SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (Zip Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (April 14,
1999).
Common Stock 7,877,664
Class A Stock 34,860,06
PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Operations -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 4-5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-10
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 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited; Dollars in Thousands, Except Per Share Data)
1999 1998
CONTINUING OPERATIONS -
NET SALES................................ $381,906 $304,139
OPERATING EXPENSES:
Cost of sales.......................... 240,011 192,332
Selling, general and administrative.... 104,751 82,039
Provision for patent litigation........ 43,000
Depreciation and amortization.......... 10,991 8,423
355,753 325,794
OPERATING INCOME (LOSS).................. 26,153 (21,655)
OTHER INCOME (EXPENSE):
Gain on sale of securities............. 11,002
Change in equity of affiliate.......... (832) 7,284
Income from marketable securities
and other interest................... 1,301 779
Interest expense....................... (4,004) (3,501)
Income from investments................ 219 223
Miscellaneous, net..................... 226 29
7,912 4,814
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES......... 34,065 (16,841)
PROVISION (CREDIT) FOR INCOME TAXES...... 12,873 (6,498)
INCOME (LOSS) FROM CONTINUING OPERATIONS. 21,192 (10,343)
INCOME FROM DISCONTINUED OPERATIONS
NET OF INCOME TAXES OF $1,666............ 2,348
NET INCOME (LOSS).......................... $ 21,192 $ (7,995)
INCOME (LOSS) PER SHARE OF COMMON
AND CLASS A STOCK
Basic: Continuing operations.......... $ .50 $ (.25)
Discontinued operations........ .06
Net income (loss).............. $ .50 $ (.19)
Diluted: Continuing operations.......... $ .49 $ (.25)
Discontinued operations........ .06
Net income (loss).............. $ .49 $ (.19)
CASH DIVIDENDS DECLARED PER SHARE:
Common................................... $ .0217 $ .0333
Class A.................................. $ .0300 $ .0417
AVERAGE SHARES OUTSTANDING (000's)......... 42,679 42,043
AVERAGE SHARES AND DILUTIVE
EQUIVALENTS OUTSTANDING (000'S).......... 43,668 42,043
See accompanying notes.
3
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 AND DECEMBER 31, 1998
(Unaudited; Dollars in Thousands)
March 31, December 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 5,056 $ 16,998
Marketable securities.................. 53,004 44,200
Accounts and notes receivable, less
allowance for doubtful accounts of
$12,583 and $12,173.................. 269,115 263,127
Inventories............................ 284,052 252,947
Future income tax benefits............. 32,044 32,870
Prepayments, deposits and other........ 11,926 10,666
655,197 620,808
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 38,779 39,645
Machinery and equipment................ 240,693 225,835
279,472 265,480
Less: Accumulated depreciation......... (142,095) (132,679)
137,377 132,801
Land................................... 2,430 2,481
139,807 135,282
INVESTMENTS:
Marketable securities (USSB)........... 47,631 51,994
Investment in affiliate (Cylink)....... 20,784 21,616
Real estate and other ventures......... 49,146 49,131
Leveraged leases....................... 15,945 16,821
133,506 139,562
OTHER ASSETS:
Goodwill, less accumulated
amortization of $10,892 and $9,642... 139,322 134,686
Other intangibles, less accumulated
amortization of $6,175 and $6,266.... 2,930 2,906
Notes receivable....................... 16,363 15,862
Miscellaneous.......................... 25,943 25,949
184,558 179,403
$1,113,068 $1,075,055
See accompanying notes.
4
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 AND DECEMBER 31, 1998
(Unaudited; Dollars in Thousands)
March 31, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 96,133 $ 92,395
Long-term debt due within one year...... 15,475 16,719
Accounts payable........................ 179,707 167,773
Accrued liabilities..................... 69,217 66,304
Income taxes payable.................... 12,651 6,136
373,183 349,327
LONG-TERM DEBT, less current maturities... 103,304 104,609
DEFERRED LIABILITIES:
Income taxes............................ 74,437 71,114
Litigation.............................. 43,000 43,000
Other................................... 8,010 11,841
125,447 125,955
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 7,878 7,878
Class A stock......................... 34,860 34,763
Capital in excess of par value.......... 20,365 18,671
Retained earnings....................... 437,338 417,363
Accumulated other comprehensive
income (loss)-
Marketable securities
valuation adjustment.............. 22,282 22,416
Foreign currency translation
adjustment........................ (11,589) (5,927)
511,134 495,164
$1,113,068 $1,075,055
See accompanying notes.
