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, 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 (October 21,
1999).
Common Stock 7,877,664
Class A Stock 34,877,405
PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1999 and 1998 3
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 4 - 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7 - 11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15 - 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited; Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
CONTINUING OPERATIONS -
NET SALES........................... $441,326 $344,488 $1,235,964 $974,165
OPERATING EXPENSES:
Cost of sales...................... 272,835 217,990 767,713 618,754
Selling, general and
administrative.................... 116,822 86,881 336,349 254,204
Litigation accrual (reversal)...... (43,000) 43,000
Depreciation and amortization...... 12,641 9,316 35,190 26,192
402,298 314,187 1,096,252 942,150
OPERATING INCOME.................... 39,028 30,301 139,712 32,015
OTHER INCOME (EXPENSE):
Gain on sale of USSB securities.... 49,317
Change in equity of affiliate...... (504) (867) (2,336) 7,035
Income from marketable securities
and other interest................ 978 607 3,468 2,076
Interest expense................... (4,073) (3,259) (11,863) (9,832)
Income from investments............ 255 214 670 5,415
Miscellaneous, net................. (1,078) (549) (732) (1,022)
(4,422) (3,854) 38,524 3,672
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 34,606 26,447 178,236 35,687
PROVISION FOR INCOME TAXES.......... 12,930 9,413 67,512 12,724
INCOME FROM CONTINUING OPERATIONS... 21,676 17,034 110,724 22,963
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of income taxes
of ($266) and $3,635................ (373) 5,031
NET INCOME........................... $ 21,676 $ 16,661 $ 110,724 $ 27,994
INCOME (LOSS) PER SHARE OF COMMON
AND CLASS A STOCK (NOTE 3):
Basic: Continuing operations..... $ .51 $ .40 $ 2.59 $ .54
Discontinued operations... (.01) .12
Net income................ $ .51 $ .39 $ 2.59 $ .66
Diluted: Continuing operations..... $ .49 $ .39 $ 2.53 $ .54
Discontinued operations... (.01) .11
Net income................ $ .49 $ .38 $ 2.53 $ .65
CASH DIVIDENDS DECLARED PER SHARE:
Common............................. $ .0217 $ .0217 $ .0651 $ .0884
Class A............................ $ .0300 $ .0300 $ .0900 $ .1133
AVERAGE SHARES OUTSTANDING (000's)... 42,754 42,503 42,725 42,263
AVERAGE SHARES AND DILUTIVE
EQUIVALENTS OUTSTANDING (000's)..... 43,927 43,445 43,771 43,132
See accompanying notes.
3
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited; Dollars in Thousands)
September 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 30,658 $ 16,998
Marketable securities.................. 43,248 44,200
Accounts and notes receivable, less
allowance for doubtful accounts of
$16,285 and $12,173.................. 309,656 263,127
Inventories............................ 322,295 252,947
Future income tax benefits............. 33,882 32,870
Prepayments, deposits and other........ 9,038 10,666
748,777 620,808
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 41,353 39,645
Machinery and equipment................ 258,646 225,835
299,999 265,480
Less: Accumulated depreciation......... (159,711) (132,679)
140,288 132,801
Land................................... 2,429 2,481
142,717 135,282
INVESTMENTS:
Marketable securities (USSB)........... 51,994
Investment in affiliate (Cylink)....... 19,280 21,616
Real estate and other ventures......... 51,133 49,131
Leveraged leases....................... 15,167 16,821
85,580 139,562
OTHER ASSETS:
Goodwill, less accumulated
amortization of $14,373 and $9,642... 174,825 134,686
Other intangibles, less accumulated
amortization of $6,199 and $6,266.... 2,444 2,906
Notes receivable....................... 14,795 15,862
Miscellaneous.......................... 26,930 25,949
218,994 179,403
$1,196,068 $1,075,055
See accompanying notes.
4
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited; Dollars in Thousands)
September 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 121,341 $ 92,395
Long-term debt due within one year...... 16,051 16,719
Accounts payable........................ 192,571 167,773
Accrued liabilities..................... 78,445 66,304
Income taxes payable.................... 19,474 6,136
427,882 349,327
LONG-TERM DEBT, less current maturities... 103,226 104,609
DEFERRED LIABILITIES:
Income taxes............................ 77,856 71,114
Litigation.............................. 43,000
Other................................... 8,903 11,841
86,759 125,955
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 7,878 7,878
Class A stock......................... 34,877 34,763
Capital in excess of par value.......... 20,721 18,671
Retained earnings....................... 524,436 417,363
Accumulated other comprehensive
income (loss) -
Marketable securities
valuation adjustment.............. 7 22,416
Foreign currency translation
adjustment........................ (9,718) (5,927)
578,201 495,164
$1,196,068 $1,075,055
See accompanying notes.
5
PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited; Dollars in Thousands)
1999 1998
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Income from continuing operations................ $110,724 $ 22,963
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
operating activities:
Depreciation and amortization.................. 35,190 26,192
Gain on sale of USSB securities, net of taxes.. (30,187)
Equity in affiliate, net of taxes.............. 1,460 (4,397)
Deferred income taxes.......................... 4,411 1,223
Retirement and deferred compensation plans..... (1,759) (4,995)
Income/loss from investments adjusted
for cash distributions received............... 1,635 1,609
Provision for losses on accounts receivable.... 6,033 3,044
Litigation (reversal) accrual, net of taxes.... (26,875) 26,875
Change in assets and liabilities, excluding
effects from acquisitions and foreign
currency adjustments:
Increase in accounts receivable.............. (34,438) (36,075)
Increase in inventories...................... (60,600) (13,150)
Decrease in prepayments and deposits......... 2,003 385
Increase in accounts payable and
accrued liabilities......................... 26,611 16,232
Increase (decrease)in income taxes payable... 14,238 (3,229)
Other changes, net............................. (311) (1,976)
Net cash provided by continuing
operating activities........................... 48,135 34,701
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (37,679) (26,864)
Proceeds from sales of USSB securities,
net of taxes................................... 45,976
Net increase (decrease) in current
marketable securities.......................... 945 (5,445)
Dispositions of property and equipment........... 1,176 360
Additions to investments......................... (2,201) (2)
Increase in notes receivable..................... (4,022) (14,620)
Net assets of businesses acquired, net of cash... (61,471) (12,654)
Net cash used by investing activities............ (57,276) (59,225)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable.................... 29,711 7,030
Proceeds of long-term debt....................... 1,427 5,863
Repayments of long-term debt..................... (4,996) (3,360)
Stock options exercised.......................... 203 5,906
Dividends paid................................... (3,657) (5,072)
Net cash provided by financing activities........ 22,688 10,367
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ 113 330
NET CASH PROVIDED BY DISCONTINUED OPERATIONS....... 3,499
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.... 13,660 (10,328)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........ 16,998 29,257
CASH AND EQUIVALENTS AT END OF PERIOD.............. $ 30,658 $ 18,929
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"). Certain businesses were discontinued in
1998, as discussed in Note 2. Except where otherwise indicated, the
following notes relate to continuing operations. Certain prior year
amounts have been reclassified to conform to the current year
classification. All share and per share data 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 $14,466 and $126,137 for the
quarter and nine months ended September 30, 1998, respectively.
NOTE 3. COMPREHENSIVE INCOME
Total comprehensive income (loss) for the three and nine month periods
ended September 30 was:
Three Months Nine Months
1999 1998 1999 1998
Net income $21,676 $16,661 $110,724 $27,994
Other comprehensive
income (loss) 4,004 (7,410) (26,200) 534
Total comprehensive income $25,680 $ 9,251 $ 84,524 $28,528
Other comprehensive income (loss) for the nine month period ended
September 30, 1999, reflects the sale of USSB securities.
7
NOTE 4. ACQUISITIONS
During the first nine months of 1999, the Company acquired the assets
and business of a foreign distributor of alarm and other security
products and three domestic operations: a manufacturer of fire
controls; a distributor of alarm and other security products; and a
distributor of structured cable products. The total purchase price for
these businesses was $61,470 cash plus $1,711 of debt assumed. During
the same period in 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. 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.
NOTE 5. INVENTORIES
The recorded value of inventories at September 30, 1999 and December
31, 1998 approximate current cost and consist of the following:
Sept 30, Dec 31,
1999 1998
Raw materials $ 71,413 $ 57,763
Work in process 17,831 22,089
Finished goods -
Manufactured by the Company 128,460 98,199
Manufactured by others 104,591 74,896
$322,295 $252,947
NOTE 6. MARKETABLE SECURITIES
Information about the Company's marketable securities at September 30,
1999 and December 31, 1998 is as follows:
Sept 30, Dec 31,
1999 1998
Current - Adjustable Rate Preferred Stocks -
Aggregate cost $ 43,237 $ 44,198
Net unrealized holding (loss) gain 11 2
Aggregate fair value $ 43,248 $ 44,200
Non-Current - USSB Common Stock -
Aggregate cost $ - $ 15,789
Unrealized holding gain - 36,205
Aggregate fair value $ - $ 51,994
8
Realized gains and losses are based upon the specific identification
method. Such gains and losses on the adjustable rate preferred stock,
for the quarter and nine months ended September 30, 1999 and 1998 were
not significant.
