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 June 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 (July 21, 1999).
Common Stock 7,877,664
Class A Stock 34,876,739
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PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three and Six Months Ended
June 30, 1999 and 1998 3
Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 4 - 5
Consolidated Statement of Cash Flows -
Six Months Ended June 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 - 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14 - 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
2
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1999 AND 1998
(Unaudited; Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
CONTINUING OPERATIONS -
NET SALES............................ $412,732 $325,538 $794,638 $629,677
OPERATING EXPENSES:
Cost of sales....................... 254,867 208,432 494,878 400,764
Selling, general and
administrative..................... 114,776 85,284 219,527 167,323
Litigation accrual (reversal)....... (43,000) (43,000) 43,000
Depreciation and amortization....... 11,558 8,453 22,549 16,876
338,201 302,169 693,954 627,963
OPERATING INCOME..................... 74,531 23,369 100,684 1,714
OTHER INCOME (EXPENSE):
Gain on sale of USSB securities..... 38,315 49,317
Change in equity of affiliate....... (1,000) 618 (1,832) 7,902
Income from marketable securities
and other interest................. 1,190 690 2,490 1,469
Interest expense.................... (3,786) (3,072) (7,790) (6,573)
Income from investments............. 195 4,977 415 5,201
Miscellaneous, net.................. 120 (501) 346 (473)
35,034 2,712 42,946 7,526
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................. 109,565 26,081 143,630 9,240
PROVISION FOR INCOME TAXES........... 41,709 9,809 54,582 3,311
INCOME FROM CONTINUING OPERATIONS.... 67,856 16,272 89,048 5,929
INCOME FROM DISCONTINUED OPERATIONS,
net of income taxes of $2,236 and
$3,902............................... 3,056 5,404
NET INCOME............................ $ 67,856 $ 19,328 $ 89,048 $ 11,333
INCOME PER SHARE OF COMMON AND
CLASS A STOCK (NOTE 3):
Basic: Continuing operations...... $ 1.59 $ .39 $ 2.08 $ .14
Discontinued operations.... .07 .13
Net income................. $ 1.59 $ .46 $ 2.08 $ .27
Diluted: Continuing operations...... $ 1.55 $ .38 $ 2.04 $ .14
Discontinued operations.... .07 .12
Net income................. $ 1.55 $ .45 $ 2.04 $ .26
CASH DIVIDENDS DECLARED PER SHARE:
Common.............................. $ .0217 $ .0333 $ .0434 $ .0667
Class A............................. $ .0300 $ .0417 $ .0600 $ .0834
AVERAGE SHARES OUTSTANDING (000's).... 42,741 42,231 42,710 42,137
AVERAGE SHARES AND DILUTIVE
EQUIVALENTS OUTSTANDING (000's)...... 43,718 43,077 43,693 42,970
See accompanying notes.
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited; Dollars in Thousands)
June 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents................... $ 10,835 $ 16,998
Marketable securities.................. 65,006 44,200
Accounts and notes receivable, less
allowance for doubtful accounts of
$14,466 and $12,173.................. 295,355 263,127
Inventories............................ 294,045 252,947
Future income tax benefits............. 32,549 32,870
Prepayments, deposits and other........ 10,510 10,666
708,300 620,808
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings.............................. 38,615 39,645
Machinery and equipment................ 248,772 225,835
287,387 265,480
Less: Accumulated depreciation......... (150,940) (132,679)
136,447 132,801
Land................................... 2,406 2,481
138,853 135,282
INVESTMENTS:
Marketable securities (USSB)........... 51,994
Investment in affiliate (Cylink)....... 19,784 21,616
Real estate and other ventures......... 51,087 49,131
Leveraged leases....................... 15,963 16,821
86,834 139,562
OTHER ASSETS:
Goodwill, less accumulated
amortization of $12,374 and $9,642... 141,490 134,686
Other intangibles, less accumulated
amortization of $5,807 and $6,266.... 2,509 2,906
Notes receivable....................... 17,283 15,862
Miscellaneous.......................... 25,937 25,949
187,219 179,403
$1,121,206 $1,075,055
See accompanying notes.
