-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IBw48AarTnNRj6O9Wd7LqVTGHkz3tEUf+pB23BwdTINzcwJWGCjmAP5Rhrd8Y7tO ZeG6RkXCpD3oqVLJoeae1w== 0000093469-96-000002.txt : 19960328 0000093469-96-000002.hdr.sgml : 19960328 ACCESSION NUMBER: 0000093469-96-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITTWAY CORP /DE/ CENTRAL INDEX KEY: 0000093469 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 135616408 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04821 FILM NUMBER: 96539362 BUSINESS ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 BUSINESS PHONE: 3128311070 MAIL ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD SHARES INC DATE OF NAME CHANGE: 19900321 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD POWER & LIGHT CORP DATE OF NAME CHANGE: 19660905 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, 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 American Stock Exchange Class A Stock, $1.00 par value American 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. [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant (based on closing sales prices on March 18, 1996): $647,436,000. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (March 18, 1996): Common Stock - 3,938,832 shares outstanding; Class A Stock - 16,973,313 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 Annual Report to Stockholders are incorporated by reference into Parts I and II of this report. Portions of the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 9, 1996 are incorporated by reference into Part III of this report. PITTWAY CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K For The Year Ended December 31, 1995 PART I Page Item 1 Business 3-7 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 10 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8 Financial Statements and Supplementary Data 10 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 10 PART III Item 10 Directors and Executive Officers of the Registrant 11 Item 11 Executive Compensation 11 Item 12 Security Ownership of Certain Beneficial Owners and Management 11 Item 13 Certain Relationships and Related Transactions 11 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 11 SIGNATURES 12 2 PART I Item 1. Business (a) General Development of Business Pittway Corporation ("Pittway" or "Registrant"), formerly Standard Shares, Inc. ("Standard"), was incorporated under Delaware law in 1925. Pittway and its subsidiaries are referred to herein collectively as the "Company". The Company operates in two reportable industry segments: alarm and other security products, and publishing. Acquisitions and dispositions of businesses by the Company, other than the discontinued operations discussed below, in each of the three years ended December 31, 1995 were not significant to the Company's sales or results of operations. 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. Financial information relating to this transaction is set forth in Note 10 ("Fair Value of Financial Instruments") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, pages 39-40, which Note is incorporated herein by reference. In April 1993, the Company distributed its investment in the AptarGroup, Inc. (formerly known as the Seaquist Division packaging group) to stockholders in a tax-free spinoff. AptarGroup, Inc. is a manufacturer of aerosol valves, dispensing pumps and closures which are sold to packagers and marketers in the personal care, fragrance/cosmetics, pharmaceutical, household products and food industries. In October 1992, the Company sold its Barr Company, a contract packager for marketers of aerosol and liquid fill (non-aerosol) personal and household products, to a Canadian packaging company. In July 1992, the Company sold its First Alert/BRK Electronics business to a new company formed by BRK management and an investment firm. Financial information relating to these transactions is set forth in Note 1 ("Discontinued Operations") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, page 36, which Note is incorporated herein by reference. (b) Financial Information about Industry Segments Financial information relating to industry segments for each of the three years ended December 31, 1995 is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, pages 41-42, which Note is incorporated herein by reference. (c) Narrative Description of Business The principal operations, products and services rendered by the Company: Alarm and Other Security Products Segment This segment involves the design, manufacture and sale of an extensive line of burglar alarm, commercial fire detection, closed circuit television, 3 access control and other alarm components and systems as well as the distribution of alarm and other security products manufactured by other companies. By offering a broad line of alarm products needed for security systems, the Company provides a full range of services to 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 the Company's computerized regional warehouses and convenience center outlets, authorized distributors and dealers. Various products sold through the alarm system distribution group are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under the Company's Ademco brand name, others are resold under brand names owned by its suppliers. In the Canadian and overseas markets, alarm and other security products are sold through the Company's distribution centers, authorized distributors and sales agents. The Company also offers AlarmNet to alarm companies in major U.S. markets. AlarmNet is a wireless cellular-like communication network designed to transmit security alarm signals by radio instead of over telephone lines. Commercial fire detectors and fire controls are sold through the Company's regional warehouses, electrical and building supply wholesalers and alarm and fire safety distributors. 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 encountered. 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 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, 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 network, efficient customer service, competitive prices and brand names. Within the industry there is competition from large and small manufacturers 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. 4 Publishing Segment This segment is a publisher of 33 national business and trade publications. A variety of magazine-related products are also offered including directories, readership lists, CD-ROMs, on-line computer services, and custom publishing. The Company's publications serve both specific industries and broad functional markets which include specialized manufacturing, service industries, technical and professional fields and general management. Most publications are distributed on a monthly basis with several others distributed on a biweekly, annual or biennial frequency. The publications are generally distributed free through controlled circulation. The principal source of revenue is from the sale of advertising space within the magazines. Other facets of the business include: the operation of a printing plant for the printing and production of most of the Company's publications and those of other publishers; a national direct mail-marketing organization serving the pharmaceutical, health care and business services markets; a printer which provides mailing service capabilities to the Company's direct mail-marketing organization and to outside customers; research and telemarketing services; direct-response card mailer service; trade shows and special publications. Within the publishing and marketing communications fields, competition exists in the form of other publications and media communication businesses. Reductions in advertising schedules by domestic industrial companies due to economic and other competitive pressures directly impacts the display advertising levels of the Company's publishing segment. The Company competes with one or more other magazines for advertising revenue in each of its magazine titles. The Company's principal sales advantages include relevant editorial content and innovative marketing complemented by specialized multi-magazine supplements. The Company believes that its competitive position also benefits from improvements in productivity and from cost control programs. The Company places great emphasis on providing quality products and services to its customers. 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 Village, a 2,000 acre parcel of land nearby, is approved for development as a master planned community. Saddlebrook Corporate Center, a nearby 450 acre parcel, was originally planned as a business park for mixed use development, although the partial conversion to a residential community is being considered 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 of Cylink Corporation (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. Cylink further offers a line of spread spectrum radio products that are used for wireless voice and data communications. The Company also owns 4,157,375 shares of United States Satellite Broadcasting Company Inc. (USSB), a company which provides subscription television programming via high-power direct broadcast satellite to households throughout the Continental U.S. Both of these companies made initial public offerings of their respective stocks in February of 1996. Additionally, the Company has approximately an 5 11% interest in a joint venture that develops wireless signaling equipment for communication between fixed points. The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties in Chicago, Dallas, Los Angeles and Boston. See Item 7 of this Form 10-K. The Company also has invested, as a 5% limited partner, in four rental apartment complexes located in Chicago, Indianapolis and Washington, D.C. which provide certain tax advantages. 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 alarm and security products business are sold under the Company's tradenames while others are sold under tradenames owned by its suppliers. Customers - Neither of the Company's industry segments is dependent upon a single customer or a few customers. The loss of any one or more of these customers would not have a material adverse effect on the Company's results of operations. 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 and other security products segment were $16.6 million in 1995, $11.8 million in 1994 and $10.8 million in 1993. 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 alarm security business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. This exposure has been lessened by the sale of First Alert/BRK Electronics. 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. While it believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the financial impact of claims and lawsuits which may be filed in the future. 6 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, 1995, there were approximately 6,000 persons employed by the Company, including 4,800 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 its employees to be good. (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 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, pages 41-42, which Note is incorporated herein by reference. Item 2. Properties The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- Syosset, New York (1) N/A 340,000 Syosset, New York (3) 1997 14,000 Syosset, New York (1) 1997 6,000 Syosset, New York (1) 2000 17,000 Syosset, New York (1) 2014 10,000 Torrance, California (1) 1998 48,000 Miami, Florida (2) 2000 14,000 El Paso, Texas (2) 2001 19,000 Louisville, Kentucky (3) 2001 4,000 Raleigh, North Carolina (1) 1998 8,000 Northford, Connecticut (1) N/A 179,000 St. Charles, Illinois (1) 2003 158,000 St. Charles, Illinois (1) 2004 50,000 West Chicago, Illinois (1) 1998 21,000 Norcross, Georgia (3) 1998 6,000 Melbourne, Australia (2) 1998 5,000 Sydney, Australia (2) 1998 25,000 Alleur, Belgium (2) 1997 5,000 Toronto, Canada (2) 1998 7,000 Concord, Ontario, Canada (2) 1997 7,000 Brighton, England (1) 1997 24,000 Lichfield Staffs, England (4) 2014 20,000 East Kilbride, Scotland (1) N/A 15,000 Hilden, Germany (2) 1999 8,000 Tsuen Wan, TN, Hong Kong (2) 1997 5,000 7 Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- (continued) Milan, Italy (1) N/A 14,000 Milan, Italy (2) 2001 8,000 Trieste, Italy (1) N/A 40,000 Juarez, Mexico (4) 1999 68,000 Madrid, Spain (2) 2000 8,000 Barcelona, Spain (2) 2005 6,000 Distribution Centers Hub Locations: Atlanta, Georgia (2) 2005 29,000 Boston, Massachusetts (2) 1999 14,000 Los Angeles, California (2) 1999 30,000 Chicago, Illinois (2) 2005 40,000 Clearwater, Florida (2) 2004 27,000 Memphis, Tennessee (2) 2006 15,000 Fairfield, New Jersey (2) 1996 16,000 Richmond, Virginia (2) 2004 14,000 Louisville, Kentucky (2) 1999 60,000 Phoenix, Arizona (2) 2004 15,000 Toronto, Canada (2) 1997 11,000 Publishing Segment- Cleveland, Ohio (3) 2000 179,000 Cleveland, Ohio (2) 1996 30,000 Berea, Ohio (5) N/A 100,000 New York, New York (3) 2000 10,000 Dunedin, Florida (3) 2000 8,000 Safety Harbor, Florida (1) 1997 19,000 Tampa, Florida (5) 1999 30,000 General Corporate- Chicago, Illinois (3) 2001 12,000 Other properties in the alarm and other security products segment include 82 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 82 centers are under leases expiring through 2002 and range in size from 1,500 to 11,500 square feet. Other properties in the publishing segment include 12 sales and/or editorial offices under leases expiring through 2003 located in major cities throughout the United States. The Company believes the above facilities are adequate for its present needs. (1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing (5) Printing N/A Not applicable - facilities are owned by the Company 8 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 currently under development 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 ground that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs have appealed the trial court's decision granting summary judgment. 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. Subject to certain conditions, the agreement 9 permits Saddlebrook to obtain subordinated loans from the Company to enable Saddlebrook to pay its one-half of the costs of the latter two items. No loans have been made to date. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market For Registrant's Common Equity and Related Stock- holder Matters The information set forth under the heading "Market Prices, Security Holders and Dividend Information" appearing on page 45 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information set forth under the heading "Supplemental Information -Five Year Summary of Selected Financial Data" appearing on page 44 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the heading "Management's Discussion and Analysis" appearing on pages 46-47 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto, together with the report thereon of Price Waterhouse LLP dated February 21, 1996, appearing on pages 29-43 of the Company's 1995 Annual Report to Stockholders are incorporated herein by reference. 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, 1996. 10 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) Reports" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 9, 1996 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 9, 1996 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 9, 1996 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 9, 1996 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 filed as a part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on page 13 of this Form 10-K and are incorporated herein by reference. Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 16-17 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) Reports on Form 8-K: The registrant announced a potential significant increase in the value of its investments in United States Satellite Broadcasting, Inc. and Cylink Corporation in a filing on Form 8-K dated December 21, 1995. The registrant announced a three for two stock split in its Common and Class A stock in a filing on Form 8-K dated January 23, 1996. 11 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 and Treasurer Date: March 27, 1996 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 27, 1996. /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/ Sidney Barrows /s/ Jerome Kahn, Jr Sidney Barrows, Director Jerome Kahn, Jr., Director /s/ Fred Conforti /s/Leo F. Mullin Fred Conforti, Director Leo F. Mullin, Director /s/ E. David Coolidge III E. David Coolidge III, Director 12 PITTWAY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following documents are filed as a part of this report: Page reference in Annual Report to Stockholders Financial Statements required by Item 8 of this Form: Consolidated Balance Sheet at December 31, 1995 and 1994........................................ 30-31 For each of the three years ended December 31, 1995 - Consolidated Statement of Income................... 29 Consolidated Statement of Cash Flows............... 32 Consolidated Statement of Stockholders' Equity..... 33 Summary of Accounting Policies and Notes to Consolidated Financial Statements.................... 34-42 Report of Independent Accountants...................... 43 Page reference in Form 10-K Financial Statement Schedule required by Article 12 of Regulation S-X: Report of Independent Accountants on Financial Statement Schedule................................... 14 Consolidated Financial Statement Schedule - II. Valuation and Qualifying Accounts............... 15 The consolidated financial statements of Pittway Corporation, listed in the above index together with the Report of Independent Accountants, which are included in the Company's 1995 Annual Report to Stockholders, are incorporated herein by reference. 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. With the exception of the aforementioned information and information incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7 and 8) of this Form 10-K, the Company's 1995 Annual Report to Stockholders is not deemed to be filed as part of this report. 13 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Pittway Corporation Our audits of the consolidated financial statements referred to in our report dated February 21, 1996 appearing on page 43 of the 1995 Annual Report to Stockholders of Pittway Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in the index on page 13 of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. As discussed in Notes 5 and 7 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois February 21, 1996 14 PITTWAY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in Thousands)
Balance at Charges to Deductions Balance beginning costs and from at end of period expenses reserve (A) of period 1995 Allowance for doubtful accounts $6,348 $4,901 $2,756 $8,493 Inventory obsolescence reserve 6,526 1,464 1,377 6,613 1994 Allowance for doubtful accounts $5,521 $3,167 $2,340 $6,348 Inventory obsolescence reserve 5,222 1,925 621 6,526 1993 Allowance for doubtful accounts $5,867 $2,938 $3,284 $5,521 Inventory obsolescence reserve 4,583 2,641 2,002 5,222 (A) Write-off of accounts considered uncollectible, net of recoveries, or write-off of obsolete inventory. Also includes valuation accounts of acquired or divested companies and foreign currency translation adjustments, net. 15
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 Annual Report on Form 10-K for the year ended February 29, 1988). 3.2 Certificate of Amendment to Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990). 3.3 Bylaws of Registrant, as amended (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 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. 10.1 Pittway Corporation 1990 Stock Awards Plan, as amended, (incorporated by reference to Exhibit 4.4 to the Registrant's Form S-8 Registration Statement No. 33 - 54753 filed with the Commission on July 27, 1994). 10.2 Agreement of employment dated as of July 1, 1990 with Sal F. Marino, as amended (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.)** 10.3 Second Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1993 (incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)** 10.4 Third Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1994 (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.)** 16 INDEX TO EXHIBITS - cont'd. Sequential Number and Description of Exhibit Page Number*** 10.5 Fourth Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1995.** 10.6 Employment Agreement with King Harris dated as of January 1, 1996.** 10.7 Employment Agreement with Leo A. Guthart dated as of January 1, 1996.** 13. 1995 Annual Report to Stockholders.* 21. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 27. Financial Data Schedule (submitted only in electronic format). * Such report, 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. 