SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Year Ended December 31, 1998
Commission File No. 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as specified in its Charter)
Delaware 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Suite 700, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (ZIP Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value New York Stock Exchange
Class A Stock, $1.00 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant (based on closing sales prices on March
4, 1999): $823,000,000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date (March 4,
1999): Common Stock - 7,877,664 shares outstanding; Class A Stock -
34,842,357 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on May 6, 1999 are incorporated by reference
into Part III of this report.
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PITTWAY CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
For The Year Ended December 31, 1998
PART I Page
Item 1 Business 1-6
Item 2 Properties 7-8
Item 3 Legal Proceedings 9-10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market For Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 16
Item 8 Financial Statements and Supplementary Data 17-38
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 39
PART III
Item 10 Directors and Executive Officers of the Registrant 39
Item 11 Executive Compensation 39
Item 12 Security Ownership of Certain Beneficial
Owners and Management 39
Item 13 Certain Relationships and Related Transactions 39
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 39
SIGNATURES 40
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PART I
Item 1. Business
(a) General Development of Business
Pittway Corporation ("Pittway" or "Registrant"), was incorporated under
Delaware law in 1925. Pittway and its subsidiaries are referred to
herein collectively as the "Company".
The Company operates principally in two reportable segments. The Alarm
Manufacturing segment designs, manufactures and sells an extensive line
of burglar and commercial fire alarm equipment and other security
products. Manufacturing sales are made through the Alarm Distribution
segment, numerous other unaffiliated distributors and directly to a
limited number of third-party customers. The Alarm Distribution segment
sells only to third-party customers alarm and other security products
manufactured by the Company and by other companies.
In August 1998, the Company distributed its investment in Penton Media,
Inc. ("Penton," formerly known as Penton Publishing, Inc.) to
stockholders in a tax-free spin-off. Financial and other information for
periods prior to the spin-off have been restated to reflect the
discontinuation of the publishing business. Penton is a diversified
business media company that publishes magazines and electronic
information products, produces trade shows and conferences, and provides
marketing and business development products and services, including
direct mail lists, research and custom publishing.
Acquisitions and dispositions of businesses by the Company, other than
the discontinued operations discussed above, in each of the five years
ended December 31, 1998 were not significant to the Company's sales or
results of operations.
In March 1998, Cylink Corporation ("Cylink"), an affiliate of the Company
(see "Real Estate and Other Ventures" in Item 1(c), below), sold its
wireless division for $60.5 million. The Company increased the carrying
value of its investment in Cylink by $6.6 million and recorded an after-
tax gain of $4.2 million, or $.10 per diluted share, to reflect its
equity in the gain on this divestiture. In September 1997, Cylink
acquired Algorithmic Research, an information security company, for cash
and Cylink stock totaling $76.3 million. The Company increased the
carrying value of its investment in Cylink by $6.4 million and recorded a
$4.0 million after-tax gain, or $.09 per diluted share, as a result of
the stock issued in the acquisition and reduced the carrying value of its
investment in Cylink by $18.9 million and recorded an $11.8 million
after-tax expense, or $.28 per diluted share, for its equity in Cylink's
write-off of "in-process technology" acquired in the transaction. In
February 1996, Cylink made an initial public offering of its common
stock. The Company increased its carrying value of this investment to
reflect the increase in the Company's equity in Cylink's net book value.
An after-tax gain of $14.4 million, or $.34 per diluted share was
recorded on the increase in Cylink's equity.
In February 1996, the Company sold 13% of its investment in United States
Satellite Broadcasting Company, Inc. ("USSB") as part of an initial
public offering of USSB common stock. The sale resulted in an after-tax
gain of $8.1 million or $.19 per diluted share. See "Real Estate and
Other Ventures" in Item 1(c), below.
During the first half of 1994, the Company sold its 16.67% ownership in
First Alert, Inc., a manufacturer of residential fire protection
products, as part of an initial public offering of that company's common
stock. The sale resulted in an after-tax gain of $11.8 million or $.28
per diluted share.
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(b) Financial Information about Industry Segments
Financial information relating to segments for each of the three years
ended December 31, 1998 is set forth in Note 14 ("Segment Information")
to the Consolidated Financial Statements on pages 35-36.
(c) Narrative Description of Business
The principal operations, products and services rendered by the Company,
are as follows:
Alarm Manufacturing Segment
This segment designs, manufactures and sells an extensive line of burglar
and commercial fire alarm equipment and other security products for the
protection of life and property. The segment manufactures alarm, access,
lighting and other controls for a variety of low-voltage systems and
peripheral devices which are monitored by and interact with these
controls, including: system smoke detectors, wireless transmitters,
motion detectors, glass break sensors, audible/visible warning devices,
closed circuit television (CCTV) equipment, keypads, video transmission
devices, and numerous contacts, switches and connectors.
The Company markets and sells its control devices and peripheral devices
to: (a) company-owned distribution centers in North America, Europe and
the Pacific Rim; (b) over 400 engineered systems distributors in North
America and (c) original equipment manufacturers and distributors
worldwide.
Over 80% of the Company's sales originate from the United States. The
Company's products are sold under numerous brand names including: Fire-
Lite, Notifier, Fire Control Instruments (fire controls), System Sensor
(system smoke detectors), Javelin (CCTV equipment), Northern Computer and
Xetron (access controls), MicroLite (lighting controls), Ademco, FBI and
First Alert Professional (complete security systems and peripherals).
Raw materials essential to the Company's businesses are purchased
worldwide in the ordinary course of business from numerous suppliers.
The vast majority of these materials are generally available from more
than one supplier and no serious shortages or delays have been en-
countered. Certain raw materials used in producing some of the Company's
products can be obtained only from one or two suppliers, the shortage of
which could adversely impact production of alarm equipment and commercial
fire detectors by the Company. The Company believes that the loss of any
other single source of supply would not have a material adverse effect on
its overall business.
Through its NESCO subsidiary the Company offers a wide variety of
services to independent distributors of its fire alarm systems products,
including assistance with system design, bonding, technical help,
training, marketing and administrative support.
The Company also offers AlarmNet to alarm companies in major U.S.
markets. AlarmNet is a wireless cellular-like communication network
designed to transmit alarm signals by radio instead of over telephone
lines. The Company also offers First Alert Professional, a brand name
marketing program to independent burglar alarm dealers.
Sales and marketing methods common to this industry segment include
communications through the circulation of catalogs and merchandising
bulletins (print and electronic), direct mail campaigns, and national and
local advertising in trade publications. The Company's principal
advantages in marketing are its reputation, broad product line, high
quality products, extensive integrated distribution networks, efficient
customer service, competitive prices and brand names.
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Within the industry there is competition from large and small manufac-
turers in both the domestic and foreign markets. While competitors will
continue to introduce new products similar to those sold by the Company,
the Company believes that its research and development efforts and the
breadth and quality of its distribution network will permit it to remain
competitive.
Alarm Distribution Segment
This segment distributes fire, security and other electrical products
manufactured by the Company and by other companies. By offering a broad
line of alarm and other low voltage products, the Company provides a full
range of services to more than 40,000 independent alarm dealers and
installers which range in size from one person operations to the largest
national alarm service companies. In every major domestic market area,
quick delivery is provided through ADI, the Company's regional warehouses
and convenience center outlets. ADI is the largest wholesale distributor
of alarms and other low voltage products in North America specializing in
burglar alarm, fire alarm, CCTV, access control, intercom, central
vacuum, voice and data cabling, and sound and communications products. Various
products sold through ADI are purchased from non-affiliated suppliers and
manufacturers to offer a broad range of products. Some of the products
purchased are resold under Company brand names, others are resold under
supplier brand names. In the Canadian, Mexican and overseas markets,
alarm and other low voltage products are sold through the Company's
distribution centers, authorized distributors and sales agents.
Real Estate and Other Ventures
The Company is involved in the marketing, sale and development of land
near Tampa, Florida for residential and commercial use. Saddlebrook East
Village, a 2,000 acre parcel of land, is approved for development as a
master planned community. The West Village, formerly called Saddlebrook
Corporate Center, a nearby 450 acre parcel, originally planned as a
business park for mixed use development, was partially converted to a
residential community due to the demand for residential housing.
Principal competition comes from other residential and commercial
developments in Florida.
The Company owns 8,606,085 shares (29.6% of the shares outstanding) of
Cylink, a leading supplier of network information security products
that enable the secure transmission of data over private local
area networks and wide area networks and public packet switched networks,
such as the Internet. In March 1998, Cylink sold its line of spread
spectrum radio products that are used for wireless voice and data
communication for $60.5 million. Cylink acquired Algorithmic Research,
an information security company, in September 1997.
The Company owns 3,781,375 shares (4.2% of the shares outstanding) of USSB,
a company which provides subscription television programming via high-power
direct broadcast satellite to households throughout the Continental U.S. In
December 1998, Hughes Electronics Corporation ("Hughes") and USSB
announced that they had reached agreement whereby Hughes would acquire
USSB for approximately $1.3 billion with a minimum and maximum price per
share of $10.50 to $18.00 based on the market value of Hughes stock
during a specified period of time. In early 1999 Pittway sold one
million of its 3.8 million shares of USSB at an average selling price of
$15.18 per share and will sell its remaining shares if the acquisition is
completed.
Additionally, the Company has a 40% interest in a partnership that
provides loans to security businesses as well as other management
services, a 30% interest in a cable manufacturer and an 11% interest in a
specialized cellular communications company that uses cellular system
control channels.
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The Company has a limited partnership interest in a real estate developer
with major commercial and residential high rise properties located
primarily in Chicago. See Item 7 of this Form 10-K. The Company also
has invested, as a 5% limited partner, in numerous apartment complexes
located in Chicago, Indianapolis, San Jose and Washington, D.C. which
provide certain tax advantages. Also, the Company is an equity
participant in leveraged leases of an aircraft and communications
satellite transponders.
Other Information
Patents and Trademarks -
While the Company owns or is licensed under a number of patents which are
cumulatively important to each of its business units, the loss of any
single patent or group of patents would not have a material adverse
effect on the Company's overall business. Products manufactured by the
Company are sold primarily under its own trademarks and tradenames. Some
products purchased and resold by the Company's distribution business are
sold under Company tradenames while others are sold under supplier
tradenames.
Customers -
Neither of the Company's alarm segments is dependent upon a single
customer or a few customers. In the past two years, both alarm segments
have developed significant national account business from several major
companies in the U.S. residential alarm market. However, the loss of any
one of these customers would not have a material adverse effect on the
Company's results of operations. No single customer accounts for 10% of
the Company's revenues.
Research and Development -
The Company is engaged in programs to develop and improve products as
well as develop new and improved manufacturing methods. Expenditures for
Company sponsored research and development activities in the Alarm
Manufacturing segment were $33.2 million in 1998, $24.3 million in 1997
and $18.1 million in 1996. These costs, which are expensed in the
Company's consolidated income statement, were associated with a number of
products in varying stages of development, none of which represents a
significant item of cost or is projected to be a significant addition to
the Company's line of products.
Product Liability -
Due to the nature of the fire and security alarm business, the Company
has been, and continues to be, subjected to numerous claims and lawsuits
alleging defects in its products. It is likely, due to the present
litigious atmosphere in the United States, that additional claims and
lawsuits will be filed in future years. The Company believes that it
maintains sufficient insurance to cover this exposure.
Environmental Matters -
The Company anticipates that compliance with various laws and regulations
relating to protection of the environment will not have a material effect
on its capital expenditures, earnings or competitive position.
Employees -
At December 31, 1998, there were approximately 7,600 persons employed by
the Company, including 4,600 employed in the United States.
Approximately 1,200 of the employees working in the United States were
represented by labor unions. The Company considers its relations with
its employees and the unions representing certain of its employees to be
good.
4
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Risks and Uncertainties -
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that
the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results
and could cause its actual results in 1998 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Risks associated with acquisition strategy - The Company's strategy
includes the acquisition of businesses that complement or augment the
Company's existing products and services. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory
approvals, including antitrust approvals. Any acquisitions completed by
the Company may be made at substantial premiums over the fair value of
the net assets of the acquired companies. There can be no assurance that
the Company will be able to complete future acquisitions or that the
Company will be able to successfully integrate and operate any acquired
businesses. In order to finance such acquisitions, it may be necessary
for the Company to raise additional funds through public or private
financings. Any equity or debt financing, if available at all, may be on
terms which are not favorable to the Company and, in the case of equity
financing, may result in dilution to the Company's stockholders.
Competition - The Company encounters and expects to continue to encounter
significant competition in the sale of its products and services. The
Company's competitors include a number of large multinational
corporations, some of which may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their products than the
Company. Competition could increase if new companies enter the market or
if existing competitors expand their product lines or intensify efforts
within existing product lines. There can be no assurance that the
Company's current products, products under development, or ability to
develop new technologies will be sufficient to enable it to compete
effectively.
Risks associated with international operations - International sales
account for 17% of the Company's 1998 consolidated revenues and the
Company intends to continue to expand its presence in international
markets. International revenues are subject to a number of risks,
including the following: agreements may be difficult to enforce and
receivables difficult to collect through a foreign country's legal
system; foreign customers may have longer payment cycles; foreign
countries may impose additional withholding taxes or otherwise tax the
Company's foreign income, impose tariffs, or adopt other restrictions on
foreign trade; fluctuations in exchange rates may affect product demand
and adversely affect the profitability in U.S. dollars of products and
services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; U.S.
export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to
enforce. There can be no assurance that any of these factors will not
have a material adverse impact on the Company's business and results of
operations.
Rapid and significant technological change and new products - The markets
for the Company's products are characterized by rapid and significant
technological change, evolving industry standards and frequent new
product introductions and enhancements. Many of the Company's products
and products under development are technologically innovative, and
require significant planning, design, development and testing, at the
technological, product and manufacturing process levels. These
activities can require significant commitments of capital, personnel and
other resources by the Company. In addition, products that are
competitive in the Company's markets are frequently characterized by
rapid and significant technological change due to industry standards that
may change and by the introduction of new products and technologies that
render existing products and technologies uncompetitive or obsolete.
There can be no assurance that any of the products currently being
developed by the Company, or those to be developed in the future, will be
technologically feasible or accepted by the marketplace, that any such
development will be completed in any particular time frame, or that the
Company's products or proprietary technologies will not become
uncompetitive or obsolete.
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Possible adverse effect from changes in governmental regulations - The
Company competes in several markets which involve compliance by its
customers with Federal, state, local and foreign regulations. The
Company develops, configures and markets its products to meet customer
needs created by such regulations. These regulations may be amended in
response to new scientific evidence or political or economic
considerations. Any significant change in regulations could adversely
affect demand for the Company's products in regulated markets.
Risks associated with dependence on capital spending policies - The level
of capital spending by users of the Company's products can have a
significant effect on the Company's revenues. Such spending is based on
a wide variety of factors, including the resources available to make
purchases, the spending priorities among various types of equipment,
public policy, and the effects of different economic cycles. Any
decrease in such spending could have a material adverse effect on the
Company's business and results of operations.
Dependence on patents and proprietary rights - The Company seeks to
obtain patents and protect trade secrets for significant new
technologies, products and processes because of the length of time and
expense associated with bringing new products through the development
process and to the marketplace. The Company's success depends in part on
its ability to develop patentable products and obtain and enforce patent
protection for its products both in the U.S. and in other countries. The
Company owns numerous U.S. and foreign patents, and intends to file
additional applications for patents as appropriate to cover its products.
No assurance can be given that patents will issue from any pending or
future patent applications owned by or licensed to the Company or that
the claims allowed under any issued patents will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given
that any issued patents owned by or licensed to the Company will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. The
Company could incur substantial costs in defending itself in suits
brought against it or in suits in which the Company may assert its patent
rights against others. If the outcome of any such litigation is
unfavorable to the Company, the Company's business and results of
operations could be materially adversely affected.
The Company relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its
collaborators, employees and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have
adequate remedies for any breach or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
Pending litigation - The Company is a party in a lawsuit which arose out
of the development of a resort and a portion of the adjoining residential
properties owned and developed by the Company as well as patent
infringement lawsuits (see Item 3). The Company is also, in the normal
course of business, subject to a number of lawsuits and claims, both
actual and potential in nature. If the outcome of any such litigation is
unfavorable to the Company, the Company's business and operations could
be materially adversely affected.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Financial information concerning foreign and domestic operations and
export sales is set forth in Note 14 ("Segment Information") to the
Consolidated Financial Statements on pages 35-36.
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Item 2. Properties
The Company's principal properties and their general characteristics are
as follows:
Principal Lease Approximate
Location Use Expiration Square Feet
Alarm Manufacturing Segment -
Syosset, New York (1) N/A 319,000
Syosset, New York (3) 2002 14,000
Syosset, New York (1) 1999 6,000
Syosset, New York (1) 2000 33,000
Torrance, California (1) 2001 12,000
Miami, Florida (2) 2002 16,000
El Paso, Texas (2) 2005 19,000
El Paso, Texas (2) 2002 97,000
Louisville, Kentucky (3) 2002 7,000
Jeffersontown, Kentucky (2) 2003 10,000
Raleigh, North Carolina (1) 1999 8,000
Northford, Connecticut (1) N/A 252,000
Lisle, Illinois (3) 2002 5,000
St. Charles, Illinois (1) 2003 158,000
St. Charles, Illinois (1) 2004 100,000
West Chicago, Illinois (1) 2003 21,000
West Chicago, Illinois (3) 2002 5,000
Norcross, Georgia (3) 2001 6,000
Waltham, Massachusetts (1) 2002 50,000
Baulkham Hills, Australia (1) 2001 50,000
Melbourne, Australia (2) 2002 6,000
Sydney, Australia (2) 2001 30,000
Alleur, Belgium (2) 2000 6,000
Toronto, Canada (2) 2001 15,000
Concord, Ontario, Canada (2) 2000 11,000
Lichfield Staffs, England (4) 2009 20,000
Burgess Hill, England (4) N/A 60,000
Tyne & Wear, England (1) 1999 12,000
Chesire, UK (1) 2013 33,000
East Kilbride, Scotland (1) N/A 15,000
Hilden, Germany (2) 2000 8,000
Xi'an, China (1) N/A 20,000
Tsuen Wan, NT, Hong Kong (2) 2001 8,000
Milan, Italy (1) N/A 14,000
Trieste, Italy (1) N/A 103,000
Arezzo, Italy (1) 2001 5,000
Juarez, Mexico (4) 2008 71,000
Juarez, Mexico (4) 2004 83,000
Juarez, Mexico (4) 2007 148,000
Madrid, Spain (2) 2000 11,000
Madrid, Spain (2) 2004 5,000
Barcelona, Spain (2) 2005 6,000
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Principal Lease Approximate
Location Use Expiration Square Feet
Alarm Distribution Segment -
Syosset, New York (1) N/A 35,000
Beuerwijk, The Netherlands (2) 2003 12,000
Milan, Italy (2) 2001 10,000
Distribution Centers -
Superhub Locations:
Atlanta, Georgia (2) 2007 116,000
Reno, Nevada (2) 2008 140,000
Louisville, Kentucky (2) 2007 190,000
Pine Brook, New Jersey (2) 2008 121,000
Hub Locations:
Boston, Massachusetts (2) 1999 30,000
Milford, Connecticut (2) 2008 18,000
Los Angeles, California (2) 1999 30,000
Chicago, Illinois (2) 2005 40,000
Clearwater, Florida (2) 2004 50,000
Memphis, Tennessee (2) 2006 15,000
Richmond, Virginia (2) 2004 14,000
Phoenix, Arizona (2) 2004 15,000
Dallas, Texas (2) 2008 76,000
Denver, Colorado (2) 1999 25,000
Detroit, Michigan (2) 2000 15,000
New Orleans, Louisiana (2) 2007 10,000
Seattle, Washington (2) 2006 25,000
Toronto, Canada (2) 2007 26,000
Montreal, Canada (2) 2000 11,000
San Leandro, California (2) 2000 34,000
General Corporate -
Chicago, Illinois (3) 2001 12,000
Other properties in the Alarm Distribution segment include 93 full-line
convenience centers, in addition to those hub locations listed above,
which function as retail-like sales distribution outlets to serve the
North American market. These 93 centers are under leases expiring
through 2008 and range in size from 1,200 to 18,000 square feet. The
Company believes the above facilities are adequate for its present needs.
(1) Offices, Manufacturing and Warehousing
(2) Warehousing
(3) General Offices
(4) Manufacturing
N/A Not applicable - facilities are owned by the Company
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Item 3. Legal Proceedings
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and
for Pasco County, Florida, entered a judgment against Saddlebrook
Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a
lawsuit which arose out of the development of Saddlebrook's resort and a
portion of the adjoining residential properties owned and developed by
the Company. The lawsuit (James H. Porter and Martha Porter, Trustees,
et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida;
Case No. CA83-1860) alleges damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the properties.
Damages of approximately $8 million were awarded to the plaintiffs and an
injunction was entered requiring, among other things, that Saddlebrook
work with local regulatory authorities to take corrective actions.
Saddlebrook made two motions for a new trial, based on separate grounds.
One such motion was granted on December 18, 1990. Such grant was
appealed by the plaintiffs. The other such motion was denied on February
28, 1991. Saddlebrook appealed such denial. The appeals were
consolidated, fully briefed and heard in February 1992. Saddlebrook
received a favorable ruling on March 18, 1992, dismissing the judgment
and remanding the case to the Circuit Court for a new trial. An agreed
order has been entered by the Court preserving the substance of the
injunction pending final disposition of this matter. As part of its plan
to comply with the agreed order, Saddlebrook filed applications with the
regulatory agency to undertake various remediation efforts. Plaintiffs,
however, filed petitions for administrative review of the applications,
which administrative hearing was concluded in February 1992. On March
31, 1992, the hearing officer issued a recommended order accepting
Saddlebrook's expert's testimony. The agency's 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
October 27, 1998 pretrial conference, the parties agreed to a mediation
hearing. If the hearing is unsuccessful in settling the matter, retrial
is expected to begin in 1999.
Until October 14, 1989, Saddlebrook disputed responsibility for ultimate
liability and costs (including costs of corrective action). On that
date, the Company and Saddlebrook entered into an agreement with regard
to such matters. The agreement, as amended and restated on July 16, 1993,
provides for the Company and Saddlebrook to split equally the costs of
the defense of the litigation and the costs of certain related litigation
and proceedings, the costs of the ultimate judgment, if any, and the
costs of any mandated remedial work.
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.
9
<PAGE>
Fact discovery in the action closed on January 17, 1997. The
Court conducted a Markman hearing in October 1997 to construe the patent
claims asserted by plaintiff and issued its Order interpreting the claims
on October 24, 1997. The Company moved for summary judgment of non-
infringement. On December 2, 1997 the Court issued its Order granting
partial summary judgment that the Company's products did not literally
infringe the patent claims, and denying summary judgment of no
infringement. Jury trial started on January 7, 1998. During the trial,
the plaintiff indicated it was seeking lost profits and royalty damages
of up to $66.8 million. The plaintiff also asserted trebling of damages,
if awarded, based upon alleged willful infringement. On March 9, 1998
the jury handed down a verdict against the Company awarding damages of
$36.0 million. The jury found that the Company did not willfully
infringe. The Court entered judgment on the jury's verdict on April 9,
1998. Consequently, the Company recorded a provision of $43.0 million in
the first quarter of 1998, which considers the judgment and interest. The
Company filed post-trial motions on April 20, 1998 for judgment as a
matter of law in favor of the Company which were denied. The Company has
appealed the verdict. Appeal briefs have been filed and oral arguments on
the appeal were heard on March 4, 1999. A verdict is expected sometime in the
third or fourth quarter of 1999. In August 1998, ITI filed a second lawsuit
against the Company which alleges that certain of the Company's products
not specified in the prior litigation infringe on the same patent. This
action has been stayed pending the outcome of the appeal of the jury
award.
The Company in the normal course of business is subject to a number of
claims and lawsuits, both actual and potential in nature. The ultimate
outcome of the ITI matter under appeal is uncertain but will result in
significant damages should the Company lose the appeal. While
management believes that the ultimate outcome of the other aforementioned
lawsuits and resolution of other existing claims and lawsuits will not
have a material adverse effect on the Company's financial statements,
management is unable to estimate the magnitude of financial impact of
claims and lawsuits which may be filed in the future.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters
The Company's Common stock (ticker symbol PRY) and Class A stock (ticker
symbol PRYA) are traded on the New York Stock Exchange. As of December
31, 1998, stockholders of record totaled approximately 400 for Common and
750 for Class A.
The spin-off of Penton was completed on August 7, 1998. The spin-off
distribution consisted of one share of Penton common stock for each share
of Pittway stock outstanding, without distinction between Pittway's
Common and Class A shares. Immediately following the distribution, the
price of Pittway's Common and Class A shares declined approximately 26%
reflecting the initial market value of the new Penton common stock.
The following table sets forth, on a quarterly basis, the high and low
prices for the Common and Class A stock on the New York Stock Exchange,
along with cash dividends declared, adjusted to reflect the two-for-one
stock split paid in September 1998.
Common Class A Dividends Declared
High Low High Low Common Class A
1998 Quarter:
First $36.50 $31.63 $36.81 $31.13 $.0333 $.0417
Second 42.50 34.81 39.59 35.38 .0333 .0417
Third 38.25 20.00(a) 37.50 17.91(a) .0217(b) .0300(b)
Fourth 33.94(a) 19.88(a) 33.06(a) 20.00(a) .0217(b) .0300(b)
1997 Quarter:
First $27.63 $24.94 $27.50 $24.25 $.0333 $.0417
Second 27.94 24.75 28.56 24.31 .0333 .0417
Third 32.25 25.13 32.50 25.00 .0333 .0417
Fourth 34.50 29.94 35.00 30.00 .0333 .0417
(a) Market prices after August 10 reflect the spin-off of Penton.
(b) Penton's initial quarterly dividend was set at $.03 per share
(equivalent to $.015 per Pittway share). The total quarterly
dividends received initially by a Pittway Common or Class A
stockholder who retained the Penton stock represent increases of
approximately 10% and 8%, respectively, from Pittway's prior quarterly
dividend.