4
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited; Dollars in Thousands)
June 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable........................... $ 87,201 $ 92,395
Long-term debt due within one year...... 15,153 16,719
Accounts payable........................ 180,208 167,773
Accrued liabilities..................... 72,327 66,304
Income taxes payable.................... 23,442 6,136
378,331 349,327
LONG-TERM DEBT, less current maturities... 103,220 104,609
DEFERRED LIABILITIES:
Income taxes............................ 77,445 71,114
Litigation.............................. 43,000
Other................................... 8,621 11,841
86,066 125,955
STOCKHOLDERS' EQUITY:
Preferred stock, none issued............
Common capital stock, $1 par value-
Common stock.......................... 7,878 7,878
Class A stock......................... 34,870 34,763
Capital in excess of par value.......... 20,579 18,671
Retained earnings....................... 503,977 417,363
Accumulated other comprehensive
income (loss) -
Marketable securities
valuation adjustment.............. 8 22,416
Foreign currency translation
adjustment........................ (13,723) (5,927)
553,589 495,164
$1,121,206 $1,075,055
See accompanying notes.
5
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30 1999 AND 1998
(Unaudited; Dollars in Thousands)
1999 1998
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Income from continuing operations................ $ 89,048 $ 5,929
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
operating activities:
Depreciation and amortization.................. 22,549 16,876
Gain on sale of USSB securities, net of taxes.. (30,187)
Equity in affiliate, net of taxes.............. 1,145 (4,939)
Deferred income taxes.......................... 4,873 (4,220)
Retirement and deferred compensation plans..... (1,385) (3,274)
Income/loss from investments adjusted
for cash distributions received............... 958 674
Provision for losses on accounts receivable.... 3,775 1,866
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.............. (18,978) (24,219)
Increase in inventories...................... (36,357) (17,861)
Decrease (increase)in prepayments
and deposits............................... 388 (515)
Increase (decrease)in accounts payable
and accrued liabilities.................... 12,085 (5,419)
Increase (decrease)in income taxes payable... 18,120 (31)
Other changes, net............................. 200 (1,508)
Net cash provided (used) by continuing
operating activities........................... 39,359 (9,766)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (25,695) (20,116)
Proceeds from sales of USSB securities,
net of taxes................................... 39,390
Net increase in current marketable securities.... (20,779) (827)
Dispositions of property and equipment........... 693 220
Additions to investments......................... (2,095) (8)
Increase in notes receivable..................... (5,741) (8,291)
Net assets of businesses acquired, net of cash... (21,016) (11,616)
Net cash used by investing activities............ (35,243) (40,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in notes payable......... (3,915) 35,521
Proceeds of long-term debt....................... 992 6,447
Repayments of long-term debt..................... (4,725) (2,799)
Stock options exercised.......................... 108 4,379
Dividends paid................................... (2,437) (5,067)
Net cash (used) provided by financing activities. (9,977) 38,481
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (302) (108)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS....... - 3,699
NET DECREASE IN CASH AND EQUIVALENTS............... (6,163) (8,332)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........ 16,998 29,257
CASH AND EQUIVALENTS AT END OF PERIOD.............. $ 10,835 $ 20,925
See accompanying notes.
6
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PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; Dollars in Thousands)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Pittway Corporation and its majority-owned subsidiaries (the
"Company" or "Registrant"). 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 $59,186 and $111,671 for the
quarter and six months ended June 30, 1998, respectively.
NOTE 3. COMPREHENSIVE INCOME
Total comprehensive income (loss) for the three and six month periods
ended June 30 was:
Three Months Six Months
1999 1998 1999 1998
Net income $67,856 $19,328 $89,048 $11,333
Other comprehensive (loss)
income (24,408) 6,050 (30,204) 7,944
Total comprehensive income $43,448 $25,378 $58,844 $19,277
Other comprehensive (loss) income for the three and six month periods
in 1999 reflects the reclassification of $23,311 and $30,187,
respectively, of after tax gains realized in net income from the sale
of USSB securities.
