 569,059
<PP&E> 243,989 255,467
<DEPRECIATION> 116,187 124,207
<TOTAL-ASSETS> 943,599<F1> 1,000,790<F1>
<CURRENT-LIABILITIES> 261,321 283,529
<BONDS> 94,970 99,325
0 0
0 0
<COMMON> 21,034 21,218
<OTHER-SE> 459,476 493,840
<TOTAL-LIABILITY-AND-EQUITY> 943,599 1,000,790
<SALES> 304,139 629,677
<TOTAL-REVENUES> 304,139 629,677
<CGS> 192,332 400,764
<TOTAL-COSTS> 192,332 400,764
<OTHER-EXPENSES> 8,423 16,876
<LOSS-PROVISION> 783 1,866
<INTEREST-EXPENSE> 3,501 6,573
<INCOME-PRETAX> (16,841) 9,240
<INCOME-TAX> (6,498) 3,311
<INCOME-CONTINUING> (10,343)<F2> 5,929<F2>
<DISCONTINUED> 2,348 5,404
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,995) 11,333
<EPS-PRIMARY> (.19) .27
<EPS-DILUTED> (.18) .26
<FN>
<F1>Included in total assets is an investment in discontinued operations of
$62.1 million and $60.7 million at March 31, 1998 and June 30, 1998,
respectively.
<F2>Excluding a net after-tax charge of $26.9 million ($.63 per diluted share)
from patent litigation and an after-tax gain of $4.2 million ($.10 per diluted
share) from a divestiture by Cylink Corporation, a 29 percent owned affiliate
of the Company, income from continuing operations would have been $12.4 million
($.29 per diluted share) and $28.6 million ($.67 per diluted share) for the
three and six months ended March 31, 1998 and June 30, 1998, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule is restated to reflect the effects of a two-for-one
stock split paid in September 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 32,477 9,192 13,125 13,906 29,257
<SECURITIES> 26,026 24,033 21,787 22,812 27,583
<RECEIVABLES> 184,798 189,271 206,498 218,154 208,913
<ALLOWANCES> 7,601 8,486 8,766 9,079 9,691
<INVENTORY> 199,895 226,907 227,267 226,554 240,228
<CURRENT-ASSETS> 459,343 465,144 486,506 498,504 521,359
<PP&E> 208,942 222,269 234,795 230,847 235,036
<DEPRECIATION> 98,058 104,648 110,606 103,957 109,118
<TOTAL-ASSETS> 817,308<F1> 850,824<F1> 873,129<F1> 877,807<F1> 910,694<F1>
<CURRENT-LIABILITIES> 198,363 224,647 236,360 236,629 252,098
<BONDS> 87,714 84,312 90,970 90,068 95,215
0 0 0 0 0
0 0 0 0 0
<COMMON> 20,926 20,981 20,984 20,987 20,991
<OTHER-SE> 425,946 436,776 445,518 452,219 466,143
<TOTAL-LIABILITY-AND-EQUITY> 817,308 850,824 873,129 877,807 910,694
<SALES> 923,453 252,492 537,650 844,186 1,143,772
<TOTAL-REVENUES> 923,453 252,492 537,650 844,186 1,143,772
<CGS> 587,323 161,879 343,791 539,746 723,547
<TOTAL-COSTS> 587,323 161,879 343,791 539,746 723,547
<OTHER-EXPENSES> 22,288 6,746 13,594 21,070 28,141
<LOSS-PROVISION> 4,223 974 1,849 2,484 4,299
<INTEREST-EXPENSE> 8,590 2,406 5,420 8,335 10,852
<INCOME-PRETAX> 96,367 15,116 33,390 40,589 63,290
<INCOME-TAX> 34,675 5,546 12,105 14,194 22,682
<INCOME-CONTINUING> 61,692 9,570 21,285 26,395<F2> 40,608<F2>
<DISCONTINUED> 11,350 2,726 7,609 10,834 14,906
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 73,042 12,296 28,894 37,229 55,514
<EPS-PRIMARY> 1.75 .29 .69 .89 1.32
<EPS-DILUTED> 1.73 .29 .68 .88 1.31
<FN>
<F1>Included in total assets is an investment in discontinued operations of
$47.1 million, $49.7 million, $46.2 million, $47.7 million and $58.4 million
at December 31, 1996, March 31,1997, June 30, 1997, September 30, 1997 and
December 31, 1997 respectively.
<F2>Excluding net after-tax charges of $7.8 million, or $.18 per diluted share,
resulting from an acquisition by the Company's affiliate, Cylink Corporation,
income from continuing operations was $34.2 million, or $.81 per diluted
share, and $48.5 million or $1.14 per diluted share for the nine months ended
September 30, 1997 and the year ended December 31, 1997, respectively.
</FN>
</TABLE>