11
<PAGE>
Item 6. Selected Financial Data
The following selected financial information has been derived from the
Company's consolidated financial statements. The information set forth
below is not necessarily indicative of results of future operations and
is qualified by reference to and should be read in conjunction with the
consolidated financial statements and related notes thereto and
Management's Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere herein. Information shown is in
thousands, except per share amounts.
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Continuing Operations -
Net Sales $1,326,646 $1,143,772 $923,453 $754,406 $601,297
Operating Income 61,442(a) 82,501 63,705 47,303 38,920
Net Earnings 36,897(a)(b) 40,608(c) 61,692(d) 31,784 38,109(e)
Per Share (Basic)(f) .87(a)(b) .97(c) 1.48(d) .76 .91(e)
Per Share (Diluted)(f) .86(a)(b) .96(c) 1.46(d) .76 .91(e)
Capital Expenditures 37,380 43,318 45,367 36,902 20,491
Depreciation and
Amortization 35,694 28,141 22,288 15,226 14,504
Discontinued Operations -
Net Earnings 5,031 14,906 11,350 8,588 6,727
Per Share (Basic)(f) .12 .35 .27 .21 .16
Per Share (Diluted)(f) .11 .35 .27 .20 .16
Net Income - 41,928(a)(b) 55,514(c) 73,042(d) 40,372 44,836(e)
Per Share (Basic)(f) .99(a)(b) 1.32(c) 1.75(d) .97 1.07(e)
Per Share (Diluted)(f) .97(a)(b) 1.31(c) 1.73(d) .96 1.07(e)
Cash Dividends Declared -
Per Common Share (f) .110 .133 .133 .133 .133
Per Class A Share (f) .143 .167 .167 .167 .167
At Year End -
Assets of Continuing
Operations 1,075,055 852,297 770,251 604,481 498,580
Investment in
Discontinued Operations - 58,397 47,058 51,362 44,879
Total Assets 1,075,055 910,694 817,309 655,843 543,459
Long-Term Debt 104,609 95,215 87,714 85,710 4,783
Stockholders' Equity 495,164 487,134 446,872 363,026 328,130
Per Outstanding Share (f) 11.61 11.60 10.68 8.68 7.85
Market Price Per Share (f):
Common 33.81 34.47 26.07 22.13 13.00
Class A 33.06 34.82 26.75 22.59 13.42
</TABLE>
(a) Includes patent litigation provision of $43,000 or $26,875 after taxes
($.64 per share; $.62 diluted)
(b) Includes the Company's equity in the after-tax gain on Cylink's
disposal of its discontinued operations of $4,154, or $.10 per share
(basic and diluted).
(c) Includes the Company's equity in the after-tax gain on Cylink capital
transactions of $3,997 and the after-tax expense for Cylink's write-
off of "acquired in-process technology" of $11,839. These items
decreased net income by $7,842, or $.19 per share (basic and diluted).
(d) Includes the after-tax gain on the sale of investment in USSB and gain
from Cylink stock offering of $8,149, or $.19 per share (basic and
diluted) and $14,413, or $.34 per share (basic and diluted).
(e) Includes net gain on sale of First Alert stock of $11,776, or $.28 per
share (basic and diluted).
(f) Per share data reflect the 2-for-1 stock split declared in September
1998 and the 3-for-2 stock split declared in January 1996.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
RESULTS OF CONTINUING OPERATIONS
Sales increased in 1998 to $1.33 billion, by 16% over 1997 sales which
were 24% higher than 1996. Domestic sales grew 15% in 1998 and 25% in
1997 while international sales increased 21% in 1998 and 17% in 1997.
International business represents 17% of total consolidated sales in 1998
and 16 % in 1997. Most of the foreign sales growth in 1998 and 1997 is
derived from expansion of European operations. Gross profit increased 15%
in 1998 and 25% in 1997 principally due to the expanded sales levels.
Excluding the $43 million provision for patent litigation recorded in
1998, selling, general and administrative expenses increased 11% in 1998
and 24% in 1997 principally as a result of increased costs associated
with the higher sales volume.
Alarm Manufacturing sales increased 11% in 1998 and 30% in 1997.
Virtually every business unit recorded increased sales in both 1998 and
1997. The volume at all of the manufacturing units benefited in 1998 and
1997 from the continued acceptance of numerous new product offerings and
from expanded worldwide distribution capabilities. The 1998
acquisitions, which accounted for less than 2% of segment sales for the
year, were made primarily to expand the Company's overall product line in
both domestic and international markets. The largest sales increase in
1998 occurred in domestic commercial fire alarm products due to new
product development and increased market penetration. The largest sales
increase in 1997 occurred in domestic burglar alarm products, aided by
major new accounts.
Operating income for the manufacturing segment increased 11% in 1998 and
34% in 1997 primarily because of the expanded sales volume. Research and
development expense increased 37% to $33.2 million in 1998 and increased
35% to $24.3 million in 1997 as the Company expended record amounts on
research and new product development.
Alarm Distribution sales accounted for 62% of consolidated sales in 1998
(60% in 1997) and increased 19% in 1998 and 24% in 1997. The increased
volume was due primarily to significant growth in national account
business of the Alarm Manufacturing segment. Sales volume also expanded
due to expansion of its outlet network, both internally and from
acquisitions. The largest 1998 acquisition, a west coast distributor,
contributed less than 3% of segment sales.
Operating income for the distribution segment increased 15% in both 1998
and 1997. The percentage increase in operating income was lower than the
percentage increase in sales in both years due to higher sales to the
lower margin national accounts and due to overall pricing pressure
stemming from ongoing consolidation in the alarm installation market.
Operating income was also reduced in 1997 by increased distribution costs
as a result of a strike at a major U.S.-based package carrier and the
reengineering of the domestic distribution hub system.
Depreciation and amortization expense increased both in 1998 and 1997,
principally as a result of capital additions associated with the
expansion of the Alarm Manufacturing segment.
13
<PAGE>
Other income (expense) in 1998, 1997 and 1996 was significantly impacted
by the change in the Company's equity investment in Cylink. The 1998
change in Cylink equity includes a $5.4 million pretax charge from
Cylink's continuing operations and a $6.6 million pretax gain from the
divestiture of its wireless division. The 1997 change in Cylink equity
includes a $1.8 million pretax credit from operations and two special
items recorded in connection with an acquisition made by Cylink: a $6.4
million pretax gain as a result of the stock issued in the acquisition
and an $18.9 million pretax expense for the Company's equity in Cylink's
write-off of "acquired in-process technology." The 1996 change in Cylink
equity includes a $23.3 million pretax gain resulting from Cylink's
initial public offering. Other income (expense) in 1996 included a
pretax gain of $13.2 million on the sale of 622,500 shares of USSB stock
in connection with its initial public offering.
Excluding Cylink, other income (expense) was more favorable in 1998 due
to increased cash distributions from real estate ventures and a gain on
the sale of an investment partially offset by increased interest expense
on higher borrowing levels. Excluding Cylink and the 1996 USSB gain,
other income (expense) was less favorable in 1997 principally due to
increased interest expense from higher borrowing levels and increased
foreign currency transaction losses from the strong U.S. dollar and UK
pound against other key international currencies.
Effective tax rates were 34.9% in 1998, 35.8% in 1997, and 36.0% in 1996.
An analysis of the Company's effective tax rate appears in Note 7 to the
Consolidated Financial Statements.
DISCONTINUED OPERATIONS
Sales and earnings from the publishing business decreased in 1998 due to
the spin-off of Penton Media, Inc. in August 1998. Earnings also
declined in 1998 due to period costs related to trade shows held
subsequent to the spin-off, higher interest and amortization expenses
related to 1997 acquisitions and costs related to the spin-off. Sales
increased 9% in 1997 compared with 1996 and operating income increased
35%. These favorable results were achieved through a combination of
increased magazine advertising revenues, a newly acquired trade show held
in the second quarter of 1997, and containment of operating costs.
PRO FORMA INFORMATION
Following are pro forma results from continuing operations excluding (a)
the provision for patent litigation, (b) the Company's equity in Cylink's
operations, (c) the 1996 gain on the sale of USSB stock and (d) related
tax effects:
1998 1997 1996
Net sales $1,326,646 $1,143,772 $ 923,453
Operating income $ 104,442 $ 82,501 $ 63,705
Income before income taxes $ 98,484 $ 74,032 $ 59,711
Provision for income taxes 35,446 26,710 20,714
Net income $ 63,038 $ 47,322 $ 38,997
Net income per diluted share $ 1.46 $ 1.11 $ .92
14
<PAGE>
FINANCIAL CONDITION
The Company's financial condition remained strong through 1998. Net
working capital at the end of 1998 was $271.5 million compared to $269.3
million at the end of 1997. Management anticipates that operations,
borrowings and marketable securities will continue to be the primary
source of funds needed to meet ongoing programs for capital expenditures,
to finance acquisitions and investments and to pay dividends.
In 1998, the $100.6 million generated from net income from continuing
operations excluding depreciation, amortization, the provision for patent
litigation, the change in equity of Cylink and other non-cash items was
partially used to fund the $28.2 million net increase in inventories,
receivables and other working capital items. The $72.4 million net cash
generated from operating activities, together with short-term borrowings
of $57.4 million, net proceeds from the increase in long term debt of
$11.1 million, $6.7 million received on the exercise of stock options and
$4.7 million from discontinued operations were used to finance nine
acquisitions completed in the period totaling $85.7 million (in addition
to $4.1 million of Pittway Class A stock and $11.0 of debt assumed),
$37.4 million of capital expenditures, a $16.2 million increase in notes
receivable, $16.5 million of net purchases of marketable securities, $3.3
million of additions to investments and $6.3 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 carried at a zero basis
which are being offered for sale. Cash distributions received from these
ventures are recorded as other income. The Company has approximately
$3.3 million accrued at December 31, 1998 to cover the deferred income
tax liability that would be due if all the properties were sold.
In December 1998 Hughes Electronics Corporation ("Hughes") and USSB
announced that they had reached agreement whereby Hughes would acquire
USSB for approximately $1.3 billion with a minimum and maximum price per
share of $10.50 and $18.00. In early 1999 the Company sold one million
of its 3.8 million shares of USSB, generating approximately $11.1 million
in cash after taxes. The Company will sell its remaining shares if the
acquisition is completed and expects to realize a minimum of $22.6
million in cash after-taxes on the transaction.
In the event the Company loses its appeal of the unfavorable verdict in
the ITI litigation (see Note 11 to the financial statements), an after-
tax payment of $26.9 million would be required.
INFLATION
The impact of inflation on the Company's results of operations has not
been significant in recent years.
YEAR 2000 ISSUE
All work necessary to upgrade the Company's systems for Year 2000 (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.
15
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates. However, the Company does not utilize hedging
arrangements in the ordinary course of business to manage its risks
because exposure to fluctuations in interest and foreign exchange rates
is immaterial to the Company's consolidated financial statements. The
Company does not use derivatives or other financial instruments for
trading purposes and is not a party to any leveraged derivatives. A
comparison of the carrying values and estimated fair values of the
Company's consolidated financial instruments is set forth in Note 13
("Fair Value of Financial Instruments") to the Consolidated Financial
Statements on pages 34-35.
****
This annual report, other than historical financial information, contains
forward-looking statements that involve a number of risks and
uncertainties. Important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
are set forth in Item 1 of this annual report on Form 10-K. 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.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
Page
Financial Statements:
Consolidated Balance Sheet at December 31, 1998 and 1997 19-20
For each of the three years ended December 31, 1998 -
Consolidated Statement of Income 18
Consolidated Statement of Cash Flows 21
Consolidated Statement of Stockholders' Equity 22
Summary of Accounting Policies and Notes to
Consolidated Financial Statements 23-37
Report of Independent Accountants 38
Report of Management 38
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 41
All other schedules have been omitted because the required information
is not present, or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements or notes thereto.
Summarized financial information for the limited real estate
partnerships and other ventures is omitted because, when considered in
the aggregate, they do not constitute a significant subsidiary.
17
<PAGE>
PITTWAY CORPORATION
Consolidated Statement of Income
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Continuing Operations -
Net Sales $1,326,646 $1,143,772 $ 923,453
Operating Expenses:
Cost of sales 841,501 723,547 587,323
Selling, general and administrative 345,009 309,583 250,137
Patent litigation provision (Note 11) 43,000
Depreciation and amortization 35,694 28,141 22,288
1,265,204 1,061,271 859,748
Operating Income 61,442 82,501 63,705
Other Income (Expense
Gain on sale of investment 13,162
Change in equity of affiliate (Note 5) 1,175 (10,742) 23,494
Income from marketable securities and
other interest 3,674 3,156 3,138
Interest expense (13,153) (10,852) (8,590)
Income from investments 6,302 833 1,551
Miscellaneous, net (2,781) (1,606) (93)
(4,783) (19,211) 32,662
Income Before Income Taxes 56,659 63,290 96,367
Income Taxes (Note 7):
Current 36,123 28,430 27,529
Deferred (16,361) (5,748) 7,146
19,762 22,682 34,675
Income From Continuing Operations 36,897 40,608 61,692
Discontinued Operations -
Earnings from discontinued operations,
net of income taxes of $4,018,
$10,632 and $7,763 5,648 14,906 11,350
Provision for divestiture expenses, net
of income tax benefit of $383 (617)
Income From Discontinued Operations 5,031 14,906 11,350
Net Income $ 41,928 $ 55,514 $ 73,042
Per Share of Common and
Class A Stock (Note 12):
Basic:
Income from continuing operations $ .87 $ .97 $ 1.48
Income from discontinued operations .12 .35 .27
Net income $ .99 $ 1.32 $ 1.75
Diluted:
Income from continuing operations $ .86 $ .96 $ 1.46
Income from discontinued operations .11 .35 .27
Net income $ .97 $ 1.31 $ 1.73
Average Shares Outstanding (000's) (Note 12) 42,350 41,958 41,842
Average Shares and Dilutive
Equivalents Outstanding (000's) (Note 12) 43,240 42,502 42,278
</TABLE>
See Summary of Accounting Policies and
Notes to Consolidated Financial Statements.
18
<PAGE>
PITTWAY CORPORATION
Consolidated Balance Sheet
December 31, 1998 and 1997
(Dollars in thousands, except per share)
1998 1997
ASSETS
Current Assets:
Cash and equivalents $ 16,998 $ 29,257
Marketable securities 44,200 27,583
Accounts and notes receivable, less
allowance for doubtful accounts of
$12,173 in 1998 and $9,691 in 1997 263,127 199,222
Inventories (Note 3) 252,947 240,228
Future income tax benefits (Note 7) 32,870 16,246
Prepayments, deposits and other 10,666 8,823
620,808 521,359
Property, Plant and Equipment:
Buildings 39,645 38,250
Machinery and equipment 225,835 194,479
265,480 232,729
Less: Accumulated depreciation 132,679 109,118
132,801 123,611
Land 2,481 2,307
135,282 125,918
Investments:
Marketable securities 51,994 30,015
Investment in affiliate (Note 5) 21,616 20,441
Real estate and other ventures 49,131 43,388
Leveraged leases (Note 6) 16,821 18,559
139,562 112,403
Other Assets:
Goodwill, less accumulated amortization
of $9,642 in 1998 and $7,293 in 1997 134,686 54,964
Other intangibles, less accumulated
amortization of $6,266 in 1998 and
$5,489 in 1997 2,906 3,207
Notes receivable 15,862 7,534
Investment in discontinued operations 58,397
Miscellaneous 25,949 26,912
179,403 151,014
$1,075,055 $ 910,694
See Summary of Accounting Policies and
Notes to Consolidated Financial Statements.
19
<PAGE>
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note 4) $ 92,395 $ 32,336
Long-term debt due within one year (Note 4) 16,719 5,730
Dividends payable 1,240 1,719
Accounts payable 167,773 151,410
Accrued expenses 59,484 43,166
Income taxes payable 6,136 7,175
Retirement and deferred compensation plans 5,580 10,562
349,327 252,098
Long-Term Debt (Note 4):
Notes payable, 6.70% and 6.81%, due in
annual installments of $5 million
beginning 1999 with the balance due 2005 70,000 75,000
Capitalized leases, principally at
5.0% - 7.6%, due in monthly installments
through 2005 10,176 9,049
Other 24,433 11,166
104,609 95,215
Deferred Liabilities:
Income taxes (Note 7) 71,114 62,611
Litigation (Note 11) 43,000
Other 11,841 13,636
125,955 76,247
Stockholders' Equity:
Preferred stock, authorized 2,000,000
shares; none issued
Common capital stock, $1 par value
(Note 12) -
Common stock, authorized 120,000,000
shares; 7,877,664 and 3,938,832 shares
issued and outstanding in 1998 and
1997, respectively 7,878 3,939
Class A stock, authorized 100,000,000
shares; 34,763,291 and 17,052,543
shares issued and outstanding in 1998
and 1997, respectively 34,763 17,052
Capital in excess of par value 18,671 24,523
Retained earnings 417,363 440,536
Accumulated other comprehensive
income (loss) -
Marketable securities valuation adjustment 22,416 8,823
Foreign currency translation adjustment (5,927) (7,739)
495,164 487,134
$1,075,055 $ 910,694
20
<PAGE>
PITTWAY CORPORATION
Consolidated Statement of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Cash Flows From Continuing Operating Activities:
Income from continuing operations $ 36,897 $ 40,608 $ 61,692
Adjustments to reconcile income from continuing
operations to cash provided by continuing
operating activities:
Depreciation and amortization 35,694 28,141 22,288
Gain on sale of investment, net of taxes (8,149)
Equity in affiliate, net of taxes (734) 6,714 (14,547)
Deferred income taxes (677) (1,741) (1,750)
Retirement and deferred compensation plans (5,110) 7,060 6,947
Income/loss from investments adjusted for cash
distributions received 1,853 292 619
Provision for losses on accounts receivable 5,462 4,298 4,222
Provision for patent litigation, net of taxes 26,875
Loss (gain) on sale of assets 304 453 (112)
Change in current assets and liabilities,
excluding effects from acquisitions,
dispositions and foreign currency adjustments:
Increase in accounts receivable (38,479) (27,578) (36,399)
Decrease (increase) in inventories 1,883 (39,913) (48,387)
(Increase) decrease in prepayments and
deposits (363) (1,454) 1,388
Increase in accounts payable and accrued
expenses 7,213 17,090 49,846
Increase in income taxes payable 1,034 1,936 114
Other changes, net 546 (433) (822)
Net cash provided by operating activities 72,398 35,473 36,950
Cash Flows From Investing Activities:
Capital expenditures (37,380) (43,318) (45,367)
Proceeds from the sale of investment, net of taxes 10,748
Net (increase) decrease in marketable securities (16,489) 591 502
Dispositions of property and equipment 392 259 736
Additions to investments (3,339) (3,592) (4,566)
Net (increase) decrease in notes receivable (16,179) 2,922 (4,434)
Net assets of businesses acquired, net of
cash received (85,748) (23,815) (3,263)
Net cash used by investing activities (158,743) (66,953) (45,644)
Cash Flows From Financing Activities:
Net increase in notes payable 57,387 26,778 1,730
Proceeds of long-term debt 20,227 12,314 5,284
Repayments of long-term debt (9,079) (8,377) (5,284)
Stock options exercised 6,736 1,060 133
Dividends paid (6,286) (6,736) (6,752)
Net cash provided (used) by financing activities 68,985 25,039 (4,889)
Effect of Exchange Rate Changes on Cash 352 (269) 210
Net Cash Provided by Discontinued Operations 4,749 3,489 15,653
Net (Decrease) Increase in Cash and Equivalents (12,259) (3,221) 2,280
Cash and Equivalents at Beginning of Year 29,257 32,478 30,198
Cash and Equivalents at End of Year $ 16,998 $ 29,257 $ 32,478
Supplemental Cash Flow Disclosure:
Interest paid $ 12,868 $ 10,950 $ 8,517
Income taxes paid $ 30,365 $ 25,490 $ 26,343
</TABLE>
See Summary of Accounting Policies and
Notes to Consolidated Financial Statements.
21
<PAGE>
PITTWAY CORPORATION
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Common Stock Class A Stock Capital In Other Total Total
Par Par Excess of Retained Comprehensive Stockholders' Comprehensive
Shares Value Shares Value Par Value Earnings Income (Loss) Equity Income (Loss)
Balance - December 31, 1995 3,938,832 $3,939 16,973,313 $16,973 $ 21,423 $325,420 $ (4,729) $ 363,026
Net income 73,042 73,042 $ 73,042
Cash dividends declared:
Common stock (1,051) (1,051)
Class A stock (5,658) (5,658)
Shares issued pursuant
to stock options 14,309 14 291 305
Net unrealized gains on
marketable securities 14,472 14,472 14,472
Foreign currency
translation adjustments 2,736 2,736 2,736
Balance - December 31, 1996 3,938,832 3,939 16,987,622 16,987 21,714 391,753 12,479 446,872 $ 90,250
Net income 55,514 55,514 $ 55,514
Cash dividends declared:
Common stock (1,051) (1,051)
Class A stock (5,680) (5,680)
Shares issued pursuant to
stock options and awards 64,921 65 2,809 2,874
Net unrealized losses on
marketable securities (3,630) (3,630) (3,630)
Foreign currency
translation adjustments (7,765) (7,765) (7,765)
Balance - December 31, 1997 3,938,832 3,939 17,052,543 17,052 24,523 440,536 1,084 487,134 $ 44,119
Net income 41,928 41,928 $ 41,928
Shares issued pursuant to
stock options and awards 345,876 346 11,352 11,698
Shares issued for
acquisition 58,163 58 4,042 4,100
Cash dividends declared:
Common stock (868) (868)
Class A stock (4,938) (4,938)
Distribution of Penton
Media, Inc. Common stock
to stockholders (59,295) (19) (59,314) (19)
Two-for-one stock split 3,938,832 3,939 17,306,709 17,307 (21,246)
Net unrealized gains on
marketable securities 13,593 13,593 13,593
Foreign currency
translation adjustments 1,831 1,831 1,831
Balance - December 31, 1998 7,877,664 $7,878 34,763,291 $34,763 $ 18,671 $417,363 $ 16,489 $ 495,164 $ 57,333
</TABLE>
See Summary of Accounting Policies and
Notes to Consolidated Financial Statements.
22
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
(Dollars in thousands)
Basis of Presentation
The consolidated financial statements include the accounts of Pittway
Corporation and its majority-owned subsidiaries (the "Company"). Periods
prior to 1998 have been restated to reflect the discontinuation of the
publishing business which was spun off in 1998 (Note 1). Except where
otherwise indicated, the following notes relate to continuing operations.
The Company follows the equity method of accounting for its investments
in greater than 20%-owned but less than majority-owned affiliates. All
share and per share data, as appropriate, reflect a 2-for-1 stock split
paid September 11, 1998 (Note 12). All significant intercompany accounts
and transactions have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year classification.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents are generally comprised of highly liquid instruments
with original maturities of three months or less, such as treasury bills,
certificates of deposit, commercial paper and time deposits.
Marketable Securities
Current marketable securities consist principally of auction rate
preferred stocks. Non-current marketable securities consist of stock in
United States Satellite Broadcasting Company, Inc. ("USSB"), a satellite
broadcast company. The Company records its investments in marketable
securities at market value. Changes in market value for these securities
are reported, net of tax, in a separate component of stockholders' equity
until realized.
Inventories
Inventories are stated at cost, which is lower than market. Costs
included in inventories are raw materials, direct labor and manufacturing
overhead. Cost of substantially all domestic inventories is determined
by using the last-in, first-out (LIFO) method, while the remaining
inventories are valued primarily using the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated
over the estimated useful lives of the assets using the straight-line
method for financial reporting purposes. Depreciation expense amounted to
$32,559, $25,880 and $20,638 in 1998, 1997 and 1996, respectively.
23
<PAGE>
Investments
Investment in affiliate consists of an equity interest in Cylink
Corporation ("Cylink"), a manufacturer of commercial data encryption
devices and software. The Company accounts for its investment in Cylink
under the equity method.
Real estate and other ventures consist principally of equity interests in
limited real estate partnerships and land held for development. The
Company's adjusted basis in certain of the limited real estate
partnerships is carried at zero, and investments in other partnerships
and ventures are carried on a cost basis. Cash distributions accruing
from these partnerships and ventures are recorded as income from
investments.
Leveraged leases consist of the rentals receivable net of the principal
and interest on the related nonrecourse debt, estimated residual value of
the leased property and unearned income. The unearned income is
recognized as income from investments over the lease term.
Intangible Assets
Management believes that goodwill, trademarks and tradenames acquired in
purchase transactions have continuing value. It is the Company's policy
to amortize such costs over periods of up to 40 years except for the
costs of such assets acquired prior to 1970. Intangible assets of
approximately $2,052 related to pre-1970 acquisitions are not being
amortized because the Company believes there has been no diminution of
value.
Other intangibles acquired in purchase transactions or developed,
consisting of non-compete agreements, patents and software development
costs, are capitalized and amortized over their estimated useful lives.
The carrying value of intangible assets is periodically reviewed by the
Company and impairment is recognized when the projected, undiscounted net
pretax cashflows derived from such intangible assets are less than their
carrying value.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income." The Statement requires the addition of
comprehensive income and its components in financial statement format.
Other comprehensive income (loss) includes cumulative foreign currency
translation adjustments and unrealized investment gains and losses, which
are not included in income under current accounting principles. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS No. 130. The unrealized gains/losses on marketable
securities are net of income tax (benefit) of $8,411, $(2,137), and
$8,812 in 1998, 1997 and 1996, respectively. Net unrealized gains/losses
on marketable securities includes reclassification adjustments for gains
(losses) realized in income from the sale of securities of $80, $156 and
$(318) in 1998, 1997 and 1996, respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. These costs
amounted to $33,243, $24,316, and $18,077 in 1998, 1997 and 1996,
respectively.