In the nine months ended September 30, 1999, the Company recorded
gains, net of taxes, of $30,187 ($.69 per diluted share) on the sale of
all its shares of USSB stock.
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 September
30, 1999, the Company's 8.6 million shares of Cylink had a quoted
market value of $63,394. In 1998, 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 Cylink's divestiture of its wireless division.
The summarized results of operations of Cylink for the quarter and nine
months ended September 30, 1999 and 1998 (as restated by Cylink in
December 1998) are as follows:
Three Months Nine Months
1999 1998 1999 1998
Revenue $15,092 $12,130 $ 42,186 $ 32,555
Gross profit 10,935 6,206 29,148 20,010
Loss from
continuing operations $(3,238) $(5,683) $(10,357) $(10,725)
Income from discontinued
operations, including
gain on disposal 2,246 2,246 22,517
Net income (loss) $ (992) $(5,683) $ (8,111) $ 11,792
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.
9
NOTE 9. SEGMENT INFORMATION
Segment information for the quarter and nine months ended September 30,
excluding the patent litigation were:
Three Months Nine Months
1999 1998 1999 1998
Sales -
Alarm Manufacturing $255,903 $189,183 $ 729,554 $538,049
Alarm Distribution 267,927 216,865 750,799 605,631
General Corporate and Other 13 17 310 204
Less inter-segment sales (82,517) (61,577) (244,699) (169,719)
$441,326 $344,488 $1,235,964 $974,165
Operating Income -
Alarm Manufacturing $ 31,341 $ 22,034 $ 80,083 $ 54,234
Alarm Distribution 9,480 8,321 27,758 23,232
General Corporate and Other (1,416) (39) (5,892) (3,929)
Less inventory profit on
inter-segment sales (377) (15) (5,237) 1,478
$ 39,028 $ 30,301 $ 96,712 $ 75,015
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
Company. The lawsuit alleged damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the properties.
Damages of approximately $8,000 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 the first quarter of 2000.
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
10
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 appealed
the verdict. In May 1999, the Federal Circuit Court of Appeals
unanimously reversed the March 1998 verdict. ITI's petition to the
Court of Appeals for a re-hearing of its decision was summarily denied.
The $43,000 provision has been reversed in the second quarter of 1999
as a result of the favorable decision of the Circuit Court of Appeals.
In October 1999, ITI filed a Petition for Certiorari with the U.S.
Supreme Court seeking review of the Circuit Court of Appeals decision.
The Company will file its opposition in November 1999 and expects
resolution by year-end.
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 lawsuit is
effectively stayed pending the resolution of the above lawsuit.
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 the 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
Sales for the third quarter and first nine months of 1999 were $441.3
million and $1.24 billion, respectively, a 28 and 27 percent increase
over the same periods in 1998. Operating income increased 29 percent
for the quarter and 29 percent, excluding the accrual/reversal of a
litigation provision, for the year to date. Income from continuing
operations amounted to $21.7 million and $110.7 million for the quarter
and nine month periods in 1999 compared to $17.0 million and $23.0
million in the respective periods of 1998. The increase in earnings for
the nine month period was affected by the inclusion of two special items
and the Cylink results for both years. The special items are an after-
tax gain on the sale of USSB stock in 1999 of $30.2 million ($.69 per
diluted share) and the accrual in 1998, and reversal in 1999, of a $26.9
million ($.61 per diluted share) after-tax provision for patent
11
litigation. The change in the Company's equity in Cylink 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 through September 30, after excluding
discontinued operations, the patent litigation accrual/reversal, changes
in Pittway's equity investment in Cylink, the gain on sale of USSB stock
and related tax effects are as follows:
Three Months Nine Months
1999 1998 1999 1998
(dollars in thousands, except per share)
Net sales $441,326 $344,488 $1,235,964 $974,165
Operating expenses:
Cost of sale 272,835 217,990 767,713 618,754
Selling, general and
administrative 116,822 86,881 336,349 254,204
Depreciation and amortization 12,641 9,316 35,190 26,192
402,298 314,187 1,139,252 899,150
Operating income 39,028 30,301 96,712 75,015
Interest expense (4,073) (3,259) (11,863) (9,832)
Other income (expense), net 155 272 3,406 6,469
Income before income taxes 35,110 27,314 88,255 71,652
Provision for income taxes 13,119 9,738 33,133 26,211
Net income $ 21,991 $ 17,576 $ 55,122 $ 45,441
Net income per diluted share
of Common and Class A stock $ .50 $ .40 $ 1.26 $ 1.05
Domestic sales for the third quarter and first nine months of 1999
increased 24 percent over the same periods in 1998. International sales
increased 50 percent in the third quarter and 43 percent for the first
nine months of 1999 over the same periods last year. International
sales now represent 17 percent of total year to date sales up from 15
percent for the third quarter and nine months of 1998. Operating
profits improved as a direct result of sales growth at higher gross
margins, although the improvement was somewhat offset by higher selling,
general and administrative expenses, principally in the manufacturing
segment, in addition to increases in certain distribution expenses.
Alarm Manufacturing sales increased 35 percent during the quarter, and
36 percent year to date leading to a 42 and 48 percent increase in
operating income, respectively. The segment's operating margin improved
to 12.2 percent of sales for the quarter and 11.0 percent year to date
from 11.6 percent and 10.1 percent in 1998 respectively. The increased
sales volume reflects the benefit of the continued acceptance of
numerous new product offerings and from expanded worldwide distribution
capabilities. Businesses acquired in 1998 and 1999 accounted for 16
percent for the third quarter and 14 percent year to date of segment
sales in 1999. Sales to the Distribution segment accounted for 32 and
12
34 percent of Manufacturing revenue in the third quarter and first nine
months of 1999 respectively and 33 percent for the quarter and 32
percent year to date in 1998. Such sales increased 34 percent and 44
percent for the quarter and nine months, respectively, from a year ago.
A portion of the increase resulted from building inventory for the
Distribution segment to meet increased customer demand, particularly for
national accounts.
Alarm Distribution sales increased 24 percent during the quarter and
nine months leading to a 14 percent and 19 percent increase in operating
income, respectively. The segment's operating margin dipped to 3.5 and
3.7 percent of sales for the quarter and nine months ended September 30,
1999 from 3.8 and 4.3 percent of sales for the respective periods of
last year. Much of the increased volume originated from continuing
growth in national account business for products manufactured by the
Alarm Manufacturing segment. Businesses acquired in 1998 and 1999
accounted for 7 percent of segment sales for the quarter and 5 percent
year to date in 1999. The volume gains led to higher operating income
although increased freight rates, acquisition integration costs and
relocation costs offset improvements in the gross margin resulting in a
decline in the operating margin.
Depreciation and amortization expense increased 36 percent in the third
quarter and 34 percent for the first nine months. Depreciation expense
increased due to capital additions from both existing operations and
acquisitions in 1998 and 1999. Amortization expense increased due to
acquisitions.
Other income (expense) during the first nine months of 1999 included a
$49.3 million pretax gain on the sale of USSB stock. The nine-month
period in 1998 included Pittway's $6.7 million share of Cylink's gain on
the divestiture of its wireless division, special cash distributions
from real estate ventures and a gain on the sale of an investment, which
totaled $4.5 million. Interest expense is higher in the third quarter
and nine months of 1999 compared to the prior year due to higher
borrowing levels.
Effective tax rates were 37.4 percent and 35.6 percent for the third
quarter and 37.9 percent and 35.7 percent for the first nine months of
1999 and 1998, respectively. The 1999 rate increased reflecting a higher
effective foreign income tax rate.
DISCONTINUED OPERATIONS
Income (loss) from the discontinued operations of Penton Media, Inc.,
which was spun-off in August 1998, was ($.4 million) and $5.0 million,
($.01) and $.11 per diluted share, for the third quarter and nine months
in 1998.
13
FINANCIAL CONDITION
The Company's financial condition remained strong during the first nine
months of 1999. Net working capital at September 30, 1999 was $320.1
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 nine months of 1999, the $100.6 million generated from
income from continuing operations excluding depreciation, amortization,
the reversal of the litigation accrual, the change in equity of Cylink,
other non-cash items and the gain on sale of USSB stock was partially
used to fund the net increase in working capital items. The remaining
$48.1 million of net cash generated from operating activities, together
with $46.0 million of proceeds from the sales of USSB stock, $29.7
million of short term borrowings, $1.2 million proceeds from the
disposition of property and equipment and $.9 million of proceeds from
the sales of marketable securities, was used primarily to finance $61.5
million in acquisitions, $37.7 million of capital expenditures, $3.6
million net repayments of long term debt, a $4.0 million increase in
notes receivable, $2.2 million additions to investments and $3.7
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 $3.0 million accrued at
September 30, 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 investment in Cylink
and has classified it as a long-term investment.