5
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited; Dollars in Thousands)
1999 1998
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Income (loss) from continuing operations......... $ 21,192 $(10,343)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
(used) by operating activities:
Depreciation and amortization.................. 10,991 8,423
Gain on sale of securities, net of taxes....... (6,876)
Equity in affiliate, net of taxes.............. 520 (4,553)
Deferred income taxes.......................... 4,406 (200)
Retirement and deferred compensation plans..... (2,094) 505
Income/loss from investments adjusted
for cash distributions received............... 658 189
Provision for losses on accounts receivable.... 2,048 784
Provision for patent litigation, net of taxes.. 26,875
Changes in assets and liabilities, excluding
effects from acquisitions
and foreign currency adjustments:
Increase in accounts receivable.............. (4,411) (13,075)
Increase in inventories...................... (27,208) (21,452)
(Increase) decrease in prepayments
and deposits............................... (1,072) 4
Increase in accounts payable and accrued
liabilities................................ 13,093 8,361
Increase in income taxes payable............. 7,248 3,336
Other changes, net............................. (497) (59)
Net cash provided (used) by operating activities. 17,998 (1,205)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (15,742) (10,092)
Proceeds from the sale of securities,
net of taxes................................... 11,052
Net (increase) decrease in current
marketable securities.......................... (8,833) (406)
Disposition of property and equipment............ 644 160
Additions to investments......................... (43) (5)
Increase in notes receivable..................... (2,712) (3,025)
Net assets of business acquired, net of cash..... (15,493)
Net cash used by investing activities............ (31,127) (13,368)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable......... 4,651 (2,137)
Proceeds of long-term debt....................... 110 2,248
Repayments of long-term debt..................... (2,218) (1,850)
Stock options exercised.......................... 90 74
Dividends paid................................... (1,221) (1,688)
Net cash provided (used) by financing activities. 1,412 (3,353)
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (225) (191)
NET CASH USED BY DISCONTINUED OPERATIONS........... (1,345)
NET DECREASE IN CASH AND EQUIVALENTS............... (11,942) (19,462)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........ 16,998 29,257
CASH AND EQUIVALENTS AT END OF PERIOD.............. $ 5,056 $ 9,795
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"). Amounts for the quarter ended March 31,
1998 have been restated to reflect the discontinuation of the
publishing business which was spun off in 1998. Except where otherwise
indicated, the following notes relate to continuing operations. All
share and per share data, as appropriate, reflect a 2-for-1 stock split
paid September 11, 1998.
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, 1998.
NOTE 2. DISCONTINUED OPERATIONS
On August 7, 1998 the Company distributed its investment in Penton
Media, Inc. ("Penton"), a wholly-owned subsidiary of the Company, to
stockholders in a tax-free spin-off. Net sales of the discontinued
operations prior to their disposition were $52,485 for the quarter
ended March 31, 1998.
NOTE 3. COMPREHENSIVE INCOME
Total comprehensive income (loss) for the quarters ended March 31 was:
1999 1998
Net income (loss) $ 21,192 $ (7,995)
Other comprehensive income (loss) (5,796) 1,894
Total comprehensive income (loss) $ 15,396 $ (6,101)
NOTE 4. ACQUISITION
In the first quarter of 1999, the Company acquired the assets and
business of a domestic distributor of alarm and other security
products. The total purchase price for this business was $15,493 cash
plus $311 of debt assumed. The acquisition was accounted for as a
purchase transactions in the consolidated financial statements from the
date of acquisition. The impact on consolidated results of operations
was not significant.
7
NOTE 5. INVENTORIES
The recorded value of inventories at March 31, 1999 and December 31,
1998 approximate current cost and consist of the following:
Mar. 31, Dec. 31,
1999 1998
Raw materials $ 60,881 $ 57,763
Work in process 20,998 22,089
Finished goods -
Manufactured by the Company 112,010 98,199
Manufactured by others 90,163 74,896
$284,052 $252,947
NOTE 6. MARKETABLE SECURITIES
Information about the Company's marketable securities at March 31, 1999
and December 31, 1998 is as follows:
Mar. 31, Dec. 31,
1999 1998
Current - Auction Rate Preferred Stocks -
Aggregate cost $ 53,032 $ 44,198
Net unrealized holding (loss) gain (28) 2
Aggregate fair value $ 53,004 $ 44,200
Non-Current - USSB Common Stock -
Aggregate cost $ 11,614 $ 15,789
Unrealized holding gain 36,017 36,205
Aggregate fair value $ 47,631 $ 51,994
Realized gains and losses are based upon the specific identification
method. Such gains and losses on the auction rate preferred stock, for
the quarters ended March 31, 1999 and 1998 were not significant.