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NOTE 4. ACQUISITIONS
During the first six months of 1999, the Company acquired the assets
and business of a domestic distributor of alarm and other security
products and a domestic distributor of structured cable products. The
total purchase price for these businesses was $21,016 cash plus $1,711
of debt assumed. During the same period in 1998, the Company acquired
the assets and business of a domestic distributor of alarms and other
security equipment and three foreign alarm businesses for stock and
cash totaling $15,716. 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 June 30, 1999 and December 31,
1998 approximate current cost and consist of the following:
June 30, Dec 31,
1999 1998
Raw materials $ 66,253 $ 57,763
Work in process 19,165 22,089
Finished goods -
Manufactured by the Company 114,828 98,199
Manufactured by others 93,799 74,896
$294,045 $252,947
NOTE 6. MARKETABLE SECURITIES
Information about the Company's marketable securities at June 30, 1999
and December 31, 1998 is as follows:
June 30, Dec 31,
1999 1998
Current - Adjustable Rate Preferred Stocks -
Aggregate cost $ 64,994 $ 44,198
Net unrealized holding (loss) gain 12 2
Aggregate fair value $ 65,006 $ 44,200
Non-Current - USSB Common Stock -
Aggregate cost $ - $ 15,789
Unrealized holding gain - 36,205
Aggregate fair value $ - $ 51,994
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 six months ended June 30, 1999 and 1998 were not
significant.
In the three months and six months ended June 30, 1999, the Company
recorded gains, net of taxes, of $23,311 and $30,187 ($.53 and $.69 per
diluted share) respectively, on the sale of all its shares of USSB
stock.
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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 June 30,
1999, the Company's 8.6 million shares of Cylink had a quoted market
value of $32,273. In March 1998 Cylink sold its wireless division for
$60.5 million. The Company increased the carrying value of its
investment in Cylink by $6,646 and recorded an after-tax gain of
$4,154, or $.10 per diluted share, to reflect its equity in the gain on
this divestiture.
The summarized results of operations of Cylink for the quarter and six
months ended June 30, 1999 and 1998 (as restated by Cylink in December
1998) are as follows:
Three Months Six Months
1999 1998 1999 1998
Revenue $15,209 $12,363 $27,094 $20,425
Gross profit 10,440 8,373 18,213 13,804
Loss from
continuing operations (3,054) (1,667) (7,119) (5,042)
Net income (loss) (3,054) (1,667) (7,119) 17,475
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.
NOTE 9. SEGMENT INFORMATION
Segment information for the quarter and six months ended June 30,
excluding the patent litigation were:
Three Months Six Months
1999 1998 1999 1998
Sales -
Alarm Manufacturing $246,597 $174,786 $473,651 $348,866
Alarm Distribution 250,687 202,921 482,872 388,766
General Corporate and Other 297 154 297 187
Less inter-segment sales (84,849) (52,323) (162,182) (108,142)
$412,732 $325,538 $794,638 $629,677
Operating Income -
Alarm Manufacturing $ 26,102 $ 15,172 $ 48,742 $ 32,200
Alarm Distribution 9,279 8,271 18,278 14,911
General Corporate and Other (2,164) (1,949) (4,476) (3,890)
Less inventory profit on
inter-segment sales (1,686) 1,875 (4,860) 1,493
$ 31,531 $ 23,369 $ 57,684 $ 44,714
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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 million were awarded to the plaintiffs and
an injunction was entered requiring, among other things, that
Saddlebrook work with local regulatory authorities to take corrective
actions. In 1990 the trial court entered an order vacating the judgment
and awarding a new trial. In December 1994, Saddlebrook's motion for
summary judgment based on collateral estoppel was granted on the ground
that Plaintiffs' claims were fully retried and rejected in a related
administrative proceeding. Plaintiffs appealed the trial court's
decision granting summary judgment. In August 1996, the appellate court
affirmed all but three issues in the trial court's summary judgment
order in favor of Saddlebrook. On April 1, 1998, the trial court
entered an order limiting the scope of the retrial in light of the
appellate court's ruling. At an April 1, 1999 pretrial conference the
retrial was scheduled to commence in the first quarter of 2000. The
Company believes that the ultimate outcome of the aforementioned
lawsuit will not have a material adverse effect on its financial
statements.