17 EX-4 2 NOTE PURCHASE AGREEMENT Composite Conformed Copy of Note Purchase Agreement Dated as of December 15, 1995 Re: $40,000,000 6.81% Senior Notes, Series A, Due December 15, 2005 and $35,000,000 6.70% Senior Notes, Series B, Due December 15, 2005 of PITTWAY CORPORATION Separate Note Purchase Agreements, each dated as of December 15, 1995, in the form attached hereto, were entered into among Pittway Corporation and the institutions named below. Each of said Note Purchase Agreements was executed on behalf of Pittway Corporation by Paul R. Gauvreau, its Financial Vice President and Treasurer. The separate Note Purchase Agreements were addressed to the institutions as shown on Schedule A attached to said Note Purchase Agreements and were accepted by the officers of the respective institutions as shown below: METROPOLITAN LIFE INSURANCE COMPANY By /s/ John R. Endres Its Assistant Vice-President METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY By /s/ Anthony J. Williamson Its Vice President and Assistant Treasurer NATIONWIDE LIFE INSURANCE COMPANY By /s/ Jeffrey G. Milburn Its Vice President Corporate Fixed-Income Securities EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU By /s/ Jeffrey G. Milburn Its Attorney-in-Fact WEST COAST LIFE INSURANCE COMPANY By /s/ Jeffrey G. Milburn Its Attorney-in-Fact Pittway Corporation $40,000,000 6.81% SENIOR NOTES, SERIES A, DUE DECEMBER 15, 2005 AND $35,000,000 6.70% SENIOR NOTES, SERIES B, DUE DECEMBER 15, 2005 _____________ Note Purchase Agreement _____________ DATED AS OF DECEMBER 15, 1995 Table of Contents (Not a part of the Agreement) SECTION HEADING PAGE SECTION 1. Authorization of Notes......................................1 SECTION 2. Sale and Purchase of Notes..................................1 SECTION 3. Closing.....................................................2 SECTION 4. Conditions to Closing.......................................2 Section 4.1. Representations and Warranties............................2 Section 4.2. Performance; No Default...................................2 Section 4.3. Compliance Certificates...................................3 Section 4.4. Opinions of Counsel.......................................3 Section 4.5. Purchase Permitted By Applicable Law, Etc.................3 Section 4.6. Sale of Other Notes.......................................3 Section 4.7. Payment of Special Counsel Fees...........................3 Section 4.8. Private Placement Number..................................3 Section 4.9. Changes in Corporate Structure............................4 Section 4.10. Proceedings and Documents.................................4 SECTION 5. Representations and Warranties of the Company...............4 Section 5.1. Organization; Power and Authority.........................4 Section 5.2. Authorization, Etc........................................4 Section 5.3. Disclosure................................................4 Section 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates................................................5 Section 5.5. Financial Statements......................................5 Section 5.6. Compliance with Laws, Other Instruments, Etc..............6 Section 5.7. Governmental Authorizations, Etc..........................6 Section 5.8. Litigation; Observance of Agreements, Statutes and Orders.6 Section 5.9. Taxes.....................................................7 Section 5.10. Title to Property; Leases.................................7 Section 5.11. Licenses, Permits, Etc....................................7 Section 5.12. Compliance with ERISA.....................................7 Section 5.13. Private Offering by the Company...........................8 Section 5.14. Use of Proceeds; Margin Regulations.......................9 Section 5.15. Existing Debt and Indebtedness; Future Liens..............9 Section 5.16. Status under Certain Statutes.............................9 Section 5.17. Environmental Matters.....................................9 -i- SECTION 6. Representations of the Purchaser............................10 Section 6.1. Purchase for Investment..................................10 Section 6.2. Source of Funds..........................................10 SECTION 7. Information as to Company...................................12 Section 7.1. Financial and Business Information.......................12 Section 7.2. Officer's Certificate....................................15 Section 7.3. Inspection...............................................16 SECTION 8. Prepayment of the Notes.....................................16 Section 8.1. Required Prepayments.....................................16 Section 8.2. Optional Prepayments with Make-Whole Amount..............16 Section 8.3. Optional Prepayment of Series B Notes Without Premium....17 Section 8.4. Allocation of Partial Prepayments........................17 Section 8.5. Maturity; Surrender, Etc.................................17 Section 8.6. Purchase of Notes........................................18 Section 8.7. Make-Whole Amount........................................18 SECTION 9. Affirmative Covenants.......................................19 Section 9.1. Compliance with Law......................................19 Section 9.2. Insurance................................................20 Section 9.3. Maintenance of Properties................................20 Section 9.4. Payment of Taxes and Claims..............................20 Section 9.5. Corporate Existence, Etc.................................20 SECTION 10. Negative Covenants Applicable to Series A Notes.............21 Section 10.1. Limitation on Debt of Restricted Subsidiaries............21 Section 10.2. Maintenance of Financial Condition.......................21 Section 10.3. Limitation on Liens......................................21 Section 10.4. Sales of Assets..........................................23 Section 10.5. Limitation on Designation of Unrestricted Subsidiaries...24 Section 10.6. Amendments of Series B Notes.............................24 Section 10.7. Loans to Officers, Etc...................................24 SECTION 11. Negative Covenants Applicable to Series B Notes.............24 Section 11.1. Limitation on Indebtedness of Restricted Subsidiaries....24 Section 11.2. Maintenance of Financial Condition.......................24 Section 11.3. Limitation on Liens......................................25 Section 11.4. Sales of Assets..........................................26 SECTION 12. Negative Covenants Applicable to All Notes..................27 Section 12.1. Sale and Leaseback.......................................27 -ii- Section 12.2. Restricted Payments......................................27 Section 12.3. Permitted Investments....................................28 Section 12.4. Transactions with Affiliates.............................28 Section 12.5. Merger, Consolidation, Etc...............................28 Section 12.6. Designation of Restricted and Unrestricted Subsidiaries..29 SECTION 13. Events of Default...........................................30 SECTION 14. Remedies on Default, Etc....................................32 Section 14.1. Acceleration.............................................32 Section 14.2. Other Remedies...........................................33 Section 14.3. Rescission...............................................34 Section 14.4. No Waivers or Election of Remedies, Expenses, Etc........34 SECTION 15. Registration; Exchange; Substitution of Notess..............34 Section 15.1. Registration of Notes....................................34 Section 15.2. Transfer and Exchange of Notes...........................35 Section 15.3. Replacement of Notes.....................................35 SECTION 16. Payments on Notes...........................................36 Section 16.1. Place of Payment.........................................36 Section 16.2. Home Office Payment......................................36 SECTION 17. Expenses, Etc...............................................36 Section 17.1. Transaction Expenses.....................................36 Section 17.2. Survival.................................................37 SECTION 18. Survival of Representations and Warranties; Entire Agreement............................................37 SECTION 19. Amendment and Waiver........................................37 Section 19.1. Requirements.............................................37 Section 19.2. Solicitation of Holders of Notes.........................37 Section 19.3. Binding Effect, Etc......................................38 Section 19.4. Notes Held by Company, etc...............................38 SECTION 20. Notices.....................................................38 SECTION 21. Reproduction of Documents...................................39 SECTION 22. Confidential Information....................................39 -iii- SECTION 23. Miscellaneous...............................................40 Section 23.1. Successors and Assigns...................................40 Section 23.2. Payments Due on Non-Business Days........................40 Section 23.3. Severability.............................................41 Section 23.4. Construction.............................................41 Section 23.5. Counterparts.............................................41 Section 23.6. Governing Law............................................41 Signature..................................................................41 -iv- SCHEDULE A - INFORMATION RELATING TO PURCHASERS SCHEDULE B - DEFINED TERMS SCHEDULE 5.3 - Disclosure Materials SCHEDULE 5.4 - Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE 5.5 - Financial Statements SCHEDULE 5.8 - Certain Litigation SCHEDULE 5.11 - Patents, etc. SCHEDULE 5.12 - Plans SCHEDULE 5.14 - Use of Proceeds SCHEDULE 5.15 - Debt and Indebtedness as of September 30, 1995 SCHEDULE 10.3(f) - Existing Liens SCHEDULE 12.3 - Certain Existing Investments EXHIBIT 1-A - Form of 6.81% Senior Note, Series A, due December 15, 2005 EXHIBIT 1-B - Form of 6.70% Senior Note, Series B, due December 15, 2005 EXHIBIT 4.4(a) - Form of Opinion of Special Counsel for the Company EXHIBIT 4.4(b) - Form of Opinion of Special Counsel for the Purchasers -v- Pittway Corporation 200 SOUTH WACKER DRIVE, SUITE 700 CHICAGO, ILLINOIS 60606-5802 6.81% SENIOR NOTES, SERIES A, DUE DECEMBER 15, 2005 AND 6.70% SENIOR NOTES, SERIES B, DUE DECEMBER 15, 2005 Dated as of December 15, 1995 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A: Ladies and Gentlemen: PITTWAY CORPORATION, a Delaware corporation (the "Company"), agrees with you as follows: SECTION 1. Authorization of Notes. The Company will authorize the issue and sale of (a) $40,000,000 aggregate principal amount of its 6.81% Senior Notes, Series A, due December 15, 2005(the "Series A Notes"), and (b) $35,000,000 aggregate principal amount of its 6.70% Senior Notes, Series B, due December 15, 2005 (the "Series B Notes" and collectively with the Series A Notes, the "Notes", such term to include any such notes issued in substitution therefor pursuant to Sec. 15 of this Agreement or the Other Agreements (as hereinafter defined)). The Series A Notes shall be substantially in the form set out in Exhibit 1-A and the Series B Notes shall be substantially in the form set out in Exhibit 1-B, in each case with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement, and references to a "Series" or "Series of Notes" shall mean separately the Series A Notes and the Series B Notes. SECTION 2. Sale and Purchase of Notes. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Sec. 3, Notes of the Series and in the principal amount specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Purchase Agreements (the "Other Agreements") identical with this Agreement with the other purchasers named in Schedule A (the "Other Purchasers"), providing for the sale at such Closing to the Other Purchasers of Notes of the Series and in the principal amounts specified opposite their respective names in Schedule A. -1- Your obligation hereunder, and the obligations of the Other Purchasers under the Other Agreements, are several and not joint obligations, and you shall have no obligation under the Other Agreements and no liability to any Person for the performance or nonperformance by the Other Purchasers thereunder. SECTION 3. Closing. The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, at 10:00 A.M. Chicago time, at a closing (the "Closing") on December 15, 1995 or on such other Business Day thereafter as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 76-30751 at Bank of America Illinois (ABA No. 071000039). If at the Closing the Company shall fail to tender such Notes to you as provided above in this Sec. 3, or any of the conditions specified in Sec. 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. SECTION 4. Conditions to Closing. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: Section 4.1. Representations and Warranties. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. Section 4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing, and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14), no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Restricted Subsidiary (nor, in the case of Sec. 12.2, any Subsidiary) shall have entered into any transaction since September 30, 1995 that would have been prohibited by Sec. 10, 11 or 12 had such Sections applied since such date. -2- Section 4.3. Compliance Certificates. (a) Officer's Certificate. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sec. 4.1, 4.2 and 4.9 have been fulfilled. (b) Secretary's Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes, this Agreement and the Other Agreements. Section 4.4. Opinions of Counsel. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Kirkland & Ellis, counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you) and (b) from Chapman and Cutler, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as you may reasonably request. Section 4.5. Purchase Permitted By Applicable Law, Etc. On the date of the Closing your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation G, T or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. Section 4.6. Sale of Other Notes. Contemporaneously with the Closing, the Company shall sell to the Other Purchasers, and each Other Purchaser shall purchase, the Notes to be purchased by it at the Closing as specified in Schedule A. Section 4.7. Payment of Special Counsel Fees. Without limiting the provisions of Sec. 17.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel referred to in Sec. 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. Section 4.8. Private Placement Number. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau shall have been obtained for each Series of Notes. -3- Section 4.9. Changes in Corporate Structure. Except for the merger of Pittway Real Estate, Inc. into the Company, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. Section 4.10. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. SECTION 5. Representations and Warranties of the Company. The Company represents and warrants to you that: Section 5.1. Organization; Power and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Notes and to perform the provisions hereof and thereof. Section 5.2. Authorization, Etc. This Agreement, the Other Agreements and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Section 5.3. Disclosure. The Company has delivered or caused to be delivered to you and the Other Purchasers a copy of a Private Placement Memorandum dated September 22, 1995 (the "Memorandum"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which -4- they were made. Except as disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since December 31, 1994, there has been no change in the financial condition, operations, business or properties of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. You acknowledge that the Company intends to effect the distribution described in clause (2) of the final sentence of Sec. 10.4, without consideration. Section 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates. (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary and whether such Subsidiary is a Restricted Subsidiary or an Unrestricted Subsidiary, (ii) of the Company's Affiliates, other than Subsidiaries and officers and directors of the Company, and (iii) of the Company's directors and executive officers. (b) All of the outstanding shares of capital stock or similar equity interests of each Restricted Subsidiary shown in Schedule 5.4 as being owned by the Company and its Restricted Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Restricted Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Restricted Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Restricted Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. (d) No Restricted Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than the agreements listed on Schedule 5.4 and customary limitations imposed by corporate law statutes) restricting the ability of such Restricted Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Restricted Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Restricted Subsidiary. Section 5.5. Financial Statements. The Company has delivered to each Purchaser copies of the financial statements of the Company and its -5- Subsidiaries, and of the Company and its Restricted Subsidiaries, listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries, or of the Company and its Restricted Subsidiaries, as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). Section 5.6. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by the Company of this Agreement and the Notes to be purchased by you will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) other than a violation caused by you, violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. The representations of the Company in clauses (ii) and (iii) above are made in reliance upon and subject to the accuracy of your representations in Sec. 6 of this Agreement, to the extent applicable. Section 5.7. Governmental Authorizations, Etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required to be made or obtained by the Company in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. Section 5.8. Litigation; Observance of Agreements, Statutes and Orders. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. -6- Section 5.9. Taxes. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate actions and with respect to which the Company or a Subsidiary, as the case may be, has established reserves to the extent and in such amounts as are in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its consolidated Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended December 31, 1990. Section 5.10. Title to Property; Leases. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Sec. 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. Section 5.11. Licenses, Permits, Etc. Except as disclosed in Schedule 5.11, (a) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known Material conflict with the rights of others; (b) to the best knowledge of the Company, no product of the Company or its Subsidiaries infringes in any Material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person and the Company has not received notice from any Person of a claimed Material infringement which remains unresolved; and (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries. Section 5.12. Compliance with ERISA. (a) The Company and each ERISA Affiliate has operated and administered each Plan in compliance with all -7- applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to any Plans, and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each Plan that is subject to the minimum funding requirements of Section 302 of ERISA or Section 412 of the Code, determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "benefit liabilities" has the meaning specified in section 4001 of ERISA and the terms "current value" and "present value" have the meanings specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected post-retirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code or applicable state continuation coverage laws) of the Company and its Restricted Subsidiaries is not Material. (e) Schedule 5.12 contains a complete and correct list of all Plans. (f) The execution and delivery of this Agreement and the issuance and sale of Notes to you hereunder will not result in a non-exempt prohibited transaction under section 406 of ERISA or section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Sec. 5.12(f) is made in reliance upon and subject to the accuracy of your representation in Sec. 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you. Section 5.13. Private Offering by the Company. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and not more than 45 other insurance companies or pension funds, each of which has substantial assets and extensive experience in investments in securities similar to the Notes and each of which has been offered the Notes at a private sale for investment. Neither the -8- Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. Section 5.14. Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 CFR 207) under such circumstances as to involve a violation of such Regulation, or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 10% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 10% of the value of such assets. As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation G. Section 5.15. Existing Debt and Indebtedness; Future Liens. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Debt and Indebtedness of the Company and its Restricted Subsidiaries as of September 30, 1995, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Debt or Indebtedness of the Company or its Restricted Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Debt or Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Debt or Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Debt or Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.15, neither the Company nor any Restricted Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Sec. 10.3 and 11.3. Section 5.16. Status under Certain Statutes. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. Section 5.17. Environmental Matters. Except as otherwise disclosed to you in writing: (a) neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim, against the Company or any of its Subsidiaries or any of -9- their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any Subsidiary has knowledge of any facts which could reasonably be expected to give rise to any claim, public or private, against any of them of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (c) neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them, or disposed of any Hazardous Materials, in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (d) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.This Sec. 5.17, together with the representation set forth in Sec. 5.8(b), sets forth the sole and exclusive representations and warranties of the Company with respect to environmental matters. SECTION 6. Representations of the Purchaser. Section 6.1. Purchase for Investment. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. Section 6.2. Source of Funds. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) if you are an insurance company, the Source is an "insurance company general account" within the meaning of PTE 95-60 and the purchase and -10- holding of Notes by you is eligible for and satisfies the requirements of PTE 95-60, it being understood and agreed that in making such representation, such insurance company is relying on the truth and accuracy of the representation of the Company set forth in Sec. 5.12(e); or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued June 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund and all other requirements for an exemption under PTE 90-1 or 91-38, as applicable, are met; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (d); or (e) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA, and does not include assets of any individual retirement account or individual retirement annuity as described in Section 408 of the Code. If you or any subsequent transferee of the Notes issued to you indicates to the Company in writing prior to acquiring such Notes that you or such transferee is relying on any representation contained in paragraph (b), (c) or (d) above, the Company shall deliver a certificate on the date of the Closing, with respect to you, and on or prior to the date of the transfer of such Notes, with respect to any such transferee, which certificate shall state whether (i) with respect to any plan identified pursuant to paragraph (b) or (d) above, the Company is a "party in interest" (as defined in Title I, Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e)(2) of the Code), or (ii) with respect to any plan identified pursuant -11- to paragraph (c) above, the Company or any "affiliate" (as defined in Section V(c) of the QPAM Exemption) has at such time, and during the immediately preceding one year, exercised the authority to appoint or terminate said QPAM as manager of the assets of any plan identified in writing pursuant to paragraph (c) above or to negotiate the terms of said QPAM's management agreement on behalf of any such identified plans. As used in this Sec. 6.2, the terms "employee benefit plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in section 3 of ERISA. SECTION 7. Information as to Company. Section 7.1. Financial and Business Information. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements - within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of: (i) a consolidated balance sheet of the Company and its Restricted Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Restricted Subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, and (iii) unless identical to the matters required under clause (i) above, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (iv) unless identical to the matters required under clause (ii) above, consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form -12- 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of Sec. 7.1(a)(iii) and (iv); (b) Annual Statements - within 105 days after the end of each fiscal year of the Company, duplicate copies of: (i) a consolidated balance sheet of the Company and its Restricted Subsidiaries, as at the end of such year, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Restricted Subsidiaries, for such year, and (iii) unless identical to the matters required under clause (i) above, a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (iv) unless identical to the matters required under clause (ii) above, consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and, in the case of the items referred to in Sec. 7.1(b)(i) and (ii), unless such items are identical to the items referred to in Sec. 7.1(b)(iii) and (iv), certified by a Senior Financial Officer in the same manner as required for items delivered under Sec. 7.1(a), and in the case of the items referred to in Sec. 7.1(b)(iii) and (iv), or in Sec. 7.1(b)(i) and (ii) if identical to the items referred to in Sec. 7.1(b)(iii) and (iv), accompanied (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) by a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain -13- knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act and the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of Sec. 7.1(b)(iii) and (iv); (c) SEC and Other Reports - promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto, filed by the Company or any Subsidiary with the Securities and Exchange Commission or with any national securities exchange (other than any registration statement on Form S-8 or any successor thereto or any related prospectus or amendment) and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) Notice of Default or Event of Default - promptly, and in any event within five Business Days after a Responsible Officer becoming aware of the existence of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters - promptly, and in any event within 10 Business Days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect as of the date such reportable event occurred; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a written notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; -14- (iii) any incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or imposition of any Lien on any of the assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; or (iv) any change in the facts with regard to the status of Plans as identified in Schedule 5.12; (f) Notices from Governmental Authority - promptly, and in any event within 30 days of receipt thereof, copies of any written notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and (g) Requested Information - with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. Section 7.2. Officer's Certificate;. Each set of financial statements delivered to a holder of Notes pursuant to Sec. 7.1(a) or Sec. 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance - the information (including detailed calculations as of the end of such quarterly or annual period) required in order to establish whether the Company was in compliance with the requirements of Sec. 10, 11, 12.1, 12.2, 12.3 and 12.5 during and as of the end of the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations as of the end of such quarterly or annual period of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation as of the end of such quarterly or annual period of the amount, ratio or percentage then in existence); and (b) Event of Default - a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Restricted Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of -15- the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. Section 7.3. Inspection. The Company shall permit the representatives of each holder of Notes of a Series that is an Institutional Investor: (a) No Default - if no Default or Event of Default then exists with respect to such Series, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) Default - if a Default or Event of Default then exists with respect to such Series, at the expense of the Company, to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. SECTION 8. PREPAYMENT OF THE NOTES. Section 8.1. Required Prepayments. (a) Series A Notes. No prepayments are required to be made with respect to the Series A Notes prior to their expressed maturity date other than prepayments which may be required in connection with an acceleration of the Series A Notes pursuant to the provisions of Sec. 14.1. (b) Series B Notes. On December 15, 1999 and on each December 15 thereafter to and including December 15, 2004, the Company will prepay $5,000,000 principal amount (or such lesser principal amount as shall then be outstanding) of the Series B Notes at par and without payment of the Make- Whole Amount or any premium, provided that upon any partial prepayment of the Series B Notes pursuant to Sec. 8.2 or Sec. 8.3 the principal amount of each required prepayment of the Series B Notes becoming due under this Sec. 8.1 on and after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Series B Notes is reduced as a result of such prepayment. Section 8.2. Optional Prepayments with Make-Whole Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes of either Series, in an amount not less than $1,000,000 of the aggregate principal amount of the Notes -16- of such Series then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, and accrued interest thereon to the date of prepayment plus the applicable Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes of the Series to be prepaid written notice of each optional prepayment under this Sec. 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes of such Series to be prepaid on such date, the principal amount of such Notes held by such holder to be prepaid (determined in accordance with Sec. 8.4), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of such Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. No incorrect determination by the Company of the Make-Whole Amount payable in connection with any Note to be prepaid pursuant to this Sec. 8.2 or that has become or is declared to be immediately due and payable pursuant to Sec. 14.1 shall be binding, and the Required Holders shall be entitled to object to any such computation of the Company and to resolve with the Company the correct computation of such Make-Whole Amount. Section 8.3. Optional Prepayment of Series B Notes Without Premium. In the event the Company shall, on or after December 15, 1997, issue and sell shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock, it may within 30 days after such transaction, at its option and upon notice as provided below, apply all or any portion of the net cash proceeds of such transaction to the prepayment of up to 50% of the then outstanding principal amount of the Series B Notes by payment of 100% of the principal amount so prepaid, and accrued interest thereon to the date of prepayment, and without payment of the Make- Whole Amount or any premium. The Company will give each holder of the Series B Notes written notice of each optional prepayment under this Sec. 8.3 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Series B Notes to be prepaid on such date, the principal amount of such Series B Notes held by such holder to be prepaid (determined in accordance with Sec. 8.4), and the interest to be paid. Section 8.4. Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes of either Series, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes of such Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. Section 8.5. Maturity; Surrender, Etc. In the case of each pre- payment of Notes pursuant to this Sec. 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such -17- date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. Section 8.6. Purchase of Notes. The Company will not and will not permit any Affiliate which it controls or any Restricted Subsidiary to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it pursuant to any payment or prepayment of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. Section 8.7. Make-Whole Amount. The term "Make-Whole Amount" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Applicable Spread" means (a) with respect to the Series A Notes, .50%; and (b) with respect to the Series B Notes, .73%. "Called Principal" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Sec. 8.2 or has become or is declared to be immediately due and payable pursuant to Sec. 14.1, as the context requires. "Discounted Value" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of any Note, the Applicable Spread plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Access Service (or such other display as may replace Page 678 on Telerate Access Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for -18- which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one decimal point) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one decimal point) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Sec. 8.2 or Sec. 14.1. "Settlement Date" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Sec. 8.2 or has become or is declared to be immediately due and payable pursuant to Sec. 14.1, as the context requires. SECTION 9. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: Section 9.1. Compliance with Law. The Company will and will cause each of its Restricted Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental -19- authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 9.2. Insurance. The Company will and will cause each of its Restricted Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if the Company or such Restricted Subsidiary has established reserves therefor to the extent and in such amounts as are in accordance with GAAP) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated, unless failure to maintain such insurance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 9.3. Maintenance of Properties. The Company will and will cause each of its Restricted Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Restricted Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business. Section 9.4. Payment of Taxes and Claims. The Company will and will cause each of its Restricted Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Restricted Subsidiary, provided that neither the Company nor any Restricted Subsidiary need pay any such tax or assessment or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Restricted Subsidiary on a timely basis in good faith and by appropriate actions which will prevent the forfeiture or sale of any property of the Company or such Restricted Subsidiary, and the Company or such Restricted Subsidiary has established reserves therefor to the extent and in such amounts as are in accordance with GAAP on the books of the Company or such Restricted Subsidiary or (ii) the nonpayment of all such taxes and assessments and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect. Section 9.5. Corporate Existence, Etc. Subject to Sec. 12.5, the Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Sec. 10.4, 11.4 and 12.5 the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Restricted Subsidiaries (unless merged into the Company or a Restricted Subsidiary) and all rights and franchises of the Company and its Restricted Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. -20- SECTION 10. NEGATIVE COVENANTS APPLICABLE TO SERIES A NOTES. The Company covenants with the holders of the Series A Notes that so long as any of the Series A Notes are outstanding: Section 10.1. Limitation on Debt of Restricted Subsidiaries. The Company will not permit any Restricted Subsidiary to create, assume, incur or in any manner become liable in respect of any Debt (other than Debt owing to the Company or to a Restricted Subsidiary) unless (x) immediately after giving effect thereto, the sum of (without duplication) (A) the aggregate principal amount of such Debt of Restricted Subsidiaries then outstanding, and (B) the aggregate principal amount of Debt of the Company and the Restricted Subsidiaries secured by Liens pursuant to clause (h) of Sec. 10.3 then outstanding shall not exceed 10% of Consolidated Total Assets, and (y) the Company shall then be in compliance with the provisions of Sec. 10.2. Section 10.2. Maintenance of Financial Condition. The Company will not at any time permit Consolidated Total Debt to exceed 50% of Series A Total Capitalization, after deducting from Series A Total Capitalization the amount of all assets which are then included as Permitted Investments under clause (l) of the definition thereof (other than any such Permitted Investments under clause (l) which are Investments in Unrestricted Subsidiaries made after the date of the Closing). Section 10.3. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, create or incur, or suffer to be incurred or to exist, any Lien on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of obligations in priority to the payment of its or their general creditors, or acquire or agree to acquire any property or assets upon conditional sales agreements or other title retention devices, except: (a) Liens for taxes and assessments or governmental charges or levies and Liens securing claims or demands of mechanics and materialmen, provided payment thereof is not at the time required by Sec. 9.4; (b) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Company or a Restricted Subsidiary shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; provided that reserves therefor have been established to the extent and in such amounts as are in accordance with GAAP; (c) Liens incidental to the conduct of business or the ownership of properties and assets (including without limitation Liens in connection with workers' compensation, unemployment insurance and other like laws, warehousemen's and attorneys' liens and statutory landlords' liens) and Liens to secure the performance of bids, tenders or trade -21- contracts, or to secure statutory obligations, surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions; provided that reserves therefor have been established to the extent and in such amounts as are in accordance with GAAP; (d) minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of the Company and its Restricted Subsidiaries or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event materially impair their use in the operation of the business of the Company and its Restricted Subsidiaries; (e) Liens securing Debt of a Restricted Subsidiary to the Company or to another Restricted Subsidiary; (f) Liens existing on the date of the Closing and reflected in Schedule 10.3(f); (g) Liens, including Capital Leases, incurred after the Closing given to secure the payment of the purchase price incurred in connection with the acquisition or construction of fixed assets useful and intended to be used in carrying on the business of the Company or a Restricted Subsidiary, including Liens existing on such fixed assets at the time of acquisition thereof or at the time of acquisition by the Company or a Restricted Subsidiary of any business entity then owning such fixed assets, whether or not such existing Liens were originally given to secure the payment of the purchase price of the fixed assets to which they attach so long as they were not incurred, extended or renewed in contemplation of such acquisition (such existing Liens being herein called the "Existing Liens"), provided that (i) the Lien shall attach solely to the fixed assets acquired, constructed or purchased, or any accessions or attachments thereto, (ii) at the time of acquisition or construction of such fixed assets, the aggregate amount remaining unpaid on all Debt secured by Liens (other than Existing Liens) on such fixed assets whether or not assumed by the Company or a Restricted Subsidiary shall not exceed an amount equal to 100% of the lesser of the total purchase price or fair market value at the time of acquisition or construction of such fixed assets (as determined in good faith by the chief financial officer of the Company), and (iii) all such Debt shall have been incurred within the limitations provided in Sec. 10.1 and Sec. 10.2;and (h) Liens, which would otherwise not be permitted by clauses (a) through (g) above, securing Debt of the Company or a Restricted Subsidiary; provided that (x) immediately after giving effect thereto, the sum of (without duplication) (A) the aggregate principal amount of Debt of the Company and the Restricted Subsidiaries secured by Liens pursuant to this clause (h) then outstanding, and (B) the aggregate -22- principal amount of Debt of Restricted Subsidiaries (other than to the Company or a Restricted Subsidiary) then outstanding, shall not exceed 10% of Consolidated Total Assets, and (y) the Company shall then be in compliance with the provisions of Sec. 10.2. Section 10.4. Sales of Assets. The Company will not, and will not permit any Restricted Subsidiary to sell, lease or otherwise dispose of any substantial part of the assets of the Company and its Restricted Subsidiaries. As used in this Sec. 10.4, a sale, lease or other disposition of assets shall be deemed to be a "substantial part" of the assets of the Company and its Restricted Subsidiaries only if the net proceeds received therefor, when added to the net proceeds received for all other assets sold, leased or otherwise disposed of by the Company and its Restricted Subsidiaries subsequent to the Closing and during the 365 day period immediately preceding such sale, lease or other disposition, exceeds 10% of Consolidated Total Assets (determined as at the end of the fiscal quarter of the Company immediately preceding such 365 day period) and a merger by a Restricted Subsidiary into another Person without such Restricted Subsidiary being the survivor of such merger and in which such Person is not the Company or a Restricted Subsidiary or a Person which thereupon becomes a Restricted Subsidiary shall be deemed a disposition by such Restricted Subsidiary of all of its assets; provided that in all such sales, leases or other dispositions, the Company and the Restricted Subsidiaries shall have received no less than fair market value or fair rental value therefor. Computations under this Sec. 10.4 shall include all issues or sales of any shares of any class (including as "shares" for the purposes of this Sec. 10.4, any warrants, rights or options to purchase or otherwise acquire shares or other Securities exchangeable for or convertible into shares) of any Restricted Subsidiary to any Person other than the Company or a Restricted Subsidiary over which the Company shall have at least the same degree of ownership and control as it did with respect to the Restricted Subsidiary issuing or selling such shares, except shares issued or sold for the purpose of qualifying directors, or except shares issued or sold in satisfaction of the validly pre-existing preemptive rights of minority shareholders in connection with the simultaneous issuance of stock to the Company and/or Restricted Subsidiaries whereby the Company and/or such Restricted Subsidiaries maintain their same proportionate interest in such Restricted Subsidiary. Computations under this Sec. 10.4 shall not include: (1) sales, leases or other dispositions in the ordinary course of business of the Company or any Restricted Subsidiary; (2) a one-time sale or other distribution of the stock and/or assets of Penton Publishing, Inc. and Curtin & Pease/Peneco, Inc., provided that, on the date thereof, such stock and/or assets do not comprise more than 20% of Consolidated Total Assets; or (3) sales, leases or other dispositions (i) by the Company to any Wholly-Owned Restricted Subsidiary, or (ii) by any Restricted Subsidiary to the Company or to any Wholly-Owned Restricted Subsidiary, or (iii) by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to another Restricted Subsidiary, provided that (x) in the case of any sale, lease or other disposition pursuant to clause (iii), the same is made for fair market value or fair rental value, and (y) -23- immediately after the consummation of any sale, lease or other disposition pursuant to clause (i), (ii) or (iii) and after giving effect thereto, no Default or Event of Default exists or would exist. Section 10.5. Limitation on Designation of Unrestricted Subsidiaries. The provisions of Sec. 12.6 to the contrary notwithstanding: (a) the Company will not designate any Subsidiary which has been a Restricted Subsidiary but has subsequently been designated as an Unrestricted Subsidiary to be a Restricted Subsidiary; and (b) the Company will not designate any Restricted Subsidiary to be an Unrestricted Subsidiary in order to cure or avoid a Default or an Event of Default. Section 10.6. Amendments of Series B Notes. The Company will not amend this Agreement or the Series B Notes or in any other manner provide for or permit the holders of the Series B Notes (a) to be prepaid with a Make- Whole Amount, or similar premium, computed using an Applicable Spread of less than .73%; or (b) to have applicable thereto an Event of Default which is of the nature of the Event of Default provided for in Sec. 13(h) which is more favorable to the holders of the Series B Notes than that set forth in Sec. 13(h) on the date of Closing. Section 10.7. Loans to Officers, Etc. The Company will not at any time permit the aggregate unpaid principal amount of all loans or advances by the Company or a Restricted Subsidiary to officers, directors or employees of the Company or a Restricted Subsidiary to exceed $5,000,000. SECTION 11. NEGATIVE COVENANTS APPLICABLE TO SERIES B NOTES. The Company covenants with the holders of the Series B Notes that so long as any of the Series B Notes are outstanding: Section 11.1. Limitation on Indebtedness of Restricted Subsidiaries. The Company will not permit any Restricted Subsidiary to create, assume, incur or in any manner become liable in respect of any Indebtedness (other than Indebtedness owing to the Company or to a Restricted Subsidiary) unless (x) immediately after giving effect thereto, the sum of (without duplication) (A) the aggregate principal amount of such Indebtedness of Restricted Subsidiaries then outstanding, and (B) the aggregate principal amount of Indebtedness of the Company and the Restricted Subsidiaries secured by Liens pursuant to clause (h) of Sec. 11.3 then outstanding shall not exceed 10% of Consolidated Total Assets, and (y) the Company shall then be in compliance with the provisions of Sec. 11.2. Section 11.2. Maintenance of Financial Condition. The Company will not at any time permit Consolidated Total Indebtedness to exceed 50% of Series B Total Capitalization, after deducting from Series B Total Capitalization the amount of all assets which are then included as Permitted Investments under clause (l) of the definition thereof (other than any such Permitted -24- Investments under clause (l) which are Investments in Unrestricted Subsidiaries made after the date of the Closing). Section 11.3. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, create or incur, or suffer to be incurred or to exist, any Lien on its or their property or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, or transfer any property for the purpose of subjecting the same to the payment of obligations in priority to the payment of its or their general creditors, or acquire or agree to acquire any property or assets upon conditional sales agreements or other title retention devices, except: (a) Liens for taxes and assessments or governmental charges or levies and Liens securing claims or demands of mechanics and materialmen, provided payment thereof is not at the time required by Sec. 9.4; (b) Liens of or resulting from any judgment or award, the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which the Company or a Restricted Subsidiary shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; provided that reserves therefor have been established to the extent and in such amounts as are in accordance with GAAP; (c) Liens incidental to the conduct of business or the ownership of properties and assets (including without limitation Liens in connection with workers' compensation, unemployment insurance and other like laws, warehousemen's and attorneys' liens and statutory landlords' liens) and Liens to secure the performance of bids, tenders or trade contracts, or to secure statutory obligations, surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions; provided that reserves therefor have been established to the extent and in such amounts as are in accordance with GAAP; (d) minor encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of the Company and its Restricted Subsidiaries or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event materially impair their use in the operation of the business of the Company and its Restricted Subsidiaries; (e) Liens securing Indebtedness of a Restricted Subsidiary to the Company or to another Restricted Subsidiary; -25- (f) Liens existing on the date of the Closing and reflected in Schedule 10.3(f); (g) Liens, including Capital Leases, incurred after the Closing given to secure the payment of the purchase price incurred in connection with the acquisition or construction of fixed assets useful and intended to be used in carrying on the business of the Company or a Restricted Subsidiary, including Existing Liens (as defined in Sec. 10.3(g)), provided that (i) the Lien shall attach solely to the fixed assets acquired, constructed or purchased, or any accessions or attachments thereto, (ii) at the time of acquisition or construction of such fixed assets, the aggregate amount remaining unpaid on all Indebtedness secured by Liens (other than Existing Liens) on such fixed assets whether or not assumed by the Company or a Restricted Subsidiary shall not exceed an amount equal to 100% of the lesser of the total purchase price or fair market value at the time of acquisition or construction of such fixed assets (as determined in good faith by the chief financial officer of the Company), and (iii) all such Indebtedness shall have been incurred within the limitations provided in Sec. 11.1 and Sec. 11.2; and (h) Liens, which would otherwise not be permitted by clauses (a) through (g) above, securing Indebtedness of the Company or a Restricted Subsidiary; provided that (x) immediately after giving effect thereto, the sum of (without duplication) (A) the aggregate principal amount of Indebtedness of the Company and the Restricted Subsidiaries secured by Liens pursuant to this clause (h) then outstanding, and (B) the aggregate principal amount of Indebtedness of Restricted Subsidiaries (other than to the Company or a Restricted Subsidiary) then outstanding, shall not exceed 10% of Consolidated Total Assets, and (y) the Company shall then be in compliance with the provisions of Sec. 11.2. Section 11.4. Sales of Assets. The Company will not, and will not permit any Restricted Subsidiary to sell, lease or otherwise dispose of any substantial part of the assets of the Company and its Restricted Subsidiaries. As used in this Sec. 11.4, a sale, lease or other disposition of assets shall be deemed to be a "substantial part" of the assets of the Company and its Restricted Subsidiaries only if the net proceeds received therefor, when added to the net proceeds received for all other assets sold, leased or otherwise disposed of by the Company and its Restricted Subsidiaries subsequent to the Closing and during the 365 day period immediately preceding such sale, lease or other disposition, exceeds 10% of Consolidated Total Assets (determined as at the end of the fiscal quarter of the Company immediately preceding such 365 day period) and a merger by a Restricted Subsidiary into another Person without such Restricted Subsidiary being the survivor of such merger and in which such Person is not the Company or a Restricted Subsidiary or a Person which thereupon becomes a Restricted Subsidiary shall be deemed a disposition by such Restricted Subsidiary of all of its assets; provided that in all such sales, leases or other dispositions, the Company and the Restricted Subsidiaries shall have received no less than fair market value or fair rental value therefor. Computations under this Sec. 11.4 shall include all issues or sales of any shares of any class (including as "shares" for the purposes of this Sec. 11.4, any warrants, rights or options to purchase or otherwise acquire -26- shares or other Securities exchangeable for or convertible into shares) of any Restricted Subsidiary to any Person other than the Company or a Restricted Subsidiary over which the Company shall have at least the same degree of ownership and control as it did with respect to the Restricted Subsidiary issuing or selling such shares, except shares issued or sold for the purpose of qualifying directors, or except shares issued or sold in satisfaction of the validly pre-existing preemptive rights of minority shareholders in connection with the simultaneous issuance of stock to the Company and/or Restricted Subsidiaries whereby the Company and/or such Restricted Subsidiaries maintain their same proportionate interest in such Restricted Subsidiary. Computations under this Sec. 11.4 shall not include: (1) sales, leases or other dispositions in the ordinary course of business of the Company or any Restricted Subsidiary; (2) a one-time sale or other distribution of stock and/or assets, provided that, on the date of such transaction, such stock and/or assets do not comprise more than 20% of Consolidated Total Assets; or (3) sales, leases or other dispositions (i) by the Company to any Wholly-Owned Restricted Subsidiary, or (ii) by any Restricted Subsidiary to the Company or to any Wholly-Owned Restricted Subsidiary, or (iii) by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to another Restricted Subsidiary, provided that (x) in the case of any sale, lease or other disposition pursuant to clause (iii), the same is made for fair market value or fair rental value, and (y) immediately after the consummation of any sale, lease or other disposition pursuant to clause (i), (ii) or (iii) and after giving effect thereto, no Default or Event of Default exists or would exist. SECTION 12. NEGATIVE COVENANTS APPLICABLE TO ALL NOTES The Company covenants with the holders of the Notes that so long as any of the Notes are outstanding: Section 12.1. Sale and Leaseback. The Company will not, and will not permit any Restricted Subsidiary to, sell or transfer any property (other than real property) to any Person other than the Company or a Restricted Subsidiary and thereupon lease, as lessee, the same property unless such lease constitutes a Capital Lease and, after giving effect thereto, the Company would be in compliance with the provisions of Sec. 10.2, 11.2, 10.3 and 11.3. Section 12.2. Restricted Payments. The Company will not except as hereinafter provided: (a) Declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Company); (b) Directly or indirectly, or through any Subsidiary, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its -27- capital stock (other than in exchange for or out of the net cash proceeds to the Company from the substantially concurrent issue or sale of other shares of capital stock of the Company or warrants, rights or options to purchase or acquire any shares of its capital stock); or (c) Make any other payment or distribution, either directly or indirectly or through any Subsidiary, in respect of its capital stock; if after giving effect thereto any Event of Default shall have occurred and be continuing. Notwithstanding the foregoing, the Company may (i) pay any dividend which it has declared, provided that such declaration did not violate this Sec. 12.2 and such dividend is paid within 60 days after such declaration, and (ii) make the distribution referred to in clause (2) of the final sentence of Sec. 10.4, without consideration. Section 12.3. Permitted Investments. The Company will not, and will not permit any of its Restricted Subsidiaries to, make or suffer to exist any Investments other than Permitted Investments. Section 12.4. Transactions with Affiliates. The Company will not and will not permit any Restricted Subsidiary to enter into directly or indirectly any transaction or group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate, unless such transaction or transactions (i) are in the ordinary course and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate, or (ii) could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect. Section 12.5. Merger, Consolidation, Etc. The Company will not and will not permit any of its Restricted Subsidiaries to, consolidate with or merge with any other corporation or convey, transfer or lease all or substantially all of its assets in a single transaction or series of related transactions to any Person (except that a Restricted Subsidiary may (x) merge with another Person as long as the Restricted Subsidiary is the survivor of such merger, (y) consolidate with or merge with, or convey, transfer or lease all or substantially all of its assets in a single transaction or a series of related transactions, to (i) another Restricted Subsidiary, (ii) a Person which upon consummation of such action becomes a Restricted Subsidiary, or (iii) the Company; provided that in a merger with the Company, the Company shall be the survivor of such merger, and (z) convey, transfer or lease all or substantially all of its assets, or merge with another Person without the Restricted Subsidiary being the survivor of such merger, in compliance with the provisions of Sec. 10.4 and Sec. 11.4, if immediately after giving effect to any such transaction no Default or Event of Default would exist); provided that the foregoing restriction does not apply to the consolidation or merger of the Company with, or the conveyance, transfer or lease of all or substantially all of the assets of the Company to, any Person so long as: -28- (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease all or substantially all of the assets of the Company, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, such corporation (i) shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement, the Other Agreements and the Notes and (ii) shall have caused to be delivered to each holder of any Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof; (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. No such conveyance, transfer or lease of all or substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Sec. 12.5 from its liability under this Agreement or the Notes. Section 12.6. Designation of Restricted and Unrestricted Subsidiaries. (a) Subject to Sec. 10.5(b) so long as any of the Series A Notes are outstanding, the Company, pursuant to a determination by its chief financial officer, may at any time and from time to time, upon not less than 30 days' prior written notice given to each holder of the Notes, designate any Restricted Subsidiary as an Unrestricted Subsidiary, provided that (i) at the time of such designation the Subsidiary so designated does not own, directly or indirectly, any capital stock or Debt of any other Restricted Subsidiary, and (ii) immediately after such designation and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. (b) Any notice of designation pursuant to Sec. 12.6(a) shall be accompanied by a certificate of a Responsible Officer of the Company (i) stating that the provisions of Sec. 12.6(a) will be complied with in connection with such designation, (ii) setting forth the name of each Subsidiary which will become an Unrestricted Subsidiary as a result of such designation, and (iii) setting forth reasonably detailed pro forma computations demonstrating compliance with clause (ii) of Sec. 12.6(a). (c) Subject to Sec. 10.5(a) so long as any of the Series A Notes are outstanding, the Company may at any time and from time to time, pursuant to a determination by its chief financial officer, upon not less than 30 days' prior written notice given to each holder of the Notes, designate any Unrestricted Subsidiary as a Restricted Subsidiary, provided that immediately after such designation and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. -29- (d) Any notice of designation pursuant to Sec. 12.6(c) shall be accompanied by a certificate of a Responsible Officer of the Company (i) stating that the requirement contained in the proviso to Sec. 12.6(c) will be complied with and setting forth reasonably detailed pro forma computations demonstrating such compliance, (ii) setting forth the name of each Unrestricted Subsidiary which will become a Restricted Subsidiary as a result of such designation, and (iii) setting forth, as to each such Unrestricted Subsidiary which will become a Restricted Subsidiary, each of the representations set forth in Sec. 5.4(b), (c) and (d). SECTION 13. EVENTS OF DEFAULT. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) in the case of Notes of either Series, the Company defaults in the payment of any principal on any Note of such Series when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) in the case of Notes of either Series, the Company defaults in the payment of any interest or Make-Whole Amount, if any, on any Note of such Series for more than five Business Days after the same becomes due and payable; or (c) in the case of the Series A Notes, the Company defaults in the performance of or compliance with any term contained in Sec. 10.1, Sec. 10.2, Sec. 10.3, Sec. 10.4, or Sec. 10.7 or in Sec. 12.1 through 12.5, both inclusive, and such default is not remedied within ten Business Days; or (d) in the case of the Series A Notes, the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sec. 11 or in paragraphs (a), (b) or (c) of this Sec. 13) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Series A Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Sec. 13); or (e) in the case of the Series B Notes, the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in Sec. 10 or in paragraphs (a) and (b) of this Sec. 13) and such default is not remedied within 30 days after written notice thereof to the holders of the Series B Notes shall have been given by the Company; or (f) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or -30- (g) in the case of the Series A Notes, (i) the Company or any Restricted Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Debt (including, without limitation, the Series B Notes) that is outstanding in an aggregate principal amount of at least $10,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Restricted Subsidiary is in default in the performance of or compliance with any term of any evidence of any Debt in an aggregate outstanding principal amount of at least $10,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Debt has become, or has been declared (or one or more Persons are entitled to declare such Debt to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Debt to convert such Debt into equity interests), (x) the Company or any Restricted Subsidiary has become obligated to purchase or repay Debt before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $10,000,000, or (y) one or more Persons have the right to require the Company or any Restricted Subsidiary so to purchase or repay such Debt; provided, however, that the provisions of this paragraph (g) of Sec. 13 shall not apply to any Debt which is payable solely out of the property or assets of a partnership, joint venture or similar entity of which the Company or any Restricted Subsidiary is a participant without further recourse to or liability of the Company or any Restricted Subsidiary; or (h) in the case of the Series B Notes, the Company or any Restricted Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness (including, without limitation, the Series A Notes) that is outstanding in an aggregate principal amount of at least $10,000,000 beyond any period of grace provided with respect thereto; provided, however, that the provisions of this paragraph (h) of Sec. 13 shall not apply to any Indebtedness which is payable solely out of the property or assets of a partnership, joint venture or similar entity of which the Company or any Restricted Subsidiary is a participant without further recourse to or liability of the Company or any Restricted Subsidiary; or (i) the Company or any Restricted Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or -31- (j) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Restricted Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Restricted Subsidiaries, or any such petition shall be filed against the Company or any of its Restricted Subsidiaries and such petition shall not be dismissed within 60 days; or (k) a final judgment or judgments for the payment of money aggregating in excess of $25,000,000 are rendered against one or more of the Company and its Restricted Subsidiaries and an amount thereof aggregating in excess of $25,000,000 is not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or is not discharged within 60 days after the expiration of such stay; or (l) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a written notice of intent to terminate any Plan shall have been filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate in writing that a Plan will become a subject of any such proceedings, (iii) as of the then most recent dates as of which actuarial evaluations were prepared, the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $10,000,000, (iv) the Company or any ERISA Affiliate shall have incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Restricted Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Restricted Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in Sec. 13(l), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in section 3 of ERISA. SECTION 14. REMEDIES ON DEFAULT, ETC. Section 14.1. Acceleration. (a) If an Event of Default with respect to the Company described in paragraph (i) or (j) of Sec. 13 (other than an Event of Default described in clause (i) of paragraph (i) or described in clause (vi) of paragraph (i) by virtue of the fact that such clause encompasses -32- clause (i) of paragraph (i)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any Event of Default described in paragraph (c), (d) or (g) of Sec. 13 has occurred and is continuing, any holder or holders of 51% or more in principal amount of the Series A Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Series A Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (e) or (h) of Sec. 13 has occurred and is continuing, any holder or holders of 51% or more in principal amount of the Series B Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Series B Notes than outstanding to be immediately due and payable. (d) If any other Event of Default other than those described in clauses (a), (b) or (c) of this Sec. 14.1 has occurred and is continuing, any holder or holders of 51% or more in principal amount of the Notes of either Series at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes of such Series then outstanding to be immediately due and payable. (e) If any Event of Default described in paragraph (a) or (b) of Sec. 13 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Note's becoming due and payable under this Sec. 14.1, whether automatically or by declaration, such Note will forthwith mature and the entire unpaid principal amount of such Note, plus (x) all accrued and unpaid interest thereon and (y) the applicable Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for), and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. Section 14.2. Other Remedies. If any Default or Event of Default has occurred and is continuing with respect to any Series of Notes, and irrespective of whether any Notes of such Series have become or have been declared immediately due and payable under Sec. 14.1, the holder of any Note of such Series at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note of such Series, or for an injunction against a violation -33- of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. Section 14.3. Rescission. At any time after any Notes of any Series have been declared due and payable pursuant to clause (b), (c) (d) or (e) of Sec. 14.1, the holders of not less than 66-2/3% in principal amount of the Notes of such Series then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences with respect to such Series if (a) the Company has paid all overdue interest on the Notes of such Series, all principal of and Make-Whole Amount, if any, on any Notes of such Series that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes of such Series, at the applicable Default Rate, (b) all Events of Default and Defaults with respect to such Series, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Sec. 19, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes of such Series. No rescission and annulment under this Sec. 14.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. Section 14.4. No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Sec. 17, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all reasonable costs and expenses of such holder incurred in any enforcement or collection under this Sec. 14, including, without limitation, reasonable attorneys' fees, expenses and disbursements. SECTION 15. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. Section 15.1. Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. -34- Section 15.2. Transfer and Exchange of Notes. (a) Subject to Sec. 6.1, upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be of the same Series as the surrendered Note, shall (subject to Sec. 6.1) be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1-A or Exhibit 1-B, as appropriate. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. (b) Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes of either Series, one Note of such Series may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Sec. 6.2 and that it is not a Competitor. Section 15.3. Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, you or an Other Purchaser or another holder of a Note with a minimum net worth of at least $1,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note of such Series, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. -35- SECTION 16. PAYMENTS ON NOTES. Section 16.1. Place of Payment. Subject to Sec. 16.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in Chicago, Illinois at the principal executive office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in the United States or the principal office of a bank or trust company in the United States. Section 16.2. Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Sec. 16.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Sec. 16.