In the first quarter of 1999 the Company recorded a $6,876 ($.16 per
diluted share) gain, net of taxes, on the sale of one million of its
3.8 million shares of USSB at an average selling price of $15.18 per
share.
NOTE 7. INVESTMENT IN AFFILIATE
The investment in affiliate consists of the Company's interest in
Cylink Corporation (Cylink), which is carried at equity. At March 31,
1999, the Company's 8.6 million shares of Cylink stock had a quoted
market value of $34,424. In March 1998 Cylink sold its wireless
division for $60.5 million. The Company increased the carrying value
of its investment in Cylink by $6,646 and recorded an after-tax gain of
$4,154, or $.10 per diluted share, to reflect its equity in the gain on
this divestiture.
8
The summarized results of operations of Cylink for the quarters ended
March 31, 1999 and 1998 (as restated by Cylink in December 1998) are as
follows:
1999 1998
Revenue $11,885 $ 8,062
Gross profit 7,773 5,431
Loss from continuing operations $(4,065) $(3,375)
Loss from discontinued operations (259)
Gain on disposal of discontinued operations 22,776
Net income (loss) $(4,065) $19,142
Net income previously reported $23,706
NOTE 8. EARNINGS PER SHARE
Basic net income per share amounts were calculated by dividing earnings
by the combined weighted average number of Class A and Common shares
outstanding. Diluted net income per share amounts were based on the
same reported earnings but assume the issuance of Class A stock upon
exercise of outstanding stock options and distributable as performance
and bonus share awards. For the first quarter of 1998 there were
819,000 potential Class A shares related to these options and awards
that were excluded from the calculation as they would have had an anti-
dilutive effect.
NOTE 9. SEGMENT INFORMATION
Segment information for the quarters ended March 31, excluding the 1998
provision for patent litigation were:
1999 1998
Sales
Alarm Manufacturing $227,054 $174,080
Alarm Distribution 232,185 185,845
General Corporate and Other 33
Less inter-segment sales (77,333) (55,819)
$381,906 $304,139
Operating Income
Alarm Manufacturing $ 22,640 $ 17,028
Alarm Distribution 8,999 6,640
General Corporate and Other (2,312) (1,941)
Less intercompany profit in inventories (3,174) (382)
$ 26,153 $ 21,345
NOTE 10. 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
9
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 April 1, 1999 pretrial conference the
retrial was scheduled to commence in January 2000. 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 alleged 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 awarding damages of
$35,954. The jury found that the Company did not willfully infringe.
The Company recorded a provision of $43,000 in the first quarter of
1998 which considers the judgment and interest. The Company has
appealed the verdict.
In August 1998, ITI filed a second lawsuit against the Company which
alleges that certain of the Company's products not specified in the
prior litigation infringe on the same patent. This action has been
stayed pending the outcome of the appeal of the jury award. The Company
believes that the ultimate outcome of this lawsuit will not have a
material adverse effect on its financial statements.
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company attained $381.9 million of sales in the first quarter of
1999, a 25.6 percent increase over the first quarter of 1998. Income
from continuing operations amounted to $21.2 million in 1999 compared to
a loss of $10.3 million in 1998. The swing in earnings between years
was dramatically affected by the inclusion of two special items and the
Cylink results for both years. The special items are an after-tax gain
of $6.9 million ($.16 per diluted share) recorded in 1999 on the sale of
USSB stock and an after-tax charge of $26.9 million ($.64 per diluted
share) recorded in 1998 for patent litigation. The change in the
Company's 29 percent share of Cylink results included an after-tax gain
on the 1998 sale of Cylink's wireless communications business of $4.2
million ($.10 per diluted share).