24
<PAGE>
Advertising and Promotion Expenses
Advertising and promotion costs are expensed as incurred. These costs
amounted to $12,298, $11,627 and $10,355 in 1998, 1997 and 1996,
respectively.
Income Taxes
Provisions for income taxes recognize the tax effects of all transactions
entering into the determination of net income for financial statement
purposes, irrespective of when such transactions are reported for income
tax purposes. Deferred income taxes and future income tax benefits have
been recognized for all temporary differences.
Translation of Foreign Currencies
The functional currency of the Company's foreign operations is the local
currency. Accordingly, assets and liabilities of foreign operations are
translated to U.S. dollars at the rates of exchange on the balance sheet
date; income and expense are translated at the average rates of exchange
prevailing during the year. Translation adjustments are accumulated in a
separate section of stockholders' equity. Transaction gains and losses
are reflected in miscellaneous income and amounted to net expenses of
$1,087, $1,041 and $102 in 1998, 1997 and 1996, respectively.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected to
continue accounting for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's Class A stock at the date of the
grant over the amount an employee must pay to acquire the stock.
Compensation cost for other stock-based awards is based on the quoted
market price of the Company's Class A stock at the date of grant for
performance and bonus share awards and, for stock appreciation rights,
the changes in such stock price during each subsequent reporting period.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share)
Note 1 - Discontinued Operations
In December 1997 the Company announced its intention to distribute its
investment in Penton Media, Inc. ("Penton"), a wholly-owned subsidiary of
the Company, to stockholders in a tax-free spin-off. The distribution was
completed on August 7, 1998. A provision was recorded in the second
quarter for divestiture expenses totaling $617 net of taxes ($.02 per
diluted share).
At December 31, 1997 the investment in the net assets of the discontinued
operations consisted of:
Current assets $ 39,126
Current liabilities (64,346)
Net current liabilities (25,220)
Net property, plant and equipment 27,242
Other non-current assets 76,923
Non-current liabilities (20,548)
$ 58,397
Net sales of the discontinued operations prior to their disposition were
$126,137, $204,931 and $188,122 for 1998, 1997 and 1996, respectively.
Note 2 - Acquisitions
During 1998, the Company acquired the assets and businesses of a domestic
manufacturer of access control systems, a domestic distributor of alarm
and other security products, a Canadian manufacturer of video
transmission equipment and six overseas alarm businesses for stock and
cash totaling $89,848 plus debt assumed of $10,979. On a date no later than
2003, the Company has agreed to purchase the remaining minority interest in
one of the foreign businesses at a formula price tied to
future earnings but not to exceed $14,400. The six overseas operations
consist of two manufacturers of fire alarm controls, one manufacturer of
CCTV surveillance domes, one distributor of fire alarm systems and two
distributors of security and fire alarm products.
During 1997, the Company acquired the assets and businesses of a foreign
distributor of alarm and other security products and one domestic and one
foreign manufacturer and distributor of fire control products. The total
purchase price for these businesses was $23,815 cash paid and $6,359 of
debt assumed.
During 1996, the Company acquired the assets and businesses of two
foreign distributors of alarm systems and a domestic manufacturer of
glass break sensors. The total purchase price for these businesses was
$3,263 cash and $3,516 of debt assumed.
All the aforementioned acquisitions were accounted for as purchase
transactions. The impact of these acquisitions on consolidated results
of operations was not significant. These companies have been included in
the consolidated financial statements from their respective dates of
acquisition. The excess of the aggregate purchase price over the fair
market value of net assets acquired of $80,997, $24,966 and $5,262 in
1998, 1997 and 1996, respectively, are being amortized over periods up to
40 years.
26
<PAGE>
Note 3 - Inventories
At December 31, 1998 and 1997 approximately 86% and 88%, respectively, of
the total inventories are accounted for by the LIFO method. The recorded
value of inventory approximates current cost. At year end, inventories
consist of:
1998 1997
Raw materials $ 57,763 $ 58,322
Work-in-process 22,089 16,501
Finished goods -
Manufactured by the Company 98,199 89,777
Manufactured by others 74,896 75,628
$252,947 $240,228
Note 4 - Debt
The average annual interest rate on short-term notes payable was
approximately 5.8% (5.6% domestic and 7.1% foreign) and 6.5% (6.2%
domestic and 8.1% foreign) at December 31, 1998 and 1997, respectively.
There are no compensating balance or commitment fee requirements
associated with these short-term borrowings. The Company has guaranteed
indebtedness of $1,250 relating to real estate ventures in which it
participates.
The Company's capitalized lease obligations are collateralized by certain
equipment. Other long-term debt bears interest principally at 4% to 9%,
with maturities through 2009. Aggregate long-term maturities due
annually for the five years beginning in 1999 are $16,719, $25,055,
$8,521, $8,725, $7,648 and an aggregate of $54,660 thereafter.
Note 5 - Investment in Affiliate
The Company's investment in Cylink consists of 8,606,085 shares of common
stock. See Note 13 regarding the fair value of the investment.
In 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. An after-
tax charge of $541, or $.01 per diluted share, resulting from the
restatement by Cylink of its 1997 earnings is included in the Company's
1998 fourth quarter results of operations.
In September 1997, Cylink acquired Algorithmic Research, an information
security company, for cash and Cylink stock totaling $76,263. The
Company increased the carrying value of its investment in Cylink by
$6,396 and recorded a $3,997 after-tax gain, or $.09 per diluted share,
as a result of the stock issued in the acquisition and reduced the
carrying value of its investment in Cylink by $18,943 and recorded an
$11,839 after-tax expense, or $.28 per diluted share, for its equity in
Cylink's write-off of "in-process technology" acquired in the
transaction.
In February 1996, the carrying value of the investment in Cylink was
increased by $23,279 to reflect the increase in the Company's equity in
Cylink's net book value as a result of an initial public offering. The
after-tax gain recorded on the increase in Cylink's equity was $14,413,
or $.34 per diluted share.
27
<PAGE>
Summarized results of operations of Cylink for the years ended December
31, 1998 and 1997 (as restated) are as follows:
1998 1997
Sales $ 42,760 $ 47,690
Gross profit 25,862 33,704
Write-off of "in-process technology" (63,920)
Loss from continuing operations $(17,356) $(64,955)
(Loss) income from discontinued operations (259) 3,210
Gain on disposal of discontinued operations 22,776
Net income (loss) $ 5,161 $(61,745)
Summarized financial position of Cylink at December 31, 1998 and 1997 (as
restated) is as follows:
1998 1997
Current assets $ 79,537 $ 58,137
Non-current assets 14,781 18,418
Current liabilities (18,950) (10,152)
Non-current liabilities (147) (269)
Stockholders' equity $ 75,221 $ 66,134
Note 6 - Leveraged Leases
The Company is an equity participant in leveraged leases of an aircraft
and communication satellite transponders. As the Company has no general
liability for the nonrecourse debt attributable to the acquisition of
such assets, the debt has been offset against the related rentals
receivable. The net investment in leveraged leases consists of:
1998 1997
Rentals receivable (net of principal
and interest on nonrecourse debt) $ 9,831 $ 11,900
Estimated residual value 11,432 11,432
Unearned and deferred income (4,442) (4,773)
Investment in leveraged leases 16,821 18,559
Deferred income taxes (16,180) (18,597)
Net investment $ 641 $ (38)
A summary of the components of income from leveraged leases follows:
1998 1997 1996
Income (loss) before income taxes $ 222 $ (81) $ 433
Income tax benefit (cost) -
Current (2,495) (1,005) (911)
Deferred 2,417 1,033 759
Income (loss) from leveraged leases $ 144 $ (53) $ 281
Minimum annual rentals receivable (net of principal and interest on
nonrecourse debt) under leveraged leases for the next five years
beginning with 1999 are $1,751, $3,487, $483, $98, $98 and an aggregate
of $3,914 thereafter.
28
<PAGE>
Note 7 - Income Taxes
Income before income taxes consists of:
1998 1997 1996
Domestic income $48,407 $58,849 $90,658
Foreign income 8,252 4,441 5,709
$56,659 $63,290 $96,367
The provision for income taxes consists of:
1998 1997 1996
Current -
Federal $ 26,415 $22,905 $22,116
State and local 4,406 2,764 2,951
Foreign 5,302 2,761 2,462
36,123 28,430 27,529
Deferred -
Federal (12,980) (5,321) 6,132
State and local (1,972) (260) 836
Foreign (1,409) (167) 178
(16,361) (5,748) 7,146
$ 19,762 $22,682 $34,675
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate of
35% to income before income taxes is as follows:
1998 1997 1996
Income tax at statutory rate $ 19,831 $22,152 $33,728
Tax effect of -
State income taxes, net of
Federal benefit 1,582 1,628 2,462
Foreign operations 1,004 1,040 642
Domestic tax credits (1,737) (1,306) (649)
Other items, net (918) (832) (1,508)
Actual income tax provision $ 19,762 $22,682 $34,675
Effective income tax rate 34.9% 35.8% 36.0%
29
<PAGE>
The components of the deferred tax liabilities (assets) at December 31,
1998 and 1997 are comprised of the following:
1998 1997
Deferred tax liabilities -
Leveraged leases $ 16,180 $ 18,597
Real estate ventures -
Affordable housing 22,467 16,799
Other 3,287 4,308
Prepaid pension 9,695 9,253
Investment in affiliate 6,362 5,760
Investment in USSB 13,790 5,418
Purchased tax benefit leases 2,550 3,091
Depreciation 1,592 291
State income taxes, net of
Federal benefit 685 4,497
Other 3,823 1,744
Total deferred tax liabilities 80,431 69,758
Deferred tax assets -
Patent litigation (15,050)
Inventory valuation (9,983) (9,153)
Tax loss carryforwards (5,777) (4,967)
Deferred compensation (4,501) (7,339)
Bad debts (2,628) (2,231)
Workers compensation (2,852) (1,428)
Other (7,173) (3,242)
Total deferred tax assets (47,964) (28,360)
Valuation allowance 5,777 4,967
Net deferred tax liability $ 38,244 $ 46,365
The valuation allowance relates to tax loss carryforwards of which $892
as of December 31, 1998 will be credited to goodwill when and if
utilized.
The Company's federal income tax returns have been examined through 1995
without material adjustment of reported income.
Note 8 - Stock Options and Awards
The Company's 1990 stock awards plan (the "Plan"), as amended in 1998 and
adjusted for the September 1998 2-for-1 stock split, provides for the
issuance of up to 6,400,000 shares of Class A stock to employees pursuant
to options, performance and bonus share awards, stock appreciation rights
("SARs") and other awards. Certain awards are payable in the form of
Class A stock or cash. Performance share awards vest ratably over terms
of five years or less. Options and SARs vest over a three year period
and are exercisable up to ten years from date of grant. Shares are
issued or cash is paid pursuant to performance and bonus share awards
upon specified maturity dates. During 1998, the Compensation Committee
accelerated the vesting of awards held by Penton employees prior to the
Penton spin-off and amended all other outstanding options and awards to
reflect the valuation of the spin-off resulting in an increase of 685,312
options and awards.
Activity in options, performance and bonus share awards under the Plan,
restated for the 2-for-1 stock split and the Penton spin-off, as provided
by the Plan, follows:
30
<PAGE>
1998 1997 1996
Outstanding at beginning of year 2,819,135 2,283,428 1,604,081
Granted 949,027 728,903 743,648
Exercised (671,583) (190,496) (61,600)
Cancelled (41,669) (2,700) (2,700)
Outstanding at end of year 3,054,910 2,819,135 2,283,428
Exercisable at end of year 990,623 927,577 531,311
Shares available for grant 2,405,407 688,397 1,399,391
Weighted average exercise price information follows:
1998 1997 1996
Outstanding at beginning of year $13.44 $10.99 $ 8.46
Granted 24.73 20.27 15.93
Exercised 12.91 10.36 4.59
Cancelled 19.03 16.02 16.02
Outstanding at end of year 16.99 13.44 10.99
Exercisable at end of year 8.59 7.46 6.14
The following non-qualified options outstanding at December 31, 1998
exclude 375,680 performance and bonus share awards, of which 96,813 are
issuable in 1999:
Range of Outstanding Exercisable
Exercise Average Average Average
Prices Shares Price Life (yrs) Shares Price
$20-$27 1,283,742 $23.33 7.1
$11-$16 745,470 $13.75 6.7 340,605 $11.05
$ 3-$ 9 650,018 $ 7.30 4.7 650,018 $ 7.30
The Company's 1998 and 1996 stock option plans for non-employee directors
("Directors' Plans") provide for the issuance of up to a total of 195,000
shares of Class A stock which are awarded at the market value on the date
of the award. Options for 7,830 and 62,400 shares were granted in 1998
and 1996 at an average exercise price per share of $26.22 and $18.27,
respectively. Options for 59,830 and 57,200 shares were outstanding at
December 31, 1998 and 1997 of which 42,308 and 31,200 shares,
respectively, were exercisable. Options for 5,200 shares were exercised
in 1998 and 5,200 shares were cancelled in 1997. Options expire at the
earlier of maturity (up to ten years from the date of grant) or five
years after the optionee ceases to be a member of the Board.
The fair value of options at date of grant was $7.88 in 1998, $8.63 in
1997 and $6.99 in 1996 for the Plan and $9.39 and $7.95 in 1998 and 1996
for the Directors' Plans. These values were determined by the Black-
Scholes option pricing model with the following weighted average
assumptions for 1998, 1997 and 1996, respectively: interest rate of 5.5%,
5.6% and 6.4%; an expected life of 5 years, 8 years and 8 years; a
volatility of 26%, 27% and 27%; and annual dividends of $.12 per share
for all three years.
Total expense under these plans was $1,870, $4,086 and $4,558 in 1998,
1997 and 1996, respectively. If the Company had adopted SFAS No. 123
with respect to options, net income would have been $38,583 or $.89 per
diluted share in 1998, $53,112, or $1.25 per diluted share in 1997, and
$71,685, or $1.70 per diluted share in 1996. The pro forma effect on net
income in 1996 is not representative of the effect in future years
because it does not take into consideration options granted prior to
1995.
31
<PAGE>
Note 9 - Retirement Plans
The Company has various noncontributory retirement plans covering
substantially all current and certain former domestic employees.
Retirement benefits for employees in foreign countries are generally
provided by national statutory programs. Benefits for domestic employees
are based on years of service and annual compensation as defined by each
plan. The components of net pension expense for the domestic plans
consist of:
1998 1997 1996
Service cost $ 4,059 $ 3,348 $ 2,890
Interest cost 2,689 2,358 2,092
Expected return on plan assets (5,406) (4,838) (4,394)
Amortization of transition asset (624) (624) (624)
Amortization of prior service cost 234 238 238
Recognized (gains) losses (126) 566 798
Net pension expense $ 826 $ 1,048 $ 1,000
The expected return on plan assets and recognition of gains and losses
are based upon an allocation of deferred gains and losses and plan assets
made between the Company and Penton Media, Inc. in connection with the
spin-off.
The assets and obligations of the domestic plans for continuing
operations are summarized as follows:
1998 1997
Change in benefit obligation -
Projected benefit obligation
at beginning of year $38,561 $33,856
Service cost 4,059 3,348
Interest cost 2,689 2,358
Actuarial loss 842 689
Benefits paid (1,888) (1,690)
Projected benefit obligation at end of year $44,263 $38,561
Change in plan assets -
Fair value of plan assets at beginning of year $78,186 $68,313
Actual return on plan assets (6,177) 11,563
Benefits paid (1,888) (1,690)
Fair value of plan assets at end of year $70,121 $78,186
Funded status of plans -
Plan assets in excess of projected
benefit obligation $25,858 $39,625
Unrecognized loss (gain) 368 (12,183)
Unrecognized prior service cost 632 866
Unamortized transition net asset (1,248) (1,872)
Prepaid pension cost $25,610 $26,436
Assumptions as of December 31 -
Discount rate 7% 7%
Expected return on plan assets 7% 7%
Rate of compensation increase 5% 5%
32
<PAGE>
Note 10 - Lease Commitments
The Company leases certain manufacturing facilities, warehouses, office
space and equipment under noncancelable operating leases expiring at
various dates through the year 2013. Most of the leases contain renewal
options and certain equipment leases include options to purchase during
or at the end of the lease term. Minimum annual rental commitments under
all noncancelable leases for the next five years beginning with 1999 are
$22,506, $19,608, $16,048, $13,043, $10,233 and an aggregate of $28,075
thereafter. Rental commitments are stated net of minimum sublease
rentals aggregating $3,352. Total rent expense (including taxes,
insurance and maintenance when included in the rent) amounted to $21,066,
$15,941 and $12,021 in 1998, 1997 and 1996, respectively.
Note 11- Contingencies and Commitments
In 1989 a judgment was entered against Saddlebrook Resorts, Inc.
("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which
arose out of the development of Saddlebrook's resort and a portion of the
adjoining residential properties owned and developed by the Company. The
lawsuit alleged damage to plaintiffs' adjoining property caused by
surface water effects from improvements to the properties. Damages of
approximately $8 million were awarded to the plaintiffs and an injunction
was entered requiring, among other things, that Saddlebrook work with
local regulatory authorities to take corrective actions. In 1990 the
trial court entered an order vacating the judgment and awarding a new
trial. In December 1994, Saddlebrook's motion for summary judgment based
on collateral estoppel was granted on the ground that Plaintiffs' claims
were fully retried and rejected in a related administrative proceeding.
Plaintiffs appealed the trial court's decision granting summary judgment.
In August 1996, the appellate court affirmed all but three issues in the
trial court's summary judgment order in favor of Saddlebrook. On April 1,
1998, the trial court entered an order limiting the scope of the retrial
in light of the appellate court's ruling. At an October 27, 1998
pretrial conference, the parties agreed to a mediation hearing. If the
hearing is unsuccessful in settling the matter, retrial is expected to
begin in 1999. The Company believes that the ultimate outcome of the
aforementioned lawsuit will not have a material adverse effect on its
financial statements.
In 1995 a lawsuit was brought against the Company by Interactive
Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of
up to $66,800 on account of Company sales of products which the plaintiff
alleged infringed on its patent. The plaintiff also asserted trebling of
damages, if awarded, based upon alleged willful infringement. The
Company moved for summary judgment of non-infringement and, in December
1997, the Court issued its order granting the Company partial summary
judgment, stating its products did not literally infringe upon
plaintiff's patent claims. In March 1998, the jury handed down a verdict
against the Company awarding damages of $35,954. The jury found that the
Company did not willfully infringe. The Company recorded a provision of
$43,000 in the first quarter of 1998 which considers the judgment and
interest. The Company has appealed the verdict.
In August 1998, ITI filed a second lawsuit against the Company which
alleges that certain of the Company's products not specified in the prior
litigation infringe on the same patent. This action has been stayed
pending the outcome of the appeal of the jury award. The Company
believes that the ultimate outcome of this lawsuit will not have a
material adverse effect on its financial statements.
The Company in the normal course of business is subject to a number of
lawsuits and claims both actual and potential in nature. While
management believes that resolution of other existing claims and lawsuits
will not have a material adverse effect on the Company's financial
statements, management is unable to estimate the magnitude of financial
impact of claims and lawsuits which may be filed in the future.
The Company has committed to invest up to a total of $45.9 million in
certain affordable housing real estate ventures through 2005.
33
<PAGE>
Note 12 - Capital Stock and Earnings Per Share
At the May 1998 annual stockholders' meeting, stockholders approved an
increase in the number of authorized shares to 100,000,000 for Class A
stock and 120,000,000 for Common stock.
In July 1998 the Board of Directors declared a 2-for-1 stock split in
the form of a 100% stock dividend on the Company's Common and Class A
stock, payable September 11, 1998 to stockholders of record September 1,
1998. In January 1996 the Board of Directors declared a 3-for-2 stock
split in the form of a 50% stock dividend on the Company's Common and
Class A stock, payable March 1, 1996 to stockholders of record February
14, 1996. The effect of this split is presented retroactively within
stockholders' equity at December 31, 1995 by transferring the par value
for the additional shares issued from the capital in excess of par value
account to the common stock accounts. All historical share and per
share data, as appropriate, reflect these stock splits.
Except for voting and dividend rights, the two classes of common capital
stock are identical. Class A stockholders are entitled to one-tenth vote
per share and have the right to elect 25% of all directors, but not less
than two. Common stockholders are entitled to one vote per share and
have the right to elect the remaining number of directors. Upon a change
of control of the Company (as defined in the Company's certificate of
incorporation), the Class A stock will automatically be changed into
Common stock.
Cash dividends declared on Class A stock are required to be 0.83 cents
per share more than dividends declared on Common stock (up to a maximum
of 3.33 cents per share per year). In recognition of the spin-off of
Penton Media, Inc. on August 7, 1998 and the 2-for-1 stock split, the
Board of Directors reduced the dividend on Common stock to an annual rate
of 8.68 cents per share and the dividend on Class A stock to an annual
rate of 12 cents per share. Cash dividends declared, in 1998, 1997 and
1996, adjusted for the stock split, were 11, 13.3 and 13.3 cents per
share, respectively, for Common stock and 14.3, 16.7 and 16.7 cents per
share, respectively, for Class A stock.
Basic net income per common share amounts were calculated by dividing
earnings by the combined weighted average number of Class A and Common
shares outstanding. Diluted net income per share amounts were based on
the same reported earnings but assume the issuance of Class A stock upon
exercise of outstanding stock options and distributable as performance
and bonus share awards.
Note 13 - Fair Value of Financial Instruments
The carrying amount of cash and equivalents, accounts receivable,
accounts payable, accrued expenses and notes payable approximates fair
value because of the short maturity of these instruments. The following
table presents the carrying amounts and estimated fair values of the
Company's other financial instruments at year end:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets -
Current marketable securities $ 44,200 $ 44,200 $ 27,583 $ 27,583
Investment in USSB 51,994 51,994 30,015 30,015
Investment in Cylink 21,616 31,197 20,441 83,909
Affordable housing investments 23,160 23,160 22,542 22,542
Notes receivable 19,276 19,251 8,092 8,074
Financial liabilities -
Long-term debt (121,328) (122,707) (100,945) (99,434)
34
<PAGE>
The estimated fair values of marketable securities, the investment in
USSB and the investment in affiliate are based on quoted market prices.
The estimated fair values of the Company's investments in affordable
housing projects were based upon available financial and other
information. The estimated fair values of the notes receivable and long-
term debt were calculated based upon the present value of estimated cash
flows using appropriate discount rates.
At December 31, 1998 and 1997, current marketable securities consisted of
auction rate preferred stocks, which had gross unrealized holding gains
of $2 and $25, respectively. Realized gains and losses on sales of
marketable securities are based upon the specific identification method
and were not significant in 1998, 1997 or 1996.
In December 1998, Hughes Electronics Corporation ("Hughes") and USSB
announced that they had reached agreement whereby Hughes would acquire
USSB for approximately $1.3 billion with a minimum and maximum price per
share of $10.50 to $18.00 based on the market value of Hughes stock
during a specified period of time. In early 1999 Pittway sold one
million of its 3.8 million shares of USSB at an average selling price of
$15.18 per share and will sell its remaining shares if the acquisition is
completed. In 1996 the Company sold 13% of its investment in USSB as part
of an initial public offering of USSB common stock. The sale resulted in
an after-tax gain of $8,149, or $.19 per diluted share. The Company
recorded a charitable donation of appreciated shares of USSB stock in
1996 resulting in a tax benefit of $849, or $.02 per diluted share.
Unrealized holding gains in this investment were $36,205 and $14,226 at
December 31, 1998 and 1997, respectively.
The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts and the
estimates presented above may not necessarily be indicative of the
amounts that the Company could realize in a current market exchange.
Note 14 - Segment Information
The Company operates principally in two reportable segments. The Alarm
Manufacturing segment designs, manufactures and sells an extensive line
of burglar and commercial fire alarm equipment and other security
products. Manufacturing sales are made through the Alarm Distribution
segment and directly to third-party customers. The Company's management
has aggregated its alarm manufacturing businesses as one reportable
segment due to strong similarities in the economic characteristics,
nature of products and services, production processes, types of
customers, regulatory environment and distribution methods used. The
Alarm Distribution segment sells only to third-party customers alarm and
other security products manufactured by the Company and by other
companies.
The Company principally evaluates performance based on sales and
operating income. Sales within and between segments and geographic areas
are made at approximate arm's-length prices. Sales and expenses which
are not related to or identifiable with specific segments are included in
General Corporate and Other. Identifiable assets are those assets that
are specifically identified with the industry segments and geographic
areas in which operations are conducted. General Corporate and Other
assets include all prepaid pension costs, future tax benefits,
marketable securities and other investments. Eliminations include sales
between segments and geographic areas and related intercompany accounts.
Export sales were not material and no single customer accounted for ten
percent of sales.
35
<PAGE>
1998 1997 1996
SEGMENTS
Sales -
Alarm Manufacturing $ 737,418 $ 664,256 $ 512,126
Alarm Distribution 822,348 691,570 558,005
General Corporate and Other 458 64 586
Less Manufacturing sales
to Distribution (233,578) (212,118) (147,264)
$1,326,646 $1,143,772 $ 923,453
Operating income - *
Alarm Manufacturing $ 73,239 $ 66,119 $ 49,343
Alarm Distribution 31,615 27,534 24,032
General Corporate and Other (3,985) (6,785) (6,660)
Eliminations 3,573 (4,367) (3,010)
$ 104,442 $ 82,501 $ 63,705
Total assets - **
Alarm Manufacturing $ 602,383 $ 460,482 $ 375,008
Alarm Distribution 298,078 259,122 208,782
General Corporate and Other 253,773 203,850 231,282
Eliminations (79,179) (71,157) (44,821)
$1,075,055 $ 852,297 $ 770,251
Capital expenditures -
Alarm Manufacturing $ 30,782 $ 37,924 $ 41,815
Alarm Distribution 6,369 5,277 3,372
General Corporate and Other 229 117 180
$ 37,380 $ 43,318 $ 45,367
Depreciation and amortization -
Alarm Manufacturing $ 31,038 $ 24,771 $ 19,672
Alarm Distribution 4,436 3,141 2,379
General Corporate and Other 220 229 237
$ 35,694 $ 28,141 $ 22,288
GEOGRAPHIC REGION
Sales -
Domestic $1,151,323 $ 999,756 $ 797,574
Foreign 227,611 188,038 160,765
Eliminations (52,288) (44,022) (34,886)
$1,326,646 $1,143,772 $ 923,453
Total assets - **
Domestic $ 873,314 $ 705,857 $ 649,560
Foreign 218,479 161,994 145,710
Eliminations (16,738) (15,554) (25,019)
$1,075,055 $ 852,297 $ 770,251
* Excludes $43,000 litigation provision recorded in 1998.