In 1995 a lawsuit was brought against the Company by Interactive
Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of
up to $66,800 on account of Company sales of products which the
plaintiff alleged infringed on its patent. The plaintiff also asserted
trebling of damages, if awarded, based upon alleged willful
infringement. The Company moved for summary judgment of non-
infringement and, in December 1997, the Court issued its order granting
the Company partial summary judgment, stating its products did not
literally infringe upon plaintiff's patent claims. In March 1998, the
jury handed down a verdict against the Company awarding damages of
$35,954. The jury found that the Company did not willfully infringe.
The Company recorded a provision of $43,000 in the first quarter of
1998 which considers the judgment and interest. The Company 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 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. The Company filed a
motion for summary judgment dismissing the lawsuit based on the
favorable decision of the Circuit Court of Appeals in the first
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 other existing claims and
10
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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 second quarter and first six months of 1999 were $412.7
million and $794.6 million, respectively, a 27 and 26 percent increase
over the same periods in 1998. Operating income, excluding the
accrual/reversal of a litigation provision, increased 35 percent for the
quarter and 29 percent year to date. Income from continuing operations
amounted to $67.9 million and $89.0 million for the quarter and six
month periods in 1999 compared to $16.3 million and $5.9 million in the
respective periods of 1998. The increase in earnings between years was
affected by the inclusion of two special items and the Cylink results
for both years. The special items are the reversal, in the second
quarter of 1999, of a $26.9 million ($.61 per diluted share in 1999)
after-tax provision for patent litigation recorded in the first quarter
of 1998 and an after-tax gain on the sale of USSB stock in 1999 - $23.3
million ($.53 per diluted share) in the second quarter and $30.2 million
($.69 per diluted share) for the year to date. 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) recorded in the second quarter of 1998.
Pro forma operating results 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 Six Months
1999 1998 1999 1998
Net sales $412,732 $325,538 $794,638 $629,677
Operating expenses:
Cost of sale 254,867 208,432 494,878 400,764
Selling, general and
administrative 114,776 85,284 219,527 167,323
Depreciation and amortization 11,558 8,453 22,549 16,876
381,201 302,169 736,954 584,963
Operating income 31,531 23,369 57,684 44,714
Interest expense (3,786) (3,072) (7,790) (6,573)
Other income (expense), net 1,505 5,166 3,251 6,197
Income before income taxes 29,250 25,463 53,145 44,338
Provision for income taxes 10,955 9,577 20,014 16,473
Net income $ 18,295 $ 15,886 $ 33,131 $ 27,865
Net income per diluted share
of Common and Class A stock $ .42 $ .37 $ .76 $ .65
11
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Domestic sales for the second quarter and first six months of 1999
increased 25 percent and 24 percent respectively over the same periods
in 1998. International sales increased 38 percent in the second quarter
and 39 percent for the first six months of 1999 over the same periods
last year. International sales now represent 18 percent of total year
to date sales up from 16 percent for the first six months of 1998.
International operations represent 15 percent of operating income for
the second quarter in 1999 and 1998 and 12 percent for the six month
period this year versus 14 percent last year. Cost of sales increased
22 percent for the second quarter and 23 percent for the first six
months of 1999 compared to prior year periods. This was less than
the overall 27 percent and 26 percent sales increases for these periods
due to better operating efficiencies than last year and an improved
product mix.