Pro forma operating results after excluding discontinued operations, the
provision for patent litigation, changes in Pittway's equity investment
in Cylink, the gain on sale of USSB stock and related tax effects are as
follows:
1999 1998
Net sales $381,906 $304,139
Operating expenses:
Cost of sale 240,011 192,332
Selling, general and administrative 104,751 82,039
Depreciation and amortization 10,991 8,423
355,753 282,794
Operating income 26,153 21,345
Interest expense (4,004) (3,501)
Other income (expense), net 1,746 1,031
Income before income taxes 23,895 18,875
Provision for income taxes 9,059 6,896
Net income $ 14,836 $ 11,979
Net income per diluted share of
Common and Class A stock $ .34 $ .28
Average number of shares and dilutive
securities outstanding (000's) 43,668 42,862
Domestic sales increased 23 percent in 1999 while international sales
increased 40 percent. International business represented 18 percent of
total consolidated sales in 1999 and 16 percent in 1998. Approximately
60 percent of the foreign sales growth was derived from businesses
acquired since the 1998 first quarter. Cost of sales increased 24.8
percent, which was less than the increase in sales due to operating
efficiencies. Excluding the $43 million provision for patent litigation
recorded in 1998, selling, general and administrative expenses increased
27.7 percent in 1999 principally as a result of increased costs
associated with the higher sales volumes of both the Manufacturing and
Distribution segments.
11
Alarm Manufacturing sales increased 30 percent during the quarter,
leading to a 33 percent increase in operating income. The segment's
operating margin improved to 10.0 percent of sales from 9.8 percent in
1998. The increased volume reflects the benefit of the continued
acceptance of numerous new product offerings and from expanded worldwide
distribution capabilities. Businesses acquired since the 1998 first
quarter accounted for 10 percent of segment sales in 1999. Sales to the
Distribution segment accounted for 34 percent of Manufacturing revenue
in 1999 and 32 percent in 1998. Such sales increased 38.5 percent over
the prior year. A large portion of the increase resulted from building
inventory for the Distribution segment to meet increased customer
demand, particularly for national accounts. This build-up is expected
to lessen as the year progresses.
Alarm Distribution sales increased 25 percent during the quarter,
leading to a 36 percent increase in operating income. The segment's
operating margin improved to 3.9 percent of sales in 1999 from 3.6
percent in 1998. Much of the increased volume originated from
significant growth in national account business for products
manufactured by the Alarm Manufacturing segment. Sales volume also
expanded due to expansion of its outlet network, both internally and
from acquisitions. Businesses acquired since the 1998 first quarter
accounted for 7 percent of segment sales in 1999.
Depreciation and amortization expense increased 30 percent in 1998
mainly as a result of capital additions in the Manufacturing segment,
and to a lesser extent, equipment and intangible assets acquired in the
1998 and 1999 acquisitions.
Other income (expense) in 1999 included an $11.0 million pretax gain on
the sale of USSB stock. Other income in 1998 included a pretax gain of
$6.7 million resulting from Pittway's equity in a gain recorded by
Cylink Corporation on the divestiture of its wireless division. In the
first quarter of 1999, the Company recorded a loss of $.8 million as its
share of Cylink's operating results versus income, before the
divestiture gain, of $.6 million in 1998. The increase in interest
expense over the 1998 first quarter, reflecting higher borrowing levels,
was offset by higher income from the Company's marketable securities.
Effective tax rates were 37.8 percent and 38.6 percent in the first
quarter of 1999 and 1998, respectively.
DISCONTINUED OPERATIONS
Included in the 1998 first quarter results is $2.3 million ($.06 per
diluted share) of income from Penton Media, Inc., which was spun-off in
August 1998.
12
FINANCIAL CONDITION
The Company's financial condition remained strong during the first
quarter of 1999. Net working capital at March 31, 1999 was $282.0
million, up from $271.5 million at December 31, 1998. Management
anticipates that operations, borrowings and marketable securities will
continue to be the primary sources of funds needed to meet ongoing
programs for capital expenditures, to finance acquisitions and
investments and to pay dividends.
In the first quarter of 1999, the $30.8 million generated from income
from continuing operations excluding depreciation, amortization, the
provision for patent litigation, the change in equity of Cylink, the
gain on sale of USSB stock, and other non-cash items was partially used
to fund the net increase in working capital items. The $18.0 million of
net cash generated from operating activities, together with short-term
borrowings of $4.7 million, $11.1 million of proceeds from the sales of
USSB stock and $11.9 million of cash were used primarily to finance a
$15.5 million acquisition, $15.7 million of capital expenditures, $2.1
million net repayments of long term debt, a $2.7 million increase in
notes receivable, $8.8 million of net purchases of marketable
securities, and $1.2 million of dividends.