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Sec. 15.2. The Company will afford the benefits of this Sec. 16.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Sec. 16.2. SECTION 17. EXPENSES, ETC. Section 17.1. Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all reasonable costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you and the Other Purchasers or holders of Notes in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the reasonable costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the reasonable costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work- out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those retained by you). -36- Section 17.2. Survival. The obligations of the Company under this Sec. 17 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. SECTION 18. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION 19. AMENDMENT AND WAIVER. Section 19.1. Requirements. This Agreement, insofar as it relates to Notes of a particular Series, and the Notes of a particular Series may be amended, and the observance of any term hereof, insofar as it relates to such Notes, or of such Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the holder or holders of at least 51% in unpaid principal amount of the Notes of such Series, except that (a) no amendment or waiver of any of the provisions of Sec. 1, 2, 3, 4, 5 or 6 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note of such Series at the time outstanding, (i) subject to the provisions of Sec. 14 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes of such Series, (ii) change the percentage of the principal amount of the Notes of such Series the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sec. 8, 13(a), 13(b), 14, 19 or 22. Section 19.2. Solicitation of Holders of Notes. (a) Solicitation. The Company will provide each holder of the Notes of the Series with respect to which an amendment, waiver or consent is being sought (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect -37- to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of such Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Sec. 19 to each holder of outstanding Notes, without regard to Series, promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes of the Series affected. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes of any Series as consideration for or as an inducement to the entering into by such holder of any waiver or amendment of any of the terms and provisions hereof related to such Series unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes of such Series then outstanding even if such holder did not consent to such waiver or amendment. Section 19.3. Binding Effect, Etc. Any amendment or waiver consented to as provided in this Sec. 19 applies equally to all holders of Notes of the Series affected and is binding upon them and upon each future holder of any such Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. Section 19.4. Notes Held by Company, etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes of either Series then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes of such Series, or have directed the taking of any action provided herein or in such Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of such Notes then outstanding, Notes of such Series directly or indirectly owned by the Company or any of its Restricted Subsidiaries or Affiliates shall be deemed not to be outstanding. SECTION 20. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: -38- (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of Financial Vice President, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Sec. 20 will be deemed given only when actually received. SECTION 21. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Sec. 21 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. SECTION 22. CONFIDENTIAL INFORMATION. For the purposes of this Sec. 22, "Confidential Information" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or by another Person known to you to be under an obligation of confidentiality or (d) constitutes financial statements delivered to you under Sec. 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance -40- with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers and employees (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your affiliates, financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Sec. 22, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Sec. 22), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Sec. 22), (vi) any federal or state regulatory authority having jurisdiction over you to the extent such delivery or disclosure is required by it or is reasonably deemed necessary by you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio to the extent such delivery or disclosure is required by it or is reasonably deemed necessary by you, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement; provided, however, that in the case of clauses (viii)(x) or (y), prompt notice of such subpoena, other legal process or potential use of such Confidential Information in such litigation is given to the Company in order to permit the Company to seek appropriate protective orders. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Sec. 22 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Sec. 22. SECTION 23. MISCELLANEOUS. Section 23.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. Section 23.2. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. -40- Section 23.3. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. Section 23.4. Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Section 23.5. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. Section 23.6. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * -41- If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, PITTWAY CORPORATION By: /s/Paul R. Gauvreau Financial Vice President and Treasurer The foregoing is hereby agreed to as of the date thereof. METROPOLITAN LIFE INSURANCE COMPANY -42- Information Relating to Purchasers NAME AND ADDRESS PRINCIPAL AMOUNT AND SERIES OF PURCHASER OF NOTES TO BE PURCHASED Metropolitan Life Insurance Company $30,000,000 One Madison Avenue Series A Notes New York, New York 10010 Attention: Treasurer Telecopier Number: (212) 578-3910 Payments All payments on or in respect of the Series A Notes to be by bank wire transfer of Federal or other immediately available funds not later than 12:00 noon, New York time, on any date such payment is due (identifying each payment as Pittway Corporation, 6.81% Senior Notes, Series A, due December 15, 2005, PPN 725790 A* 0, principal or interest) to: The Chase Manhattan Bank, N.A. (ABA #021000021) Metropolitan Branch 33 East 23rd Street New York, New York 10010 for credit to: Metropolitan Life Insurance Company Account Number 002-2-410591 Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above with duplicate notice to: Metropolitan Life Insurance Company Suite 800 One Lincoln Centre Oak Brook Terrace, Illinois 60181 Attention: Assistant Vice President Telephone Number: (708) 916-2565 Telecopier Number: (708) 916-2575 Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 13-5581829 SCHEDULE A (to Note Purchase Agreement) Information Relating to Purchasers NAME AND ADDRESS PRINCIPAL AMOUNT AND SERIES OF PURCHASER OF NOTES TO BE PURCHASED Metropolitan Property and Casualty Insurance Company $10,000,000 700 Quaker Lane Series A Notes Warwick, Rhode Island 02886 Attention: Treasurer Payments All payments on or in respect of the Series A Notes to be by bank wire transfer of Federal or other immediately available funds not later than 12:00 noon, New York time, on any date such payment is due (identifying each payment as Pittway Corporation, 6.81% Senior Notes, Series A, due December 15, 2005, PPN 725790 A* 0, principal or interest) to: The Chase Manhattan Bank, N.A. (ABA #021000021) Metropolitan Branch 33 East 23rd Street New York, New York 10010 for credit to: Metropolitan Property and Casualty Insurance Company Account Number 002-1-025432 Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above with duplicate notices to: Metropolitan Life Insurance Company Suite 800 One Lincoln Centre Oak Brook Terrace, Illinois 60181 Attention: Assistant Vice President Telephone Number: (708) 916-2565 Telecopier Number: (708) 916-2575 Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 13-2725441 A-2 NAME AND ADDRESS PRINCIPAL AMOUNT AND SERIES OF PURCHASER OF NOTES TO BE PURCHASED Nationwide Life Insurance Company $30,000,000 One Nationwide Plaza Series B Notes Columbus, Ohio 43215-2220 Telecopier Number: (614) 249-4698 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as Pittway Corporation, 6.70% Senior Notes, Series B, due December 15, 2005, PPN 725790 A@ 8, principal or interest) to: Morgan Guaranty Trust Company of New York (ABA #021-000-238) JOURNAL #999-99-024 For the account of Nationwide Life Insurance Company Custody Account #71615 Attention: Custody Service Department Notices All notices of payment on or in respect of the Notes and written confirmation of each such payment to: Nationwide Life Insurance Company One Nationwide Plaza-1-32-09 Columbus, Ohio 43215-2220 Attention: Corporate Money Management All notices and communications other than those in respect to payments to be addressed: Nationwide Life Insurance Company One Nationwide Plaza-1-33-07 Columbus, Ohio 43215-2220 Attention: Corporate Fixed-Income Securities Telecopier Number: (614) 249-4553 Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 31-4156830 A-3 NAME AND ADDRESS PRINCIPAL AMOUNT AND SERIES OF PURCHASER OF NOTES TO BE PURCHASED Employers Life Insurance Company $3,000,000 of Wausau SERIES B NOTES 2000 Westwood Drive Wausau, Wisconsin 54401 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as Pittway Corporation, 6.70% Senior Notes, Series B, due December 15, 2005, PPN 725790 A@ 8, principal or interest) to: Morgan Guaranty Trust Company of New York (ABA #021-000-238) JOURNAL #999-99-024 For the account of Employers Life Insurance Company of Wausau Custody Account #50135 Attention: Custody Service Department Notices All notices of payment on or in respect of the Notes and written confirmation of each such payment to: Employers Life Insurance Company of Wausau 2000 Westwood Drive Wausau, Wisconsin 54401 All notices and communications other than those in respect to payments to be addressed: Nationwide Life Insurance Company 2000 Westwood Drive Wausau, Wisconsin 54401 Attention: Corporate Fixed-Income Securities Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: A-4 NAME AND ADDRESS PRINCIPAL AMOUNT AND SERIES OF PURCHASER OF NOTES TO BE PURCHASED West Coast Life Insurance Company $2,000,000 343 Sansome Street Series B Notes San Francisco, CA 94104 Payments All payments on or in respect of the Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as Pittway Corporation, 6.70% Senior Notes, Series B, due December 15, 2005, PPN 725790 A@ 8, principal or interest) to: Morgan Guaranty Trust Company of New York (ABA #021-000-238) JOURNAL #999-99-024 For the account of Nationwide Life Insurance Company Custody Account #73290 Attention: Custody Service Department Notices All notices of payment on or in respect of the Notes and written confirmation of each such payment to: Nationwide Life Insurance Company 343 Sansome Street San Francisco, CA 94104 Attention: Karl Snover All notices and communications other than those in respect to payments to be addressed: Nationwide Life Insurance Company 343 Sansome Street San Francisco, CA 94104 Attention: Corporate Fixed-Income Securities Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: A-5 Defined Terms As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "Affiliate" means, at any time, (a) any Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, the Company or a Restricted Subsidiary, (b) any Person beneficially owning or holding, directly or indirectly, 20% or more of any class of voting interests of the Company or a Restricted Subsidiary, and (c) any Person that at such time is an officer of the Company (as opposed to an officer of a division of the Company) or a director of the Company or a Restricted Subsidiary; provided that neither the Company nor a Restricted Subsidiary is an Affiliate. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Business Day" means (a) for the purposes of Sec. 8.2 and Sec. 8.7 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City or Chicago, Illinois are required or authorized to be closed. "Capital Lease" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Closing" is defined in Sec. 3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Company" means Pittway Corporation, a Delaware corporation. "Competitor" means an entity that (i) is directly engaged substantially in the publishing business or the manufacture and distribution of security equipment and systems, or (ii) controls, is controlled by or is under common control with another entity that is directly engaged substantially in the publishing business or the manufacture and distribution of security equipment and systems unless, in the case of any such control relationship, the first entity has established, or establishes, procedures satisfactory in the Company's reasonable judgment which will prevent Confidential Information from being transmitted or made available to such other entity or any officer, director, employee or agent thereof; provided that in the event the Company or a Subsidiary which would then constitute a "significant subsidiary" under Regulation S-X of the Securities and Exchange Commission as in effect on the date of the Closing shall become directly engaged substantially in the conduct of a business other than the publishing business or the manufacture and distribution of security equipment and systems and shall request the consent of the holders of the Notes to an amendment to this definition to include such SCHEDULE B (to Note Purchase Agreement) business, the holders of the Notes shall not withhold such consent unless they reasonably believe such inclusion of such business in this definition would impair the ability to transfer the Notes to transferees of the type who would normally invest in securities such as the Notes, which transferees would include, without limitation, insurance companies, banks and trust companies, finance and credit companies, investment banks, pension funds, mutual funds and asset management organizations. "Confidential Information" is defined in Sec. 22. "Consolidated Net Worth" means, at any time, (a) the sum of (i) the par value (or value stated on the books of the corporation) of the capital stock (but excluding treasury stock and capital stock subscribed and unissued) of the Company and its Restricted Subsidiaries at such time plus (ii) the amount of the paid-in capital and retained earnings of the Company and its Restricted Subsidiaries at such time, in each case as such amounts would be shown on a consolidated balance sheet of the Company and its Restricted Subsidiaries as of such time prepared in accordance with GAAP, minus (b) to the extent included in clause (a), all amounts properly attributable to minority interests, if any, in the stock and surplus of Restricted Subsidiaries. "Consolidated Total Assets" means the consolidated total assets of the Company and its Restricted Subsidiaries determined in accordance with GAAP. "Consolidated Total Debt" means all Debt of the Company and its Restricted Subsidiaries after eliminating inter-company items in accordance with GAAP. "Consolidated Total Indebtedness" means all Indebtedness of the Company and its Restricted Subsidiaries after eliminating inter-company items in accordance with GAAP. "Debt" with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; B-2 (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Debt of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. Debt of the Company shall not include any amount owed by it to any Restricted Subsidiary, and Debt of a Restricted Subsidiary shall not include any amount owed by it to the Company, pursuant to the Company's cash management program. Debt shall not in any event include (i) any direct or indirect Guaranty of obligations (not constituting Debt) of dealers under financing programs with third parties sponsored by the Company or a Restricted Subsidiary, or (ii) any liability for the deferred purchase price of a limited partnership interest or other financial Investment. "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Default Rate" means that rate of interest that is the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes of the Series with respect such rate is being determined or (ii) the rate of interest publicly announced by The Chase Manhattan Bank, National Association in New York, New York as its "base" or "prime" rate. "Environmental Laws" means any and all applicable Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to surface water or to public waste systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. B-3 "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under sections 414(b), (c) or (m) of the Code. "Event of Default" is defined in Sec. 13. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Liens" is defined in Sec. 10.3(g). "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Governmental Authority" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or B-4 (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "Hazardous Material" means any and all pollutants, toxic or hazardous wastes or hazardous substances or any other substances with respect to which liability or standards of conduct are imposed pursuant to any Environmental Law. "holder" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Sec. 15.1. "Indebtedness" of any Person means (i) all indebtedness of such person for borrowed money, (ii) all Capital Leases of such Person, and (iii) all Guaranties by such Person of Indebtedness of others. Indebtedness of the Company shall not include any amount owed by it to any Restricted Subsidiary, and Indebtedness of a Restricted Subsidiary shall not include any amount owed by it to the Company, pursuant to the Company's cash management program. Indebtedness shall not in any event include (i) any direct or indirect Guaranty of obligations (not constituting Indebtedness) of dealers under financing programs with third parties sponsored by the Company or a Restricted Subsidiary, or (ii) any liability for the deferred purchase price of a limited partnership interest or other financial Investment. "Institutional Investor" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes of such Series then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "Investment" means any investment, made in cash or by delivery of property by the Company or any of its Restricted Subsidiaries (i) in any Person, whether by acquisition of stock, indebtedness or other obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise, or (ii) in any property. In no event shall "Investment" include: (i) any Guaranty that constitutes Debt or Indebtedness, (ii) any direct or indirect Guaranty of obligations (not constituting Debt or Indebtedness) of dealers under financing programs with third parties sponsored by the Company or a Restricted Subsidiary (but any amount paid pursuant to such a direct or indirect Guaranty shall, to the extent not reimbursed, constitute an "Investment"), or (iii) any liability for the deferred purchase price of any property other than a limited partnership interest or other financial Investment (but any liability for the deferred purchase price of a limited partnership interest or other financial Investment shall constitute an "Investment"). "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under B-5 any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Sec. 8.7. "Material" means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. "Memorandum" is defined in Sec. 5.3. "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Notes" is defined in Sec. 1. "Officer's Certificate" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "Other Agreements" is defined in Sec. 2. "Other Purchasers" is defined in Sec. 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Permitted Investment" means the following: (a) property to be used in the ordinary course of business of the Company and its Restricted Subsidiaries; (b) current assets arising from the sale of goods and services in the ordinary course of business of the Company and its Restricted Subsidiaries; (c) Investments in the ordinary course of business in one or more Restricted Subsidiaries or any Person that concurrently with such Investment becomes a Restricted Subsidiary and loans or advances, in the B-6 ordinary course of business, to the Company from a Restricted Subsidiary at least 80% of the voting and equity interests of which are owned by one or more of the Company and other such Restricted Subsidiaries; (d) Investments existing on the date of the Closing in Unrestricted Subsidiaries and in United States Satellite Broadcasting, Inc., Cylink Corporation and DSC Enterprises, Inc. and disclosed in Schedule 12.3, and any restructurings or extensions thereof which do not increase the amount thereof; (e) Investments in United States Governmental Securities, provided that such obligations mature within 365 days from the date of acquisition thereof; (f) Investments in certificates of deposit, Eurodollar deposits, or banker's acceptances issued by an Acceptable Bank at the time of acquisition thereof, provided that such obligations mature within 365 days from the date of acquisition thereof; (g) Investments in commercial paper given a rating of "A" or better by S&P or "A" or better by Moody's at the time of acquisition thereof, and maturing not more than 365 days from the date of creation thereof; (h) Investments in tax-exempt obligations of any state of the United States of America, or any municipality of any such state, in each case rated "A" or better by S&P or "A" or better by Moody's at the time of acquisition thereof, provided that such obligations mature within 365 days from the date of acquisition thereof; (i) Investments in adjustable rate preferred stock in which the rate reset period is less than one year and which is rated "BBB" or better by S&P or "baa" or better by Moody's at the time of acquisition thereof; (j) Loans and advances in the ordinary course of business, and any restructurings or extensions thereof which do not increase the amount thereof, to suppliers, officers, directors and employees of the Company or a Restricted Subsidiary incidental to carrying on the business of the Company or a Restricted Subsidiary (including, without limitation, employee relocation loans); (k) receivables, loans and advances from or to Unrestricted Subsidiaries arising from activities conducted in the ordinary course of business between the Company or its Restricted Subsidiaries on the one hand and its Unrestricted Subsidiaries on the other hand; (l) Investments in addition to those described in clauses (a) through (k) provided that the aggregate amount of Investments permitted pursuant to this clause (l) shall not at any time exceed 25% of Consolidated Total Assets; and (m) Investments in addition to those described in clauses (a) through (l), provided that the aggregate amount of Investments permitted pursuant to this clause (m) shall not at any time exceed $5,000,000 and that no Investment in a leveraged lease or affordable housing transaction is permitted under this clause (m). B-7 For purposes of this Agreement, an Investment shall be valued at the lesser of (i) cost and (ii) the value at which such Investment is to be shown on the books of the Company and its Restricted Subsidiaries in accordance with GAAP. As used in this definition of "Permitted Investments": "Acceptable Bank" means any bank or trust company (i) which is organized under the laws of the United States of America or any State thereof, and has capital, surplus and undivided profits aggregating at least $250,000,000, or (ii) which is organized under the laws of any jurisdiction outside the United States of America, has a branch office within the United States of America and has capital, surplus and undivided profits aggregating at least $1,000,000,000. "Moody's" means Moody's Investors Service, Inc. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. "United States Governmental Security" means any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA), other than a Multiemployer Plan, that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate has any liability. "Preferred Stock" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "property" or "properties" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. B-8 "PTE 95-60" means the Department of Labor Prohibited Transaction Exemption 95-60 issued July 12, 1995. "QPAM Exemption" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "Required Holders" means the holders of 66-2/3% or more in principal amount of each Series of Notes acting separately, or in the case of a matter involving only a separate Series of Notes, the holders of 66-2/3% or more in principal amount of the Notes of such Series. "Responsible Officer" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement. "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Security" has the meaning set forth in Section 2(1) of the Securities Act. "Senior Financial Officer" means the chief financial officer, principal accounting officer or treasurer of the Company. "Series" or "Series of Notes" is defined in Sec. 1. "Series A Notes" is defined in Sec. 1. "Series B Notes" is defined in Sec. 1. "Series A Total Capitalization" means the sum of (i) Consolidated Total Debt, (ii) deferred income tax liability of the Company and its Restricted Subsidiaries determined in accordance with GAAP, and (iii) Consolidated Net Worth. "Series B Total Capitalization" means the sum of (i) Consolidated Total Indebtedness, (ii) deferred income tax liability of the Company and its Restricted Subsidiaries determined in accordance with GAAP, and (iii) Consolidated Net Worth. "Source" is defined in Sec. 6.2. B-9 "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect t hereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "Unrestricted Subsidiary" means any Subsidiary which has been designated as such pursuant to the provisions of this Agreement. "Wholly-Owned Restricted Subsidiary" means, at any time, any Restricted Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests (except directors' qualifying shares) of which are owned by any one or more of the Company and the Company's other Wholly-Owned Restricted Subsidiaries at such time. B-10 [Form of Series A Note] Pittway Corporation 6.81% Senior Note, Series A, Due December 15, 2005 No. [_________] [Date] $[____________] PPN[____________] FOR VALUE RECEIVED, the undersigned, PITTWAY CORPORATION (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [________________], or registered assigns, the principal sum of [________________] DOLLARS on December 15, 2005, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.81% per annum from the date hereof, payable semi-annually, on the 15th day of June and December in each year, commencing with the first of such dates next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semi-annually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.81% or (ii) the rate of interest publicly announced by The Chase Manhattan Bank, National Association from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal executive office of the Company in Chicago, Illinois, or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Notes, Series A (herein called the "Series A Notes"), issued pursuant to separate Note Purchase Agreements, dated as of December 15, 1995 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and pursuant to which the Company is also issuing a series of Senior Notes, Series B (herein called the "Series B Notes" and collectively with the Series A Notes, the "Notes"). This Note is, together with such other Notes, entitled to the benefits of said Note Purchase Agreements. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Sec. 22 of the Note Purchase Agreements and (ii) to have made the representation set forth in Sec. 6.2 of the Note Purchase Agreements and that it is not a Competitor (as defined in the Note Purchase Agreements). EXHIBIT 1-A (to Note Purchase Agreement) This Note is a registered Note and, as provided in and subject to Sec. 6.1 of the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series A Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Note shall be governed by the laws of the State of New York. PITTWAY CORPORATION By______________________________________ Financial Vice President and Treasurer 1-A-2 [Form of Series B Note] Pittway Corporation 6.70% Senior Note, Series B, due December 15, 2005 No. [_________] [Date] $[____________] PPN[____________] FOR VALUE RECEIVED, the undersigned, PITTWAY CORPORATION (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [________________], or registered assigns, the principal sum of [________________] DOLLARS on December 15, 2005, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.70% per annum from the date hereof, payable semi-annually, on the 15th day of June and December in each year, commencing with the first of such dates next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semi-annually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.70% or (ii) the rate of interest publicly announced by The Chase Manhattan Bank, National Association from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal executive office of the Company in Chicago, Illinois, or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Notes, Series B (herein called the "Series B Notes"), issued pursuant to separate Note Purchase Agreements, dated as of December 15, 1995 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and pursuant to which the Company is also issuing a series of Senior Notes, Series A (herein called the "Series A Notes" and collectively with the Series B Notes, the "Notes"). This Note is, together with such other Notes, entitled to the benefits of said Note Purchase Agreements. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Sec. 22 of the Note Purchase Agreements and (ii) to have made the representation set forth in Sec. 6.2 of the Note Purchase Agreements and that it is not a Competitor (as defined in the Note Purchase Agreements). EXHIBIT 1-B (to Note Purchase Agreement) This Note is a registered Note and, as provided in and subject to Sec. 6.1 of the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series B Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreements. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Note shall be governed by the laws of the State of New York. PITTWAY CORPORATION By____________________________________ Financial Vice President and Treasurer 1-B-2 EX-10.5 3 EMPLOYMENT AGREEMENT - MARINO EXHIBIT 10.5 PITTWAY CORPORATION DECEMBER 31, 1995 FORM 10-K FOURTH EXTENSION AND AMENDMENT Reference is made to the Agreement of Employment dated July 1, 1990, as extended and amended by the Extension and Amendment dated as of June 30, 1992, the Second Extension and Amendment dated as of December 31, 1993 and the Third Extension and Amendment dated as of December 31, 1994, by and between Penton Publishing, Inc. (the "Corporation") and Sal F. Marino ("Marino") (as so extended and amended, the "Agreement"). The Agreement provides that the "term of employment" thereunder expires on December 31, 1995 unless extended by the Corporation and Marino. The Corporation and Marino desire to extend such "term of employment", and in connection therewith to make certain amendments to the Agreement. Accordingly, the Corporation and Marino hereby agree as follows: 1. Paragraph 1 of the Agreement is amended in its entirety to read as follows: "1. This Agreement shall become effective at 12:01 a.m., EDT, on the date hereof and Marino's employment by the Corporation shall continue until December 31, 1996 (or such later date as the Corporation and Marino may agree upon in writing during the term of employment (as defined below)), unless earlier terminated by Marino's death or pursuant to Paragraph 6. The period from the date hereof to and including the first to occur of December 31, 1996 (or such later date), the date of Marino's death, or the date of termination pursuant to Paragraph 6, is herein referred to as the "term of employment"." 2. The first sentence of Paragraph 3 of the Agreement is amended in its entirety to read as follows: "The Corporation agrees to pay Marino a salary during the term of employment, which shall be payable in equal monthly installments at a rate not less than TWO HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($275,000.00) per year during that portion of the term of employment occurring prior to December 31, 1992, at a rate not less than THREE HUNDRED FIVE THOUSAND DOLLARS ($305,000.00) per year during that portion of the term of employment occurring after December 31, 1992 and prior to December 31, 1993, at a rate not less than THREE HUNDRED FIFTEEN THOUSAND DOLLARS ($315,000.00) per year during that portion of the term of employment occurring after December 31, 1993 and prior to December 31, 1994, at a rate not less than THREE HUNDRED THIRTY THOUSAND DOLLARS ($330,000.00) per year during that portion of the term of employment occurring after December 31, 1994 and prior to December 31, 1995, and at a rate not less than THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000.00) per year during any portion of the term of employment occurring after December 31, 1995." IN WITNESS WHEREOF, the undersigned have executed this Fourth Extension and Amendment as of December 31, 1995. PENTON PUBLISHNG, INC. By: /s/King Harris As Its: Vice President /s/ Sal F. Marino Sal F. Marino EX-10.6 4 EMPLOYMENT AGREEMENT - HARRIS EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1996, between Pittway Corporation, a Delaware corporation (the "Company"), and King Harris ("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 executive 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 President and Chief Executive Officer 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 the Company for so long as the Board nominates him to that position and he is elected to it 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 Board. (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 $550,000 per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or 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 -2- (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"); -3- (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; -4- (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. -5- (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 -6- 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 Board and perform all actions reasonably requested by the Board (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 Board 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 Board. 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 Confiden-tial 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. -7- 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 -8- 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. King Harris 209 E. Lake Shore Drive Apt. 10W Chicago, IL 60611 -9- Notices to the Company: Mr. Neison Harris Chairman of the Board 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, -10- 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 /s/ Paul R. Gauvreau Its: Vice President /s/ King Harris KING HARRIS -11- Exhibit A (to Form 10K Exhibit 10.6) 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 numbered paragraphs 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; -2- (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 -3- 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 -4- 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 -5- 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 -6- 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 -7- 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 -8- 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 unless the participant consents to such amendment or termination. -9- 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_____________________________ -10- Exhibit 1 (to Form 10K Exhibit 10.6) 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 -2- 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; -3- (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; -4- (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 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 -5- 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 -6- 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. -7- 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 -8- 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 -9- 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 -10- affiliate of the Company in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 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. * * * * * -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ [EXECUTIVE] -12- EX-10.7 5 EMPLOYMENT AGREEMENT - GUTHART EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1996, between Pittway Corporation, a Delaware corporation (the "Company"), and Leo A. Guthart ("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 executive officer of the Ademco Security Group of the Company or any successor to such Group, in each case as constituted from time to time (the "Group"), and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") or the President of the Company to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title Chairman and Chief Executive Officer of the Group, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of the Company for so long as the Board nominates him to that position and he is elected to it, as a Vice-Chairman of the Company for so long as the Board elects or appoints him to that position and as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company. (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity, and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Group and the business and affairs of any other group of the Company, any division of the Company, or any subsidiary or affiliate of the Company (or any group or division thereof), engaged in the security, alarm or monitoring products business or any other business the same as or similar to or related to that then engaged in by the Group. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the New York metropolitan area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Group. 3. Salary and Benefits. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $425,000 per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company (If Executive is not participating in term life insurance coverage under the Standard Executive Benefits Package and if such additional coverage would be available at standard rates from such insurer if Executive were so participating, Executive shall instead be entitled to an amount each -2- calendar year, payable monthly, equal to the amount the Company would have been required to pay for such additional coverage for such year.); (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A. 4. Adjustments. Notwithstanding 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 fifth anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than four 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"); -3- (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; -4- (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 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. -5- (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, -6- without limitation, assignments, consents, powers of attorney and other instruments). 8. Limitation. 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. 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 -7- 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). -8- 12. Executive Representations. Executive repre-sents 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. Leo A. Guthart 96 Willets Road Old Westbury, NY 11568 Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 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 -9- 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, including without limitation the Agreement of Employment dated July 2, 1973 between Pittway Corporation, a Pennsylvania corporation, and Executive, as heretofore amended and otherwise modified. 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 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 New York. 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. -10- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By /s/King Harris Its: President /s/ Leo A. Guthart LEO A. GUTHART -11- Exhibit A (to Form 10K Exhibit 10.7) 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 numbered paragraphs 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; -2- (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 -3- 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 -4- 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 -5- 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 -6- 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 -7- 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 -8- 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 unless the participant consents to such amendment or termination. -9- 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: /s/ King Harris Its: President Date: 2/16/96 ATTEST By _________________________________ Its _____________________________ Date_____________________________ -10- Exhibit 1 (to Form 10K Exhibit 10.7) 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 -2- 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; -3- (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; -4- (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 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 -5- 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 -6- 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. -7- 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 -8- 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 -9- 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 -10- affiliate of the Company in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 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. * * * * * -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ [EXECUTIVE] -12- EX-13 6 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 PITTWAY CORPORATION DECEMBER 31, 1994 FORM 10-K Pittway Corporation and Subsidiaries Consolidated Statement of Income For The Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands, except per share)
1995 1994 1993 Continuing Operations: Net Sales $945,669 $778,026 $650,105 Operating Expenses: Cost of sales 581,694 475,420 398,756 Selling, general and administrative 283,717 232,524 200,088 Depreciation and amortization 21,014 20,160 17,249 886,425 728,104 616,093 Operating Income 59,244 49,922 34,012 Other Income (Expense): Gain on sale of investment 19,506 Income from marketable securities and other interest 2,745 3,955 2,855 Interest expense (5,778) (3,250) (2,789) Income from investments 3,828 2,506 2,573 Miscellaneous, net 4,039 1,206 (511) 4,834 23,923 2,128 Income From Continuing Operations Before Income Taxes 64,078 73,845 36,140 Income Taxes (Note 5): Current 30,634 27,301 8,436 Deferred (6,928) 1,708 6,464 23,706 29,009 14,900 Income From Continuing Operations 40,372 44,836 21,240 Income From Discontinued Operations, net of income taxes of $3,560 and including credit for cumulative effect of change in accounting for income taxes of $3,106 (Note 1): 10,046 Income Before Cumulative Effect of Changes in Accounting Principles 40,372 44,836 31,286 Cumulative Effect of Changes in Accounting For Income Taxes and Postretirement Benefits 1,535 Net Income $ 40,372 $ 44,836 $ 32,821 Per Share of Common and Class A Stock (Note 8): Income from continuing operations $ 1.93 $ 2.15 $ 1.02 Income from discontinued operations .48 Cumulative effect of changes in accounting principles .07 Net income $ 1.93 $ 2.15 $ 1.57 Average number of shares outstanding (in thousands)(Note 8) 20,912 20,911 20,911 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 29 Pittway Corporation and Subsidiaries Consolidated Balance Sheet December 31, 1995 and 1994 (Dollars in thousands, except per share)
ASSETS 1995 1994 Current Assets: Cash and equivalents $ 31,407 $ 10,359 Marketable securities 25,586 34,313 Accounts and notes receivable, less allowance for doubtful accounts of $8,493 in 1995 and $6,348 in 1994 175,432 137,747 Inventories (Note 3) 152,636 124,801 Future income tax benefits (Note 5) 16,996 17,879 Prepayments, deposits and other 11,929 11,805 413,986 336,904 Property, Plant and Equipment, at cost: Buildings 25,797 24,769 Machinery and equipment 190,780 157,061 216,577 181,830 Less: Accumulated depreciation 109,021 94,426 107,556 87,404 Land 2,188 2,369 109,744 89,773 Investments: Real estate and other ventures 61,563 56,261 Leveraged leases (Note 4) 21,046 22,752 82,609 79,013 Other Assets: Goodwill, less accumulated amortization of $8,432 in 1995 and $7,193 in 1994 48,714 40,935 Other intangibles, less accumulated amortization of $10,360 in 1995 and $9,597 in 1994 5,422 6,256 Notes receivable 5,892 4,370 Miscellaneous 6,607 6,036 66,635 57,597 $672,974 $563,287 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 30
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 Current Liabilities: Notes payable (Note 6) $ 32,212 $ 46,232 Long-term debt due within one year (Note 6) 3,788 5,184 Dividends payable 1,766 1,758 Accounts payable 68,700 58,246 Accrued expenses 46,310 41,391 Income taxes payable 5,644 10,093 Retirement and deferred compensation plans 6,503 1,148 Unearned income 3,185 5,797 168,108 169,849 Long-Term Debt, less current maturities (Note 6): Notes payable, 6.70% and 6.81%, due in annual installments of $5 million beginning 1999 with the balance due 2005 75,000 Capitalized leases, principally at 5%-6%, due in monthly installments through 2002 6,186 2,519 Other 4,780 2,569 85,966 5,088 Deferred Liabilities: Income taxes (Note 5) 46,920 54,158 Other 8,954 6,062 55,874 60,220 Stockholders' Equity: Preferred stock, authorized 2,000,000 shares; none issued Common capital stock, $1 par value (Note 8) - Common stock, authorized 30,000,000 shares; 3,938,832 and 2,626,024 shares issued and outstanding in 1995 and 1994, respectively 3,939 2,626 Class A stock, authorized 24,000,000 shares; 16,973,313 and 11,314,700 shares issued and outstanding in 1995 and 1994, respectively 16,973 11,315 Capital in excess of par value 21,423 28,348 Retained earnings 325,420 291,756 Cumulative marketable securities valuation adjustment (2,019) (3,050) Cumulative foreign currency translation adjustment (2,710) (2,865) 363,026 328,130 $672,974 $563,287