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
14
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.
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
15
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 the first quarter
of 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.
16
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 considered 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 appealed the verdict. Appeal briefs were filed and oral
arguments on the appeal were heard on March 4, 1999. In May 1999, the
Federal Circuit Court of Appeals unanimously reversed the March 1998
verdict. ITI's petition to the Court of Appeals for a re-hearing of
its decision was summarily denied. The $43.0 million provision has been
reversed in the second quarter of 1999 as a result of the favorable
decision of the Circuit Court of Appeals. In October 1999, ITI filed a
Petition of Certiorari with the U.S. Supreme Court seeking review of
the Circuit Court of Appeals decision. The Company will file its
opposition in November 1999 and expects resolution by year-end.
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 lawsuit is
effectively stayed pending the resolution of the above lawsuit.
17
Other
The Company in the normal course of business is subject to a number of
claims and lawsuits, both actual and potential in nature. While
management believes that the ultimate outcome of the 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
10.1 Amended and Restated Employment Agreement with
Leo A. Guthart dated as of January 1, 1999.*
10.2 Pittway Corporation Change Of Control Plan dated
as of September 15, 1999.*
10.3 Pittway Corporation Change of Control Plan Acceptance
executed by King Harris on October 13, 1999
10.4 Pittway Corporation Change of Control Plan Acceptance
executed by Paul R. Gauvreau on October 22, 1999
10.5 Pittway Corporation Change of Control Plan Acceptance
executed by Edward J. Schwartz on October 24, 1999
27 Financial Data Schedule
(submitted only in electronic format).
* This document is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report pursuant
to Item 6(a) of Form 10-Q.
(b) No reports on Form 8-K have been filed during the quarter
for which this report is filed.
18
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 2, 1999
19
Exhibit 10.1
Pittway Corporation
September 30, 1999
Form 10-Q
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") made
as of January 1, 1999, between Pittway Corporation, a Delaware
corporation (the "Company"), and Leo A. Guthart ("Executive").
Executive currently serves as the chief executive officer of the
Pittway Security Group (f/k/a the Ademco Security Group) of the
Company pursuant to an Employment Agreement dated as of January 1,
1996 (the "Existing Employment Agreement").
The Company and Executive desire to replace the Existing Employment
Agreement (insofar as it relates to periods from and after the date
hereof) with this Agreement.
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company shall employ Executive, and Executive
accepts continued employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on
the date hereof and ending as provided in paragraph 5 hereof (the
"Employment Period").
2. POSITION AND DUTIES.
(a) During the Employment Period, Executive shall serve as the
chief executive officer of the Pittway Security Group of the
Company or any successor to such Group, in each case as constituted
from time to time (the "Group"), and shall have the normal duties,
responsibilities and authority of an executive serving in such
position, subject to the power of the Board of Directors of the
Company (the "Board") or the President of the Company to expand or
limit such duties, responsibilities and authority, either generally
or in specific instances. Executive shall have the title Chairman
and Chief Executive Officer of the Group, subject to the power of
the Board or the President of the Company to change such title from
time to time. During the Employment Period, Executive shall also
serve as a director of the Company for so long as the Board
nominates him to that position and he is elected to it, as a Vice-
Chairman of the Company for so long as the Board elects or appoints
him to that position and as a director of any affiliate of the
Company (or other entity in which the Company has an investment)
designated by the Board for so long as the Board causes him to be
elected to such position.
(b) Executive shall report to the President of the Company.
(c) During the Employment Period, Executive shall devote his best
efforts and his full business time and attention (except for
permitted vacation periods, reasonable periods of illness or other
incapacity, and, provided such activities do not exceed those in
which Executive has engaged in the past, participation in
charitable and civic endeavors and management of Executive's
personal investments and business interests) to the business and
affairs of the Group and the business and affairs of any other
group of the Company, any division of the Company, or any
subsidiary or affiliate of the Company (or any group or division
thereof), engaged in the security, alarm or monitoring products
business or any other business the same as or similar to or related
to that then engaged in by the Group. Executive shall perform his
duties and responsibilities to the best of his abilities in a
diligent, trustworthy, businesslike and efficient manner.
(d) Executive shall perform his duties and responsibilities
principally in the New York metropolitan area, and shall not be
required to travel outside that area any more extensively than he
has done in the past in the ordinary course of the business of the
Group.
3. SALARY AND BENEFITS.
(a) The Company agrees to pay Executive a salary during the
Employment Period, in monthly installments.
(b) Executive's initial salary shall be $550,000 per annum.
(c) Executive's salary may be increased by the Board from time to
time.
(d) The Board may, in its sole discretion, award a bonus to
Executive for any calendar year during the Employment Period.
(e) The Company shall reimburse Executive for all reasonable
expenses incurred by him in the course of performing his duties
under this Agreement which are consistent with the Company's
policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such
expenses.
(f) In addition to the salary and any bonus(es) payable to
Executive pursuant to this paragraph, Executive shall be entitled
during the Employment Period to participate, on the same basis as
other executives of the Company (but subject to variations among
executives resulting from differences in the levels of benefits
made available to employees at particular business units under the
Company's 401(k) plan or any other plan of the Company), in the
Company's Standard Executive Benefits Package. The Company's
"Standard Executive Benefits Package" means those benefits
(including insurance, vacation, company car or car allowance and/or
other benefits) for which substantially all of the executives of
the Company are from time to time generally eligible, as determined
from time to time by the Board.
(g) In addition to participation in the Company's Standard
Executive Benefits Package pursuant to this paragraph, Executive
shall be entitled during the Employment Period to:
(i) additional term life insurance coverage in an
amount equal to Executive's salary; but only if and so long as
such additional coverage is available at standard rates from
the insurer providing term life insurance coverage under the
Standard Executive Benefits Package or a comparable insurer
acceptable to the Company (If Executive is not participating
in term life insurance coverage under the Standard Executive
Benefits Package and if such additional coverage would be
available at standard rates from such insurer if Executive
were so participating, Executive shall instead be entitled to
an amount each calendar year, payable monthly, equal to the
amount the Company would have been required to pay for such
additional coverage for such year.);
(ii) supplementary long-term disability coverage in an
amount which will increase maximum covered annual compensation
to $330,000 and maximum monthly payments to $18,333; but only
if and so long as such supplementary coverage is available at
standard rates from the insurer providing long-term disability
coverage under the Standard Executive Benefits Package or a
comparable insurer acceptable to the Company; and
(iii) participation in the Pittway Corporation Supplemental
Executive Retirement Plan (the "SERP"), a copy of which, as
currently in effect, is attached hereto as Exhibit A.
4. ADJUSTMENTS. Notwithstanding paragraphs 2 and 3 hereof, at
any time during the Employment Period Executive may elect, by means
of advance written notice to the Company at least ninety (90) days
prior to the effective date of such election, to reduce the
business time and attention he is required to devote pursuant to
paragraph 2(c) hereof to the number of hours per week specified in
such election (which shall not be less than eight (8) hours per
week). Any such election, once made, shall be irrevocable.
In the event of any such election:
(i) if the number of hours per week specified in such
election is less than twenty (20), at the effective date of
such election Executive's salary shall automatically be
reduced to $350,000 per annum; and if the number of hours per
week specified in such election is twenty (20) or more, at the
effective date of such election Executive's salary shall
automatically be reduced to an amount, between $350,000 and
$550,000 per annum, to be negotiated between Executive and the
President of the Company promptly following the Company's
receipt of such election;
(ii) unless Executive's actual hours of work during the
calendar year in which the effective date of such election
occurs or any subsequent calendar year equal or exceed 1,000,
Executive shall not expect any bonus for such calendar year;
(iii) Executive shall not thereafter participate in any
benefits included in the Company's Standard Executive Benefits
Package for which a minimum number of regularly scheduled
hours of work or actual hours of work during a year are
required unless Executive, in fact, meets such requirement;
(iv) if, under clause (iii) above, Executive ceases to
participate in term life insurance coverage, Executive shall
also cease to be entitled to any additional term life
insurance coverage pursuant to paragraph 3(g)(i) hereof (but
not to any amount in lieu thereof to which he is otherwise
entitled pursuant to such paragraph);
(v) if, under clause (iii) above, Executive ceases to
participate in long-term disability coverage, Executive shall
also cease to be entitled to any supplementary long-term
disability coverage pursuant to paragraph 3(g)(ii) hereof;
(vi) if, under clause (iii) above, Executive ceases to
participate in the Company's health insurance program, then
for so long during the remainder of the Employment Period as
the Company maintains a health insurance program the Company
shall maintain for Executive (and his dependents) private
health insurance providing substantially the same benefits as
those provided to executives of the Company under the
Company's health insurance program in effect from time to
time, provided that (A) such private health insurance is
available, (B) the premium for such private health insurance
does not exceed 150% of the gross rate (before any cost-
sharing under the terms of the program) allocated to employees
of the Group under the Company's health insurance program and
(C) Executive pays the percentage of the premium for such
private health insurance equivalent to any cost-sharing
requirement imposed under the terms of the Company's health
insurance program;
(vii) at the effective date of such election, the level of
any continuing benefits included in the Standard Executive
Benefits Package or provided for in paragraph 3(g) hereof the
amount of which is based on salary or compensation shall be
adjusted to reflect Executive's reduced salary; and
(viii) if the Board so determines, Executive shall cease to
serve as the chief executive officer of the Group.