The Company continually investigates investment opportunities for growth
in related areas and is presently committed to invest up to $45.9
million in certain affordable housing ventures through 2005.
The Company has real estate investments in various limited partnerships
with interests in commercial rental properties, which may be sold or
turned over to lenders. Such events have no effect on net income
although they do have a negative impact on the Company's cash position
because tax payments become due when the properties are sold or returned
to the lenders. The Company has approximately $3.2 million accrued at
March 31, 1999 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 and Cylink although occasional sales of preferred
stocks may be made selectively as conditions warrant.
In the first quarter of 1999 the Company sold one million of its 3.8
million shares of USSB, generating approximately $11.1 million in cash
after taxes. The Company continues to liquidate its USSB holdings based
upon current favorable market prices and expects to sell all of its
shares if the acquisition of USSB by Hughes Electronic Corporation is
completed.
In the event the Company loses its appeal of the unfavorable verdict in
the ITI litigation (see Note 10 to the financial statements), an after-
tax payment of $26.9 million would be required.
13
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
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, 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, 1998. 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.
14
Such grant was appealed by the plaintiffs. The other such motion was
denied on February 28, 1991. Saddlebrook appealed such denial. The
appeals were consolidated, fully briefed and heard in February 1992.
Saddlebrook received a favorable ruling on March 18, 1992, dismissing
the judgment and remanding the case to the Circuit Court for a new
trial. An agreed order has been entered by the Court preserving the
substance of the injunction pending final disposition of this matter.
As part of its plan to comply with the agreed order, Saddlebrook filed
applications with the regulatory agency to undertake various
remediation efforts. Plaintiffs, however, filed petitions for
administrative review of the applications, which administrative hearing
was concluded in February 1992. On March 31, 1992, the hearing officer
issued a recommended order accepting Saddlebrook's expert's testimony.
The agency's governing board was scheduled to consider this recommended
order on April 28, 1992, however, shortly before the hearing, the
plaintiffs voluntarily dismissed their petitions and withdrew their
challenges to the staff's proposal to issue a permit.
At the April 28, 1992 hearing the governing board closed its file on
the matter and issued the permits. Saddlebrook appealed the board's
refusal to issue a final order. On July 9, 1993 a decision was rendered
for Saddlebrook remanding jurisdiction to the governing board for
further proceedings, including entry of a final order which was issued
on October 25, 1993. The plaintiffs appealed the Appellate Court
decision to the Florida Supreme Court and appealed the issuance of the
final order to the Second District Court of Appeals. The Florida
Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs'
appeal. The other appeal was voluntarily dismissed by the plaintiffs on
June 17, 1994. On remand to the trial court, Saddlebrook's motion for
summary judgment, based on collateral estoppel on the 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. 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 April 1, 1999 pretrial
conference the retrial was scheduled to commence in January 2000.
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.
15
Patent Infringement Claim
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 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. 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. Appeal briefs have been filed and
oral arguments on the appeal were heard on March 4, 1999. A verdict is
expected sometime in the third or fourth quarter of 1999. In August
1998, ITI filed a second lawsuit against the Company which alleges that
certain of the Company's products not specified in the prior litigation
infringe on the same patent. This action has been stayed pending the
outcome of the appeal of the jury award.
Other
The Company in the normal course of business is subject to a number of
claims and lawsuits, both actual and potential in nature. The ultimate
outcome of the ITI matter under appeal is uncertain but will result in
significant damages should the Company lose the appeal. While
management believes that the ultimate outcome of the other
aforementioned lawsuits 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.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
10.1 Amendment To Employment Agreement between
Pittway Corporation and Paul R. Gauvreau dated
as of March 18, 1999.
10.2 Amendment To Employment Agreement between
Pittway Corporation and Edward J. Schwartz dated
as of March 18, 1999.
27 Financial Data Schedule
(submitted only in electronic format)
(b) No reports on form 8-K have been filed during the quarter
for which this report is being filed.
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: May 5, 1999
17
Exhibit 10.1
Pittway Corporation
March 31, 1999
Form 10-Q
AMENDMENT
TO
EMPLOYMENT AGREEMENT
AMENDMENT made as of March 18, 1999 between Pittway
Corporation, a Delaware corporation (the "Company"), and Paul R.