Page 31 Pittway Corporation and Subsidiaries Consolidated Statement of Cash Flows For The Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
1995 1994 1993 Cash Flows From Continuing Operating Activities: Income from continuing operations $ 40,372 $ 44,836 $ 21,240 Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: Depreciation and amortization 21,014 20,160 17,249 Gain on sale of investment, net of taxes (11,776) Deferred income taxes (6,928) 1,708 6,464 Retirement and deferred compensation plans 9,275 2,010 1,231 Income/loss from investments adjusted for cash distributions received 2,277 (931) 330 Provision for losses on accounts receivable 4,901 3,167 2,938 Gain on sale of assets (2,575) (828) (4) Change in assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts and notes receivable (34,229) (26,882) (23,340) Increase in inventories (17,457) (23,669) (13,946) Increase in prepayments and deposits (2,068) (3,422) (267) Increase (decrease) in accounts payable and accrued expenses 7,628 19,919 (930) (Decrease) increase in income taxes payable (4,480) 7,137 7,284 Other changes, net (3,904) 2,491 2,420 Net cash provided by continuing operations 13,826 33,920 20,669 Cash Flows From Investing Activities: Capital expenditures (42,056) (28,246) (29,478) Proceeds from the sale of investment, net of taxes of $9,730 14,776 Proceeds from the sale of marketable securities 16,034 29,297 39,529 Purchases of marketable securities (5,846) (37,261) (37,914) Dispositions of property and equipment 3,202 795 585 Additions to investments (5,984) (10,112) (12,317) Dispositions of businesses 355 650 (Increase) decrease in notes receivable (1,194) 4,267 5,434 Net assets of businesses acquired, net of cash (12,931) (5,921) (3,430) Net cash used by investing activities (48,420) (31,755) (37,591) Cash Flows From Financing Activities: Net (decrease)increase in notes payable (14,090) 14,802 29,200 Proceeds of long-term debt 81,693 3,585 1,996 Repayments of long-term debt (5,307) (5,488) (5,405) Dividends paid (6,699) (6,707) (5,722) Net cash provided by financing activities 55,597 6,192 20,069 Effect of Exchange Rate Changes on Cash 45 94 (166) Cash Flows From Discontinued Operations (4,711) Net Increase (Decrease) in Cash and Equivalents 21,048 8,451 (1,730) Cash and Equivalents at Beginning of Period 10,359 1,908 3,638 Cash and Equivalents at End of Period $ 31,407 $ 10,359 $ 1,908 Supplemental Cash Flow Disclosure: Interest Paid $ 5,720 $ 3,388 $ 2,804 Income Taxes Paid 35,329 22,173 8,939 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 32 Pittway Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity For The Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands, except per share)
Cumulative Cumulative Marketable Foreign Capital In Securities Currency Common Stock Class A Stock Excess of Retained Valuation Translation Shares Par Value Shares Par Value Par Value Earnings Adjustment Adjustment Balance - December 31, 1992 2,626,024 $2,626 11,314,700 $11,315 $28,348 $381,138 $(3,926) Net income 32,821 Cash dividends declared: Common stock - $.30 per share (1,183) Class A stock - $.367 per share (6,222) Distribution of AptarGroup, Inc. common stock to stockholders (152,926) (90) Currency translation adjustment 163 Balance - December 31, 1993 2,626,024 2,626 11,314,700 11,315 28,348 253,628 (3,853) Cumulative effect of change in accounting for marketable securities $ 141 Net income 44,836 Cash dividends declared: Common stock - $.267 per share (1,051) Class A stock - $.333 per share (5,657) Marketable securities valuation adjustment (3,191) Currency translation adjustment 988 Balance - December 31, 1994 2,626,024 2,626 11,314,700 11,315 28,348 291,756 (3,050) (2,865) Net income 40,372 Cash dividends declared: Common stock - $.267 per share (1,051) Class A stock - $.333 per share (5,657) Shares issued pursuant to performance awards 996 1 52 Three-for-two stock split (Including $7 payable for fractional shares) 1,312,808 1,313 5,657,617 5,657 (6,977) Marketable securities valuation adjustment 1,031 Currency translation adjustment 155 Balance - December 31, 1995 3,938,832 $3,939 16,973,313 $16,973 $21,423 $325,420 $(2,019) $(2,710) See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 33 Summary of Accounting Policies (Dollars in thousands) STOCK SPLIT 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. All share and per share data, as appropriate, reflect this split. The effect of the 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. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company"). The Company follows the equity method of accounting for its investments in greater than 20%-owned but less than majority-owned affiliates. All significant intercompany accounts and transactions have been eliminated. Except where otherwise indicated, the following notes relate to continuing operations consisting principally of alarm systems businesses and trade publishing. Certain prior year amounts in the consolidated statement of cash flows 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 On January 1, 1994 the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires the Company to record its investments in certain debt and equity securities available-for- sale at market value. Changes in market value for these securities are reported, net of tax, in a separate component of stockholders' equity until realized. Prior to the adoption of SFAS No. 115, these securities were valued at the lower of aggregate cost or market. SFAS No. 115 does not apply to investments accounted for using the equity method or for which readily determinable market values are not available. As a result of adopting SFAS No. 115, a $141 unrealized gain, net of tax, was recorded to stockholders' equity at January 1, 1994. The adoption of this Statement had no impact on net income and prior year financial statements are not restated. 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 $21,100, $17,492 and $14,664 in 1995, 1994 and 1993, respectively. INVESTMENTS Real estate and other ventures - These investments consist principally of equity interests in limited real estate partnerships, an affiliate that manufactures encryption and data communication devices ("Cylink"), a residential security products company ("First Alert") sold in 1994, a satellite broadcast company ("U.S.S.B. ") and land held for development. The Company's adjusted basis Page 34 in certain of the limited real estate partnerships is carried at zero, Cylink is carried at equity and investments in other partnerships and ventures are carried on a cost basis. Cash distributions received from these partnerships and ventures, other than Cylink, are recorded as income from investments. Leveraged leases - The Company's investment in leveraged leases consists 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 $3,356 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, customer mailing lists, 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. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed as incurred. These costs amounted to $16,599, $11,849 and $10,814 in 1995, 1994 and 1993, respectively. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion costs are expensed as incurred. These costs amounted to $17,500, $15,440 and $13,707 in 1995, 1994 and 1993, 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. In general, depreciation is computed on a straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. Deferred income taxes and future income tax benefits have been recognized for all temporary differences. Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes (see Note 5). PRODUCT LIABILITY AND WORKERS COMPENSATION CLAIMS Provisions are made for estimated losses from product liability and workers compensation claims which are not covered by insurance. 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 (expense) income of $(72), $373 and $(523) in 1995, 1994 and 1993, respectively. Page 35 Notes To Consolidated Financial Statements (Dollars in thousands, except per share) NOTE 1 - DISCONTINUED OPERATIONS The Company distributed its investment, carried at $153,016, in the Seaquist packaging group (now known as AptarGroup, Inc.) to stockholders in a tax-free spin-off on April 22, 1993. Net sales of the Seaquist group prior to its spin-off were $117,473 in 1993. NOTE 2 - ACQUISITIONS AND DISPOSITIONS During 1995, the Company acquired the assets and businesses of a manufacturer of residential burglar/fire alarm controls, a distributor of alarm and other security products and a foreign manufacturer of commercial intrusion alarms and control panels. The total purchase price for these businesses was $12,931 cash and $3,089 in notes. The Company also sold (a) a publication for $1 million cash, received in January 1996, and the assumption of related liabilities and (b) its 51% interest in a business offering seminars to its minority stockholders for $354 cash. The Company retained a note receivable in the amount of $1 million due from this former subsidiary. During 1994, the Company acquired the assets and businesses of a direct mail production company, a designer of wide area network building control monitoring systems, a manufacturer of glass break sensors and a designer of closed-circuit television, access control and alarm systems. The total purchase price for these businesses was $5,921 cash. The Company also sold a publication for $650 cash. During 1993, the Company acquired the assets and business of a domestic access control manufacturer and two publications for $3,430 cash. 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 or to the dates of disposition. NOTE 3 - INVENTORIES At December 31, 1995 and 1994 approximately 83% and 87%, respectively, of the total inventories are accounted for by the LIFO method. At year end, inventories consist of: 1995 1994 Raw materials $ 34,440 $ 32,520 Work-in-process 18,654 11,653 Finished goods - Manufactured by the Company 55,523 43,096 Manufactured by others 45,007 37,794 Total 153,624 125,063 Less LIFO reserve (988) (262) $152,636 $124,801 The LIFO reserve represents the excess of FIFO cost, which approximates current cost, over the LIFO value of inventory. NOTE 4 - LEVERAGED LEASES The Company is an equity participant in leveraged leases of 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: 1995 1994 Rentals receivable (net of principal and interest on nonrecourse debt) $13,179 $14,500 Estimated residual value 12,532 13,205 Unearned and deferred income (4,665) (4,953) Investment in leveraged leases 21,046 22,752 Deferred income taxes (20,523) (20,290) Net investment $ 523 $ 2,462 A summary of the components of income from leveraged leases follows: 1995 1994 1993 Income before income taxes $ 363 $ 1,142 $ 1,706 Current income tax benefit 106 3,201 3,711 Deferred income taxes (233) (3,601) (4,183) Income from leveraged leases $ 236 $ 742 $ 1,234 Page 36 Minimum annual rent receivable (net of principal and interest on nonrecourse debt) under leveraged leases for the next five years beginning with 1996 are $357, $926, $2,065, $1,751, $3,488 and an aggregate of $4,592 thereafter. NOTE 5 - INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". The cumulative effect of the change as of January 1, 1993 was a benefit of $1,965 ($.09 per share) for continuing operations and $3,106 ($.15 per share) for discontinued operations. As a result of the 1993 increase in the U.S. federal income tax rate from 34% to 35%, the effect in 1993 was to increase the federal income tax provision by $1,202 consisting of $400 ($.02 per share) related to 1993 income and $802 ($.04 per share) to increase prior accumulated deferred taxes. Income from continuing operations before income taxes consists of: 1995 1994 1993 Domestic income $60,148 $73,204 $39,985 Foreign income (loss) 3,930 641 (3,845) $64,078 $73,845 $36,140 The provision for income taxes consists of: 1995 1994 1993 Current - Federal $25,107 $22,819 $ 5,819 State and local 2,857 3,660 2,000 Foreign 2,670 822 617 30,634 27,301 8,436 Deferred - Federal (6,696) 1,576 7,131 Foreign (232) 132 (667) (6,928) 1,708 6,464 $23,706 $29,009 $14,900 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 from continuing operations before income taxes is as follows: 1995 1994 1993 Income tax at statutory rate $22,427 $25,846 $12,649 Tax effect of - State income taxes, net of federal benefit 1,857 2,379 1,300 U.S. income tax rate increase on cumulative timing differences 802 Foreign operations 1,062 730 1,296 Reserves no longer required (800) Other items, net (1,640) 54 (347) Actual income tax provision $23,706 $29,009 $14,900 Effective income tax rate 37.0% 39.3% 41.2% The components of the deferred tax liabilities (assets) at December 31, 1995 and 1994 are comprised of the following: 1995 1994 Leveraged leases $ 20,523 $ 20,290 Real estate ventures - Affordable housing 10,816 6,809 Other 5,500 17,029 Purchased tax benefit leases 4,056 5,023 Depreciation 3,517 1,831 State income taxes, net of federal benefit 5,925 6,007 Other 4,175 2,963 Total deferred tax liabilities 54,512 59,952 Inventory valuation (6,954) (6,254) Tax loss carryforwards (4,275) (4,679) State income taxes, net of federal benefit (1,721) (2,519) Deferred compensation (4,035) (1,288) Bad debts (2,339) (2,041) Workers compensation (2,685) (2,575) Marketable securities valuation (1,354) (2,033) Other (5,500) (6,963) Total deferred tax assets (28,863) (28,352) Valuation allowance 4,275 4,679 Net deferred tax liability $ 29,924 $ 36,279 Page 37 The valuation allowance relates to tax loss carryforwards of which $1,141 as of December 31, 1995 will be credited to goodwill when and if utilized. The Company's federal income tax returns have been examined through 1990 without material adjustment of reported income. NOTE 6 - DEBT The average annual interest rate on short-term notes payable was approximately 6.5% (5.9% domestic and 12.1% foreign) and 6.1% (5.8% domestic and 10.1% foreign) at December 31, 1995 and 1994, 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. During 1995 the Company entered into a ten-year $75 million unsecured debt agreement with institutional investors. Additionally, the Company has capitalized lease obligations that are collateralized by certain equipment. Aggregate long-term maturities due annually for the five years beginning in 1996 are $3,788, $3,552, $2,890, $6,846, $6,547 and $66,131 thereafter. NOTE 7 - 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 Company's policy is to fund pension costs accrued. The components of net pension (income) for the plans consist of: 1995 1994 1993 Service cost - benefits earned during the year $ 4,005 $ 3,618 $ 3,154 Interest cost on projected benefit obligation 4,042 3,851 3,410 Actual return on plan assets (27,286) 4,840 (12,563) Net amortization and deferred gains and losses 18,439 (13,071) 5,165 Net pension (income) $ (800) $ (762) $ (834) In 1994 the Company increased accrued benefits for active non-union employees for service prior to December 31, 1993 by 20%. The benefit improvement increased the projected benefit obligation by $3,342 and reduced the net pension income for the year by approximately $760. The reconciliation of the funded status of the plans at year end follows: 1995 1994 Actuarial present value of benefit obligations - Vested benefit obligation $(50,883) $(48,332) Nonvested benefit obligation (3,044) (1,321) Accumulated benefit obligation (53,927) (49,653) Excess of projected benefit obligation over accumulated benefit obligation (7,892) (9,873) Projected benefit obligation (61,819) (59,526) Plan assets at fair value 101,548 78,885 Plan assets in excess of projected benefit obligation 39,729 19,359 Unrecognized net gain (30,538) (10,101) Unrecognized prior service cost 4,027 4,625 Unamortized transition net asset (7,325) (8,790) Prepaid pension cost included in the consolidated balance sheet $ 5,893 $ 5,093 Plan assets consist primarily of U.S. government obligations, investment grade corporate bonds and common and preferred stocks. The projected benefit obligation was determined using an assumed discount rate of 7% and an assumed rate of increase in compensation of 5% for both years. The expected long-term rate of return on plan assets was 7% for both years. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", which requires the accrual of the expected cost of retiree medical and life insurance benefits over the period the employee provides services to the Company. Prior to the change, costs were charged to expense as incurred. The cumulative effect reported in the 1993 consolidated statement of income is an after-tax charge of $430, or $(.02) per share. The annual expense for these postretirement benefits was not significant in 1995, 1994 or 1993. Page 38 NOTE 8 - CAPITAL STOCK AND EARNINGS PER SHARE 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. All share and per share data, as appropriate, reflect this split. The effect of the 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. 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 1 2/3 cents per share more than dividends declared on Common stock (up to a maximum of 6 2/3 cents per share per year). Beginning with dividends declared in the second quarter of 1993, the quarterly dividends on Common stock and Class A stock were reduced by 3 1/3 cents as a result of the spinoff of AptarGroup, Inc. on April 22, 1993. Net income per share of common capital stock is based on the combined weighted average number of Class A and Common shares outstanding which does not include shares issuable upon exercise of outstanding non-qualified stock options or shares distributable as performance share awards because the dilutive effect is not significant. NOTE 9 - STOCK OPTIONS AND AWARDS The Company's 1990 stock awards plan (as amended in 1994) provides for the issuance of up to 1,500,000 shares of Class A stock to employees pursuant to options, performance and bonus share rights and other awards. Certain awards are payable in the form of Class A stock or cash. Performance and bonus share rights and non-qualified options vest ratably over terms of five years or less. Options are exercisable up to ten years from date of grant. Shares are issued or cash is paid pursuant to performance and bonus share rights upon specified maturity dates. Activity in options and performance and bonus share rights for Class A stock, restated for the 3-for-2 stock split is summarized as follows (prices shown are per share): 1995 1994 Outstanding at beginning of year 359,590 224,314 Shares issued for rights ($17.08 to $20.08) (1,494) Options paid in cash (1,072) Options cancelled (2,146) Rights granted ($26.33 to $30.50) 72,600 Options granted ($29.83 and $23.00) 166,650 135,276 Outstanding at end of year ($6.32 to $30.50 and $6.32 to $23.00) 594,128 359,590 Exercisable at end of year ($6.32 to $9.05) 30,750 0 Available for grant 716,154 953,258 In addition, the Company has granted other awards which provide additional deferred compensation based on the increase in fair market value of the Company's Class A stock. The cost of these compensation agreements is provided currently as it relates to prior service and ratably over the employees' future employment as it applies to future service. Awards of performance and bonus share rights are expensed as compensation at the date of grant. Expense under all of these arrangements amounted to $5,748, $1,065 and $1,180 in 1995, 1994 and 1993, respectively. NOTE 10 - 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: Page 39 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets - Marketable securities $ 25,585 $ 25,585 $ 34,313 $ 34,313 Investment in U.S.S.B 20,000 121,280 20,000 25,000 Affordable housing investments 17,325 17,325 11,525 11,525 Notes receivable 6,536 6,634 5,047 5,569 Financial liabilities - Long-term debt (89,754) (89,138) (10,272) (10,071) The estimated fair values of marketable securities (all available-for- sale) are based on quoted market prices. At December 31, 1995 and 1994, marketable securities consisted of adjustable rate preferred stocks, which had gross unrealized holding losses of $3,366 and $5,083, respectively. Realized gains and losses on sales of marketable securities are based upon the specific identification method. Such gains totaled $198 and $330 in 1995 and 1994, respectively, and losses totaled $453 and $305 in 1995 and 1994, respectively. In February 1996 the Company sold 13% of its investment in U.S.S.B. as part of an initial public offering of U.S.S.B. common stock. The sale resulted in a pre-tax gain of $13,162. In 1994 the Company sold its 16.67% ownership in First Alert, Inc. as part of an initial public offering of First Alert, Inc. common stock. The sale resulted in a pretax gain of $19,506. 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. The estimated fair values of the Company's investments in affordable housing projects and, for 1994, in U.S.S.B., a satellite broadcasting company, were based upon available financial and other information. For 1995, the estimated fair value of U.S.S.B. was based on the sale price of the above mentioned public offering. In addition, the Company will increase the recorded value of its investment in Cylink Corporation from $7.7 million at December 31, 1995 to $31.7 million to reflect the increase in the Company's equity in Cylink's net book value as a result of an initial public offering in February 1996. The Company's 8.6 million shares in Cylink had a quoted market value in excess of $168 million as of February 20, 1996. 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 11 - LEASE COMMITMENTS The Company leases certain manufacturing facilities, warehouses, office space and equipment under noncancelable operating leases expiring at various dates through the year 2014. 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 1996 are $16,031, $14,630, $12,810, $11,420, $8,652 and an aggregate of $7,474 thereafter. Rental commitments are stated net of minimum sublease rentals aggregating $4,236. Total rent expense (including taxes, insurance and maintenance when included in the rent) amounted to $17,714, $16,426 and $15,484 in 1995, 1994 and 1993, respectively. NOTE 12 - 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 currently under development 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 have Page 40 appealed the trial court's decision granting summary judgment. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. The Company has committed to invest up to a total of $2.7 million in certain affordable housing ventures through 1997. 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 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. NOTE 13 - SEGMENT INFORMATION The Company operates principally in two industry segments. The Alarm and Other Security Products segment involves the design, manufacture and sale of an extensive line of burglar alarm and commercial fire detection and alarm components and systems and the distribution of alarm and other security products manufactured by other companies. The Publishing segment is engaged in the publication of national business magazines with other businesses in the marketing-communications field. Sales within and between segments and geographic areas are made at approximate arm's-length prices. Operating income consists of sales less operating expenses. Sales and expenses which were 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. 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.