Without limiting the generality of clause (iii) above, if Executive
were to elect to reduce to eight hours the business time and
attention he is required to devote pursuant to paragraph 2(c)
hereof, under the current terms of the Company's benefits it is
anticipated that Executive would not be eligible to continue to
participate in any health, disability or insurance benefit or to
receive any award under the Pittway Corporation 1990 Stock Awards
Plan and would not be entitled to any increase in benefit under the
Pittway Corporation Retirement Plan, but would be eligible to
participate in the Company's 401(k) plan and the SERP and, subject
to the terms of clause (vi) above, to private health insurance
coverage.
5. EMPLOYMENT PERIOD.
(a) Except as hereinafter provided, the Employment Period shall
continue until, and shall end upon, September 26, 2004.
(b) Notwithstanding (a) above, the Employment Period shall end
early upon the first to occur of any of the following events:
(i) Executive's death;
(ii) Executive's retirement upon or after reaching age 65
("Retirement");
(iii) the Company's termination of Executive's employment
on account of Executive's having become unable (as
determined by the Board in good faith) to regularly perform
his duties hereunder by reason of illness or incapacity for
a period of more than six (6) consecutive months
("Termination for Disability");
(iv) the Company's termination of Executive's
employment for Cause ("Termination for Cause");
(v) the Company's termination of Executive's employment
other than a Termination for Disability or a Termination for
Cause ("Termination without Cause"); or
(vi) Executive's termination of Executive's employment for
Good Reason, by means of advance written notice to the
Company at least thirty (30) days prior to the effective
date of such termination identifying such termination as a
Termination by Executive for Good Reason ("Termination by
Executive for Good Reason").
(c) For purposes of this Agreement, "Cause" shall mean:
(i) the commission by Executive of a felony or a crime
involving moral turpitude;
(ii) the commission by Executive of a fraud;
(iii) the commission by Executive of any act involving
dishonesty or disloyalty with respect to the Company or any of
its subsidiaries or affiliates;
(iv) conduct by Executive tending to bring the
Company or any of its subsidiaries or affiliates into
substantial public disgrace or disrepute;
(v) gross negligence or willful misconduct by Executive
with respect to the Company or any of its subsidiaries or
affiliates;
(vi) repudiation of this Agreement by Executive or
Executive's abandonment of his employment with the Company (it
being expressly understood that a Termination by Executive for
Good Reason shall not constitute such a repudiation or
abandonment);
(vii) breach by Executive of any of the agreements in
paragraph 10 hereof; or
(viii) any other breach by Executive of this Agreement
which is material and which is not cured within thirty (30)
days after written notice thereof to Executive from the
Company.
(d) For purposes of this Agreement, "Good Reason" shall mean:
(i) a reduction by the Company in Executive's salary, other
than pursuant to paragraph 4 hereof, to an amount less than
"Executive's Reference Salary" (i.e., $550,000 or, upon
reduction pursuant to paragraph 4 hereof, the reduced amount
pursuant to such paragraph); or
(ii) any breach by the Company of this Agreement which is
material and which is not cured within thirty (30) days after
written notice thereof to the Company from Executive.
6. POST-EMPLOYMENT PERIOD PAYMENTS.
(a) If the Employment Period ends on September 26, 2004, or if
the Employment Period ends early pursuant to paragraph 5 hereof for
any reason, Executive shall cease to have any rights to salary,
bonus (if any) or benefits other than: (i) any salary which has
accrued but is unpaid, and any expenses which have been incurred
but are unpaid, as of the end of the Employment Period, (ii) (but
only to the extent provided in the SERP or any other benefit plan
in which Executive has participated as an employee of the Company)
any plan benefits which by their terms extend beyond termination of
Executive's employment and (iii) any other amount(s) payable
pursuant to the succeeding provisions of this paragraph 6 or the
provisions of paragraph 7.
(b) If the Employment Period ends early pursuant to paragraph 5
hereof on account of Executive's death, the Company shall pay to
Executive's estate (or such person or persons as Executive may
designate in a written instrument signed by him and delivered to
the Company prior to his death) either (i) amounts during the
period of fifteen years from and after the end of the Employment
Period equal to one-half of the monthly installments which would
have been paid to Executive pursuant to paragraph 7 hereof had the
Employment Period instead ended early pursuant to paragraph 5
hereof on account of Retirement or (ii) if so elected by the
payee(s) by written notice to the Company within the period of
sixty (60) days after the date of Executive's death, a lump sum
amount equivalent to the discounted present value of such amounts,
discounted at the publicly announced reference rate for commercial
lending of Bank of America, N.A. in effect at the date of notice to
the Company of such election, with said amount to be paid on a date
no later than thirty (30) days following the date of notice to the
Company of such election.
(c) If the Employment Period ends early pursuant to paragraph 5
hereof on account of Termination for Disability, the Company shall
pay to Executive (or his personal representative) amounts during
the period of fifteen years from and after the end of the
Employment Period equal to the monthly installments which would
have been paid to Executive pursuant to paragraph 7 hereof had the
Employment Period instead ended early pursuant to paragraph 5
hereof on account of Retirement (in the event Executive is entitled
during the payment period to any payments under any disability
benefit plan or the like in which Executive has participated as an
employee of the Company, less such payments); provided, however,
that in the event of Executive's death during the payment period,
the Company shall not be obligated to pay any subsequent such
amounts, but the Company shall pay to Executive's estate (or such
person or persons as Executive may designate in a written
instrument signed by him and delivered to the Company prior to his
death) either (i) amounts during the remainder of the payment
period equal to one-half the amounts which would have been paid to
Executive but for his death or (ii) if so elected by the payee(s)
by written notice to the Company within the period of sixty (60)
days after the date of Executive's death, a lump sum amount
equivalent to the discounted present value of such amounts,
discounted at the publicly announced reference rate for commercial
lending of Bank of America, N.A. in effect at the date of notice to
the Company of such election, with said amount to be paid on a date
no later than thirty (30) days following the date of notice to the
Company of such election.
(d) If the Employment Period ends early pursuant to paragraph 5
hereof on account of Termination for Cause, the Company shall pay
Executive an amount equal to that Executive would have received as
salary (based on Executive's salary then in effect) had the
Employment Period remained in effect until the later of the
effective date of the Company's termination of Executive's
employment or the date thirty days after the Company's notice to
Executive of such termination.
(e) If the Employment Period ends early pursuant to paragraph 5
hereof on account of a Termination without Cause or a Termination
by Executive for Good Reason, the Company shall pay to Executive
amounts equal to the amounts Executive would have received as
salary (based on Executive's salary then in effect or, if greater,
Executive's Reference Salary) had the Employment Period remained in
effect until September 26, 2004 and for consulting services had the
Consulting Period (as defined in paragraph 7 hereof) thereafter
continued until September 26, 2019, at the times such amounts would
have been paid (in the event Executive is entitled during the
payment period to any payments under any disability benefit plan or
the like in which Executive has participated as an employee of the
Company, less such payments); provided, however, that in the event
of Executive's death during the payment period, the Company shall
not be obligated to pay any subsequent such amounts, but the
Company shall pay to Executive's estate (or such person or persons
as Executive may designate in a written instrument signed by him
and delivered to the Company prior to his death) either (i) amounts
during the remainder of the payment period equal to one-half of the
amounts which would have been paid to Executive but for his death
or (ii) if so elected by the payee(s) by written notice to the
Company within the period of sixty (60) days after the date of
Executive's death, a lump sum amount equivalent to the discounted
present value of such reduced amounts, discounted at the publicly
announced reference rate for commercial lending of Bank of America,
N.A. in effect at the date of notice to the Company of such
election, with said amount to be paid on a date no later than
thirty (30) days following the date of notice to the Company of
such election. It is expressly understood that the Company's
payment obligations under this (e) shall cease in the event
Executive breaches any of his agreements in paragraph 8, 10 or 11
hereof.