** Excludes investment in discontinued operations of $58,397 in 1997
and $47,058 in 1996.
36
<PAGE>
Note 15 - Quarterly Results (Unaudited)
Quarterly results of operations for the years ended December 31, 1998 and
1997 are shown below:
First Second Third Fourth Total
Net Sales
1998 $304,139 $325,538 $344,488 $352,481 $1,326,646
1997 252,492 285,158 306,536 299,586 1,143,772
Gross Profit
1998 $103,955 $109,255 $117,835 $121,541 $ 452,586
1997 84,337 96,940 103,668 109,400 394,345
Net Income (Loss)
1998 (b) $ (7,995)(a) $ 19,328 $ 16,661 $ 13,934 $ 41,928
1997 (b) 12,296 16,598 8,335 18,285 55,514
Net Income (Loss)
Per Share -
Basic
1998 (b) $ (.19)(a) $ .46 $ .39 $ .33 $ .99
1997 (b) .29 .40 .20 .44 1.32
Diluted
1998 (b) $ (.19)(a) $ .45 $ .38 $ .32 $ .97
1997 (b) .29 .39 .20 .43 1.31
(a) Includes after-tax patent litigation provision of $26,875 ($.64
per basic share, $.63 per diluted share) recorded in the 1998 first
quarter.
(b) Includes discontinued operations and changes in equity in Cylink
after taxes, as follows:
First Second Third Fourth Total
Discontinued Operations -
Income (loss)
1998 $ 2,348 $ 3,056 $ (373) $ 5,031
1997 2,726 4,883 3,225 $ 4,072 14,906
Per Share - Basic
1998 $ .06 $ .07 $ (.01) $ .12
1997 .06 .12 .08 $ .10 .35
Per Share - Diluted
1998 $ .06 $ .07 $ (.01) $ .11
1997 .06 .11 .08 $ .10 .35
Changes in equity
in Cylink -
Income (loss)
1998 $ 4,553 $ 386 $ (542) $ (3,663) $ 734
1997 384 238 (7,650) 314 (6,714)
Per Share - Basic
1998 $ .11 $ .01 $ (.01) $ (.08) $ .02
1997 .01 .01 (.18) .01 (.16)
Per Share - Diluted
1998 $ .11 $ .01 $ (.01) $ (.08) $ .02
1997 .01 .01 (.18) (.15)
37
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Pittway Corporation
In our opinion, the consolidated financial statements, listed in the
index appearing under Item 8 on page 17, present fairly, in all material
respects, the financial position of Pittway Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Pittway
Corporation's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 16, 1999
Report of Management
Management's Responsibility for Financial Statements
The financial statements of Pittway Corporation and its consolidated
subsidiaries, and all other information presented in this Annual Report,
are the responsibility of the management of the Company. These
statements have been prepared in accordance with generally accepted
accounting principles and reflect in all material respects the substance
of events and transactions that should be included.
Management is responsible for the accuracy and objectivity of the
financial statements, including estimates and judgments reflected
therein, and fulfills this responsibility primarily by establishing and
maintaining accounting systems and practices adequately supported by
internal accounting controls. Management believes that the internal
accounting controls in use are satisfactory to provide reasonable
assurance that the Company's assets are safeguarded, that transactions
are executed in accordance with management's authorizations, and that the
financial records are reliable for the purpose of preparing financial
statements.
Independent accountants were selected by the Board of Directors, upon the
recommendation of the Audit Committee, to audit the financial statements
in accordance with generally accepted auditing standards. Their audits,
as well as those of the Company's internal audit department, include a
review of internal accounting control policies and procedures and
selective tests of transactions.
The Audit Committee of the Board of Directors, which consists of three
directors who are not officers or employees of the Company, meets
regularly with management, the internal auditors and the independent
accountants to review matters relating to financial reporting, internal
accounting controls, and auditing. The independent accountants have
unrestricted access to the Audit Committee.
King Harris Paul R. Gauvreau
President and Chief Executive Officer Financial Vice President,
Treasurer
and Chief Financial Officer
38
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Information required to be furnished in this part of the Form 10-K has
been omitted because the Registrant will file with the Securities and
Exchange Commission a definitive proxy statement pursuant to Regulation
14A under the Securities Exchange Act of 1934 not later than April 30,
1998.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the headings "Nominees for Election by
the Holders of Class A Stock", "Nominees for Election by the Holders of
Common Stock", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for
the annual meeting of stockholders to be held on May 6, 1999 is
incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the headings "Compensation Committee
Interlocks and Insider Participation", "Compensation", "Compensation
Committee Report on Executive Compensation" and "Performance Graph" in
the Registrant's Proxy Statement for the annual meeting of stockholders
to be held on May 6, 1999 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for the annual meeting of stockholders to be held on May 6,
1999 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the headings "Certain Transactions" (and
the information set forth under the heading "Compensation Committee
Interlocks and Insider Participation" which is cross-referenced under the
heading "Certain Transactions") in the Registrant's Proxy Statement for
the annual meeting of stockholders to be held on May 6, 1999 is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements and financial statement schedule - See index
to Consolidated Financial Statements and Financial Statement
Schedule at page 17 of this Form 10-K
Exhibits required by Item 601 of Regulation S-K are listed in the
Index to Exhibits on pages 42-43 of this Form 10-K, which is
incorporated herein by reference. Each management contract or
compensatory plan or arrangement required to be filed as an Exhibit
to this report pursuant to Item 14 (c) of Form 10-K is so
identified on the Index to Exhibits.
(b) No reports on Form 8-K have been filed during the fourth quarter
of the year for which this report is filed.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PITTWAY CORPORATION
(Registrant)
By :/s/Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President, Treasurer
and Chief Financial Officer
Date: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 19, 1999.
/s/ Neison Harris /s/ Anthony Downs
Neison Harris, Director and Anthony Downs, Director
Chairman of the Board
/s/King Harris /s/ Leo A. Guthart
King Harris, Director, President Leo A. Guthart, Director
and Chief Executive Officer
/s/ Paul R. Gauvreau /s/ Irving B. Harris
Paul R. Gauvreau, Principal Irving B. Harris, Director
Financial and Accounting Officer
/s/ Eugene L. Barnett /s/ William W. Harris
Eugene L. Barnett, Director William W. Harris, Director
/s/ Fred Conforti /s/ Jerome Kahn, Jr.
Fred Conforti, Director Jerome Kahn, Jr., Director
/s/ E. David Coolidge III /s/ John McCarter
E. David Coolidge III, Director John McCarter, Director
40
<PAGE>
PITTWAY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additions
Balance at Charges to From Deductions Balance
beginning costs and businesses from at end of
of period expenses acquired reserve (a) Period
1998
Allowance for doubtful accounts $9,691 $5,462 $1,986 $4,966 $12,173
Inventory obsolescence reserve 9,047 3,926 1,221 1,784 12,410
1997
Allowance for doubtful accounts $7,601 $4,298 $ 319 $2,527 $ 9,691
Inventory obsolescence reserve 8,512 4,973 339 4,777 9,047
1996
Allowance for doubtful accounts $6,496 $4,223 $ 53 $3,171 $ 7,601
Inventory obsolescence reserve 6,613 2,686 29 816 8,512
</TABLE>
(a) Deductions include write-off of accounts considered uncollectible,
net of recoveries, or write-off of obsolete inventory and net foreign
currency translation adjustments.
41
<PAGE>
INDEX TO EXHIBITS*
Sequential
Number and Description of Exhibit Page Number***
3.1 Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
3.2 Certificate of Amendment of Restated Certificate
of Incorporation of Registrant dated June 23, 1987
(incorporated by reference to Exhibit 3.2 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
3.3 Certificate of Amendment of Restated Certificate
of Incorporation of Registrant dated December 28,
1989 (incorporated by reference to Exhibit 3.3 of
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
3.4 Certificate of Amendment to Restated Certificate
of Incorporation dated May 9, 1996 (incorporated by
reference to Exhibit 3.4 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
3.5 Certificate of Amendment to Restated Certificate
of Incorporation dated May 7, 1998 (incorporated by
reference to Exhibit 3.5 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
3.6 Bylaws of Registrant, as amended.
4. Composite Conformed Copy of separate Note Purchase
Agreements Dated as of December 15, 1995, each,
between the Registrant and one of Metropolitan Life
Insurance Company, Metropolitan Property and
Casualty Insurance Company, Nationwide Life
Insurance Company, Employers Life Insurance Company
of Wausau, and West Coast Life Insurance Company
without exhibits (incorporated by reference to
Exhibit 4.0 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.1 Pittway Corporation 1990 Stock Awards Plan, as
amended (incorporated by reference to Exhibit 4 to
the Registrant's Form S-8 Registration Statement
No. 333 - 71613 filed with the Commission on
February 1, 1999).
10.2 Pittway Corporation 1998 Director Stock Option
Plan (incorporated by reference to Exhibit 4 of
Registrant's Form S-8 Registration Statement No.
333 - 71617 filed with the Commission on February
1, 1999).
10.3 Pittway Corporation 1996 Director Stock Option
Plan (incorporated by reference to Exhibit 4 of
Registrant's Form S-8 Registration Statement No.
333 - 12615 filed with the Commission on September
25, 1996).
42
<PAGE>
10.4 Employment Agreement with Paul R. Gauvreau dated
as of January 1, 1998.**
10.5 Employment Agreement with Edward J. Schwartz
dated as of January 1, 1998.**
10.6 Employment Agreement with King Harris dated as of
January 1, 1996. (incorporated by reference to
Exhibit 10.6 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).**
10.7 Employment Agreement with Leo A. Guthart dated as
of January 1, 1996. (incorporated by reference to
Exhibit 10.7 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).**
10.8 Combination Agreement, dated May 21, 1998, by and
among Penton Media, Inc., DM Acquisition Corp.,
Pittway Corporation, Donohue Meehan Publishing
Company, William C. Donohue, and John J. Meehan
(incorporated by reference to Exhibit 2.1 of the
Penton Media, Inc. S-1 Registration Statement
Number 333-56877 filed on June 15, 1998).
13. 1998 Annual Report to Stockholders.*
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended
December 31, 1998 (submitted only in electronic
format).
27.2 Restated Financial Data Schedule for the first
three quarters of 1998 (submitted only in
electronic format).
27.3 Restated Financial Data Schedule for the year
ended December 31, 1997 and 1996, and the first
three quarters of 1997 (submitted only in
electronic format).
* This document, together with the Annual Report on
Form 10-K, constitutes the 1998 Annual Report to
Stockholders. This document, except to the extent
incorporated herein by reference, is being
furnished for the information of the Securities and
Exchange Commission only and is not to be deemed
filed as a part of this Form 10-K.
** This document is a management contract or
compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item
14 (c) of Form 10-K.
*** This information appears only in the manually
signed original of this Form 10-K.
43
<PAGE>
Exhibit 3.6
Pittway Corporation
December 31, 1998
Form 10-K
PITTWAY CORPORATION
(a Delaware corporation)
________
BY-LAWS
________
NAME-LOCATION
Section 1. Name. The name of the Corporation is PITTWAY
CORPORATION.
Section 2. Registered Office. The registered office shall be
in the City of Wilmington, County of New Castle, State of Delaware, and
the name of the resident agent in charge thereof shall be The Corporation
Trust Company. The Corporation may also have offices at such other places
as the Board of Directors may from time to time appoint or the business of
the Corporation may require.
SEAL
Section 3. Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware." One or more duplicate dies for
impressing such seal may be kept and used.
MEETINGS OF STOCKHOLDERS
Section 4. Place of Meeting. All meetings of the
stockholders shall be held at such place, within or without the State of
Delaware, as is fixed in the notice of the meeting.
Section 5. Annual Meeting. An annual meeting of the
stockholders of the Corporation for the election of directors and the
transaction of such other business as may properly come before the meeting
shall be held on the first Monday of May in each year if not a legal
holiday, and if a legal holiday, then on the next succeeding business day,
not a Saturday, at 4:00 P.M. Central Daylight Savings Time. If for any
reason any annual meeting shall not be held at the time herein specified,
the same may be held at any time thereafter upon notice, as herein
provided, or the business thereof may be transacted at any special meeting
called for the purpose.
Section 6. Special Meetings. Special meetings of
stockholders may be called by the Chairman of the Board, the Chairman of
the Executive Committee, the President, or a Vice-Chairman of the Board
whenever the one so calling the meeting deems it necessary or advisable,
and shall be called by the Chairman of the Board, the Chairman of the
Executive Committee, the President, or a Vice-Chairman of the Board,
whenever so directed in writing by a majority of the full Board of
Directors (and, in the case of each of the Chairman of the Board and the
President, whenever so required by the Certificate of Incorporation).
Section 7. Notice of Meetings. Notice of the date, time and
place of each annual and each special meeting of the stockholders shall be
given to each of the stockholders entitled to vote at such meeting by
mailing the same in a postage prepaid wrapper addressed to each such
stockholder at his address as it appears on the books of the Corporation,
or by delivering the same personally to any such stockholder, in lieu of
such mailing, at least ten (10) days prior to, and not more than sixty
(60) days before, such meeting, and meetings may be held without notice if
all of the stockholders entitled to vote thereat are present in person or
by proxy, or if notice thereof is waived by all such stockholders not
present in person or by proxy, before or after the meeting. The notice of
each special meeting of the stockholders shall set forth the purposes
thereof and the business transacted at all special meetings of
stockholders shall be confined to the purposes stated in the notice
thereof.
Section 8. Closing of Transfer Books. The Board of Directors
may close the stock transfer books of the Corporation
for a period not exceeding sixty (60) days preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or
the date for the allotment of rights, or the date when any change or
conversion or exchange of capital stock shall go into effect, or for a
period not exceeding sixty (60) days in connection
with obtaining the consent of stockholders for any purpose,
provided, however, that in lieu of closing the stock transfer books as
aforesaid the Board of Directors shall have the power to fix in advance a
date not exceeding sixty (60) days and not less than ten (10) days
preceding the date of any meeting of stockholders, or the date for the
payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange
of capital stock shall go into effect, or the final date for obtaining any
such consent, as a record date for the determination of the stockholders
entitled to notice of and to vote at such meeting, entitled to receive
payment of such dividend or to such allotment of rights or to exercise the
right in respect of such change, conversion or exchange of capital stock,
or to give such consent, and in such case only such stockholders as shall
be stockholders of record on the date so fixed shall be entitled to such
notice of and to vote at such meeting or to receive payment of such
dividend or to receive such allotment of rights or to exercise such rights
or to give such consent as the case may be, notwithstanding any transfer
of any stock on the books of the Corporation after any such record date
fixed as aforesaid.
Section 9. Organization. At each meeting of the
stockholders, the Chairman of the Board, or in the case of vacancy in
office or absence of the Chairman of the Board, one of the following
officers present in the order stated: the Chairman of the Executive
Committee, the President, the Vice-Chairmen of the Board in their order of
rank, the Vice-Presidents in their order of rank and seniority, or a
chairman chosen by the stockholders entitled to cast a majority of the
votes which all stockholders present in person or by proxy are entitled to
cast on such matter, shall act as chairman, and the Secretary, or, in the
absence of the Secretary, an Assistant Secretary, or in the absence of
both the Secretary and Assistant Secretaries, a person appointed by the
chairman, shall act as secretary.
Section 10. Voting at Stockholders' Meetings. At each
meeting of the stockholders, every stockholder having the right to vote
thereat shall be entitled to vote in person, or by proxy appointed by an
instrument in writing subscribed by such stockholder and bearing a date
not more than three years prior to the date of said meeting, unless said
instrument provides for a longer period. Stockholders shall have the
voting rights specified in the Certificate of Incorporation. The vote for
directors, and, upon the demand of any stockholder, the vote upon any
question before the meeting, shall be by ballot.
Section 11. Quorum and Adjournment. Except as otherwise
provided by law or by the Certificate of Incorporation, at any meeting of
the stockholders the presence, in person or by proxy, of the holders of
shares of stock of the Corporation entitled to cast at least a majority of
the votes which the outstanding stock entitled to vote thereat is entitled
to cast on a particular matter shall be requisite and shall constitute a
quorum entitled to take action with respect to that vote on that matter.
If at any meeting of stockholders there shall be, with respect to a
particular matter, less than a quorum so present, the stockholders present
in person or by proxy and entitled to vote thereat on such matter may
without further notice, following the completion of such action, if any,
with respect to other matters as the stockholders present in person or by
proxy and constituting a quorum to vote thereat on such matters desire to
take, adjourn the meeting from time to time until a quorum with respect to
such matter shall be present, but no business shall be transacted at any
such adjourned meeting except such as might have been lawfully transacted
had the meeting not been adjourned.
Section 12. List of Stockholders. The Secretary shall
prepare, at least 10 days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote at such meeting
arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder, and
such list shall be open to examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the
notice of the meeting or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
DIRECTORS
Section 13. Number of Directors. The number of directors
constituting the full Board of Directors shall be such number, not less
than eight (8), as shall from time to time be fixed by resolution of the
Board of Directors. Vacancies, and newly created directorships resulting
from any increase in the number of directorships, may be filled as
provided in the Certificate of Incorporation. The directors, other than
directors elected to fill vacancies or any new directorships resulting
from any increase in the number of directors, shall be elected at the
annual meeting of the stockholders and each director shall be elected to
serve (unless removed) until his successor shall be elected and shall
qualify.
Section 14. Powers, Qualifications and Removal. The business
of the Corporation shall be managed by the Board of Directors, except as
may otherwise be provided in the Certificate of Incorporation. Any
director may tender his resignation at any time. Directors may be removed
at any time as provided by law.
Section 15. Regular and Special Meetings of the Board. The
Board of Directors may hold its meetings, whether organizational, regular
or special, either within or without the State of Delaware. Regular
meetings of the Board may be held with or without notice at such times
and places as shall from time to time be determined by resolution of the
Board. Whenever the time or place of a regular meeting of the Board
shall have been determined by resolution of the Board, the meeting shall
not be held pursuant to any subsequent resolution of the Board modifying
its previous determination without first giving notice to each director
of such modification. Special meetings of the Board shall be held
whenever called in writing by the Chairman of the Board, the Chairman of
the Executive Committee, the President, a Vice-Chairman of the Board, or
any two (2) directors (at least one of whom shall have been elected by
the holders of the Corporation's Common Stock of the par value of $1.00
per share). Notice of any modification of the time and place at which a
regular meeting of the Board is to be held without notice, and notice of
each special meeting of the Board, shall be given to each director at
least twenty-four (24) hours before the meeting either personally, by
telephone or by facsimile transmission or at least five (5) days before
the meeting by mail to him to his residence or usual place of business.
Meetings of the Board, whether regular or special, may be held at any
time and place, and for any purpose, without notice, when all the
directors are present or when all directors not present shall, in
writing, waive notice of and consent to the holding of such meeting,
which waiver and consent may be given after the holding of such meeting.
Section 16. Organization. At every meeting of the Board, the
Chairman of the Board, or in the case of vacancy in office or absence of
the Chairman of the Board, one of the following officers present in the
order stated: the Chairman of the Executive Committee, the President, the
Vice-Chairmen of the Board in their order of rank, the Vice Presidents in
their order of rank and seniority, or a chairman chosen by a majority of
the directors present, shall preside, and the Secretary, or, in the
absence of the Secretary, an Assistant Secretary, or in the absence of the
Secretary and the Assistant Secretaries, any person appointed by the
chairman of the meeting, shall act as secretary.
Section 17. Quorum and Adjournment. At all meetings of the
Board a majority of the full Board of Directors shall be necessary and
sufficient to constitute a quorum for the transaction of business except
as may otherwise be specifically provided in the Certificate of
Incorporation or in these By-Laws; provided, that if a quorum of directors
shall not be present at any duly called or regular meeting thereof, the
directors present may adjourn said meeting from time to time for a period
of not exceeding two (2) weeks in the aggregate and notice of any such
adjourned meeting shall not be necessary unless an adjournment was taken
sine die.
COMMITTEES
Section 18. Executive Committee. There shall be a committee
of the Board of Directors designated as the Executive Committee, to
consist of three (3) or more of the directors, as shall from time to time
be appointed by resolution of the Board. Except as otherwise limited by
resolution of the Board of Directors adopted on or after November 15, 1989
or by law, the Certificate of Incorporation or these By-Laws, the
Executive Committee shall have and may exercise, when the Board is not in
session, all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which
may require it; but the Executive Committee shall not have power to fill
vacancies in the Board, or to change the membership of or to fill
vacancies in the said Committee, to remove or replace the Chairman of the
Executive Committee, or to amend these By-Laws. The Board shall have the
power at any time to change the membership of the Executive Committee, to
fill vacancies in it, or to dissolve it. The Executive Committee may make
rules for the conduct of its business and may appoint such assistants as
it shall from time to time deem necessary. A majority of the members of
the Executive Committee shall constitute a quorum.
Section 19. Audit Committee. There shall be a committee of
the Board of Directors designated as the Audit Committee, to consist of
not fewer than two members of the Board as shall from time to time be
appointed by resolution of the Board. No member of the Board who is an
officer or an employee of the Corporation or any subsidiary of the
Corporation shall be eligible to serve on the Audit Committee. The Audit
Committee shall review and, as it shall deem appropriate, approve internal
accounting and financial controls for the Corporation and accounting
principles and auditing practices and procedures to be employed in the
preparation and review of financial statements of the Corporation. The
Audit Committee shall make recommendations to the Board concerning the
engagement of independent public accountants to audit the annual financial
statements of the Corporation and its subsidiaries and shall arrange with
such accountants the scope of the audit to be undertaken by such
accountants. The Board shall have the power at any time to change the
membership of the Audit Committee, to fill vacancies in it, or to dissolve
it. The Audit Committee may make rules for the conduct of its business
and may appoint such assistants as it shall from time to time deem
necessary. A majority of the members of the Audit Committee shall
constitute a quorum.
Section 20. Other Committees. The Board of Directors may
also, by resolution or resolutions passed by the affirmative vote therefor
of the majority of the full Board of Directors, designate one or more
other committees, which, to the extent provided in said resolution or
resolutions, shall have and may exercise, when the Board is not in
session, the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which
may require it. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the
Board of Directors. A majority of the members of any such committee may
determine its action and fix the time and place of
its meetings unless the Board of Directors shall otherwise provide. The
Board of Directors shall have power at any time to fill vacancies in, to
change the membership of, or to dissolve any such committee.
Section 21. Compensation of Directors. By resolution of the
Board of Directors, the directors may be paid their expenses, if any, for
attendance at each regular or special meeting of the Board or of any
committee designated by the Board and may be paid a fixed sum for
attendance at such meeting, or a stated salary as director, or both.
Nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor; provided however that directors who are also salaried officers
shall not receive fees or salaries as directors.
OFFICERS
Section 22. Designation, Term, Vacancies. The officers of
the Corporation shall be a President, one or more Vice-Presidents, a
Secretary, one or more Assistant Secretaries, a Treasurer, one or more
Assistant Treasurers, and such other officers, including a Chairman of the
Board, a Chairman of the Executive Committee and one or more Vice-Chairmen
of the Board, as the Board of Directors may from time to time deem
necessary. Such officers may have and perform the powers and duties
usually pertaining to their respective offices, the powers and duties
respectively prescribed by law and by these By-Laws, and such additional
powers and duties as may from time to time be prescribed by the Board.
The same person may hold any two (2) offices. Only the Chairman of the
Board, if any, the Chairman of the Executive Committee, if any, the
President, and the Vice-Chairman of the Board, if any, need be members of
the Board of Directors.
As soon as practicable after the election of the Board at the
annual meeting of stockholders, the Board shall elect the President,
Secretary and Treasurer and, at their discretion, a Chairman of the Board,
a Chairman of the Executive committee, such Vice-Chairmen of the Board and
such Vice-Presidents as they shall determine, all of whom shall hold
office until the regular annual meeting of the Board of Directors
following their appointment or until their successors are appointed and
qualify, provided that they, or any of them, may be removed at any time,
with or without cause, by the affirmative vote therefor of a majority of
the full Board of Directors. All other agents and employees of the
Corporation shall hold office during the pleasure of the Board of
Directors. Vacancies occurring among the officers of the Corporation
shall be filled by the Board of Directors. The salaries of all officers
of the Corporation shall be fixed by the Board of Directors.
Section 23. Chairman of the Board. The Chairman of the
Board, if any, shall exercise such powers as may from time to time be
specifically delegated to him by these By-Laws or by resolution of the
Board of Directors.
Section 24. Chairman of the Executive Committee. The
Chairman of the Executive Committee, if any, shall preside at meetings of
the Executive Committee and shall exercise such other powers as may from
time to time be specifically delegated to him by these By-Laws or by
resolution of the Board of Directors.
Section 25. President. The President shall be the chief
executive officer and the chief operating officer of the Corporation and
shall exercise such other powers as may from time to time be specifically
delegated to him by these By-Laws or by resolution of the Board of
Directors. Subject to the Board of Directors, he shall have general
charge of the entire business of the Corporation. He may sign
certificates of stock and sign and seal bonds, debentures, contracts or
other obligations authorized by the Board, and may, without previous
authority of the Board, make such contracts as the ordinary conduct of the
Corporation's business requires. He shall have the usual powers and
duties vested in the President of a corporation. He shall have power to
select and appoint all necessary officers and employees of the
Corporation, except those selected by the Board of Directors, and to
remove all such officers and employees, except those selected by the Board
of Directors, and make new appointments to fill vacancies. He may
delegate any of his powers to a Vice-President of the Corporation. He
shall at all times be subject to the direction of the Board of Directors.