Gauvreau ("Executive").
The Company and Executive are parties to an Employment
Agreement made as of January 1, 1998 (the "Existing Employment
Agreement"). The Company and Executive desire to amend the Existing
Employment Agreement.
Accordingly, the Company (pursuant to authorization from the
Compensation Committee of its Board of Directors) and Executive agree as
follows:
Clause (iii) of paragraph 3(g) of the Existing Employment
Agreement is amended and restated to read as follows:
(iii) participation in the Pittway Corporation Supplemental
Executive Retirement Plan effective January 1, 1996 (the "SERP"), a copy
of which, as currently in effect, is attached hereto as Exhibit A, with
the beginning date for accrual of a benefit being January 1, 1995.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first written above.
PITTWAY CORPORATION
By /s/ King Harris
Its President
/s/ Paul R. Gauvreau
PAUL R. GAUVREAU
Exhibit 10.2
Pittway Corporation
March 31, 1999
Form 10-Q
AMENDMENT
TO
EMPLOYMENT AGREEMENT
AMENDMENT made as of March 18, 1999 between Pittway
Corporation, a Delaware corporation (the "Company"), and Edward J.
Schwartz ("Executive").
The Company and Executive are parties to an Employment
Agreement made as of January 1, 1998 (the "Existing Employment
Agreement"). The Company and Executive desire to amend the Existing
Employment Agreement.
Accordingly, the Company (pursuant to authorization from the
Compensation Committee of its Board of Directors) and Executive agree as
follows:
Clause (iii) of paragraph 3(g) of the Existing Employment
Agreement is amended and restated to read as follows:
(iii) participation in the Pittway Corporation Supplemental
Executive Retirement Plan effective January 1, 1996 (the "SERP"), a copy
of which, as currently in effect, is attached hereto as Exhibit A, with
the beginning date for accrual of a benefit being January 1, 1995 and
with the following modifications (A) in the event Executive becomes
entitled, and so long as Executive remains entitled, to a monthly
benefit under section 2.4 of the SERP on account of accruals under
section 2.2 thereof, the amount of such monthly benefit (if paid on a
life annuity basis commencing upon Executive's attainment of age 65
years) shall be increased by an amount equal to the additional monthly
benefit that would have been payable on such basis pursuant to the
Pittway Corporation Retirement Plan had Executive commenced
participation in that Plan on October 1, 1979 rather than on July 1,
1987 and had his total cash compensation from Standard Shares, Inc. for
any plan year or fraction under that Plan occurring between such dates
been treated for purposes of that Plan as having been earned from the
Company during such plan year or fraction, and the aggregate benefit
shall be payable as provided in section 2.4 of the SERP, and (B) if
Executive dies prior to his supplemental retirement benefit commencement
date under the SERP and has a spouse (as defined in section 2.7 thereof)
at the time of his death, such spouse shall be entitled to an additional
monthly benefit pursuant to section 2.6 of the SERP calculated based on
such aggregate benefit (rather than on the monthly benefit on account of
accruals under section 2.2 of the SERP).
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date first written above.
PITTWAY CORPORATION
By /s/ King Harris
Its President
/s/ Edward J. Schwartz
EDWARD J. SCHWARTZ
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,056
<SECURITIES> 53,004
<RECEIVABLES> 281,698
<ALLOWANCES> 12,583
<INVENTORY> 284,052
<CURRENT-ASSETS> 655,197
<PP&E> 281,902
<DEPRECIATION> 142,095
<TOTAL-ASSETS> 1,113,068
<CURRENT-LIABILITIES> 373,183
<BONDS> 103,304
0
0
<COMMON> 42,738
<OTHER-SE> 468,396
<TOTAL-LIABILITY-AND-EQUITY> 1,113,068
<SALES> 381,906
<TOTAL-REVENUES> 381,906
<CGS> 240,011
<TOTAL-COSTS> 240,011
<OTHER-EXPENSES> 9,570
<LOSS-PROVISION> 2,048
<INTEREST-EXPENSE> 4,004
<INCOME-PRETAX> 34,065
<INCOME-TAX> 12,873
<INCOME-CONTINUING> 21,192<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,192
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
<FN>
<F1> Excluding the gain on sale of USSB stock and the change in equity in
Cylink, income from continuing operations would have been $14.8 million
($.34 per diluted share).
</FN>
</TABLE>