7. AVAILABILITY FOR CONSULTING. If the Employment Period ends
pursuant to paragraph 5 hereof on September 26, 2004, or if the
Employment Period ends early pursuant to paragraph 5 hereof on
account of Retirement, during the period of fifteen years from and
after the end of the Employment Period, or, if shorter, during the
period from the end of the Employment Period until the date of
termination of the Consulting Period pursuant to the final
paragraph of this paragraph 7 (the "Consulting Period"), Executive
shall make himself available to the Company as a consultant at such
times as the Company requests upon reasonable advance notice to
Executive. In return, (i) Executive shall be paid, in monthly
installments, at a rate per annum equal initially to $100,000 but
which shall increase on September 26, 2005 and on each subsequent
September 26th by the percentage of the amount in effect on the
immediately preceding day equal to the Social Security
Administration automatic cost-of-living adjustment (COLA) that
became effective on the immediately preceding January 1st, and (ii)
the Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing consulting services at
the Company's request which are consistent with the Company's
policies in effect from time to time with respect to travel and
other business expenses, subject to the Company's requirements with
respect to reporting and documentation of such expenses. Any
request for the performance of consulting services shall be
ineffective unless it is received by Executive at least two weeks
in advance of the date such services are to be performed, and shall
also be ineffective to the extent the performance of such services
would be impractical for Executive in view of Executive's health or
travel or vacation plans or any employment, consulting or family-
related commitments which Executive may have at the time. At the
time of Executive's receipt of a Company request, Executive shall
advise the Company of any relevant such impracticality and the
basis therefor. To the extent deemed practical by the Company,
Executive shall provide his consulting advice by telephone. In any
event, Executive shall not be required to travel in connection with
the performance of his consulting services, except to the Group's
offices. It is expressly understood that Executive shall not be
required to spend more than 20 hours in the performance of his
consulting services during any particular month.
The Company may terminate the Consulting Period early for Cause, in
which event the Company's obligations under the foregoing
provisions of this paragraph 7 shall cease.
8. INVENTIONS AND OTHER INTELLECTUAL PROPERTY. Executive agrees
that all inventions, innovations, improvements, developments,
methods, designs, analyses, drawings, reports, trademarks, slogans,
product or other designs, advertising or marketing programs, and
all similar or related information which relate to the Company's or
any of its subsidiaries' or affiliates' actual or anticipated
business, research and development or existing or future products
or services and which are (or were prior to the date of this
Agreement) conceived, developed or made by Executive, whether alone
or jointly with others, while employed by the Company or any such
subsidiary or affiliate or any predecessor thereof ("Work Product")
belong to the Company or such subsidiary or affiliate. Executive
will promptly disclose such Work Product to the President of the
Company and perform all actions reasonably requested by the
President of the Company (whether during or after the Employment
Period) to establish and confirm such ownership (including, without
limitation, assignments, consents, powers of attorney and other
instruments).
9. LIMITATION. Paragraph 8 of this Agreement regarding the
ownership of inventions and other intellectual property does not
apply to the extent application thereof is prohibited by any law
the benefits of which cannot be waived by Executive. Executive
hereby waives the benefits of any such law to the maximum extent
permitted by law.
10. CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by him while employed
by the Company pursuant to this Agreement or during the Consulting
Period, as well as those obtained by him while employed by the
Company or any of its subsidiaries or affiliates or any predecessor
thereof prior to the date of this Agreement, concerning the
business or affairs of the Company or any of its subsidiaries or
affiliates or any predecessor thereof (unless and except to the
extent the foregoing become generally known to and available for
use by the public other than as a result of Executive's acts or
omissions to act, "Confidential Information") are the property of
the Company or such subsidiary or affiliate. Therefore, Executive
agrees that he shall not disclose any Confidential Information
without the prior written consent of the President of the Company
unless and except to the extent that such disclosure is (i) made in
the ordinary course of Executive's performance of his duties under
this Agreement or (ii) required by any subpoena or other legal
process (in which event Executive will give the Company prompt
notice of such subpoena or other legal process in order to permit
the Company to seek appropriate protective orders), and that he
shall not use any Confidential Information for his own account
without the prior written consent of the President of the Company.
Executive shall deliver to the Company at the termination of the
Employment Period, or at any other time the Company may request,
all memoranda, notes, plans, records, reports, computer tapes and
software and other documents and data (and copies thereof) relating
to the Confidential Information, the Work Product or the business
of the Company or any of its subsidiaries or affiliates which he
may then possess or have under his control.
11. NON-COMPETE, NON-SOLICITATION.
(a) Executive acknowledges that in the course of his employment
with the Company pursuant to this Agreement and any consulting
services for the Company pursuant to this Agreement he will become
familiar, and during the course of his employment by the Company or
any of its subsidiaries or affiliates or any predecessor thereof
prior to the date of this Agreement he has become familiar, with
trade secrets and customer lists of and other confidential
information concerning the Company and its subsidiaries and
affiliates and predecessors thereof and that his services have been
and will be of special, unique and extraordinary value to the
Company.
(b) Executive agrees that during the Employment Period and the
Consulting Period and, if Executive has performed any consulting
services during the final year of the Consulting Period, for one
year after the performance of such services, he shall not in any
manner, directly or indirectly, through any person, firm or
corporation, alone or as a member of a partnership or as an
officer, director, stockholder, investor or employee of or in any
other corporation or enterprise or otherwise, engage or be engaged
in, or assist any other person, firm, corporation or enterprise in
engaging or being engaged in, the security, alarm or monitoring
products business or any other business then actively being
conducted by the Group, in any geographic area in which the Group
is then conducting such business (whether through manufacturing or
production, calling on customers or prospective customers, or
otherwise). Notwithstanding the foregoing, subsequent to the
Employment Period Executive may engage or be engaged in, or assist
any other person, firm, corporation or enterprise in engaging or
being engaged in, any business activity which is not competitive
with a business activity being conducted by the Group at the time
subsequent to the Employment Period Executive first engages or
assists in such business activity (a "Non-competitive Business
Activity").
(c) Executive further agrees that during the Employment Period
and the Consulting Period and, if Executive has performed any
consulting services during the final year of the Consulting Period,
for one year after the performance of such services, he shall not
in any manner, directly or indirectly, (i) induce or attempt to
induce any employee of the Company or of any of its subsidiaries or
affiliates to quit or abandon his employ, or any customer of the
Company or of any of its subsidiaries or affiliates to quit or
abandon its relationship, for any purpose whatsoever, or (ii) in
connection with any business to which the first sentence of (b)
above applies, except where such activity constitutes a Non-
competitive Business Activity, call on, service, solicit or
otherwise do business with any then current or prospective customer
of the Company or of any of its subsidiaries or affiliates.
(d) Nothing in this paragraph 11 shall prohibit Executive from
being: (i) a stockholder in a mutual fund or a diversified
investment company or (ii) a passive owner of not more than 2% of
the outstanding stock of any class of a corporation which is
publicly traded, so long as Executive has no active participation
in the business of such corporation.
(e) If, at the time of enforcement of this paragraph, a court
holds that the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the
maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or
area and that the court shall be allowed to revise the restrictions
contained herein to cover the maximum period, scope and area
permitted by law.
12. ENFORCEMENT. Because Executive's services are unique and
because Executive has access to Confidential Information and Work
Product, the parties hereto agree that the Company would be damaged
irreparably in the event any of the provisions of paragraph 8, 10
or 11 hereof were not performed in accordance with their specific
terms or were otherwise breached and that money damages would be an
inadequate remedy for any such non-performance or breach.
Therefore, the Company or its successors or assigns shall be
entitled, in addition to other rights and remedies existing in
their favor, to an injunction or injunctions to prevent any breach
or threatened breach of any of such provisions and to enforce such
provisions specifically (without posting a bond or other security).
13. EXECUTIVE REPRESENTATIONS. Executive represents and warrants
to the Company that (i) the execution, delivery and performance of
this Agreement by Executive does not and will not conflict with,
breach, violate or cause a default under any contract, agreement,
instrument, order, judgment or decree to which Executive is a party
or by which he is bound, (ii) Executive is not a party to or bound
by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company,
this Agreement shall be the valid and binding obligation of
Executive, enforceable in accordance with its terms.
14. SURVIVAL. Paragraphs 8, 10 and 11 hereof shall survive and
continue in full force in accordance with their terms notwithstand-
ing the end of the Employment Period or the end of the Consulting
Period, in each case regardless of the cause.
15. NOTICES. Any notice provided for in this Agreement shall be
in writing and shall be either personally delivered, or mailed by
first class mail, return receipt requested, to the recipient at the
address below indicated:
Notices to Executive:
Mr. Leo A. Guthart
96 Willets Road
Old Westbury, NY 11568
Notices to the Company:
Mr. King Harris
President
Pittway Corporation
200 South Wacker Drive, Suite 700
Chicago, IL 60606-5802
or such other address or to the attention of such other person as
the recipient party shall have specified by prior written notice to
the sending party. Any notice under this Agreement will be deemed
to have been given when so delivered or mailed.
16. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable in any
respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any
other provision or any other jurisdiction, but this Agreement shall
be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been
contained herein.
17. CHANGE OF CONTROL. In the event that there is a Change of
Control of the Company: (i) the Company shall establish a grantor
trust (within the meaning of Sections 671, et. seq., of the
Internal Revenue Code of 1986, as amended) designed, taking into
account the investment of the corpus thereof, to fund the Company's
payment obligations to Executive thereafter as and when due, and
shall fund the corpus of such grantor trust in accordance with such
design (which grantor trust the Company shall establish and fund
prior to the Change of Control of the Company in the event it has
sufficient advance notice thereof to do so; and otherwise which the
Company shall establish and fund promptly following its becoming
aware of the Change of Control of the Company); and (ii) if, after
the Change of Control of the Company, the Company wrongfully
withholds from Executive any amount payable to Executive pursuant
to this Agreement or the SERP and Executive obtains a final
judgment against the Company for such amount, the Company shall
reimburse Executive for any costs and expenses (including without
limitation attorneys' fees) reasonably incurred by Executive in
obtaining such judgment and shall pay Executive interest on the
amount of each such cost or expense from the date of payment
thereof by Executive to the date of reimbursement by the Company at
a floating rate per annum equal to the publicly announced reference
rate for commercial lending of Bank of America, N.A. in effect from
time to time. For purposes of the foregoing, a "Change of Control
of the Company" will be deemed to have occurred if but only if, for
purposes of Section 13(d) of the Securities Exchange Act of 1934,
as amended, a person or group other than one or more members of the
Harris Group (as currently defined in the Company's Restated
Certificate of Incorporation, as amended) becomes the beneficial
owner of stock of the Company possessing a majority of the voting
power under ordinary circumstances with respect to the election of
directors.
18. COMPLETE AGREEMENT. This Agreement embodies the
complete agreement and understanding between the parties with
respect to the subject matter hereof and effective as of its date
supersedes and preempts any prior understandings, agreements or
representations by or between the parties, written or oral, which
may have related to the subject matter hereof in any way, including
without limitation the Existing Employment Agreement.
19. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed to be an original and
both of which taken together shall constitute one and the same
agreement.
20. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of and be enforceable by Executive, the Company and
their respective heirs, executors, personal representatives,
successors and assigns, except that neither party may assign any of
his or its rights or delegate any of his or its obligations
hereunder without the prior written consent of the other party.
Executive hereby consents to the assignment by the Company of all
of its rights and obligations hereunder to: (i) any subsidiary or
affiliate of the Company in the event all or any substantial part
of the business to which Executive's duties under this Agreement
relate are transferred thereto and (ii) any successor to the
Company by merger or consolidation or purchase of all or
substantially all of the Company's assets; in each case provided
such transferee or successor assumes the liabilities of the Company
hereunder.
21. CHOICE OF LAW. This Agreement shall be governed by the
internal law, and not the laws of conflicts, of the State of New
York.
22. AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended or waived only with the prior written consent of the
Company and Executive, and no course of conduct or failure or delay
in enforcing the provisions of this Agreement shall affect the
validity, binding effect or enforceability of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
PITTWAY CORPORATION
By KING HARRIS
Its President
LEO A. GUTHART
Exhibit 10.2
Pittway Corporation
September 30, 1999
Form 10-Q
PITTWAY CORPORATION
CHANGE OF CONTROL PLAN
SECTION 1
INTRODUCTION
1.1 THE PLAN AND ITS EFFECTIVE DATE. This Pittway Corporation
Change of Control Plan (the "Plan") has been established by
Pittway Corporation (the "Company"), effective September 15,
1999.
1.2 PURPOSE. The Company and certain of its subsidiaries are
currently parties to employment agreements with key employees
thereof which permit the employers to terminate the key
employees' employment without cause and which permit the key
employees to terminate their employment by giving the notice
specified therein, and the Company and its subsidiaries may
hereafter become parties to other such employment agreements
(each such existing or future employment agreement, an
"Employment Agreement").
Under the Employment Agreements, an employer's termination of a
key employee's employment may result in economic benefits to the
employee, and the employee's termination of employment may result
in the surrender of economic benefits. However, in the event of
an impending change of control of the Company or the employee's
perception that there may be an impending change of control of
the Company, the prospect of such payment or surrender may not be
sufficient to overcome the employee's uncertainty as to his or
her future and any related inclination of the employee to seek
other employment, to the detriment of the Company. The purpose
of the Plan is to provide certain key employees of the Company
and its subsidiaries with benefits related to a change of control
of the Company intended to preserve for the Company and its
stockholders the value of the services of such employees in such
events.
SECTION 2
ELIGIBILITY
2.1. ELIGIBILITY. Each key employee of the Company or a
subsidiary who (i) is a party to an Employment Agreement, (ii) is
designated by the Compensation Committee (the "Committee") of the
Board of Directors of the Company (the "Board") to participate in
the Plan, and (iii) accepts in writing the terms of the Plan
(along with his or her employer, if his or her employer is a
subsidiary rather than the Company) (each a "participant") shall
participate in the Plan, subject to the limitations of the Plan.
SECTION 3
BENEFIT
3.1 TRIGGERING OF BENEFIT. If a Change of Control of the
Company (as defined in Section 4.3) should occur, and if during
the period thereafter ending on the second anniversary thereof
either (i) a participant's employment is terminated by his or her
employer without Cause (as defined in the participant's
Employment Agreement, and based on a finding described in Section
4.1) or (ii) a participant terminates his or her employment for
Good Reason (as defined in the participant's Employment
Agreement) (each a "Triggering Termination"), then the
participant shall be entitled to the benefit provided in Section
3.2. Such benefit shall be in addition to any salary which has
accrued but is unpaid, and any expenses which have been incurred
but are unpaid, at the time of such termination and (but only to
the extent provided in any benefit plan in which the participant
has participated as an employee of his or her employer) any plan
benefits which by their terms extend beyond such termination; but
shall be in lieu of any other amounts that the employer would
otherwise have paid to (or contributed to a grantor trust for
the benefit of) the participant pursuant to his or her Employment
Agreement as a result of or following such termination.
3.2. AMOUNT OF BENEFIT. Subject to Section 3.3, a participant
entitled to a benefit shall be entitled:
(A) For a period of three years following the date of his
or her Triggering Termination (or, if shorter, the period
following the date of his or her Triggering Termination
ending on the date on which, without any extension thereof,
the Employment Period under his or her Employment Agreement
is scheduled to end as of the date of such termination), to
receive the participant's salary at the time of such
termination (or, if higher, Executive's Reference Salary as
defined in his or her Employment Agreement), payable at the
times such salary would have been paid had the participant's
employment continued for such period;
(B) To receive a lump sum payment within thirty days after
the date of his or her Triggering Termination equal to the
participant's Target Bonus (as defined in Section 4.7) for
the year in which such termination occurs (or, if higher,
the participant's Target Bonus for the preceding year or the
year in which the Change of Control of the Company occurs);
(C) If his or her Triggering Termination occurs after July
1 of the then-current year (unless the then-current year is
the year in which, without any extension thereof, the
Employment Period under his or her Employment Agreement is
scheduled to end as of the date of such termination), to
receive an additional lump sum payment within thirty days
after the date of such termination equal to the product of
(x) the participant's Target Bonus for the year in which
such termination occurs (or, if higher, the participant's
Target Bonus for the preceding year or the year in which the
Change of Control of the Company occurs) multiplied by (y) a
fraction, the numerator of which shall be the number of
months that have elapsed, as of the date of such
termination, during the then-current year (rounded up to the
next largest full month), and the denominator of which shall
be 12; and
(D) For a period of one year following the date of his or
her Triggering Termination (or, if shorter, the period
following the date of his or her Triggering Termination
ending on the date on which, without any extension thereof,
the Employment Period under his or her Employment Agreement
is scheduled to end as of the date of such termination), to
be a full participant in, and to the benefits provided
under, the Company's Standard Executive Benefits Package (as
defined in the participant's Employment Agreement) in effect
at the time of such termination (except that the participant
shall not be entitled to any stock option, performance
share, performance unit, stock purchase, stock appreciation
or other equity-based compensatory benefit award) and the
additional benefits set forth in Section 3 of his or her
Employment Agreement in effect at the time of such
termination (or, in the case of each such benefit, if
higher, for the preceding year or the year in which the
Change of Control of the Company occurs). If, however, the
participant is not eligible to participate in particular
benefits set forth in the preceding sentence, the Company
shall reimburse the participant, on a monthly basis (net
after taxes on the receipt of such reimbursement), for any
premiums or other fees paid by the participant to obtain
benefits (for the participant and his or her dependents)
equivalent to such benefits. Notwithstanding the foregoing
or any other provision of the Plan, (i) for the purpose of
determining the period of continuation coverage to which the
participant or any of his or her dependents is entitled
pursuant to the requirements of COBRA (as defined in Section
4.4), the participant's "qualifying event," subject to the
requirements of applicable plans, will be the termination of
the one-year (or shorter) period set forth above in this (D)
and the participant will be considered to have remained
actively employed on a full-time basis through that date and
(ii) the Company shall reimburse the participant (net after
taxes on the receipt of such reimbursement) for any premiums
paid by the participant for health insurance provided to the
participant (for the participant and his or her dependents)
by the Company pursuant to the requirements of COBRA as in
effect on the effective date of the Plan.