Section 26. Vice-Chairmen of the Board. Each Vice-Chairman
of the Board, if any, shall have such of the President's powers and duties
as the President may from time to time delegate to him and shall exercise
such other powers as may from time to time be specifically delegated to
him by these By-Laws or by resolution of the Board of Directors.
Section 27. Vice-Presidents. Each Vice-President shall have
such of the President's powers and duties as the President may from time
to time delegate to him, and each Vice-President shall have such other
powers and perform such other duties as may be assigned to him by these
By-Laws or by resolution of the Board of Directors.
Section 28. Treasurer. The Treasurer shall have custody of
such funds and securities of the Corporation as may come to his hands or
be committed to his care by the Board of Directors. Whenever necessary or
proper, he shall endorse on behalf of the Corporation, for collection,
checks, notes, or other obligations, and shall deposit the same to the
credit of the Corporation in such bank or banks or depositories, approved
by the Board of Directors, as the Board of Directors or President may
designate. He may sign receipts or vouchers for payments made to the
Corporation, and the Board of Directors may require that such receipts or
vouchers shall also be signed by some other officer to be designated by
them. Whenever required by the Board of Directors, he shall render a
statement of his cash accounts and such other statements respecting the
affairs of the Corporation as may be required. He shall keep proper and
accurate books of account. He shall perform all acts incident to the
office of Treasurer, subject to the control of the Board.
Section 29. Secretary. The Secretary shall have custody of
the seal of the Corporation and when required by the Board of Directors,
or when any instrument signed by another officer of the Corporation duly
authorized to sign the same so requires, or when necessary to attest any
proceedings of the stockholders or directors, shall affix it to any
instrument requiring the same and shall attest the same with his
signature, provided that the seal may be affixed by the President or a
Vice-President or other officer of the Corporation to any document
executed by either of them respectively on behalf of the Corporation which
does not require the attestation of the Secretary. He shall attend to the
giving and serving of notices of meetings. He shall have charge of such
books and papers as properly belong to his office or as may be committed
to his care by the Board of Directors. He shall perform such other duties
as appertain to his office or as may be required by the Board of
Directors.
Section 30. Assistant Secretary. Each Assistant Secretary
shall be vested with such powers and duties as may be delegated to him by
the President or the Secretary and any act may be done or duty performed
by an Assistant Secretary with like effect as though done or performed by
the Secretary; and shall have such other powers and perform such other
duties as may be assigned to him by the Board of Directors.
Section 31. Assistant Treasurer. Each Assistant Treasurer
shall be vested with such powers and duties as may be delegated to him by
the President or the Treasurer, and any act may be performed by an
Assistant Treasurer with like effect as though done or performed by the
Treasurer; and shall have such other powers and perform such other duties
as may be assigned to him by the Board of Directors.
Section 32. Delegation. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of
Directors may deem sufficient, the Board may delegate, for the time being,
the powers or duties, or any of them, of such officer to any other officer
or to any director.
STOCK
Section 33. Certificates of Stock. All certificates of
shares of the capital stock of the Corporation shall be in such form not
inconsistent with the Certificate of Incorporation, these By-Laws and the
laws of the State of Delaware, as shall be approved by the Board of
Directors, and shall be signed by the President or a Vice-President and by
the Secretary or an Assistant Secretary or by the Treasurer or an
Assistant Treasurer and shall bear the seal of the Corporation and shall
not be valid unless so signed and sealed. Certificates countersigned by a
duly appointed transfer agent and/or registered by a duly appointed
registrar shall be deemed to be so signed and sealed whether the
signatures be manual or facsimile signatures and whether the seal be a
facsimile seal or any other form of seal. All certificates for each class
of stock shall be consecutively numbered and the name of the person owning
the shares represented thereby, his address, with the number of such
shares and the date of issue, shall be entered on the Corporation's books.
All certificates surrendered shall be cancelled and no new certificates
issued until the former certificates for the same number of shares shall
have been surrendered and cancelled, except in cases provided for herein.
In case any officer or officers who shall have signed or whose
facsimile signature or signatures shall have been affixed to any such
certificate or certificates, shall cease to be such officer or officers of
the Corporation before such certificate or certificates shall have been
delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation, and may be issued and
delivered as though the person or persons who signed such certificates, or
whose facsimile signature or signatures shall have been affixed thereto,
had not ceased to be such officer or officers of the Corporation.
Section 34. Transfers of Shares. Transfers of stock shall be
made upon the books of the Corporation by the holder in person or by
attorney, upon the surrender and cancellation of the certificate or
certificates for such shares. But the Board of Directors may appoint one
or more suitable banks and/or trust companies as transfer agents and/or
registrars of transfers, for facilitating transfers of any class or series
of stock of the Corporation by the holders thereof under such regulations
as the Board of Directors may from time to time prescribe. Upon such
appointment being made all certificates of such class or series thereafter
issued shall be countersigned by one of such transfer agents and/or one of
such registrars of transfers, and shall not be valid unless so
countersigned. The transfer books of the Corporation may be closed for
such period, not to exceed sixty (60) days, as the Board of Directors may
direct previous to and on the day of the annual or any special meeting of
the stockholders, and may also be closed by the Board of Directors for
such time as may be deemed advisable for dividend purposes or allotment of
rights, or determination of stockholders entitled to vote as provided in
Section 8 hereof, and during such time as stock shall be transferable.
Section 35. Addresses of Stockholders. Every stockholder
shall furnish the Corporation with an address to which notices of meetings
and all other notices may be served upon or mailed to him, and in default
thereof notices may be addressed to him at his last known post-office
address.
Section 36. Stolen, Lost, Mutilated and Destroyed
Certificates. The Board of Directors may in its sole discretion direct
that a new certificate or certificates of stock may be issued in place of
any certificate or certificates of stock theretofore issued by the
Corporation, alleged to have been stolen, lost, mutilated or destroyed,
and the Board of Directors when authorizing the issuance of such new
certificate or certificates may, in its discretion, and as a condition
precedent thereto, require the owner of such mutilated certificate to
surrender the same and the owner of such stolen, lost, mutilated or
destroyed certificate or certificates or his legal representatives to give
to the Corporation, and to such registrar or registrars and/or transfer
agent or transfer agents as may be authorized or required to countersign
such new certificate or certificates, a bond in such sum as the
Corporation may direct not exceeding double the value of the stock
represented by the certificate alleged to have been stolen, lost,
mutilated or destroyed, as indemnity against any claim that may be made
against them or any of them for or in respect of the shares of stock
represented by the certificate alleged to have been stolen, lost,
mutilated or destroyed.
Section 37. Registered Stockholders. The Corporation shall
be entitled to treat the holder of record of any share or shares of stock
as the owner in fact thereof and accordingly shall not be bound to
recognize any equitable or other claim to or interest in such share on the
part of any other person, whether or not it shall have express or other
notice thereof, save as expressly provided by the laws of Delaware.
DIVIDENDS AND FINANCE
Section 38. The Board of Directors shall have power to fix
and determine and to vary, from time to time, the amount of the working
capital of the Corporation before declaring any dividends among its
stockholders, and to direct and determine the use and disposition of any
net profits or surplus, and to determine the date or dates for the
declaration and payment of dividends, not inconsistent with those set
forth in the Certificate of Incorporation, and to determine the amount of
any dividend, and the amount of any reserves necessary in their judgment
before declaring any dividends among its stockholders, and to determine
the amount of the net profits of the Corporation from time to time
available for dividends.
BOOKS AND RECORDS
Section 39. Subject to the provisions of the statute under
which the Corporation is organized, the Corporation may keep its books
outside the State of Delaware.
The Board of Directors shall have power, from time to time, to
determine whether and to what extent and at what times and places and
under what conditions and regulations the accounts and books of the
Corporation (except such as may by statute be specifically open to
inspection), or any of them shall be open to the inspection of the
stockholders and no stockholder shall have any right to inspect any
account or book or document of the Corporation, except as conferred by
statute or authorized by the directors.
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS
Section 40. Contracts - How Executed. Subject to the
provisions of the Certificate of Incorporation, the Board of Directors or
the Executive Committee may authorize any officer or officers, fiscal
agent or other agent or employee of the Corporation to enter into any
contract or execute or deliver any instrument in the name of or on behalf
of the Corporation and such authority may be general or confined to
specific instances; and unless so authorized by the Board of Directors or
by these By-Laws, no officer, fiscal or other agent or employee of the
Corporation shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable
for any purpose.
Section 41. Loans. Any officer or agent of the Corporation
when authorized by the Board of Directors or the Executive Committee may
negotiate loans and advances for the Corporation from any bank, trust
company or other institution or from any firm, corporation or individual,
and for such loans and advances, when authorized by the Board of
Directors, may make, execute and deliver promissory notes or other
evidences of indebtedness of the Corporation, and pledge, hypothecate or
transfer as security for the payment thereof securities or other property
at any time held by the Corporation. No loans shall be contracted on
behalf of the Corporation and no notes or other evidences of indebtedness
shall be issued in its behalf unless and except as authorized by the Board
of Directors or the Executive Committee.
Section 42. Deposits. All funds of the Corporation shall be
deposited from time to time to the credit of the Corporation in such bank
or trust companies or with such bankers or other depositories in the
United States or elsewhere as the Board of Directors or the President may
approve.
Section 43. Checks, Drafts, Etc. All notes, drafts,
acceptances, checks, endorsements or other evidences of indebtedness shall
be signed by the President or a Vice-President and shall be countersigned
by the Treasurer or an Assistant Treasurer of the Corporation, or by such
officers as may, from time to time, be designated by resolution of the
Board of Directors or the Executive Committee for that purpose. Endorse-
ments for deposit to the credit of the Corporation in any of its duly
authorized depositories may be made by the Treasurer or an Assistant
Treasurer or by any other officer or agent who may be designated by
resolution of the Board of Directors or the Executive Committee.
Section 44. Safe Deposit Vaults. To the extent permitted by
law, securities of the Corporation may be deposited in such safe deposit
vaults in the United States or elsewhere as the Board of Directors or the
Executive Committee may approve, and access to such vaults shall be only
by such officer together with such additional officer or officers and/or
responsible employee or employees as may from time to time be designated
for the purpose by resolution of the Board of Directors.
Section 45. Deposit of Securities for Safekeeping. From time
to time, to the extent permitted by law, the Board of Directors may
deposit for safekeeping with one or more banks, trust companies or other
financial institutions to be selected by them in the United States or
elsewhere, any securities owned by the Corporation and not otherwise
deposited or pledged as security. Any and all securities so deposited may
be withdrawn from time to time only by such officer of the Corporation
together with such additional officer or officers and/or responsible
employee or employees as may from time to time, to the extent permitted by
law, be designated for the purpose by resolution of the Board of
Directors.
FISCAL YEAR
Section 46. The fiscal year shall begin the first day of
January in each year.
NOTICES
Section 47. Whenever under the provisions of these By-Laws
notice is required to be given to any director, officer or stockholder, it
shall not be construed to mean personal notice, but such notice may be
given in writing, by mail, by depositing the same in the post-office or
letter-box, in a post-paid sealed wrapper, addressed to such stockholder,
officer or director at such address as appears on the books of the
Corporation, or, in default of other address, to such director, officer or
stockholder at his last known post-office address and such notice shall be
deemed to be given at the time when the same shall be thus mailed.
Any stockholder, director or officer may waive any notice
required to be given under these By-Laws by instrument in writing signed
(either before or after the holding of any meeting in respect of which the
notice is required) by such stockholder, director or officer and filed
with the Corporation. The presence of a director at any meeting of the
Board shall be deemed a waiver of notice thereof by him.
STOCK OF OTHER CORPORATIONS
Section 48. The Chairman of the Board, if any, the Chairman
of the Executive Committee, if any, the President, each Vice-Chairman of
the Board, if any, and each Vice-President are authorized on behalf of the
Corporation, in person or (to the extent permitted by law) by proxy, to
attend, act and vote at meetings of the stockholders, partners or other
holders of equity or voting rights of any corporation, partnership,
limited liability company or other entity in which the Corporation shall
hold stock or any other equity interest or any voting rights, and to
exercise thereat any and all rights and powers incident to the ownership
of such stock or other equity interest or voting rights, and to execute
waivers of notice of such meetings and calls therefor. Such officers are
also authorized on behalf of the Corporation to execute written consents
and the like with respect to actions to be taken without meetings of
stockholders, partners or other holders of equity or voting rights of any
such corporation, partnership, limited liability company or other entity.
The Board of Directors may also authorize any other director, officer or
other person on behalf of the Corporation to take any and all of such
actions, and authority may be given to exercise such authority either on
one or more designated occasions, or generally on all occasions until
revoked by the Board.
REGISTRATION OF SECURITIES
Section 49. Any stocks or securities owned by the Corporation
may, if so determined by the Board of Directors, be registered either in
the name of the Corporation or in the name of any nominee or nominees
appointed for that purpose by the Board of Directors.
AMENDMENTS
Section 50. These By-Laws may be altered or amended by the
holders of shares of stock of the Corporation entitled to vote with
respect thereto, present in person or by proxy at any regular or special
meeting of the stockholders, if notice of the proposed alteration or
amendment be contained in the notice of the meeting, or by the affirmative
vote therefor of a majority of the full Board of Directors, provided,
however, that these By-Laws may not be altered or amended either by action
of the stockholders or by action of the Board of Directors to make
provisions contrary to or in conflict with or in any way modifying any
provision of the Certificate of Incorporation.
AS ADOPTED AT
NOVEMBER 15, 1989
BOARD MEETING
Revised March 1995 and March 1999
Exhibit 10.4
Pittway Corporation
December 31, 1998
Form 10-K
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 1, 1998, between Pittway
Corporation, a Delaware corporation (the "Company"), and Paul R. Gauvreau
("Executive").
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 financial officer and chief accounting officer of the Company,
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") to expand or limit such duties,
responsibilities and authority, either generally or in specific instances.
Executive shall have the title Financial Vice President, Chief Financial
Officer and Treasurer of the Company, subject to the power of the Board to
change such title from time to time. During the Employment Period,
Executive shall also serve as a director of any affiliate of the Company
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
(the "President").
(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 Company, its subsidiaries
and affiliates. 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 Chicago 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 Company.
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 $290,000 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 from a
comparable insurer acceptable to the Company;
(ii) supplementary long-term disability coverage in an amount
which will increase maximum covered annual compensation
to $330,000 and the 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 effective January
1, 1996 (the "SERP"), a copy of which, as currently in
effect, is attached hereto as Exhibit A, except that the
beginning date for accrual of a benefit shall be January
1, 1998.
4. Adjustments. Notwithstanding any other provision of this
Agreement, it is expressly understood and agreed that if there is a
significant reduction in the level of the business to which Executive's
duties under this Agreement relate, but Executive thereafter remains an
employee of the Company, the Board may make adjustments in Executive's
duties, responsibility and authority, and in Executive's compensation, as
the Board deems appropriate to reflect such reduction.
5. Employment Period.
(a) Except as hereinafter provided, the Employment Period
shall continue until, and shall end upon, the third anniversary of the
date hereof.
(b) On each anniversary of the date hereof which precedes
Executive's sixty-fifth birthday by more than two years, unless the
Employment Period shall have ended early pursuant to (c) below or either
party shall have given the other party written notice that the extension
provision in this sentence shall no longer apply, the Employment Period
shall be extended for an additional calendar year (unless Executive's
sixty-fifth birthday occurs during such additional calendar year, in which
event the Employment Period shall be extended only until such birthday).
In no event shall the Employment Period be extended beyond the Executive's
sixty-fifth birthday except by mutual written agreement of the Company and
Executive.
(c) Notwithstanding (a) and (b) 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");
(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") (it being expressly
understood that Executive's giving notice that the
extension provision in the first sentence of paragraph 5
(b) hereof shall no longer apply shall not constitute a
"Termination by Executive for Good Reason"); or
(vii) Executive's termination of Executive's employment
for any reason other than Good Reason, by means of
advance written notice to the Company at least one
hundred eighty (180) days prior to the effective date of
such termination identifying such termination as a
Termination by Executive with Advance Notice
("Termination by Executive with Advance Notice") (it
being expressly understood that Executive's giving notice
that the extension provision in the first sentence of
paragraph 5 (b) hereof shall no longer apply shall not
constitute a "Termination by Executive with Advance
Notice").
(d) 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 or a Termination by Executive with Advance
Notice 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.
(e) For purposes of this Agreement, "Good Reason" shall mean:
(i) a reduction by the Company in Executive's salary to an
amount less than "Executive's Reference Salary" (i.e.,
Executive's initial salary or, in the event the
Employment Period has been extended pursuant to paragraph
5(b) hereof, Executive's salary on the date on which the
most recent such extension occurred); 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 the date on which
(without any extension thereof) it is then scheduled to end pursuant to
paragraph 5 hereof, 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 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 amounts(s) payable pursuant to the succeeding provisions of this
paragraph 6.
(b) If the Employment Period ends pursuant to paragraph 5
hereof on Executive's sixty-fifth birthday, or if the Employment Period
ends early pursuant to paragraph 5 hereof on account of Executive's death,
Retirement or Termination for Disability, the Company shall make no
further payments to Executive except as contemplated in (a) (i) and (ii)
above.
(c) 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.
(d) 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 the date on
which (without any extension thereof) it was then scheduled to end, 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 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 (d)
shall cease in the event Executive breaches any of his agreements in
paragraph 7, 9 or 10 hereof.
(e) If the Employment Period ends early pursuant to
paragraph 5 hereof on account of a Termination by Executive with Advance
Notice, the Company shall make no further payments to Executive except as
contemplated in (a) (i) and (ii) above.
7. 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 and
perform all actions reasonably requested by the President (whether during
or after the Employment Period) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney
and other instruments).
8. Limitation/Illinois Disclosure. Paragraph 7 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. In accordance with Section 2872 of the Illinois Employee Patent
Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is hereby
advised that in the event and to the extent such Act is applicable to
Executive, paragraph 7 of this Agreement regarding the ownership of
inventions and other intellectual property does not apply to any invention
for which no equipment, supplies, facilities or trade secret information
of the Company or any of its subsidiaries or affiliates was used and which
was developed entirely on Executive's own time, unless (i) the invention
relates to the business of the Company or any of its subsidiaries or
affiliates or to the Company's or any of its subsidiaries' or affiliates'
actual or demonstrably anticipated research or development or (ii) the
invention results from any work performed by Executive for the Company or
any of its subsidiaries or affiliates.
9. Confidential Information. Executive acknowledges that
the information, observations and data obtained by him while employed by
the Company pursuant to this Agreement 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 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. 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.
10. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of his
employment with 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
for two years thereafter 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, any business then actively
being conducted by the Company or any of its subsidiaries or affiliates,
in any geographic area in which the Company or any of its subsidiaries or
affiliates 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 Company or any of its subsidiaries or affiliates 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 for two years thereafter 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 10 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.
11. 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 7, 9 or 10 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).
12. 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.
13. Survival. Paragraphs 7, 9 and 10 hereof shall survive
and continue in full force in accordance with their terms notwithstanding
any termination of the Employment Period.
14. 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. Paul R. Gauvreau
4483 RFD Normandy Court
Long Grove, IL 60047
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.
15. 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.
16. Payment of Certain Costs and Expenses. In the event that
there is a Change of Control of the Company, if the Company thereafter
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 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.
17. 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.
18. 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.
19. 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 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.
20. Choice of Law. This Agreement shall be governed by the
internal law, and not the laws of conflicts, of the State of Illinois.
21. 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 ___________________________
Its __________________________
______________________________
PAUL R. GAUVREAU
Exhibit A
to Exhibit 10.5
Pittway Corporation
December 31, 1998
Form 10-K
PITTWAY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
SECTION 1
Introduction
1.1 The Plan and Its Effective Date. This Pittway Corporation
Supplemental Executive Retirement Plan (the "plan") has been established
by Pittway Corporation (the "company"), effective January 1, 1996.
1.2 Purpose. The company maintains the Pittway Corporation
Retirement Plan (As Amended and Restated Effective as of January 1, 1989)
(as the same may hereafter be amended, the "retirement plan"), which is
intended to meet the requirements of a "qualified plan" under the
Internal Revenue Code of 1986, as amended (the "Code"). While the Code
places limitations on the maximum benefits which may be paid from a
qualified plan and the maximum amount of an employee's compensation that
may be taken into account for determining benefits payable under a
qualified plan, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), permits the payment under an "unfunded plan" of
benefits which may not be paid under a qualified plan because of such
limitations. The purpose of the plan is to provide certain key employees
of the company and its subsidiaries with certain benefits which may not
be provided under the retirement plan because of the maximum
compensation limitation of the Code.
SECTION 2
Eligibility and Benefits
2.1 Eligibility. Each key employee of the company or a subsidiary
of the company (a "participant") who participates in the retirement plan
and who is a party to an employment agreement with the company or a
subsidiary of the company substantially in the form attached hereto as
Exhibit 1 (as the same may hereafter be amended, his "Employment
Agreement") that provides for his participation in the plan shall
participate in the plan, subject to the conditions and limitations of the
plan. It is expressly understood that variations among the participants'
Employment Agreements may result in differences in the numberedparagraphs
thereof in which corresponding provisions appear (for example, the non-
competition provisions which are in paragraph 10 of Exhibit 1 attached
hereto, or variations thereof, may be in paragraph 10 of certain of the
Employment Agreements but in paragraph 9 of others). Accordingly, each
reference in the plan to a particular numbered paragraph of a
participant's Employment Agreement shall be deemed to be a reference to
the paragraph thereof, if any, which corresponds to the identically
numbered paragraph of Exhibit 1.
2.2 Accrued Benefit. For 1995 and for each full calendar year and
any final fraction of a calendar year of a participant's Employment
Period (as such term is defined in such participant's Employment
Agreement), the participant shall accrue a benefit under the plan equal
to 1.85 percent of that portion of his earnings (as defined in section
2.3 below) for such year or fraction that is in excess of the "maximum
dollar limitation" (as defined below) for such year or fraction and is
less than $300,000. For purposes of
the plan, "maximum dollar limitation" means, for any year or fraction of
a year, the greater of $150,000 or the dollar amount of any higher
maximum limitation on annual compensation taken into account under a
qualified plan for such year or fraction of a year determined by the
Secretary of Treasury or his delegate or by law under section 401(a)(17)
of the Code; it being understood that annual compensation for purposes of
such limitation is computed differently from "earnings" for purposes of
the plan. A participant's accrued benefits under the plan shall be
referred to hereinafter as the participant's "supplemental retirement
benefits."
2.3 Earnings. For purposes of the plan, a participant's "earnings"
for any year or fraction means his total, regular cash compensation paid
for such year or fraction for services rendered to the Pittway Companies
(as such term is defined in the retirement plan) during such year or
fraction, consisting solely of his salary and his annual discretionary
cash bonus, if any, for such year. It is expressly understood that a
participant's "earnings" do not include any other compensation,
including, without limitation, any of the following:
(a) Long-term incentive compensation;
(b) Unused vacation pay;
(c) Special cash bonuses;
(d) Any income realized for Federal income tax purposes as a result
of the grant or exercise of an option or options to acquire shares of
stock of a Pittway Company, the receipt or exercise of any stock
appreciation right or payment, or the disposition of shares acquired by
the exercise of such an option or right;
(e) Any noncash compensation, including any amounts contributed by
the participant's employer(s) for his benefit under the retirement plan
or any other retirement or benefit plan, arrangement, or policy
maintained by his employer(s);
(f) Any reimbursements for medical, dental or travel expenses,
automobile allowances, relocation allowances, educational assistance
allowances, awards and other special allowances;
(g) Any income realized for Federal income tax purposes as a result
of (i) group life insurance, (ii) the personal use of an employer-owned
automobile, or (iii) the transfer of restricted shares of stock or
restricted property of a Pittway Company, or the removal of any such
restrictions;
(h) Any severance pay paid as a result of the participant's
termination of employment (it being expressly understood that any
amount(s) taken into account pursuant to the final sentence of section
2.8 below shall not be deemed severance pay for purposes hereof); or
(i) Any compensation paid or payable to the participant, or to any
governmental body or agency on account of the participant, under the
terms of any state, Federal or foreign law requiring the payment of such
compensation because of the participant's voluntary or involuntary
termination of employment with any Pittway Company.
Notwithstanding the foregoing, a participant's "earnings" do include (i)
any salary reduction amount elected by the participant and credited to a
cafeteria plan (as defined in section 125(c) of the Code) or a qualified
cash or deferred arrangement (as defined in section 401(k) of the Code)
and (ii) the initial value ascribed to any performance shares award the
participant elects to receive in lieu of a portion of his annual
discretionary cash bonus.
2.4 Payment of Benefits. Each participant's Employment Agreement
provides that in no event shall his Employment Period be extended beyond
his 65th birthday except by mutual agreement of the participant and his
employer. Subject to the conditions and limitations of the plan, upon a
participant's attainment of age 65 years, he shall be entitled to a
monthly benefit payable for his life commencing upon his attainment of
age 65 years in an amount equal to one-twelfth (1/12) of the sum of the
participant's accrued supplemental retirement benefits. A participant's
supplemental retirement benefits shall be paid to him in the form
described below that applies to the participant; provided, however, that
in lieu of payment in the normal form described below, the participant
may irrevocably elect, within thirty (30) days after his commencement of
participation in the plan, to receive his supplemental retirement
benefits in a single lump sum as soon as practicable after his attainment
of age 65 years. A participant's "supplemental retirement benefit
commencement date" means the date as of which the initial payment (or, in
the case of a single lump sum, full payment) of the supplemental
retirement benefits to which the participant is entitled is payable.