Alarm Manufacturing sales increased 41 percent during the quarter, and
36 percent year to date leading to a 72 and 51 percent increase in
operating income, respectively. The segment's operating margin improved
to 10.6 percent of sales for the quarter and 10.3 percent year to date
from 8.7 percent and 9.2 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 13
percent for the second quarter and 14 percent year to date of segment
sales in 1999. Sales to the Distribution segment accounted for 34
percent of Manufacturing revenue in the second quarter and first six
months of 1999 and 30 percent for the quarter and 31 percent year to
date in 1998. Such sales increased 62 percent and 50 percent for the
quarter and six months, respectively, from a year ago. A large portion
of the increase resulted from building inventory for the Distribution
segment to meet increased customer demand, particularly for national
accounts. This build-up is expected to lessen as the year progresses.
Alarm Distribution sales increased 24 percent during the quarter and six
months leading to a 12 percent and 23 percent increase in operating
income, respectively. The segment's operating margin dipped slightly to
3.7 percent in the quarter but remained level with the prior year at 3.8
percent of sales for the six months ended June 30, 1999. Much of the
increased volume originated from continuing growth in national account
business for products manufactured by the Alarm Manufacturing segment.
Sales volume also expanded due to expansion of its outlet network, both
internally and from acquisitions. However, ADI has not yet fully
realized operating efficiencies from integrating a recent acquisition as
well as its recent move into a new headquarters building. Businesses
acquired in 1998 and 1999 accounted for 3 percent of segment sales for
the quarter and 5 percent year to date in 1999.
Depreciation and amortization expense increased 37 percent in the
second quarter and 34 percent for the first six months. Depreciation
expense increased $3.8 million due to capital additions from both
acquisitions in 1998 and 1999 and existing operations. Amortization
expense increased $1.8 million year to date over 1998 due to
acquisitions.
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Other income (expense) during the first six months of 1999 included a
$49.3 million pretax gain on the sale of USSB stock including $38.3
million in the second quarter. For the second quarter of 1999, the
Company recorded a loss on it's equity in Cylink of $1.0 million versus
income of $.6 million in 1998. The six month period in 1998 included
Pittway's $6.7 million share of Cylink's gain on the divestiture of its
wireless division. Other income in the second quarter of 1998 included
special cash distributions from real estate ventures and a gain on the
sale of an investment which totaled $4.5 million.
Effective tax rates were 38.1 percent and 37.6 percent for the second
quarter and 38.0 percent and 35.8 percent for the first six months of
1999 and 1998, respectively. The 1999 rate increased reflecting a higher
effective foreign income tax rate.
DISCONTINUED OPERATIONS
Income from the discontinued operations of Penton Media, Inc., which was
spun-off in August 1998, is $3.1 million and $5.4 million ($.07 and $.12
per diluted share) for the second quarter and year to date in 1998.
FINANCIAL CONDITION
The Company's financial condition remained strong during the first six
months of 1999. Net working capital at June 30, 1999 was $330.0
million, up from $271.5 million at December 31, 1998. Management
anticipates that operations, borrowings and marketable securities will
continue to be the primary sources of funds needed to meet ongoing
programs for capital expenditures, to finance acquisitions and
investments and to pay dividends.
In the first half of 1999, the $63.9 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 $39.4
million of net cash generated from operating activities, together with
$39.4 million of proceeds from the sales of USSB stock, $.7 million
proceeds from the disposition of property and equipment and $6.2
million of cash was used primarily to finance $21.0 million in
acquisitions, $25.7 million of capital expenditures, $7.7 million net
repayments of notes payable and long term debt, a $5.7 million increase
in notes receivable, $20.8 million of net purchases of marketable
securities, $2.1 million additions to investments and $2.4 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
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because tax payments become due when the properties are sold or returned
to the lenders. The Company has approximately $3.1 million accrued at
June 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
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
14
<PAGE>
Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a
lawsuit which arose out of the development of Saddlebrook's resort and
a portion of the adjoining residential properties owned and developed
by the Company. The lawsuit (James H. Porter and Martha Porter,
Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco,
Florida; Case No. CA83-1860) alleges damage to plaintiffs' adjoining
property caused by surface water effects from improvements to the
properties. Damages of approximately $8 million were awarded to the
plaintiffs and an injunction was entered requiring, among other things,
that Saddlebrook work with local regulatory authorities to take
corrective actions. Saddlebrook made two motions for a new trial, based
on separate grounds. One such motion was granted on December 18, 1990.