(E) Notwithstanding any provision of the Plan to the
contrary, if any amount or benefit to be paid or provided to
a participant under the Plan or otherwise pursuant to or by
reason of any other agreement, policy, plan, program or
arrangement, including without limitation any bonus and any
stock option, performance share, performance unit, stock
purchase, stock appreciation or other equity-based right,
or the lapse or termination of any restriction on or the
vesting or exercisability of any of the foregoing, would be
an "Excess Parachute Payment" within the meaning of Section
280G of the Code (as defined in Section 4.5), or any
successor provision thereto, but for the application of this
sentence, then the payments and benefits to be paid or
provided to the participant under the Plan shall be reduced
to the minimum extent necessary (but in no event to less
than zero) so that no portion of any such payment or
benefit, as so reduced, constitutes an Excess Parachute
Payment; provided, however, that the foregoing reduction
shall be made only if and to the extent that such reduction
would result in an increase in the aggregate payment and
benefits to be provided to the participant, determined on an
after-tax basis (taking into account the excise tax imposed
pursuant to Section 4999 of the Code, or any successor
provision thereto, any tax imposed by any comparable
provision of state law, and any applicable federal, state
and local income taxes). The determination of whether any
reduction in such payment or benefits to be provided to the
participant under the Plan is required pursuant to the
preceding sentence shall be made at the expense of the
Company, if requested by the participant or the Company, by
the Company's independent accountants. The fact that the
participant's right to payments or benefits may be reduced
by reason of the limitations contained in this (E) shall not
of itself limit or otherwise affect any other rights of the
participant other than pursuant to the Plan. In the event
that any payment or benefit intended to be provided under
the Plan is required to be reduced pursuant to this (E), the
participant shall be entitled to designate the payments
and/or benefits to be so reduced in order to give effect to
this (E). The Company shall provide the participant with
all information reasonably requested by the participant to
permit the participant to make such designation. In the
event that the participant fails to make such designation
within 10 business days after his or her receipt of such
information (or, if later, within 10 business days after his
or her Triggering Termination), the Company may effect such
reduction in any manner it deems appropriate.
Without limiting the rights of the participant at law or in
equity, if the Company fails to make any payment or provide any
benefit required to be made or provided hereunder on a timely
basis, the Company will pay interest on the amount or value
thereof at an annualized rate of interest equal to the so-called
composite "prime rate" as quoted from time to time during the
relevant period in the Midwest Edition of THE WALL STREET
JOURNAL. Such interest will be payable on demand as it accrues.
Any change in such prime rate will be effective on and as of the
date of such change.
3.3 LIMITATIONS IN SPECIFIC CASES. At the time the Committee
designates a key employee of the Company or a subsidiary to
participate in the Plan, the Committee may reduce some or all of
the payments and other benefits to which such employee will be
entitled as a participant pursuant to Section 3.2.
3.4 PREVAILING PARTY'S LITIGATION EXPENSES. In the event of
litigation between the Company and a participant related to the
Plan, except as set forth in Section 3.5 the non-prevailing party
shall reimburse the prevailing party for any costs and expenses
(including without limitation attorneys' fees) reasonably
incurred by the prevailing party in connection therewith.
3.5 CERTAIN PAYMENTS BY THE COMPANY. Without limiting the
generality of Section 3.4: (i) if in the good faith judgment of a
participant the Company has failed to comply with any of its
obligations under the Plan or (ii) in the event that the Company
or any other person takes or threatens to take any action to
declare the Plan void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to
recover from, a participant the benefits provided or intended to
be provided to the participant hereunder, the Company irrevocably
authorizes the participant from time to time to retain counsel of
the participant's choice as hereinafter provided, at the expense
of the Company, to advise and represent the participant in
connection with any such interpretation, enforcement or defense,
including without limitation the initiation or defense of any
litigation or other legal action, whether by or against the
Company or any director, officer, shareholder or other person
affiliated with the Company, in any jurisdiction.
Notwithstanding any then existing or prior attorney-client
relationship between the Company and such counsel, the Company
irrevocably consents to the participant's entering into an
attorney-client relationship with such counsel, and in that
connection the Company and the participant agree that a
confidential relationship will exist between the participant and
such counsel. Without respect to whether the participant
prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially
responsible for any and all attorneys' and related fees and
expenses incurred by the participant in connection with any of
the foregoing.
3.6 SOURCE OF PAYMENTS IN THE EVENT OF A CHANGE OF CONTROL OF
THE COMPANY. In the event that there is a Change of Control of
the Company, the Company shall establish one or more grantor
trusts (within the meaning of Sections 671, et. seq., of the
Code) designed, taking into account the investment of the corpus
thereof, to fund the Company's payment obligations to the
participants thereafter as and when due and shall fund the corpus
of such grantor trust in accordance with such design (which
grantor trust the Company shall establish and fund prior to the
Change of Control of the Company in the event it has sufficient
advance notice thereof to do so; and otherwise which the Company
shall establish and fund promptly following its becoming aware of
the Change of Control of the Company).
SECTION 4
CERTAIN DEFINITIONS
4.1 "CAUSE". Following a Change of Control of the Company, a
participant shall in no event be deemed to have been terminated
for "Cause" for purposes of the Plan unless prior to his or her
termination there shall have been delivered to the participant a
copy of a resolution duly adopted by the affirmative vote of not
less than a majority of the non-employee directors of the Company
then in office at a meeting of the Board called and held for such
purpose, after reasonable notice to the participant and an
opportunity for the participant, together with the participant's
counsel (if the participant chooses to have counsel present at
such meeting), to be heard before the Board, finding that, in the
good faith opinion of such directors, the participant had
committed an act constituting "Cause" as defined in his or her
Employment Agreement and specifying the particulars thereof in
detail. While, for purposes of the Plan, such a determination
will be a condition precedent to the existence of "Cause"
following a Change of Control of the Company, such a
determination will not be determinative or create a presumption
that "Cause" in fact exists under the participant's Employment
Agreement nor limit the right of the participant to contest the
validity or propriety of such a determination.
4.2. "CHANGE OF CONTROL DATE". For purposes of the Plan,
"Change of Control Date" shall have the meaning given such term
in the Company's Restated Certificate of Incorporation, as
amended as of the effective date of the Plan; it being understood
that a Change of Control Date may occur without the occurrence of
a Change of Control of the Company and vice versa.
4.3 "CHANGE OF CONTROL OF THE COMPANY". For purposes of the
Plan, a "Change of Control of the Company" shall mean the
occurrence of any of the following events:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
40% or more of the then-outstanding shares of Common Stock
of the par value of $1.00 per share of the Company (or, upon
or after a Change of Control Date, of 40% or more of either
(I) the then-outstanding shares of common stock of the
Company (the "Company Common Stock") or (II) the combined
voting power of the then-outstanding voting securities of
the Company entitled to vote generally in the election of
directors ("Voting Stock")); provided, however, that for
purposes of this subparagraph (i), none the following
acquisitions shall constitute a Change of Control of the
Company: (A) an acquisition directly from the Company, (B)
an acquisition by the Company, a subsidiary of the Company
or the Harris Group (as defined below), (C) an acquisition
by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any subsidiary of the Company,
or (D) an acquisition by any Person pursuant to a
transaction which complies with clauses (A), (B) and (C) of
subparagraph (iii) of this Section 4.3; or
(ii) Individuals who, as of the effective date of the
Plan, constitute the Board (the "Incumbent Board") cease
for any reason (other than death or disability) to
constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent
to the effective date of the Plan whose election, or
nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in
which such person is named as a nominee for director,
without objection to such nomination) shall be considered as
though such individual were a member of the Incumbent Board,
but excluding for this purpose any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest (within the meaning of Rule
14a-11 promulgated under the Exchange Act) with respect to
the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(iii) Consummation of a merger as a result of which the
Company ceases to exist or becomes a subsidiary of another
entity, a consolidation or a sale or other disposition of
all or substantially all of the assets of the Company (a
"Business Combination"), in each case unless, following such
Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Company Common Stock and Voting Stock
immediately prior to such Business Combination (or, if no
Change of Control Date had occurred prior to such Business
Combination, who on a pro forma basis would have been the
beneficial owners, respectively, of the Company Common Stock
and Voting Stock immediately prior to such Business
Combination had a Change of Control Date occurred prior to
such Business Combination) beneficially own, directly or
indirectly, more than a majority of, respectively, the then-
outstanding shares of common stock and the combined voting
power of the then-outstanding voting securities entitled to
vote generally in the election of directors, as the case may
be, of the entity resulting from such Business Combination
(including, without limitation, an entity which as a result
of such transaction is the parent of the Company or owns all
or substantially all of the Company's assets, in each case
either directly or through one or more subsidiaries) in
substantially the same proportions relative to each other as
their ownership (or pro forma ownership), immediately prior
to such Business Combination, of the Company Common Stock
and Voting Stock, as the case may be, (B) no Person
(excluding any entity resulting from such Business
Combination, the Harris Group or any employee benefit plan
(or related trust) sponsored or maintained by the Company or
the entity resulting from such Business Combination)
beneficially owns, directly or indirectly, 40% or more of,
respectively, the then-outstanding shares of common stock of
the entity resulting from such Business Combination or the
combined voting power of the then-outstanding voting
securities of such entity, except to the extent that such
ownership existed prior to the Business Combination and (C)
at least a majority of the members of the board of directors
or other governing body of the entity resulting from such
Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business
Combination; or
(iv) Approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.