Subject to the conditions and limitations of the plan, a participant's
supplemental retirement benefit commencement date shall normally be the
first day of the calendar month coincident with or next following the
participant's attainment of age 65 years. Notwithstanding the immediately
preceding sentence, if a participant's Employment Period under his
Employment Agreement terminates prior to his attainment of age 65 years
and he is eligible, and elects, to receive early retirement benefits
under the retirement plan, and if the participant requests a supplemental
retirement benefit commencement date prior to his attainment of age 65
years, then with (but only with) the consent of the committee (as defined
in section 3.1 below), the participant's supplemental retirement benefit
commencement date shall be such earlier date, if any, selected by the
committee. Supplemental retirement benefits that are paid in a lump sum,
or commence, before the participant's attainment of age 65 years, if any,
shall be subject to actuarial reduction in accordance with section 2.5
below.
(a) Life Annuity. If a participant does not have a spouse (as
defined in section 2.7 below) on his supplemental retirement benefit
commencement date, and if he has not elected pursuant to the preceding
provisions of this section 2.4 to receive his supplemental retirement
benefits in a single lump sum, payment of his supplemental retirement
benefits shall be during his lifetime on a life annuity basis.
(b) Joint and Survivor Annuity. If a participant has a spouse (as
defined in section 2.7 below) on his supplemental retirement benefit
commencement date, payment of his supplemental retirement benefits shall
be in the form of a joint and 50 percent survivor annuity unless the
participant has theretofore elected pursuant to the preceding provisions
of this section 2.4 to have his benefits provided in a single lump sum.
Such joint and 50 percent survivor annuity shall consist of a reduced
monthly benefit continuing during the participant's lifetime, and if such
spouse is living at the time of the participant's death, payment of 50
percent of such monthly benefit shall be made to such spouse until such
spouse's death occurs. The amount of the participant's and such spouse's
benefits under this subsection shall be calculated so that it is the
actuarial equivalent of the supplemental retirement benefits to which the
participant would otherwise be entitled under the plan. If such spouse
predeceases the participant, or if the participant and such spouse cease
to be married after the participant's supplemental retirement benefit
commencement date, there shall be no adjustment to the participant's
monthly payments and no supplemental retirement benefits shall be payable
to any person after the participant's death.
2.5 Actuarial Equivalent. A benefit shall be actuarially equivalent
to another benefit if the actuarial reserve required to provide such
benefit is equal to the actuarial reserve required to provide such other
benefit, computed on the basis of the same actuarial assumptions,
interest rates, tables, methods and procedures, including reduction
factors for commencement of payments prior to attainment of age 65 years,
that are used for purposes of the retirement plan as in effect on the
applicable date that a benefit payment amount is determined.
2.6 Pre-Retirement Surviving Spouse Benefit. If a participant
dies prior to his supplemental retirement benefit commencement date, no
supplemental retirement benefits under the plan shall be paid or payable
with respect to the participant; provided, however, that if the
participant has a spouse (as defined in section 2.7 below) at the time of
his death, such spouse shall be entitled to receive a monthly benefit for
such spouse's lifetime equal to 50 percent of the amount of monthly
benefit that would have been payable to the participant in the form of a
joint and 50 percent survivor annuity if he had terminated employment as
of the date of his death with entitlement to supplemental retirement
benefits under the plan and the committee (as defined in section 3.1
below) had permitted his supplemental retirement benefit commencement
date to occur on the first day of the calendar month coincident with or
next following the date of his death, taking into account actuarial
reduction for commencement prior to the participant's attainment of age
65 years. The first payment to the spouse shall be made as of the first
day of the calendar month coincident with or next following the date of
the participant's death and the final payment shall be made as of the
first day of the calendar month during which the spouse's death occurs.
If, prior to the participant's death, the participant had elected
pursuant to section 2.4 above to receive his supplemental retirement
benefits in a single lump sum, in lieu of the monthly payments described
above, such spouse shall be entitled to receive a single lump sum equal
to 50 percent of the lump sum value of the participant's supplemental
retirement benefits as of the date of his death, taking into account
actuarial factors for payment prior to the participant's attainment of
age 65 years. Such lump sum payment shall be made to such spouse as soon
as practicable following the participant's death.
2.7 Spouse. For purposes of the plan, a person will be considered
the "spouse" of a participant as of any date if and only if such person
and the participant have been married in a religious or civil ceremony
recognized under the laws of the state where the marriage was contracted
and the marriage remains legally effective. Any person who is not, or
who has ceased to be, a participant's "spouse" on the participant's
supplemental retirement benefit commencement date (or, in the event of
the participant's death prior to his supplemental retirement benefit
commencement date, the date of his death) shall not be considered the
participant's "spouse" for purposes of the plan.
2.8 Forfeiture; Early Termination of Employment Period. If the
participant's Employment Period ends early pursuant to paragraph 5 of his
Employment Agreement on account of a Termination for Cause or a
Termination by Executive with Advance Notice (as such terms are defined,
respectively, in his Employment Agreement), or if after the participant's
Employment Period ends (whether or not early and regardless of the
reason) the participant breaches any of his agreements in paragraph 7, 9
or 10 of his Employment Agreement, the participant shall forfeit all of
his supplemental retirement benefits, if any, under the plan, no benefit
under the plan shall thereafter be payable to or with respect to the
participant or his spouse, and any benefit under the plan theretofore
paid to or with respect to the participant or his spouse must be repaid
to the company by the participant or his spouse promptly upon demand. If
the participant's Employment Period ends early pursuant to paragraph 5 of
his Employment Agreement on account of a Termination without Cause or a
Termination by Executive for Good Reason (as such terms are defined,
respectively, in his Employment Agreement), the participant's
supplemental retirement benefits under the plan shall be the supplemental
retirement benefits the participant would have been entitled to under the
plan had his Employment Period remained in effect until the earlier of
the date on which (without any extension thereof) such Employment Period
was then scheduled to end pursuant to his Employment Agreement or the
date of his death and had the participant's salary in effect as of the
last day of his Employment Period (or, if greater, his Executive's
Reference Salary (as such term is defined in his Employment Agreement))
continued until the earlier of such dates and been paid at the times such
salary would have been paid, and had the participant received no further
annual cash bonus.
2.9 Funding. The plan is intended to be non-qualified for purposes
of the Code and unfunded for purposes of the Code and ERISA. Benefits
payable under the plan to a participant and/or his spouse, as the case
may be, shall be paid directly by the company. The company shall not be
required to segregate on its books or otherwise any amount to be used for
payment of supplemental retirement benefits under the plan. Each
participant and spouse is solely an unsecured creditor of the company
with respect to any benefit payable with respect to a participant
hereunder.
SECTION 3
General Provisions
3.1 Committee. The plan shall be administered by the plan
administrative committee of the retirement plan (the "committee"). The
committee shall have, to the extent appropriate, the same powers, rights,
duties and obligations with respect to the plan as it has with respect to
the retirement plan. Each determination provided for in the plan shall
be made by the committee under such procedure as may from time to time be
prescribed by the committee and shall be made in the absolute discretion
of the committee. Any determination so made shall be conclusive.
3.2 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 Pittway Companies or to any
benefits not specifically provided by the plan.
3.3 Taxes and Withholding. Each participant (or his spouse, as
applicable) shall be responsible for any taxes imposed on him (or his
spouse) ("taxes") by reason of the establishment of, or his participation
in, the plan, including, without limitation, any Federal, state and/or
local income or employment taxes imposed on benefits or potential
benefits under the plan (or on the value thereof) in advance of the
participant's receipt of such benefits or potential benefits. The
company or a subsidiary of the company may deduct any taxes from payroll
or other payments due the participant or his spouse. The committee shall
deduct from all payments under the plan any taxes required to be
withheld, including, without limitation, any Federal, state and/or local
income or employment taxes. In the event that such deductions and/or
withholdings are not sufficient to pay the taxes, the participant (or his
spouse) shall promptly remit the deficit to the company upon its request.
3.4 Interests Not Transferable. Except as to withholding of any tax
under the laws of the United States or any state, the interests of
participants and their spouses under the plan are not subject to the
claims of their creditors and may not be voluntarily or involuntarily
transferred, assigned, alienated or encumbered. No participant shall
have any right to any benefit payments hereunder prior to his termination
of employment with the Pittway Companies.
3.5 Payment with Respect to Incapacitated Participants or
Beneficiaries. If any person entitled to benefits under the plan is
under a legal disability or in the committee's opinion is incapacitated
in any way so as to be unable to manage his financial affairs, the
committee may direct the payment of such benefit to such person's legal
representative or to a relative or friend of such person for such
person's benefit, or the committee may direct the application of such
benefits for the benefit of such person in any manner which the committee
may select that is consistent with the plan. Any payments made in
accordance with the foregoing provisions of this section shall be a full
and complete discharge of any liability for such payments.
3.6 Limitation of Liability. To the extent permitted by law, no
person (including the company, any subsidiary of the company, the Board
of Directors of the company (the "Board"), the board of directors of any
subsidiary of the company, the committee, any present or former member of
the Board or of the board of directors of any subsidiary of the company
or of the committee, and any present or former officer of the company or
of any subsidiary of the company) shall be personally liable for any act
done or omitted to be done in good faith in the administration of the
plan.
3.7 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.
3.8 Gender and Number. Where the context admits, words in the
masculine gender shall include the feminine and neuter genders, the
plural shall include the singular and the singular shall include the
plural.
3.9 Action by the Company. Any action required of or permitted by
the company under the plan, including action by the company to amend the
plan, shall be by resolution of the Board or by a duly authorized
committee of the Board or by a person or persons authorized by resolution
of the Board or such committee. The procedure for amending the plan is
that the plan shall be amended by the company's taking appropriate
corporate action to effectuate any amendment considered by it to be
advisable to be made. Appropriate corporate action includes action by
resolution of the Board, by a committee authorized by the Board, or by a
person or persons authorized by the Board or such committee, as provided
above.
3.10 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.
3.11 Miscellaneous. The plan shall be binding upon and inure to the
benefit of the parties, their legal representatives, successors and
assigns, and all persons entitled to benefits hereunder. 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 4
Amendment and Termination
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
or to terminate the plan at any time; provided (i) that no amendment of
the plan with respect to a participant that reduces or eliminates any
benefits such participant has accrued as of the effective date of such
amendment shall be effective unless such participant consents to such
amendment; and (ii) no amendment of the plan with respect to a
participant whose Employment Period under his Employment Agreement has
not yet ended that adversely affects such participant, or termination of
the plan with respect to such a participant, by the company on any date
shall be effective prior to the date on which (without any extension
thereof) such participant's Employment Period is then scheduled to end
pursuant to his Employment Agreement unlesss the participant consents to
such amendment or termination.
IN WITNESS WHEREOF, this 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:
Its:
Date:
ATTEST
By _________________________________
Its _____________________________
Date_____________________________
Exhibit 1
to Exhibit A
of Exhibit 10.5
Pittway Corporation
December 31, 1998
Form 10-K
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 1, 1996, between Pittway Corporation, a
Delaware corporation (the "Company"), and ___________ ("Executive").
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
____________ of the ___________________ 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 ____________________ of the Group, subject to the power of
the Board 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 ____________ 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 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 __________________ 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 Company.
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 $_______ 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 a supplemental executive
retirement program, the principal terms of which are set forth in Exhibit
A attached hereto:
(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 from
a comparable insurer acceptable to the Company;
(ii) supplementary long-term disability coverage in an amount
which will increase maximum covered annual compensation to $330,000 and
the 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 any other provision of this
Agreement, it is expressly understood and agreed that if there is a
significant reduction in the level of the business to which Executive's
duties under this Agreement relate, or if all or any significant part of
such business is disposed of by the Company and/or its subsidiaries or
affiliates during the Employment Period but Executive thereafter remains
an employee of the Company, the Board may make adjustments in Executive's
duties, responsibility and authority, and in Executive's compensation, as
the Board deems appropriate to reflect such reduction or disposition.
5. Employment Period.
(a) Except as hereinafter provided, the Employment Period shall
continue until, and shall end upon, the third anniversary of the date
hereof.
(b) On each anniversary of the date hereof which precedes
Executive's sixty-fifth birthday by more than two years, unless the
Employment Period shall have ended early pursuant to (c) below or either
party shall have given the other party written notice that the extension
provision in this sentence shall no longer apply, the Employment Period
shall be extended for an additional calendar year (unless Executive's
sixty-fifth birthday occurs during such additional calendar year, in
which event the Employment Period shall be extended only until such
birthday). In no event shall the Employment Period be extended beyond
the Executive's sixty-fifth birthday except by mutual written agreement
of the Company and Executive.
(c) Notwithstanding (a) and (b) 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");
(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") (it being expressly
understood that Executive's giving notice that the extension provision in
the first sentence of paragraph 5 (b) hereof shall no longer apply shall
not constitute a "Termination by Executive for Good Reason"); or
(vii) Executive's termination of Executive's employment for any
reason other than Good Reason, by means of advance written notice to the
Company at least one hundred eighty (180) days prior to the effective
date of such termination identifying such termination as a Termination by
Executive with Advance Notice ("Termination by Executive with Advance
Notice") (it being expressly understood that Executive's giving notice
that the extension provision in the first sentence of paragraph 5 (b)
hereof shall no longer apply shall not constitute a "Termination by
Executive with Advance Notice").
(d) 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 Exxecutive for Good Reason or a
Termination by Executive with Advance Notice 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.
(e) For purposes of this Agreement, "Good Reason" shall mean:
(i) a reduction by the Company in Executive's salary to an amount
less than "Executive's Reference Salary" (i.e., Executive's initial
salary or, in the event the Employment Period has been extended pursuant
to paragraph 5(b) hereof, Executive's salary on the date on which the
most recent such extension occurred); 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 the date on which (without
any extension thereof) it is then scheduled to end pursuant to paragraph
5 hereof, 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.
(b) If the Employment Period ends pursuant to paragraph 5 hereof
on Executive's sixty-fifth birthday, or if the Employment Period ends
early pursuant to paragraph 5 hereof on account of Executive's death
Retirement or Termination for Disability, the Company shall make no
further payments to Executive except as contemplated in (a) (i) and (ii)
above.
(c) 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.
(d) 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 the date on
which (without any extension thereof) it was then scheduled to end, 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 Illinois 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 (d) shall cease in the event Executive
breaches any of his agreements in paragraph 7, 9 or 10 hereof.
(e) If the Employment Period ends early pursuant to paragraph 5
hereof on account of a Termination by Executive with Advance Notice, the
Company shall make no further payments to Executive except as
contemplated in (a) (i) and (ii) above.
7. 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).
8. Limitation/Illinois Disclosure. Paragraph 7 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. In accordance with Section 2872 of the Illinois
Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983),
Executive is hereby advised that in the event and to the extent such Act
is applicable to Executive, paragraph 7 of this Agreement regarding the
ownership of inventions and other intellectual property does not apply to
any invention for which no equipment, supplies, facilities or trade
secret information of the Company or any of its subsidiaries or
affiliates was used and which was developed entirely on Executive's own
time, unless (i) the invention relates to the business of the Company or
any of its subsidiaries or affiliates or to the Company's or any of its
subsidiaries' or affiliates' actual or demonstrably anticipated research
or development or (ii) the invention results from any work performed by
Executive for the Company or any of its subsidiaries or affiliates.
9. Confidential Information. Executive acknowl-edges that the
information, observations and data obtained by him while employed by the
Company pursuant to this Agreement, 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.
10. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of his employment
with 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 for
two years thereafter 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 for two years thereafter 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 10 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.
11. 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 7, 9 or 10
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).
12. 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.
13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and
continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period.
14. 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:
___________________
___________________
___________________
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.
15. 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.
16. Payment of Certain Costs and Expenses. In the event that
there is a Change of Control of the Company, if the Company thereafter
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 Illinois 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.
17. 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.
18. 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.
19. 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 in each case
provided such transferee or successor assumes the liabilities of
the Company hereunder.
20. Choice of Law. This Agreement shall be governed by the
internal law, and not the laws of conflicts, of the State of Illinois.
21. 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 ___________________________
Its __________________________
______________________________
[EXECUTIVE]
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Exhibit 10.5
Pittway Corporation
December 31, 1998
Form 10-K
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 1, 1998, between Pittway
Corporation, a Delaware corporation (the "Company"), and Edward J.
Schwartz ("Executive").
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 an
executive officer of the Company, and shall have the duties,
responsibilities and authority he has had in the past serving in such
position, subject to the power of the Board of Directors of the Company
(the "Board") to expand or limit such duties, responsibilities and
authority, either generally or in specific instances. Executive shall
have the title Vice President of the Company, subject to the power of the
Board to change such title from time to time. During the Employment
Period, Executive shall also serve as a director of any affiliate of the
Company 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
(the "President").
(c) During the Employment Period, Executive shall devote his
best efforts and his full business time and attention to the business and
affairs of the Company, its subsidiaries and affiliates 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, service on boards of directors, service for or on behalf of
members of the Harris Group (as defined in the Company's Restated
Certificate of Incorporation, as amended) and management of Executive's
personal investments and business interests. 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 Chicago 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 Company.
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 $195,000 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
from a comparable insurer acceptable to the Company;
(ii) supplementary long-term disability coverage in an amount
which will increase maximum covered annual compensation to $330,000 and
the 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 effective January 1, 1996 (the
"SERP"), a copy of which, as currently in effect, is attached hereto as
Exhibit A, except that the beginning date for accrual of a benefit shall
be January 1, 1998.
4. Adjustments. Notwithstanding any other provision of this
Agreement, it is expressly understood and agreed that if there is a
significant reduction in the level of the business to which Executive's
duties under this Agreement relate, but Executive thereafter remains an
employee of the Company, the Board may make adjustments in Executive's
duties, responsibility and authority, and in Executive's compensation, as
the Board deems appropriate to reflect such reduction.
5. Employment Period.
(a) Except as hereinafter provided, the Employment Period
shall continue until, and shall end upon, the third anniversary of the
date hereof.
(b) On each anniversary of the date hereof which precedes
Executive's sixty-fifth birthday by more than two years, unless the
Employment Period shall have ended early pursuant to (c) below or either
party shall have given the other party written notice that the extension
provision in this sentence shall no longer apply, the Employment Period
shall be extended for an additional calendar year (unless Executive's
sixty-fifth birthday occurs during such additional calendar year, in which
event the Employment Period shall be extended only until such birthday).
In no event shall the Employment Period be extended beyond the Executive's
sixty-fifth birthday except by mutual written agreement of the Company and
Executive.
(c) Notwithstanding (a) and (b) 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");
(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") (it being expressly
understood that Executive's giving notice that the extension provision in
the first sentence of paragraph 5 (b) hereof shall no longer apply shall
not constitute a "Termination by Executive for Good Reason"); or
(vii) Executive's termination of Executive's employment
for any reason other than Good Reason, by means of advance written notice
to the Company at least one hundred eighty (180) days prior to the
effective date of such termination identifying such termination as a
Termination by Executive with Advance Notice ("Termination by Executive
with Advance Notice") (it being expressly understood that Executive's
giving notice that the extension provision in the first sentence of
paragraph 5 (b) hereof shall no longer apply shall not constitute a
"Termination by Executive with Advance Notice").
(d) 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 or a
Termination by Executive with Advance Notice 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.
(e) For purposes of this Agreement, "Good Reason" shall mean:
(i) a reduction by the Company in Executive's salary to an
amount less than "Executive's Reference Salary" (i.e., Executive's initial
salary or, in the event the Employment Period has been extended pursuant
to paragraph 5(b) hereof, Executive's salary on the date on which the most
recent such extension occurred); 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 the date on which
(without any extension thereof) it is then scheduled to end pursuant to
paragraph 5 hereof, 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 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 amounts(s) payable pursuant to the succeeding provisions of this
paragraph 6.
(b) If the Employment Period ends pursuant to paragraph 5
hereof on Executive's sixty-fifth birthday, or if the Employment Period
ends early pursuant to paragraph 5 hereof on account of Executive's death,
Retirement or Termination for Disability, the Company shall make no
further payments to Executive except as contemplated in (a) (i) and (ii)
above.
(c) 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.
(d) 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 the date on
which (without any extension thereof) it was then scheduled to end, 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 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 (d)
shall cease in the event Executive breaches any of his agreements in
paragraph 7, 9 or 10 hereof.
(e) If the Employment Period ends early pursuant to
paragraph 5 hereof on account of a Termination by Executive with Advance
Notice, the Company shall make no further payments to Executive except as
contemplated in (a) (i) and (ii) above.
7. 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 and
perform all actions reasonably requested by the President (whether during
or after the Employment Period) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney
and other instruments).
8. Limitation/Illinois Disclosure. Paragraph 7 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. In accordance with Section 2872 of the Illinois Employee Patent
Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is
hereby advised that in the event and to the extent such Act is applicable to
Executive, paragraph 7 of this Agreement regarding the ownership of
inventions and other intellectual property does not apply to any invention
for which no equipment, supplies, facilities or trade secret information
of the Company or any of its subsidiaries or affiliates was used and which
was developed entirely on Executive's own time, unless (i) the invention
relates to the business of the Company or any of its subsidiaries or
affiliates or to the Company's or any of its subsidiaries' or affiliates'
actual or demonstrably anticipated research or development or (ii) the
invention results from any work performed by Executive for the Company or
any of its subsidiaries or affiliates.
9. Confidential Information. Executive acknowledges that
the information, observations and data obtained by him while employed by
the Company pursuant to this Agreement 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 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. 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.
10. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of his
employment with 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
for two years thereafter 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, any business then actively
being conducted by the Company or any of its subsidiaries or affiliates,
in any geographic area in which the Company or any of its subsidiaries or
affiliates 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 Company or any of its subsidiaries or affiliates 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 for two years thereafter 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 10 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.
11. 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 7, 9 or 10 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).
12. 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.
13. Survival. Paragraphs 7, 9 and 10 hereof shall survive
and continue in full force in accordance with their terms notwithstanding
any termination of the Employment Period.
14. 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. Edward J. Schwartz
715 Valley Road
Glencoe, IL 60022
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.
15. 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.
16. Payment of Certain Costs and Expenses. In the event that
there is a Change of Control of the Company, if the Company thereafter
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 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.
17. 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.
18. 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.
19. 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 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.
20. Choice of Law. This Agreement shall be governed by the
internal law, and not the laws of conflicts, of the State of Illinois.
21. 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 ___________________________
Its __________________________
______________________________
EDWARD J. SCHWARTZ
Exhibit A
to Exhibit 10.5
Pittway Corporation
December 31, 1998
Form 10-K
PITTWAY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
SECTION 1
Introduction
1.1 The Plan and Its Effective Date. This Pittway Corporation
Supplemental Executive Retirement Plan (the "plan") has been established
by Pittway Corporation (the "company"), effective January 1, 1996.
1.2 Purpose. The company maintains the Pittway Corporation
Retirement Plan (As Amended and Restated Effective as of January 1, 1989)
(as the same may hereafter be amended, the "retirement plan"), which is
intended to meet the requirements of a "qualified plan" under the
Internal Revenue Code of 1986, as amended (the "Code"). While the Code
places limitations on the maximum benefits which may be paid from a
qualified plan and the maximum amount of an employee's compensation that
may be taken into account for determining benefits payable under a
qualified plan, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), permits the payment under an "unfunded plan" of
benefits which may not be paid under a qualified plan because of such
limitations. The purpose of the plan is to provide certain key employees
of the company and its subsidiaries with certain benefits which may not
be provided under the retirement plan because of the maximum
compensation limitation of the Code.
SECTION 2
Eligibility and Benefits
2.1 Eligibility. Each key employee of the company or a subsidiary
of the company (a "participant") who participates in the retirement plan
and who is a party to an employment agreement with the company or a
subsidiary of the company substantially in the form attached hereto as
Exhibit 1 (as the same may hereafter be amended, his "Employment
Agreement") that provides for his participation in the plan shall
participate in the plan, subject to the conditions and limitations of the
plan. It is expressly understood that variations among the participants'
Employment Agreements may result in differences in the numberedparagraphs
thereof in which corresponding provisions appear (for example, the non-
competition provisions which are in paragraph 10 of Exhibit 1 attached
hereto, or variations thereof, may be in paragraph 10 of certain of the
Employment Agreements but in paragraph 9 of others). Accordingly, each
reference in the plan to a particular numbered paragraph of a
participant's Employment Agreement shall be deemed to be a reference to
the paragraph thereof, if any, which corresponds to the identically
numbered paragraph of Exhibit 1.
2.2 Accrued Benefit. For 1995 and for each full calendar year and
any final fraction of a calendar year of a participant's Employment
Period (as such term is defined in such participant's Employment
Agreement), the participant shall accrue a benefit under the plan equal
to 1.85 percent of that portion of his earnings (as defined in section
2.3 below) for such year or fraction that is in excess of the "maximum
dollar limitation" (as defined below) for such year or fraction and is
less than $300,000. For purposes of
the plan, "maximum dollar limitation" means, for any year or fraction of
a year, the greater of $150,000 or the dollar amount of any higher
maximum limitation on annual compensation taken into account under a
qualified plan for such year or fraction of a year determined by the
Secretary of Treasury or his delegate or by law under section 401(a)(17)
of the Code; it being understood that annual compensation for purposes of
such limitation is computed differently from "earnings" for purposes of
the plan. A participant's accrued benefits under the plan shall be
referred to hereinafter as the participant's "supplemental retirement
benefits."
2.3 Earnings. For purposes of the plan, a participant's "earnings"
for any year or fraction means his total, regular cash compensation paid
for such year or fraction for services rendered to the Pittway Companies
(as such term is defined in the retirement plan) during such year or
fraction, consisting solely of his salary and his annual discretionary
cash bonus, if any, for such year. It is expressly understood that a
participant's "earnings" do not include any other compensation,
including, without limitation, any of the following:
(a) Long-term incentive compensation;
(b) Unused vacation pay;
(c) Special cash bonuses;
(d) Any income realized for Federal income tax purposes as a result
of the grant or exercise of an option or options to acquire shares of
stock of a Pittway Company, the receipt or exercise of any stock
appreciation right or payment, or the disposition of shares acquired by
the exercise of such an option or right;
(e) Any noncash compensation, including any amounts contributed by
the participant's employer(s) for his benefit under the retirement plan
or any other retirement or benefit plan, arrangement, or policy
maintained by his employer(s);
(f) Any reimbursements for medical, dental or travel expenses,
automobile allowances, relocation allowances, educational assistance
allowances, awards and other special allowances;
(g) Any income realized for Federal income tax purposes as a result
of (i) group life insurance, (ii) the personal use of an employer-owned
automobile, or (iii) the transfer of restricted shares of stock or
restricted property of a Pittway Company, or the removal of any such
restrictions;
(h) Any severance pay paid as a result of the participant's
termination of employment (it being expressly understood that any
amount(s) taken into account pursuant to the final sentence of section
2.8 below shall not be deemed severance pay for purposes hereof); or
(i) Any compensation paid or payable to the participant, or to any
governmental body or agency on account of the participant, under the
terms of any state, Federal or foreign law requiring the payment of such
compensation because of the participant's voluntary or involuntary
termination of employment with any Pittway Company.