Depreciation Operating Identifiable Capital and Industry Segments Net Sales Income Assets Expenditures Amortization 1995 Alarm and Other Security Products $754,003 $ 54,021 $420,738 $ 36,835 $ 15,008 Publishing 191,263 11,941 88,721 5,154 5,788 General Corporate and Other 403 (6,718) 163,515 67 218 Consolidated $945,669 $ 59,244 $672,974 $ 42,056 $ 21,014 1994 Alarm and Other Security Products $600,643 $ 45,173 $336,730 $ 20,381 $ 13,993 Publishing 176,729 11,002 87,007 7,755 5,656 General Corporate and Other 654 (6,253) 139,550 110 511 Consolidated $778,026 $ 49,922 $563,287 $ 28,246 $ 20,160 1993 Alarm and Other Security Products $482,787 $ 33,416 $268,151 $ 23,117 $ 11,464 Publishing 164,627 7,206 78,733 6,265 5,185 General Corporate and Other 2,691 (6,610) 135,093 96 600 Consolidated $650,105 $ 34,012 $481,977 $ 29,478 $ 17,249
Page 41 Operating Identifiable Geographic Areas Net Sales Income Assets 1995 Domestic Operations $860,687 $ 53,032 $576,018 European Operations 70,302 4,041 77,328 Other Foreign Operations 40,943 2,199 20,445 Eliminations (26,263) (28) (817) Consolidated $945,669 $ 59,244 $672,974 1994 Domestic Operations $721,956 $ 48,206 $503,853 European Operations 48,063 119 49,580 Other Foreign Operations 31,238 882 10,279 Eliminations (23,231) 715 (425) Consolidated $778,026 $ 49,922 $563,287 1993 Domestic Operations $606,199 $ 35,919 $446,244 European Operations 38,024 (1,094) 34,598 Other Foreign Operations 27,243 9 10,618 Eliminations (21,361) (822) (9,483) Consolidated $650,105 $ 34,012 $481,977 NOTE 14 - QUARTERLY RESULTS (UNAUDITED) Quarterly results of operations for the years ended December 31, 1995 and 1994 are shown below: 1995 Quarters Total First Second Third Fourth For Year Net Sales $220,404 $235,320 $239,131 $250,814 $945,669 Gross Profit 80,785 85,384 83,847 92,945 342,961 Net Income 8,720 10,730 9,180 11,742 (a) 40,372 Per Share - Net Income .42 .51 .44 .56 (a) 1.93 1994 Quarters Total First Second Third Fourth For Year Net Sales $176,543 $189,220 $202,026 $210,237 $778,026 Gross Profit 66,468 68,503 72,314 75,161 282,446 Income Before Gain on Sale of Investment 7,707 7,882 8,296 9,175 33,060 Gain on Sale of Investment 10,249 1,527 11,776 Net Income 17,956 9,409 8,296 9,175 44,836 Per Share - Income Before Gain on Sale of Investment .37 .37 .40 .44 1.58 Gain on Sale of Investment .49 .08 .57 Net Income .86 .45 .40 .44 2.15 (a) Net income for the 1995 fourth quarter includes cash distributions received from real estate limited partnerships, a gain on the sale of a publication and insurance proceeds, less accruals related to certain litigation. The net after-tax effect of these items increased net income by $1,671, or $.08 per share. Page 42 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pittway Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Pittway Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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. As discussed in Notes 5 and 7 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/ Price Waterhouse LLP Chicago, Illinois February 21, 1996 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. /s/ King Harris /s/ Paul R. Gauvreau President and Chief Executive Officer Financial Vice President and Treasurer Page 43 Supplemental Information Five Year Summary of Selected Financial Data (Dollars in thousands, except per share Data)
1995 1994 1993 1992 1991 Operating Results Net Sales of Continuing Operations $945,669 $778,026 $650,105 $568,301 $516,343 Operating Income from Continuing Operations 59,244 49,922 34,012 22,069 11,621 Income from Continuing Operations 40,372 44,836(b) 21,240 12,460 4,371 Income from Discontinued Operations 10,046 34,938(c) 21,145 Cumulative Effect of Changes in Accounting Principles 1,535 Net Income 40,372 44,836(b) 32,821 47,398(c) 25,516 Per Share (a): Income from Continuing Operations 1.93 2.15(b) 1.02 .60 .21 Income from Discontinued Operations .48 1.68(c) 1.02 Cumulative Effect of Changes in Accounting Principles .07 Net Income 1.93 2.15(b) 1.57 2.28(c) 1.23 Cash Dividends Declared Per Share (a): Common .267 .267 .30 .40 .40 Class A .333 .333 .367 .733 .733 Capital Expenditures 42,056 28,246 29,478 17,187 13,872 Depreciation and Amortization 21,014 20,160 17,249 14,829 13,783 At Year End Assets of Continuing Operations 672,974 563,287 481,977 436,358 371,375 Investment in Discontinued Operations 137,648 198,433 Total Assets 672,974 563,287 481,977 574,006 569,808 Long-Term Debt 85,966 5,088 6,083 9,601 21,584 Stockholders' Equity(d) 363,026 328,130 292,064 419,501 399,578 Per Share(a)(d) 17.36 15.69 13.97 20.06 19.27 Market Price Per Share (a)(d): Common 44.25 26.00 22.67 25.33 22.08 Class A 45.17 26.83 21.50 23.00 19.58 (a) Per share data reflect the 3-for-2 stock split declared in January 1996. (b) Includes net gain on sale of First Alert stock of $11,776, or $.57 per share. (c) Includes net gain on disposal of discontinued operations of $16,558, or $.80 per share. (d) Stockholders' equity and market prices after December 31, 1992 reflect the spin-off of AptarGroup, Inc. in April 1993.
Page 44 Market Prices, Security Holders and Dividend Information The Company's Common stock (ticker symbol PRY) and Class A stock (ticker symbol PRYA) are traded on the American Stock Exchange. As of December 31, 1995, stockholders of record totaled approximately 500 for Common and 1,000 for Class A. The following table sets forth, on a quarterly basis, the high and low prices for the Common and Class A stock on the American Stock Exchange, along with the cash dividends declared, adjusted to reflect the three-for-two stock split declared in January 1996. Common Class A Dividends Declared High Low High Low Common Class A 1995 Quarter: First $30.67 $25.00 $31.00 $25.00 $.0667 $.0833 Second 31.17 28.00 30.75 28.25 .0667 .0833 Third 41.33 28.58 41.50 29.33 .0667 .0833 Fourth 44.92 38.17 46.00 37.58 .0667 .0833 1994 Quarter: First $26.00 $21.00 $23.17 $20.92 $.0667 $.0833 Second 27.17 22.67 25.42 22.33 .0667 .0833 Third 26.33 23.50 25.58 22.50 .0667 .0833 Fourth 26.67 24.33 27.08 23.75 .0667 .0833 Page 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF CONTINUING OPERATIONS Sales grew 22% in 1995 and 20% in 1994 principally due to higher sales levels in the Company's alarm systems segment. Domestic sales increased 19% in both 1995 and 1994. International sales, representing 12% of total consolidated sales in 1995 and 10% in 1994, relate to the alarm segment and increased 40% in 1995 and 22% in 1994. The larger increase in 1995 is primarily attributable to the expansion of European operations. Gross profit increased 21% in both 1995 and 1994 principally due to the increased sales levels. Selling, general and administrative expenses increased 22% in 1995 and 16% in 1994 primarily due to increased costs associated with the expanded sales volume. General and administrative expenses also increased in 1995 due to higher employee deferred compensation expense on accruals related to stock appreciation rights resulting from the effect of a significant increase in the price of the Company's stock. ALARM product sales accounted for 80% of consolidated revenues in 1995 (77% in 1994) and increased 26% in 1995 and 24% in 1994. The increases were due to a combination of overall market growth and, more significantly, increased market share. The Company's distribution business made significant gains capitalizing on the bankruptcy of a major competitor. Increases at the Company's manufacturing units reflect continued acceptance of numerous new product offerings. Operating income for the segment increased 20% in 1995 and 35% in 1994 primarily because of the expanded sales volume. Research and development expense amounted to $16.6 million and $11.8 million in 1995 and 1994, respectively, reflecting continuing development and expansion of the Company's burglar and fire alarm products and systems. Deferred compensation expense in 1995 was significantly higher than in 1994. PUBLISHING sales increased 8% in 1995 and 7% in 1994 primarily due to a modest increase in advertising pages and page rates and to higher ancillary product revenues. Operating income increased 9% in 1995 and 53% in 1994 due to increased advertising revenues, higher profits from non-advertising-page revenues and improved operating efficiencies. Operating income in 1995 was adversely impacted by significantly higher paper costs, up 40%, postage costs, up 10%, and the aforementioned deferred compensation costs. DEPRECIATION AND AMORTIZATION expense increased both in 1995 and 1994 as a result of capital additions, principally in the alarm segment. OTHER INCOME (EXPENSE) was less favorable in 1995 compared to 1994 due to the inclusion of a $19.5 million pretax gain on the sale of First Alert, Inc. common stock in 1994. Excluding this gain, other income (expense) was slightly more favorable due to increased cash distributions from real estate ventures, a larger gain on the sale of publications and insurance proceeds partially offset by higher interest expense, reduced income from marketable securities and leveraged leases and a greater loss at an affiliate. Excluding the First Alert gain, other income in 1994 increased over 1993 primarily due to higher yields on marketable securities, a $896,000 favorable swing in foreign currency transaction effects, a gain on the sale of a publication and higher miscellaneous income. These favorable comparisons were partially offset by reduced income from leveraged leases and a loss from an affiliate and higher interest expense. The effect of increased rates on a higher level of short-term borrowings was partly offset by lower long-term debt. EFFECTIVE TAX RATES were 37.0% in 1995, 39.3% in 1994 and 41.2% in 1993. An analysis of the Company's effective tax rate appears in Note 5 to the Consolidated Financial Statements. The effect of the increase in the U.S. federal income tax rate from 34% to 35% in 1993 was to increase the federal income tax provision by $1.2 million ($.4 million related to 1993 income and $.8 million to increase prior accumulated deferred taxes). ACCOUNTING CHANGES Effective January 1, 1993 the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", and No. 109, "Accounting for Income Taxes". The cumulative effect on prior years of the changes in accounting principles as of January 1, 1993 was a $1.9 million benefit for income taxes and a $.4 million after-tax charge for postretirement benefits. In October 1995 SFAS No. 123, "Accounting for Stock Based Compensation", was issued. The statement becomes effective for the 1996 Page 46 fiscal year and establishes a fair value based method of accounting for employee stock based compensation plans and encourages adoption of that method. Companies may however continue to apply the method currently prescribed under existing accounting rules, provided certain pro forma disclosures are made. The Company plans to retain the accounting method prescribed under the existing rules and will provide the necessary disclosures in the notes to the consolidated financial statements in 1996. DISCONTINUED OPERATIONS Earnings from discontinued operations in 1993 include the results of AptarGroup, Inc. until the spinoff in April of that year. Income from discontinued operations in 1993 was favorably impacted by a $3.1 million benefit from the adoption of SFAS No. 109. FINANCIAL CONDITION The Company's financial condition remained strong through 1995. 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 1995 the primary sources of the $13.8 million net cash provided by continuing operations were operating profits before depreciation and amortization. Such cash generated was partially used to finance the net increase in working capital items. The remaining cash generated from operations, along with a $75 million long-term borrowing and $10.2 million net proceeds from the sale of marketable securities, were used principally to make capital expenditures of $42.1 million, pay down short-term loans, make additional investments of $6.0 million, principally in affordable housing, pay dividends of $6.7 million and make business acquisitions totaling $12.9 million. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest approximately $2.7 million in certain affordable housing ventures through 1997. The Company has real estate investments in various limited partnerships with interests in commercial rental properties which may be sold or turned over to lenders due to the present weak commercial real estate market. Such events have no effect on net income although they do have a negative impact on the Company's cash position because significant tax payments become due when the properties are sold or returned to the lenders. After the tax payments made in 1995 relating to these properties and additional tax losses generated from holding them, the Company has approximately $5 million accrued at December 31, 1995 to fully cover the remaining tax payments that would be due if all the properties are sold or returned to the lenders. Cash distributions received from limited real estate partnerships amounted to $4 million in 1995. Distributions from these partnerships in 1996 are not expected to be as significant. In February 1996, the Company sold 622,500 shares of its investment in United States Satellite Broadcasting ("U.S.S.B.") in connection with its initial public offering and realized net cash proceeds of $15.8 million or $10.7 million after taxes. The Company intends to classify its remaining 4,167,375 U.S.S.B. shares in 1996 as a non- current investment in marketable equity securities. The Company also intends to hold its existing investment in preferred stocks, although occasional sales may be made selectively as conditions warrant. The impact of inflation on the Company's results of operations has lessened in recent years, although inflation does increase the Company's cost of doing business. The Company attempts to offset the impact of inflation through productivity and technological improvements, cost containment programs and by increasing its selling prices over time as allowed by market conditions. In addition, substantially all domestic inventories are valued on the last-in, first-out (LIFO) method, which generally results in reporting the cost of goods sold at approximately current costs. Page 47 EX-21 7 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1995 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 90 Penton Publishing, Inc. Delaware 100 Curtin & Pease/Peneco, Inc. Florida 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 ADI of Puerto Rico, Inc. Puerto Rico 100 Ademco Italia S.p.A. Italy 100 Ademco (Hong Kong) Limited Hong Kong 100 Pittway Foreign Sales Corp. U.S. Virgin Islands 100 EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1995 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 Espana S.A. Spain 100 Notifier (Benelux) S.A. Belgium 100 Notifier Deutschland GmbH Germany 100 Notifier, Ltd. (Singapore) Delaware 100 System Sensor, Ltd. (China) Delaware 100 Xi'an System Sensor Electronics, Ltd. China 55 Pittway UK Limited England 100 Notifier Limited (U.K.) England 100 System Sensor Limited (U.K.) England 100 Ademco-Sontrix Limited England 100 Microtech Security Ltd. Scotland 100 Pittway Australia Pty., Ltd. Australia 100 Ademco-Sontrix Espana, S.A. Spain 100 Notifier Italia S.r.l. Italy 100 Pittway Tecnologica S.p.A. Italy 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. EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 PITTWAY CORPORATION DECEMBER 31, 1995 FORM 10-K CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-35168 and 33-54753) of Pittway Corporation of our report dated February 21, 1996 appearing on page 43 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 15 of this Form 10-K. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois March 27, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 DEC-31-1995 31,407 25,586 183,925 8,493 152,636 413,986 218,765 109,021 672,974 168,108 85,966 20,912 0 0 342,114 672,974 945,669 945,669 581,694 581,694 21,014 4,901 5,778 64,078 23,706 40,372 0 0 0 40,372 1.93 1.93
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