For purposes of this Section 4.3, the "Harris Group" shall mean
Messrs. Irving Harris, Neison Harris, King Harris, William W.
Harris and Sidney Barrows and their respective spouses (including
widows and widowers until first remarried), descendants and
spouses (including widows and widowers until first remarried) of
descendants, trustees of trusts established for the benefit of
such persons (acting in their capacity as trustees of such
trusts), and executors of estates of such persons (acting in
their capacity as executors of such estates), and each Person of
which any one or more of the foregoing owns (i) more than fifty
percent (50%) of the voting stock or other voting interests and
(ii) stock or other interests representing more than fifty
percent (50%) of the total value of the stock or other interests
of such Person.
4.4 "COBRA". For purposes of the Plan, "COBRA" shall mean Part
6 of subtitle B of Title I of ERISA.
4.5 "CODE". For purposes of the Plan, "Code" shall mean the
Internal Revenue Code of 1986, as amended.
4.6 "ERISA". For purposes of the Plan, "ERISA" shall mean the
Employee Retirement Income Security Act of 1974, as amended.
4.7 "TARGET BONUS". For purposes of the Plan, "Target Bonus"
for a participant for a particular year shall mean (i) the
amount, if any, identified as such in writing by the Committee or
(ii) if no amount has been so identified, an amount equal to the
participant's salary for such year (or, in the case of the year
in which his or her Triggering Termination occurs, if higher,
Executive's Reference Salary as defined in his or her Employment
Agreement for such year); provided, however, that in the event
the participant's Triggering Termination occurs during the year
in which, without any extension thereof, the Employment Period
under his or her Employment Agreement is scheduled to end as of
the date of such termination, the participant's Target Bonus for
any prior year shall be deemed to be the participant's Target
Bonus for such prior year multiplied by a fraction, the numerator
of which shall be the number of months in the year in which such
termination occurs prior to such scheduled end of the Employment
Period (rounded up to the next largest full month), and the
denominator of which shall be 12.
SECTION 5
GENERAL PROVISIONS
5.1 EMPLOYMENT RIGHTS. Neither the establishment of, nor
participation in, the Plan shall be construed to give any
participant the right to be retained in the service of the
Company or any of its subsidiaries or to any benefits not
specifically provided by the Plan.
5.2 TAXES AND WITHHOLDING. Each participant shall be
responsible for any taxes imposed on him or her ("taxes") by
reason of the establishment of, or his or her participation in,
the Plan. The Company or a subsidiary of the Company, or any
grantor trust established pursuant to Section 3.6 designed to
fund the Company's payment obligations to the participant, may
deduct any taxes from payroll or other payments due the
participant. In the event that such deductions are not
sufficient to pay the taxes, the participant shall promptly remit
the deficit to the Company upon its request.
5.3 INTERESTS NOT TRANSFERABLE. Except as to withholding of
any tax under the laws of the United States or any state, the
interests of participants under the Plan are not subject to the
claims of their creditors and may not be voluntarily or
involuntarily transferred, assigned, alienated or encumbered;
provided that the benefits of a participant under the Plan shall
inure to the benefit of his or her heirs, executors or personal
representatives.
5.4 CONTROLLING LAW. The Plan shall be construed in accordance
with the provisions of ERISA and other Federal laws, to the
extent such provisions are applicable to the Plan. To the extent
not inconsistent therewith, the Plan shall be construed in
accordance with the laws of the State of Illinois.
5.5 SUCCESSOR TO THE COMPANY. The term "Company" as used in
the Plan shall include any successor to the Company by reason of
merger, consolidation, the purchase of all or substantially all
of the Company's assets or otherwise.
5.6 MISCELLANEOUS. The Plan shall be binding upon and inure to
the benefit of the Company, the participants and their respective
heirs, executors, legal representatives, successors and assigns.
Any notice given in connection with the Plan shall be in writing
and shall be delivered in person or by registered mail, return
receipt requested. Any notice given by registered mail shall be
deemed to have been given upon the date of delivery indicated on
the registered mail return receipt, if correctly addressed.
SECTION 6
AMENDMENT
6.1. AMENDMENT. While the Company expects to continue the
Plan, it must necessarily reserve and hereby does reserve the
right, either in general or as to one or more particular
participants, to amend the Plan from time to time; provided that
no amendment of the Plan with respect to a participant that
reduces or eliminates any benefits of such participant shall be
effective unless such participant consents to such amendment.
IN WITNESS WHEREOF, the Plan has been executed on behalf of the
Company by its duly authorized officers as of the day and year
first above written.
PITTWAY CORPORATION
By: KING HARRIS
Its: President
ATTEST
By: JAMES F. VONDRAK
Its: Secretary
Exhibit 10.3
Pittway Corporation
September 30, 1999
Form 10-Q
PITTWAY CORPORATION
CHANGE OF CONTROL PLAN
ACCEPTANCE
The undersigned, who is a party to an Employment Agreement
with Pittway Corporation ("Pittway") dated as of January 1, 1996
and who has been designated by the Compensation Committee of the
Board of Directors of Pittway to participate in the Pittway
Corporation Change of Control Plan that became effective
September 15, 1999 (the "Plan"), hereby accepts the terms of the
Plan.
Dated: October 13, 1999.
King Harris
Exhibit 10.4
Pittway Corporation
September 30, 1999
Form 10-Q
PITTWAY CORPORATION
CHANGE OF CONTROL PLAN
ACCEPTANCE
The undersigned, who is a party to an Employment Agreement
with Pittway Corporation ("Pittway") dated as of January 1, 1998,
as amended as of March 18, 1999, and who has been designated by
the Compensation Committee of the Board of Directors of Pittway
to participate in the Pittway Corporation Change of Control Plan
that became effective September 15, 1999 (the "Plan"), hereby
accepts the terms of the Plan.
Dated: October 22, 1999.
Paul R. Gauvreau
Exhibit 10.5
Pittway Corporation
September 30, 1999
Form 10-Q
PITTWAY CORPORATION
CHANGE OF CONTROL PLAN
ACCEPTANCE
The undersigned, who is a party to an Employment Agreement
with Pittway Corporation ("Pittway") dated as of January 1, 1998,
as amended as of March 18, 1999, and who has been designated by
the Compensation Committee of the Board of Directors of Pittway
to participate in the Pittway Corporation Change of Control Plan
that became effective September 15, 1999 (the "Plan"), hereby
accepts the terms of the Plan.
Dated: October 24, 1999.
Edward J. Schwartz
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,658
<SECURITIES> 43,248
<RECEIVABLES> 325,941
<ALLOWANCES> 16,285
<INVENTORY> 322,295
<CURRENT-ASSETS> 748,777
<PP&E> 302,427
<DEPRECIATION> 159,711
<TOTAL-ASSETS> 1,196,068
<CURRENT-LIABILITIES> 427,882
<BONDS> 103,226
0
0
<COMMON> 42,755
<OTHER-SE> 535,446
<TOTAL-LIABILITY-AND-EQUITY> 1,196,068
<SALES> 1,235,964
<TOTAL-REVENUES> 1,235,964
<CGS> 767,713
<TOTAL-COSTS> 767,713
<OTHER-EXPENSES> 30,216
<LOSS-PROVISION> 6,033
<INTEREST-EXPENSE> 11,863
<INCOME-PRETAX> 178,236
<INCOME-TAX> 67,512
<INCOME-CONTINUING> 110,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,724<F1>
<EPS-BASIC> 2.59
<EPS-DILUTED> 2.53<F1>
<FN>
<F1>Excluding the reversal of a litigation provision, changes in Pittway's
equity investment in Cylink, the gain on sale of USSB stock and related tax
benefits, net income would have been $55.1 million ($1.26 per diluted share).
</FN>
</TABLE>