Notwithstanding the foregoing, a participant's "earnings" do include (i)
any salary reduction amount elected by the participant and credited to a
cafeteria plan (as defined in section 125(c) of the Code) or a qualified
cash or deferred arrangement (as defined in section 401(k) of the Code)
and (ii) the initial value ascribed to any performance shares award the
participant elects to receive in lieu of a portion of his annual
discretionary cash bonus.
2.4 Payment of Benefits. Each participant's Employment Agreement
provides that in no event shall his Employment Period be extended beyond
his 65th birthday except by mutual agreement of the participant and his
employer. Subject to the conditions and limitations of the plan, upon a
participant's attainment of age 65 years, he shall be entitled to a
monthly benefit payable for his life commencing upon his attainment of
age 65 years in an amount equal to one-twelfth (1/12) of the sum of the
participant's accrued supplemental retirement benefits. A participant's
supplemental retirement benefits shall be paid to him in the form
described below that applies to the participant; provided, however, that
in lieu of payment in the normal form described below, the participant
may irrevocably elect, within thirty (30) days after his commencement of
participation in the plan, to receive his supplemental retirement
benefits in a single lump sum as soon as practicable after his attainment
of age 65 years. A participant's "supplemental retirement benefit
commencement date" means the date as of which the initial payment (or, in
the case of a single lump sum, full payment) of the supplemental
retirement benefits to which the participant is entitled is payable.
Subject to the conditions and limitations of the plan, a participant's
supplemental retirement benefit commencement date shall normally be the
first day of the calendar month coincident with or next following the
participant's attainment of age 65 years. Notwithstanding the immediately
preceding sentence, if a participant's Employment Period under his
Employment Agreement terminates prior to his attainment of age 65 years
and he is eligible, and elects, to receive early retirement benefits
under the retirement plan, and if the participant requests a supplemental
retirement benefit commencement date prior to his attainment of age 65
years, then with (but only with) the consent of the committee (as defined
in section 3.1 below), the participant's supplemental retirement benefit
commencement date shall be such earlier date, if any, selected by the
committee. Supplemental retirement benefits that are paid in a lump sum,
or commence, before the participant's attainment of age 65 years, if any,
shall be subject to actuarial reduction in accordance with section 2.5
below.
(a) Life Annuity. If a participant does not have a spouse (as
defined in section 2.7 below) on his supplemental retirement benefit
commencement date, and if he has not elected pursuant to the preceding
provisions of this section 2.4 to receive his supplemental retirement
benefits in a single lump sum, payment of his supplemental retirement
benefits shall be during his lifetime on a life annuity basis.
(b) Joint and Survivor Annuity. If a participant has a spouse (as
defined in section 2.7 below) on his supplemental retirement benefit
commencement date, payment of his supplemental retirement benefits shall
be in the form of a joint and 50 percent survivor annuity unless the
participant has theretofore elected pursuant to the preceding provisions
of this section 2.4 to have his benefits provided in a single lump sum.
Such joint and 50 percent survivor annuity shall consist of a reduced
monthly benefit continuing during the participant's lifetime, and if such
spouse is living at the time of the participant's death, payment of 50
percent of such monthly benefit shall be made to such spouse until such
spouse's death occurs. The amount of the participant's and such spouse's
benefits under this subsection shall be calculated so that it is the
actuarial equivalent of the supplemental retirement benefits to which the
participant would otherwise be entitled under the plan. If such spouse
predeceases the participant, or if the participant and such spouse cease
to be married after the participant's supplemental retirement benefit
commencement date, there shall be no adjustment to the participant's
monthly payments and no supplemental retirement benefits shall be payable
to any person after the participant's death.
2.5 Actuarial Equivalent. A benefit shall be actuarially equivalent
to another benefit if the actuarial reserve required to provide such
benefit is equal to the actuarial reserve required to provide such other
benefit, computed on the basis of the same actuarial assumptions,
interest rates, tables, methods and procedures, including reduction
factors for commencement of payments prior to attainment of age 65 years,
that are used for purposes of the retirement plan as in effect on the
applicable date that a benefit payment amount is determined.
2.6 Pre-Retirement Surviving Spouse Benefit. If a participant
dies prior to his supplemental retirement benefit commencement date, no
supplemental retirement benefits under the plan shall be paid or payable
with respect to the participant; provided, however, that if the
participant has a spouse (as defined in section 2.7 below) at the time of
his death, such spouse shall be entitled to receive a monthly benefit for
such spouse's lifetime equal to 50 percent of the amount of monthly
benefit that would have been payable to the participant in the form of a
joint and 50 percent survivor annuity if he had terminated employment as
of the date of his death with entitlement to supplemental retirement
benefits under the plan and the committee (as defined in section 3.1
below) had permitted his supplemental retirement benefit commencement
date to occur on the first day of the calendar month coincident with or
next following the date of his death, taking into account actuarial
reduction for commencement prior to the participant's attainment of age
65 years. The first payment to the spouse shall be made as of the first
day of the calendar month coincident with or next following the date of
the participant's death and the final payment shall be made as of the
first day of the calendar month during which the spouse's death occurs.
If, prior to the participant's death, the participant had elected
pursuant to section 2.4 above to receive his supplemental retirement
benefits in a single lump sum, in lieu of the monthly payments described
above, such spouse shall be entitled to receive a single lump sum equal
to 50 percent of the lump sum value of the participant's supplemental
retirement benefits as of the date of his death, taking into account
actuarial factors for payment prior to the participant's attainment of
age 65 years. Such lump sum payment shall be made to such spouse as soon
as practicable following the participant's death.
2.7 Spouse. For purposes of the plan, a person will be considered
the "spouse" of a participant as of any date if and only if such person
and the participant have been married in a religious or civil ceremony
recognized under the laws of the state where the marriage was contracted
and the marriage remains legally effective. Any person who is not, or
who has ceased to be, a participant's "spouse" on the participant's
supplemental retirement benefit commencement date (or, in the event of
the participant's death prior to his supplemental retirement benefit
commencement date, the date of his death) shall not be considered the
participant's "spouse" for purposes of the plan.
2.8 Forfeiture; Early Termination of Employment Period. If the
participant's Employment Period ends early pursuant to paragraph 5 of his
Employment Agreement on account of a Termination for Cause or a
Termination by Executive with Advance Notice (as such terms are defined,
respectively, in his Employment Agreement), or if after the participant's
Employment Period ends (whether or not early and regardless of the
reason) the participant breaches any of his agreements in paragraph 7, 9
or 10 of his Employment Agreement, the participant shall forfeit all of
his supplemental retirement benefits, if any, under the plan, no benefit
under the plan shall thereafter be payable to or with respect to the
participant or his spouse, and any benefit under the plan theretofore
paid to or with respect to the participant or his spouse must be repaid
to the company by the participant or his spouse promptly upon demand. If
the participant's Employment Period ends early pursuant to paragraph 5 of
his Employment Agreement on account of a Termination without Cause or a
Termination by Executive for Good Reason (as such terms are defined,
respectively, in his Employment Agreement), the participant's
supplemental retirement benefits under the plan shall be the supplemental
retirement benefits the participant would have been entitled to under the
plan had his Employment Period remained in effect until the earlier of
the date on which (without any extension thereof) such Employment Period
was then scheduled to end pursuant to his Employment Agreement or the
date of his death and had the participant's salary in effect as of the
last day of his Employment Period (or, if greater, his Executive's
Reference Salary (as such term is defined in his Employment Agreement))
continued until the earlier of such dates and been paid at the times such
salary would have been paid, and had the participant received no further
annual cash bonus.
2.9 Funding. The plan is intended to be non-qualified for purposes
of the Code and unfunded for purposes of the Code and ERISA. Benefits
payable under the plan to a participant and/or his spouse, as the case
may be, shall be paid directly by the company. The company shall not be
required to segregate on its books or otherwise any amount to be used for
payment of supplemental retirement benefits under the plan. Each
participant and spouse is solely an unsecured creditor of the company
with respect to any benefit payable with respect to a participant
hereunder.
SECTION 3
General Provisions
3.1 Committee. The plan shall be administered by the plan
administrative committee of the retirement plan (the "committee"). The
committee shall have, to the extent appropriate, the same powers, rights,
duties and obligations with respect to the plan as it has with respect to
the retirement plan. Each determination provided for in the plan shall
be made by the committee under such procedure as may from time to time be
prescribed by the committee and shall be made in the absolute discretion
of the committee. Any determination so made shall be conclusive.
3.2 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 Pittway Companies or to any
benefits not specifically provided by the plan.
3.3 Taxes and Withholding. Each participant (or his spouse, as
applicable) shall be responsible for any taxes imposed on him (or his
spouse) ("taxes") by reason of the establishment of, or his participation
in, the plan, including, without limitation, any Federal, state and/or
local income or employment taxes imposed on benefits or potential
benefits under the plan (or on the value thereof) in advance of the
participant's receipt of such benefits or potential benefits. The
company or a subsidiary of the company may deduct any taxes from payroll
or other payments due the participant or his spouse. The committee shall
deduct from all payments under the plan any taxes required to be
withheld, including, without limitation, any Federal, state and/or local
income or employment taxes. In the event that such deductions and/or
withholdings are not sufficient to pay the taxes, the participant (or his
spouse) shall promptly remit the deficit to the company upon its request.
3.4 Interests Not Transferable. Except as to withholding of any tax
under the laws of the United States or any state, the interests of
participants and their spouses under the plan are not subject to the
claims of their creditors and may not be voluntarily or involuntarily
transferred, assigned, alienated or encumbered. No participant shall
have any right to any benefit payments hereunder prior to his termination
of employment with the Pittway Companies.
3.5 Payment with Respect to Incapacitated Participants or
Beneficiaries. If any person entitled to benefits under the plan is
under a legal disability or in the committee's opinion is incapacitated
in any way so as to be unable to manage his financial affairs, the
committee may direct the payment of such benefit to such person's legal
representative or to a relative or friend of such person for such
person's benefit, or the committee may direct the application of such
benefits for the benefit of such person in any manner which the committee
may select that is consistent with the plan. Any payments made in
accordance with the foregoing provisions of this section shall be a full
and complete discharge of any liability for such payments.
3.6 Limitation of Liability. To the extent permitted by law, no
person (including the company, any subsidiary of the company, the Board
of Directors of the company (the "Board"), the board of directors of any
subsidiary of the company, the committee, any present or former member of
the Board or of the board of directors of any subsidiary of the company
or of the committee, and any present or former officer of the company or
of any subsidiary of the company) shall be personally liable for any act
done or omitted to be done in good faith in the administration of the
plan.
3.7 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.
3.8 Gender and Number. Where the context admits, words in the
masculine gender shall include the feminine and neuter genders, the
plural shall include the singular and the singular shall include the
plural.
3.9 Action by the Company. Any action required of or permitted by
the company under the plan, including action by the company to amend the
plan, shall be by resolution of the Board or by a duly authorized
committee of the Board or by a person or persons authorized by resolution
of the Board or such committee. The procedure for amending the plan is
that the plan shall be amended by the company's taking appropriate
corporate action to effectuate any amendment considered by it to be
advisable to be made. Appropriate corporate action includes action by
resolution of the Board, by a committee authorized by the Board, or by a
person or persons authorized by the Board or such committee, as provided
above.
3.10 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.
3.11 Miscellaneous. The plan shall be binding upon and inure to the
benefit of the parties, their legal representatives, successors and
assigns, and all persons entitled to benefits hereunder. 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 4
Amendment and Termination
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
or to terminate the plan at any time; provided (i) that no amendment of
the plan with respect to a participant that reduces or eliminates any
benefits such participant has accrued as of the effective date of such
amendment shall be effective unless such participant consents to such
amendment; and (ii) no amendment of the plan with respect to a
participant whose Employment Period under his Employment Agreement has
not yet ended that adversely affects such participant, or termination of
the plan with respect to such a participant, by the company on any date
shall be effective prior to the date on which (without any extension
thereof) such participant's Employment Period is then scheduled to end
pursuant to his Employment Agreement unlesss the participant consents to
such amendment or termination.
IN WITNESS WHEREOF, this 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:
Its:
Date:
ATTEST
By _________________________________
Its _____________________________
Date_____________________________
Exhibit 1
to Exhibit A
of Exhibit 10.5
Pittway Corporation
December 31, 1998
Form 10-K
EMPLOYMENT AGREEMENT
AGREEMENT made as of January 1, 1996, between Pittway Corporation, a
Delaware corporation (the "Company"), and ___________ ("Executive").
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
____________ of the ___________________ 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 ____________________ of the Group, subject to the power of
the Board 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 ____________ 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 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 __________________ 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 Company.
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 $_______ 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 a supplemental executive
retirement program, the principal terms of which are set forth in Exhibit
A attached hereto:
(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 from
a comparable insurer acceptable to the Company;
(ii) supplementary long-term disability coverage in an amount
which will increase maximum covered annual compensation to $330,000 and
the 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 any other provision of this
Agreement, it is expressly understood and agreed that if there is a
significant reduction in the level of the business to which Executive's
duties under this Agreement relate, or if all or any significant part of
such business is disposed of by the Company and/or its subsidiaries or
affiliates during the Employment Period but Executive thereafter remains
an employee of the Company, the Board may make adjustments in Executive's
duties, responsibility and authority, and in Executive's compensation, as
the Board deems appropriate to reflect such reduction or disposition.
5. Employment Period.
(a) Except as hereinafter provided, the Employment Period shall
continue until, and shall end upon, the third anniversary of the date
hereof.
(b) On each anniversary of the date hereof which precedes
Executive's sixty-fifth birthday by more than two years, unless the
Employment Period shall have ended early pursuant to (c) below or either
party shall have given the other party written notice that the extension
provision in this sentence shall no longer apply, the Employment Period
shall be extended for an additional calendar year (unless Executive's
sixty-fifth birthday occurs during such additional calendar year, in
which event the Employment Period shall be extended only until such
birthday). In no event shall the Employment Period be extended beyond
the Executive's sixty-fifth birthday except by mutual written agreement
of the Company and Executive.
(c) Notwithstanding (a) and (b) 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");
(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") (it being expressly
understood that Executive's giving notice that the extension provision in
the first sentence of paragraph 5 (b) hereof shall no longer apply shall
not constitute a "Termination by Executive for Good Reason"); or
(vii) Executive's termination of Executive's employment for any
reason other than Good Reason, by means of advance written notice to the
Company at least one hundred eighty (180) days prior to the effective
date of such termination identifying such termination as a Termination by
Executive with Advance Notice ("Termination by Executive with Advance
Notice") (it being expressly understood that Executive's giving notice
that the extension provision in the first sentence of paragraph 5 (b)
hereof shall no longer apply shall not constitute a "Termination by
Executive with Advance Notice").
(d) 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 Exxecutive for Good Reason or a
Termination by Executive with Advance Notice 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.
(e) For purposes of this Agreement, "Good Reason" shall mean:
(i) a reduction by the Company in Executive's salary to an amount
less than "Executive's Reference Salary" (i.e., Executive's initial
salary or, in the event the Employment Period has been extended pursuant
to paragraph 5(b) hereof, Executive's salary on the date on which the
most recent such extension occurred); 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 the date on which (without
any extension thereof) it is then scheduled to end pursuant to paragraph
5 hereof, 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.
(b) If the Employment Period ends pursuant to paragraph 5 hereof
on Executive's sixty-fifth birthday, or if the Employment Period ends
early pursuant to paragraph 5 hereof on account of Executive's death
Retirement or Termination for Disability, the Company shall make no
further payments to Executive except as contemplated in (a) (i) and (ii)
above.
(c) 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.
(d) 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 the date on
which (without any extension thereof) it was then scheduled to end, 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 Illinois 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 (d) shall cease in the event Executive
breaches any of his agreements in paragraph 7, 9 or 10 hereof.
(e) If the Employment Period ends early pursuant to paragraph 5
hereof on account of a Termination by Executive with Advance Notice, the
Company shall make no further payments to Executive except as
contemplated in (a) (i) and (ii) above.
7. 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).
8. Limitation/Illinois Disclosure. Paragraph 7 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. In accordance with Section 2872 of the Illinois
Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983),
Executive is hereby advised that in the event and to the extent such Act
is applicable to Executive, paragraph 7 of this Agreement regarding the
ownership of inventions and other intellectual property does not apply to
any invention for which no equipment, supplies, facilities or trade
secret information of the Company or any of its subsidiaries or
affiliates was used and which was developed entirely on Executive's own
time, unless (i) the invention relates to the business of the Company or
any of its subsidiaries or affiliates or to the Company's or any of its
subsidiaries' or affiliates' actual or demonstrably anticipated research
or development or (ii) the invention results from any work performed by
Executive for the Company or any of its subsidiaries or affiliates.
9. Confidential Information. Executive acknowl-edges that the
information, observations and data obtained by him while employed by the
Company pursuant to this Agreement, 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.
10. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of his employment
with 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 for
two years thereafter 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 for two years thereafter 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 10 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.
11. 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 7, 9 or 10
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).
12. 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.
13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and
continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period.
14. 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:
___________________
___________________
___________________
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.
15. 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.
16. Payment of Certain Costs and Expenses. In the event that
there is a Change of Control of the Company, if the Company thereafter
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 Illinois 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.
17. 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.
18. 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.
19. 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 in each case
provided such transferee or successor assumes the liabilities of
the Company hereunder.
20. Choice of Law. This Agreement shall be governed by the
internal law, and not the laws of conflicts, of the State of Illinois.
21. 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 ___________________________
Its __________________________
______________________________
[EXECUTIVE]
44
- 1 -
Exhibit 13
Pittway Corporation
December 31, 1998
Form 10-K
PITTWAY CORPORATION 1998 ANNUAL REPORT
OPERATING HIGHLIGHTS
Penton Media Spun Off to Shareholders
Record Number of New Products Introduced
$100 Million in Acquisitions
Record Sales and Operating Earnings
Sales (in millions)
94 601.3
95 754.4
96 923.5
97 1,143.8
98 1,326.6
Operating Income (in millions)
94 38.9
95 47.3
96 63.7
97 82.5
98 104.4
Return on Equity
94 9.7%
95 10.8%
96 11.5%
97 12.3%
98 14.0%
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
Percent
1998 1997 Increase
PRO FORMA (a)
Net Sales $1,326,646 $1,143,772 16%
Operating Income 104,442 82,501 27%
Net Income 63,038 47,322 33%
Net Income Per Common and
Class A Share (Diluted) 1.46 1.11 32%
HISTORICAL
Continuing Operations:
Net Sales 1,326,646 1,143,772
Operating Income (b) 61,442 82,501
Income from Continuing
Operations (b) (c) 36,897 40,608
Discontinued Operations (d) 5,031 14,906
Net Income (b) (c) 41,928 55,514
Per Common and Class A Share (Diluted):
Income from Continuing
Operations (b) (c) .86 .96
Discontinued Operations (d) .11 .35
Net Income (b) (c) .97 1.31
Depreciation and Amortization (e) 35,694 28,141
Capital Expenditures (e) 37,380 43,318
Working Capital (e) 271,481 269,261
Stockholders' Equity (e) 495,164 428,737
Stockholders' Equity Per Share (e) 11.61 10.21
Number of Employees (e) 7,600 6,500
(a) Excludes provision for patent litigation, change in equity in Cylink
and discontinued operations.
(b) 1998 includes $43 million pre-tax provision for patent litigation
($26,875 after-tax; $.62 per diluted share).
(c) Includes change in equity in Cylink: 1998 increase-$734 ($.02 per
diluted share); 1997 decrease-$6,714 ($.15 per diluted share).
(d) Penton Media, Inc. was spun off to shareholders on August 7, 1998.
(e) Excludes discontinued operations.
COMPOUND SALES GROWTH RATES:
Year(s) One Three Five
Pittway* 15.9% 20.7% 22.3%
S&P 400 Industrials 0.5% 3.7% 4.8%
*Continuing operations
PITTWAY CLASS A STOCK PRICE AS OF DECEMBER 31:
1993 7.72
1994 9.78
1995 16.61
1996 19.81
1997 25.93
1998 33.06*
* Prior year prices adjusted for stock splits and Penton spin-off.
5-year compound annual growth rate = 34%.
TO OUR SHAREHOLDERS
1998 was a year of change, challenge and accomplishment for Pittway. We
completed a record number of acquisitions during the year and spun off
our Penton Media subsidiary to shareholders in August in a tax-free
transaction. We achieved record sales and operating earnings in our
alarm business and increased our industry-leading market share. Our net
income from continuing operations, excluding special items, rose 33% to
$63,038,000 or $1.46 per diluted share.
The sales and operating earnings gains we achieved from continuing
operations, excluding special items, 16% and 27% respectively, were
especially impressive given the economic turmoil that affected many
parts of the world including in Asia, Russia, the Middle East and Latin
America.
We did a first-rate job serving the needs of our major customers and, at
the same time, reinforced our reputation as the premier supplier to the
security and fire alarm industries. We launched a record number of new
products and added a significant number of new engineers to our staff
with expertise in growth markets like closed circuit television and
access control.
We had one major setback during the year, an adverse jury decision in a
wireless patent suit with Interactive Technologies, Inc. (ITI). The
adverse decision led to a one-time $43 million charge to pre-tax
earnings in the first quarter. While appealing the decision and
preparing for new ITI litigation relating to transmitter enrollment
methods in wireless security systems, we took steps to make sure our
wireless business would continue no matter what the outcome of these
patent-related matters.
We had mixed results with our non-operating investments during the year.
Hughes Electronics Corporation, owner of DirecTV, announced at year-end
that it had reached an agreement to acquire United States Satellite
Broadcasting (USSB) for approximately $1.3 billion. In early 1999
Pittway sold one million of its 3,781,375 shares of USSB and will sell
its remaining shares if the acquisition is completed as planned. We
expect to realize a minimum after-tax gain of $18 million on the
transaction. Cylink (we own 8,606,085 shares) sold its wireless business
in March for a substantial profit, leading to a one-time pre-tax gain
for Pittway of $6.6 million. Cylink also increased its data encryption
sales but lost a significant amount of money in the process. Its
marketing and product development costs remain high, especially for its
newer internet/intranet systems. At the end of the year, Cylink
installed a new top management team to address its ongoing challenges.
As for our other non-operating investments, we signed an agreement with
a real estate development firm late in October to sell approximately
1700 acres of land we own near Tampa for a mixed residential and
commercial development. The land sale is contingent on the developer
getting necessary permits and approvals for the contemplated project. We
are also discussing the sale of additional property we own in Tampa with
other developers.
In September we split our stock two-for-one to increase our float. We
also established a $.0868/share per year dividend ($.0217 per quarter)
on our Common Stock and a $.12/share per year dividend ($.03 per
quarter) on our Class A Stock. These dividends, when combined with
Penton Media's $.12/share per year dividend, represent a modest 8%
increase in the dividend received by Pittway stockholders before the
Penton Media spin-off.
There is one other matter to report which saddens all of us who have
been associated with Pittway and its predecessor company, Standard
Shares, over the last 40 years. Sidney Barrows, Vice-Chairman of the
Company and long-time member of its Executive Committee, unexpectedly
passed away in July. A brilliant lawyer who was respected by all his
peers, Sid was an invaluable advisor to the Company as it grew from a
small conglomerate into a large multinational firm. His passing was a
great loss to all of us.
EXTENDING OUR REACH
Over the last nine years we at Pittway have worked hard to expand our
alarm and communications business and position it to penetrate growing
markets whether they be geographical or product-based. We have shown a
willingness to invest significant amounts of money in market and product
development, always believing that we could overcome start-up problems
and end up with profitable extensions of our business. Our strategy has
been very simple. We want to have a full range of alarm and monitoring
equipment. We want to achieve design, performance and manufacturing
excellence in all the product markets we serve. We want to be leaders,
not followers, in new technology. We want the capability to reach our
worldwide customer base quickly and efficiently. Finally, we want to
give our customers outstanding support and service so they can succeed
with their businesses.
During the last eight years, a period in which our sales have grown at a
21% compound rate and our operating earnings at a 33% compound rate, we
have made major strides toward realizing our strategic goals.
In the area of product design and development, we have become the
recognized worldwide leader in many key categories-burglar alarm
controls, fire alarm controls, system smoke detectors and long-range
radio systems. We are co-leader in short-range wireless systems and
making headway at becoming the leader in space protection and fire alarm
sounding devices. Our numerous engineering groups are turning out large
numbers of new products, products which reinforce our existing
leadership in key product categories and products which will enable us
to significantly expand sales in key target markets.
1998 underscored our growing commitment to new product development. We
launched a record number of new products including a self-contained
wireless system (Lynx), a new wireless keypad receiver for
wired/wireless alarm systems, a Low Profile detector with a built-in
piezoelectronic sounder (1998 Product of the Show at the Spring
International Security Conference in Las Vegas) and several new
"intelligent" fire alarm controls.
We continued to be "cutting edge" product developers. System Sensor
extended its leadership in the specialty detector market by completing
development of its remarkable dust-resistant Filtrex(tm) detector and by
formally launching a new series of air duct detectors, the Innovair(tm)
series. Notifier introduced a lower-cost version of its very intelligent
early warning VIEW(tm) detection system. VIEW(tm) continues to
outperform expensive and hard-to-install air sampling systems in
telecommunications and clean room environments.