Such grant was appealed by the plaintiffs. The other such motion was
denied on February 28, 1991. Saddlebrook appealed such denial. The
appeals were consolidated, fully briefed and heard in February 1992.
Saddlebrook received a favorable ruling on March 18, 1992, dismissing
the judgment and remanding the case to the Circuit Court for a new
trial. An agreed order has been entered by the Court preserving the
substance of the injunction pending final disposition of this matter.
As part of its plan to comply with the agreed order, Saddlebrook filed
applications with the regulatory agency to undertake various
remediation efforts. Plaintiffs, however, filed petitions for
administrative review of the applications, which administrative hearing
was concluded in February 1992. On March 31, 1992, the hearing officer
issued a recommended order accepting Saddlebrook's expert's testimony.
The agency's 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
15
<PAGE>
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.
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 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. The Company filed a
motion for summary judgment dismissing the lawsuit based on the
favorable decision of the Circuit Court of Appeals in the first
lawsuit.
16
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 6, 1999 and the
following actions were taken:
(a) Management's slate of nominees for directors was unopposed and
elected in its entirety. The results of the voting were as follows:
Director For Withheld
Common Stock-
R. Barrows 6,972,712 11,629
F. Conforti 6,972,712 11,629
L. Guthart 6,972,712 11,629
I. Harris 6,972,712 11,629
K. Harris 6,972,712 11,629
N. Harris 6,972,712 11,629
W. Harris 6,972,712 11,629
J. Kahn. Jr. 6,972,712 11,629
J. McCarter 6,969,212 15,129
Class A Stock-
E. Barnett 27,789,572 450,287
E. Coolidge III 27,794,933 444,926
A. Downs 27,792,072 447,787
There were no broker non-votes in the above voting.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
27 Financial Data Schedule
(submitted only in electronic format)
(b) Reports on Form 8-K
On March 10, 1998, Registrant reported on a Form 8-K that a jury
in the U.S. District Court in St. Paul, Minnesota handed down a
verdict the previous day in ITI's patent suit against the
Registrant relating to ITI's U.S. Patent 4,855,713. The patent
relates to a method of entering wireless transmitter identity
codes into security system control panels. The jury verdict
awarded damages of approximately $36 million plus accrued
interest.
On June 1, 1999, the Registrant filed a Form 8-K under Item 5
reporting that the Federal Circuit Court of Appeals reversed the
jury verdict handed down in the U.S. District Court.
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: July 28, 1999
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,835
<SECURITIES> 65,006
<RECEIVABLES> 309,821
<ALLOWANCES> 14,466
<INVENTORY> 294,045
<CURRENT-ASSETS> 708,300
<PP&E> 289,793
<DEPRECIATION> 150,940
<TOTAL-ASSETS> 1,121,206
<CURRENT-LIABILITIES> 378,331
<BONDS> 103,220
0
0
<COMMON> 42,748
<OTHER-SE> 510,841
<TOTAL-LIABILITY-AND-EQUITY> 1,121,206
<SALES> 794,638
<TOTAL-REVENUES> 794,638
<CGS> 494,878
<TOTAL-COSTS> 494,878
<OTHER-EXPENSES> 19,548
<LOSS-PROVISION> 3,775
<INTEREST-EXPENSE> 7,790
<INCOME-PRETAX> 143,630
<INCOME-TAX> 54,582
<INCOME-CONTINUING> 89,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,048<F1>
<EPS-BASIC> 2.08
<EPS-DILUTED> 2.04<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 $33.1 million ($.76 per diluted share).
</FN>
</TABLE>