Launching innovative new products in the alarm market does not, by
itself, guarantee success. New products must offer more features, better
value to users, and yet have lower costs to compete in an increasingly
competitive and deflationary world. Ademco Sensor's new pet immune
passive infrared motion sensors, System Sensor's newly improved
SpectrAlert(tm) line of fire horn/strobes and Notifier's new manual pull
station symbolize our success in meeting these design challenges.
We should also point out that our new product development efforts are
increasingly aimed at international markets. In Europe, for example,
Notifier announced a key new intelligent fire control line which, as it
gets approved throughout the region, should enable it to expand its
share of the large European fire alarm market. Ademco-MicroTech launched
new wired/wireless hybrid control lines which feature wireless
components meeting the stringent requirements of European approval
authorities. As several of our large international customers
aggressively pursue the residential alarm market in Europe and other
areas of the world, we will be able to service their need for flexible,
cost-effective control systems.
In Latin America, Eastern Europe and selected markets elsewhere, Ademco
started selling a very low cost version of its VISTA(r) line, a product
which should allow us to be competitive with low cost local competitors
and establish a meaningful position in alarm markets worldwide.
While we are very proud of our internal design capabilities, we
recognize that the alarm market is growing fast in areas where we lack
development expertise or need additional engineering resources. For this
reason we have been actively acquiring companies around the world.
The most notable acquisition we made in 1998, that of Northern Computers
in December, greatly strengthens our position in the access control
market. Northern is one of the largest manufacturers of access control
systems in the world and has a very strong position in the small to mid-
sized U.S. access control market. It is also moving into the upscale
engineered access systems market and will be aided by work Pittway has
been doing in this area. Northern will be a key platform for Pittway as
it expands its integrated security systems business.
We also filled other gaps in our overall product line when we acquired
two companies in the rapidly expanding closed circuit television (CCTV)
equipment market, Video Controls Limited (VCL) and Rapid Eye. VCL is one
of England's leading manufacturers of surveillance camera domes and has
excellent product technology. We believe that VCL can expand its
European business and become a factor in the large North American market
for domes. Surveillance domes are an important part of most CCTV systems
and represent a $100 million market worldwide. Rapid Eye is a small
company that manufactures advanced digital video transmission and
storage equipment and specializes in remote surveillance systems such as
those used to monitor automatic teller machines.
We continued to actively expand our fire systems business worldwide.
Notifier purchased one of Australia's leading fire controls companies,
Forcal Services (Inertia Fire Systems), and then followed up that
acquisition by buying an important regional fire equipment distributor
in the Australian market, Safeguard. In England, Notifier fortified its
market position by buying IAS, a small but well regarded fire controls
company. The manufacturing operations of IAS and Morley (purchased late
in 1997) are being transferred to Notifier's major assembly plant in
Burgess Hill, England.
Having an industry leading product design and development effort is, of
course, critical to success in any market. But to be a true market
leader, a company like Pittway has to provide its products in a timely
manner to customers all over the world.
Our first-rate product distribution system is one of our greatest
strengths. At the start of the 1990s we already had a well earned
reputation for product delivery thanks to our factory direct logistics
capability and our rapidly expanding network of ADI, Ademco
International, and Notifier distribution outlets. In the last eight
years we have improved our delivery capabilities in every part of the
world.
ADI now has five major shipping hubs and 108 outlets throughout North
America. In 1998 it purchased Alarm Suppliers, the largest burglar/fire
alarm distributor in Northern California. In January of 1999 it acquired
KingAlarm, a strong regional distributor, originally founded by Glenn
Fischer, with outlets in New Jersey, New York and elsewhere in the
United States. ADI now has full coverage in the North American market.
Ademco International purchased a small alarm components distributor in
France in September and another small distributor in the Netherlands
which it merged into Security House, now the largest alarm distributor
in its market. Ademco International now has strong distribution
operations in Spain, Italy, the Netherlands, England, Australia and Hong
Kong.
Notifier substantially expanded its distribution capabilities in
Australia, thanks to the two acquisitions mentioned earlier, and also
established a new distribution business in Sweden. Notifier already has
major company owned distribution operations in England, Spain, Italy,
Germany, Belgium, and Hong Kong.
Our company owned distribution operations abroad are augmented by a
network of over 3,500 independent burglar/fire alarm distributors and
over 600 fire equipment distributors in 46 countries on six continents.
A substantial portion of the goods we market and distribute are produced
by our own operations which are increasingly becoming worldwide in
scope. We now have major assembly operations in England (burglar alarm
components and fire controls), Italy (smoke detectors), Mexico (burglar
alarm components, smoke detectors and horn/strobes), and China (smoke
detectors). We have smaller assembly operations in Canada and Australia
(fire alarm controls). We have invested tens of millions of dollars in
flexible manufacturing systems at these facilities and are actively
implementing "lean" manufacturing techniques to improve quality, shorten
order response times, lower assembly costs and reduce working capital
and the use of space.
With all the progress we have made in product development, distribution
and manufacturing, we still realize that outstanding customer support
and technical assistance is a must if we are to retain our position as
the alarm industry's leading supplier.
In recent years we have expanded our service/support operations in the
United States and have established over 50 sales/support offices in 15
countries abroad. We have also extended the reach of our highly
successful independent dealer networks-Notifier, First Alert
Professional and FCI. First Alert Professional, for example, now has 36
dealers in Latin America, 20 dealers in Canada, and 6 in England. Just 2
years ago First Alert Professional had no international dealers.
Notifier now has engineered systems distributors in nearly every market
of significance in the world. Over half its business is international;
in 1990 only 12% of its business was offshore. FCI has strengthened its
dealer network over the last two years by adding 51 distributors in
North America.
We have clearly come a long way over the last nine years extending our
reach in terms of product development, manufacturing, distribution and
customer service. Our challenge is to maintain our high standards and
extend that reach more.
King Harris, President and Chief Executive Officer
February 17, 1999
NEW PRODUCTS:
Lynx
Ademco's quick-install residential wireless security system with full
keypad, easy-to-read LCD display, English speaking voice response and
voice memo.
NBG-12 Series
Notifier's non-coded, durable manual fire alarm pull station features
single and dual-action versions with multiple mounting options.
Vista(r) 5
Ademco Europe's low cost, wired control/communicator with advanced
features and attractively styled LED keypads.
AFC-600
Notifier's intelligent addressable fire alarm control panel with RISC
based micro-processor and support for FlashScan(tm) digital device
protocol.
Innovair(tm)
System Sensor's low profile, easily interconnectible duct smoke detector
for HVAC applications, with industry-leading features including a
supervised cover.
100 Series with sounder
System Sensor's low profile, direct-wire intelligent smoke detector with
built-in sounder and SmartCheck(tm) self-diagnostics.
5800 EU Series
Ademco Europe's supervised wireless security system installs easily and
requires no special programming tools or switch settings.
Filtrex(tm)
System Sensor's revolutionary new smoke detector provides early warning
in dirty, dusty environments where traditional sensors are not
practical.
GROUP LOCATIONS AND DIVISIONS
Pittway Security Group
165 Eileen Way
Syosset, NY 11791
tel. 516-921-6704
Chairman and CEO
Leo A. Guthart
Ademco Distribution, Inc. (ADI)
President
Steven I. Roth
Executive Vice Presidents
Michael Cannata
Joseph Cappelletti
Senior Vice Presidents
Dennis Babcock
David Cook
Vice Presidents
Tom Braun
John Burton
Anthony Caputo
Michael Chanenchuk
Pat Comunale
Mark Ingram
Chris Lanier
Stan Martin
Martin Mueller
James W. Rothstein
Arthur Shaw
Warren Stillwell
Jordan Thomasson
Ademco Distribution International
Etobicoke, Ontario, Canada
Vice President and
Managing Director
Ken Hall
Alarm Device Manufacturing Company (ademco)
President
Roger B. Fradin
Executive Vice
Presidents
Ben Cornett
Martin Higgins
Dennis Raefield
Senior Vice Presidents
Edward Freeman
Herbert Lustig
Vice presidents
Steven Amodeo
Mark Chekos
Kathy Engel
Gordon Hope
Charles A. LaCarrubba
John Lorenty
Frank Marino
Kevin O'Connor
Martin Raphael
Ron Rothman
Joe Sausa
Alvin Silver
Nick Vitarelli
Ademco de Juarez
Juarez, Mexico
General manager
Manuel Rivera
Ademco Sensor
Company (ASC)
Louisville, Kentucky
President
Ben Cornett
Vice president
Tom Polson
APEX
Raleigh, North Carolina
President
Jim Filer
Fire Burglary Instruments (FBII)
Syosset, NY
Senior vice president
Theodore Simon
First Alert Professional
Syosset, NY
President
Ivan Scharer
Senior vice president
Ken Weinstein
Vice president
Jeffrey Vollmar
Radscan, Inc.
(Alarmnet)
Syosset, NY
President
Steven Winick
StreetSmart
San Diego, CA
President
Mike Lamb
Vice president
Mark O'Keefe
Ademco
Systems Group
Syosset, NY
President
Dennis Raefield
Vice president
Tam Hulusi
Government Systems Division
Syosset, NY
President
John Sasso
Javelin Systems
Torrance, California
President
Graham Wallis
Executive vice
President
Ray Payne
Vice president
Ron Levy
Northern Computers, Inc.
Milwaukee, WI
President
Joel Konicek
Vice presidents
Charles Baker
James Vinson
Ademco International
Syosset, NY
President
Andreas Kramvis
Vice presidents
Paul Brennan
Dean McCaskill
Alan Wachtel
Ademco MicroTech Limited
East Kilbride, Scotland
Managing director
Jim Green
Directors
Robert Ebrey
Jim Gemmill
Paul Kenny
Video Controls Ltd.
Runcorn, United Kingdom
Managing director
Phill Burton
Directors
Keith Parkins
John Prosser
Ademco Asia-Pacific Limited
Hong Kong, China
General manager
N.H. Lam
Ademco Australia, Pty. Ltd.
Managing director
Barry Whitton
Ademco-Canada
Mississauga, Ontario
President
J.P. Chalmin
Ademco-Italia S.p.A.
Corsico, Italy
Managing director
Giordano Picchi
Director
Stefano Fratini
SAS France
Palaiseau, France
General manager
Bruno Creiche
Security House
The Netherlands
Managing director
Jos Mathot
Ademco-Sontrix
Espana, A.S.
Madrid, Spain
Managing director
Pedro de Ibarrando
Affiliate
Cylink Corporation
Sunnyvale, California
Chairman
Leo A. Guthart
Pittway Systems Technology Group
4225 Naperville Road
Suite 155
Lisle, IL 60532
tel. 630/577-3700
President and CEO
Fred Conforti
Vice president
George Schoenfelder
Notifier/Fire-Lite Alarms, Inc.
Northford, Connecticut
President
Mark S. Levy
Senior vice presidents
Donald D. Anderson
W. Allen Fritts
Vice Presidents
John A. Chetelat
David M. DeMeo
Paul L. Harris
Fabian J. Skretta
Frank N. Tomberlin
Notifier Engineered Systems Company (NESCO)
Atlanta, Georgia
Vice President
Kenneth A. Plummer
Notifier Integrated Systems (NIS)
Atlanta, Georgia
Vice President
Kenneth A. Plummer
General Manager
Nicholas G. Martello
Notifier Integrated Systems (NIS)
Louisville, Kentucky
Vice President
George J. Zamiar
Notifier Europe
Notifier Limited
Burgess Hill, U.K.
Managing Director
Richard B. Marshall
Morley/IAS Fire Systems
Burgess Hill, U.K.
Notifier AB
Huddinge, Sweden
General Manager
Lennart Person
Notifier Benelux S.A.
Alleur, Belgium
General Manager
Wim Vandenberghe
Notifier Deutschland GmbH
Dusseldorf, Germany
General Manager
Holger Hesse
Notifier Espana S.A.
Barcelona, Spain
General Manager
Miguel Moreno
Notifier Italia S.r.L.
Milan, Italy
General Manager
Franco Dischi
Notifier International
Northford, CT.
Senior Vice President
W. Allen Fritts
Vice President
Paul L. Harris
Notifier Canada
Toronto, Canada
Managing Director
Ivan Spiegel
Notifier Far East
Kowloon, Hong Kong
Managing Director
Steve Higgins
Notifier/Inertia Fire Systems
New South Wales, Australia
Managing Director
David Callus
Notifier Middle East
Amman, Jordan
Managing Director
Gideon Golan
Notifier Latin America
Sao Paulo, Brazil
Managing director
George Clark
System Sensor
Division
St. Charles, Illinois
President and CEO
John W. Hakanson
Senior Vice President
Gary L. Lederer
Vice Presidents
Nicholas Bellavia
James B. Brown
Aroon Chaddha
Donald Malaker
Audible/Visible & Waterflow Division
St. Charles, Illinois
Vice President and
General Manager
John Strauss
System Sensor de Mexico SA de CV
Juarez, Mexico
general manager
Agustin Sosa
System Sensor Europe
Horsham, U.K.
Managing director
David C. Harvey
Pittway Tecnologica S.p.A.
Trieste, Italy
President
Vincenzo Nesta
System Sensor International
St. Charles, Illinois
Vice President and
General Manager
James B. Brown
System Sensor Canada
Mississauga, Canada
Managing Director
Peter Collier
Xi'an System Sensor
Electronics, Ltd.
Xi'an, China
General manager
Li Ning
Fire Control Instruments (FCI)
Waltham, Massachusetts
President and CEO
Arthur S. Appel
Vice Presidents
Gregory Fowler
Carl Hagarty
Kenneth LaRocque
Microlite
Corporation
West Chicago, Illinois
President
Richard LeBlanc
Vice president
Darrell Chelcun
Pittway Real Estate
Wesley Chapel, Florida
Tel. 813-973-3685
President
Paul R. Gauvreau
Vice President
Harold E. Rice, Jr.
BOARD OF DIRECTORS
Eugene L. Barnett (a)
Chairman of the Audit Committee; Consultant, former Chairman of
The Brand Companies
Fred Conforti
Vice President; President and CEO of the Pittway Systems
Technology Group
E. David Coolidge, III (a)(d)(e)
CEO William Blair & Company
(investment banker)
Anthony Downs (a)(b)
Chairman of the Compensation Committee; Senior Fellow, Brookings
Institution (non-profit social policy research center)
Leo A. Guthart (c)(d)
Vice Chairman of the Board; Chairman of the Pittway Security
Group; Chairman of the Board of Cylink Corporation
Irving B. Harris (c)(d)
Chairman of the Executive and Investment Committees; Chairman of
the Board of The Acorn Investment Trust (mutual funds)
King Harris(c)(e)
President and CEO
Nelson Harris (c)
Chairman of the Board
William W. Harris (b)(c)(e)
Chairman of the Nominating Committee; Private Investor; Treasurer
of KidsPac (political action committee)
Jerome Kahn, Jr. (b)
President of William Harris Investors, Inc. (investment advisors)
John W. McCarter, Jr. (b)
President and CEO Field Museum of Natural History
Committee Membership:
(a) Audit
(b) Compensation
(c) Executive
(d) Investment
(e) Nominating
OFFICERS
Neison Harris (83)
Chairman of the Board
Irving B. Harris (88)
Chairman of the Executive Committee
King Harris (55)
President and CEO
Leo A. Guthart (61)
Vice Chairman of the Board
Fred Conforti (57)
Vice President
Edward J. Schwartz (57)
Vice President
Paul R. Gauvreau (59)
Financial Vice President,
Treasurer and CFO
James F. Vondrak (54)
Corporate Secretary
Philip McCanna (51)
Controller
CORPORATE INFORMATION
General Offices
200 South Wacker Drive, Suite 700
Chicago, Illinois 60606-5802
Tel. 312-831-1070
Stock Transfer Agent and Registrar
Harris Trust and Savings Bank
P.O. Box A-3504
Chicago, Illinois 60690-9502
Tel. 800-942-5909
Independent Accountants
PricewaterhouseCoopers LLP
200 East Randolph Drive
Chicago, Illinois 60601
Counsel
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Pittway Common (PRY) and Class A (PRYA) stocks
are listed on the New York Stock Exchange.
A copy of the Company's December 31, 1998 Annual Report to the
Securities and Exchange Commission on Form 10-K (excluding
exhibits) is enclosed.
These financial statements are available on-line
at:www.pittway.com
Pittway Corporation
200 South Wacker Drive
Suite 700
Chicago, Illinois 60606-5802
EXHIBIT 21
PITTWAY CORPORATION
DECEMBER 31, 1998
FORM 10-K
Approximate
Percentage of
State or Voting Securities
Country of Owned by
Name of Company Incorporation Immediate Parent
Pittway Corporation
Ademco Distribution, Inc. Delaware 100
ADI-Lenox Club, Inc. Delaware 100
Ademconet, Inc. Delaware 100
Radscan, Inc. Delaware 100
Fire Burglary Instruments, Inc. New York 100
Ademco Security Group, Inc. California 100
Ademco Communications Partners, Inc. Delaware 100
Fire-Lite Alarms, Inc. Connecticut 100
Notifier Engineered Systems Company Delaware 100
MicroLite Corporation California 100
Chilpub, Inc. Delaware 100
Final Frontier Pittway I, Inc. Illinois 100
Final Frontier Pittway II, Inc. Illinois 100
Pittway Corporation of Canada Canada 100
Pittway Fire Safety, Inc. Delaware 100
Ademco de Juarez, S.A. de C.V. Mexico 100
Ademco Asia Pacific Limited Hong Kong 100
Pittway Foreign Sales Corp. U.S. Virgin Islands 100
Fire Control Instruments, Inc. Delaware 100
Northern Computer, Inc. Wisconsin 100
EXHIBIT 21 - cont'd
PITTWAY CORPORATION
DECEMBER 31, 1997
FORM 10-K
Approximate
Percentage of
State or Voting Securities
Country of Owned by
Name of Company Incorporation Immediate Parent
Pittway Corporation (continued)
Pittway International, Ltd. Delaware 100
ADI de Mexico S.A. de C.V. Mexico 100
Notifier de Mexico S.A. de C.V. Mexico 100
System Sensor de Mexico S.A. de C.V. Mexico 100
Notifier Espana S.A. Spain 100
Notifier (Benelux) S.A. Belgium 100
Notifier Deutschland GmbH Germany 100
Notifier, Ltd. (Singapore) Delaware 100
System Sensor, Ltd. Delaware 100
Xi'an System Sensor Electronics, Ltd. China 55
Pittway UK Limited England 100
Pittway Systems Tecnology Group Europe Ltd. England 100
Ademco Microtech Limited England 100
Ademco Australia Pty., Ltd. Australia 100
Ademco-Sontrix Espana, S.A. Spain 100
Notifier Ab Sweden 100
Video Controls Limited England 90
Notifier Italia S.r.l. Italy 100
Pittway Tecnologica S.p.A. Italy 100
Ademco Italia S.p.A. Italy 100
Ademco Security and Communications Group, B.V. Netherlands 100
Notifier Australia Pty., Ltd. Australia 60
ADI of Puerto Rico, Inc. Puerto Rico 100
Pittway France France 100
Securite Acces Systemes France 100
Pittway Australia Pty., Limited Australia 100
Pittway Intertia Pty., Limited Australia 100
Forcal Services Pty., Limited Australia 100
Notes: All of the above subsidiaries are included in the Registrant's
consolidated financial statements. Parent-subsidiary or affiliate
relationships are shown by marginal indentation.
EXHIBIT 23
PITTWAY CORPORATION
DECEMBER 31, 1998
FORM 10-K
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-12615, 333-71613 and 333-71617) of Pittway
Corporation of our report dated February 16, 1999 appearing on page 38 of
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,998
<SECURITIES> 44,200
<RECEIVABLES> 275,300
<ALLOWANCES> 12,173
<INVENTORY> 252,947
<CURRENT-ASSETS> 620,808
<PP&E> 267,961
<DEPRECIATION> 132,679
<TOTAL-ASSETS> 1,075,055
<CURRENT-LIABILITIES> 349,327
<BONDS> 104,609
0
0
<COMMON> 42,641
<OTHER-SE> 452,523
<TOTAL-LIABILITY-AND-EQUITY> 1,075,055
<SALES> 1,326,646
<TOTAL-REVENUES> 1,326,646
<CGS> 841,501
<TOTAL-COSTS> 841,501
<OTHER-EXPENSES> 32,559
<LOSS-PROVISION> 5,462
<INTEREST-EXPENSE> 13,153
<INCOME-PRETAX> 56,659
<INCOME-TAX> 19,762
<INCOME-CONTINUING> 36,897<F1>
<DISCONTINUED> 5,031
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,928
<EPS-PRIMARY> .99
<EPS-DILUTED> .97
<FN>
<F1> Excluding the provision for patent litigation and change in equity in
Cylink income from continuing operations would have been $63.0 million
($1.46 per diluted share).
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Certain amounts in this financial data schedule have been reclassified to conform to
the current year classification.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 9,796 20,925 18,929
<SECURITIES> 27,940 28,415 33,125
<RECEIVABLES> 223,689 241,643 258,121
<ALLOWANCES> 9,802 10,423 11,028
<INVENTORY> 261,308 262,163 258,853
<CURRENT-ASSETS> 538,234 569,059 585,375
<PP&E> 243,989 255,467 264,009
<DEPRECIATION> 116,187 124,207 133,242
<TOTAL-ASSETS> 943,599<F1> 1,000,790<F1> 944,451
<CURRENT-LIABILITIES> 261,321 283,529 271,507
<BONDS> 94,970 99,325 98,578
0 0 0
0 0 0
<COMMON> 21,034 21,218 42,581
<OTHER-SE> 459,476 493,840 423,943
<TOTAL-LIABILITY-AND-EQUITY> 943,599 1,000,790 944,451
<SALES> 304,139 629,677 974,165
<TOTAL-REVENUES> 304,139 629,677 974,165
<CGS> 192,332 400,764 618,754
<TOTAL-COSTS> 192,332 400,764 618,754
<OTHER-EXPENSES> 8,423 16,876 24,366
<LOSS-PROVISION> 783 1,866 3,044
<INTEREST-EXPENSE> 3,501 6,573 9,832
<INCOME-PRETAX> (16,841) 9,240 35,687
<INCOME-TAX> (6,498) 3,311 12,724
<INCOME-CONTINUING> (10,343)<F2> 5,929<F2> 22,963<F2>
<DISCONTINUED> 2,348 5,404 5,031
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (7,995) 11,333 27,994
<EPS-PRIMARY> (.19) .27 .66
<EPS-DILUTED> (.18) .26 .65
<FN>
<F1>Included in total assets is an investment in discontinued operations of
$62.1 million and $60.7 million at March 31, 1998 and June 30, 1998,
respectively.
<F2> Excluding the patent litigation provision and the change in equity
in Cylink, income from continuing operations would have been as follows:
Mar-31-1998 $12.0 million ($ .28 per diluted share)
Jun-30-1998 $27.9 million ($ .65 per diluted share)
Sep-30-1998 $45.4 million ($1.05 per diluted share)
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Certain amounts in this financial data schedule have been reclassified to conform to
the current year classification.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 32,477 9,192 13,125 13,906 29,257
<SECURITIES> 26,026 24,033 21,787 22,812 27,583
<RECEIVABLES> 184,798 189,271 206,498 218,154 208,913
<ALLOWANCES> 7,601 8,486 8,766 9,079 9,691
<INVENTORY> 199,895 226,907 227,267 226,554 240,228
<CURRENT-ASSETS> 459,343 465,144 486,506 498,504 521,359
<PP&E> 208,942 222,269 234,795 230,847 235,036
<DEPRECIATION> 98,058 104,648 110,606 103,957 109,118
<TOTAL-ASSETS> 817,308<F1> 850,824<F1> 873,129<F1> 877,807<F1> 910,694<F1>
<CURRENT-LIABILITIES> 198,363 224,647 236,360 236,629 252,098
<BONDS> 87,714 84,312 90,970 90,068 95,215
0 0 0 0 0
0 0 0 0 0
<COMMON> 20,926 20,981 20,984 20,987 20,991
<OTHER-SE> 425,946 436,776 445,518 452,219 466,143
<TOTAL-LIABILITY-AND-EQUITY> 817,308 850,824 873,129 877,807 910,694
<SALES> 923,453 252,492 537,650 844,186 1,143,772
<TOTAL-REVENUES> 923,453 252,492 537,650 844,186 1,143,772
<CGS> 587,323 161,879 343,791 539,746 723,547
<TOTAL-COSTS> 587,323 161,879 343,791 539,746 723,547
<OTHER-EXPENSES> 20,638 6,276 12,582 19,495 25,880
<LOSS-PROVISION> 4,222 974 1,849 2,484 4,298
<INTEREST-EXPENSE> 8,590 2,406 5,420 8,335 10,852
<INCOME-PRETAX> 96,367 15,116 33,390 40,589 63,290
<INCOME-TAX> 34,675 5,546 12,105 14,194 22,682
<INCOME-CONTINUING> 61,692<F2> 9,570<F2> 21,285<F2> 26,395<F2> 40,608<F2>
<DISCONTINUED> 11,350 2,726 7,609 10,834 14,906
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 73,042 12,296 28,894 37,229 55,514
<EPS-PRIMARY> 1.75 .29 .69 .89 1.32
<EPS-DILUTED> 1.73 .29 .68 .88 1.31
<FN>
<F1>Included in total assets is an investment in discontinued operations of
$47.1 million, $49.7 million, $46.2 million, $47.7 million and $58.4 million
at December 31, 1996, March 31,1997, June 30, 1997, September 30, 1997 and
December 31, 1997 respectively.
<F2> Excluding the gain on sale of investment, in 1996, and the change in equity
in Cylink, income from continuing operations would have been as follows:
Dec-31-1996 $39.0 million ($.92 per diluted share)
Mar-31-1997 $ 9.2 million ($.22 per diluted share)
Jun-30-1997 $20.7 million ($.49 per diluted share)
Sep-30-1997 $33.4 million ($.79 per diluted share)
Dec-31-1997 $47.3 million ($1.11 per diluted share)
</FN>
</TABLE>
