-----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, DCxOGsqKCIbRKp2WFc5BJFjilZ76iOpVD4QZXDfpyNrrDqZnp04lnrL6ftks833U MB4kwVdq5lk2XumREmlsFg== 0000093469-98-000003.txt : 19980430 0000093469-98-000003.hdr.sgml : 19980430 ACCESSION NUMBER: 0000093469-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980428 SROS: NYSE 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-Q SEC ACT: SEC FILE NUMBER: 001-04821 FILM NUMBER: 98602989 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (Zip Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (April 16, 1998). Common Stock 3,938,832 Class A Stock 17,154,623 PITTWAY CORPORATION AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 1998 INDEX PART I. FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Statement of Operations - Three Months Ended March 31, 1998 and 1997 3 Consolidated Balance Sheet - March 31, 1998 and December 31, 1997 4 - 5 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 - 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 13 - 15 ITEM 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16 2 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited; Dollars in Thousands, Except Per Share Data) 1998 1997 NET SALES.................................. $356,624 $301,158 OPERATING EXPENSES: Cost of sales............................ 215,653 184,091 Selling, general and administrative...... 104,510 87,698 Provision for patent litigation.......... 43,000 - Depreciation and amortization............ 10,443 8,416 373,606 280,205 OPERATING INCOME (LOSS).................... (16,982) 20,953 OTHER INCOME (EXPENSE): Equity in Cylink gain on divestiture..... 6,646 - Income from marketable securities, investments and other interest......... 1,640 1,515 Interest expense......................... (4,162) (2,614) Miscellaneous, net....................... 31 (78) 4,155 (1,177) INCOME (LOSS) BEFORE INCOME TAXES.......... (12,827) 19,776 PROVISION (CREDIT) FOR INCOME TAXES........ (4,832) 7,480 NET INCOME (LOSS).......................... $ (7,995) $ 12,296 NET INCOME (LOSS) PER SHARE OF COMMON AND CLASS A STOCK Basic................................... $ (.38) $ .59 Diluted................................. $ (.38) $ .58 CASH DIVIDENDS DECLARED PER SHARE: Common................................... $ .067 $ .067 Class A.................................. $ .083 $ .083 AVERAGE NUMBER OF SHARES OUTSTANDING (in thousands)........................... 21,021 20,959 AVERAGE NUMBER OF SHARES AND DILUTIVE EQUIVALENTS OUTSTANDING (in thousands)... 21,021 21,209 See accompanying notes. 3 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1998 AND DECEMBER 31, 1997 (Unaudited; Dollars in Thousands) March 31, December 31, 1998 1997 ASSETS CURRENT ASSETS: Cash and equivalents................... $ 25,663 $ 41,334 Marketable securities.................. 12,440 16,583 Accounts and notes receivable, less allowance for doubtful accounts of $12,170 and $12,097.................. 245,999 228,584 Inventories............................ 264,966 242,656 Future income tax benefits............. 19,027 18,617 Prepayments, deposits and other........ 13,869 12,709 581,964 560,483 PROPERTY, PLANT AND EQUIPMENT, at cost: Buildings.............................. 44,490 44,418 Machinery and equipment................ 264,998 254,972 309,488 299,390 Less: Accumulated depreciation......... (157,528) (148,962) 151,960 150,428 Land................................... 2,718 2,733 154,678 153,161 INVESTMENTS: Marketable securities.................. 34,741 30,015 Investment in affiliate................ 27,725 20,441 Real estate and other ventures......... 41,115 43,388 Leveraged leases....................... 18,129 18,559 121,710 112,403 OTHER ASSETS: Goodwill, less accumulated amortization of $13,378 and $12,410.. 125,090 125,062 Other intangibles, less accumulated amortization of $10,983 and $10,871.. 5,272 5,351 Notes receivable....................... 9,363 7,534 Miscellaneous.......................... 7,361 7,456 147,086 145,403 $1,005,438 $971,450 See accompanying notes. 4 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1998 AND DECEMBER 31, 1997 (Unaudited; Dollars in Thousands) March 31, December 31, 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable........................... $ 62,284 $ 64,031 Long-term debt due within one year...... 8,697 8,206 Dividends payable....................... 1,717 1,719 Accounts payable........................ 167,862 159,493 Accrued expenses........................ 56,657 60,114 Income taxes payable.................... 10,629 7,116 Retirement and deferred compensation plans.................... 10,585 10,562 Unearned income......................... 8,215 5,203 326,646 316,444 LONG-TERM DEBT, less current maturities... 95,095 95,357 DEFERRED LIABILITIES: Income taxes............................ 46,487 58,065 Litigation.............................. 43,000 - Other................................... 13,700 14,450 103,187 72,515 STOCKHOLDERS' EQUITY: Preferred stock, none issued............ Common capital stock, $1 par value- Common stock.......................... 3,939 3,939 Class A stock......................... 17,095 17,052 Capital in excess of par value.......... 25,644 24,523 Retained earnings....................... 430,854 440,536 Cumulative marketable securities valuation adjustment.................. 11,696 8,823 Cumulative foreign currency translation adjustment............................ (8,718) (7,739) 480,510 487,134 $1,005,438 $971,450 See accompanying notes. 5 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited; Dollars in Thousands) 1998 1997 Cash Flows From Operating Activities: Net Income (Loss)................................ $ (7,995) $ 12,296 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................. 10,443 8,416 Equity in Cylink gain on divestiture, net of taxes...................................... (4,154) - Deferred income taxes.......................... 18 781 Retirement and deferred compensation plans..... 505 165 Income/loss from investments adjusted for cash distributions received............... (450) (732) Provision for losses on accounts receivable.... 952 1,191 Provision for patent litigation, net of taxes.. 26,875 - Changes in assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts and notes receivable.... (15,990) (3,422) Increase in inventories...................... (22,683) (25,843) Increase in prepayments and deposits......... (1,172) (1,626) Increase (decrease) in accounts payable and accrued expenses....................... 6,122 (5,388) Increase in income taxes payable............. 3,336 4,558 Other changes, net............................. 1,962 (609) Net cash used by operating activities............ (2,231) (10,213) Cash Flows From Investing Activities: Capital expenditures............................. (11,220) (15,073) Proceeds from the sale of marketable securities.. 7,082 8,308 Purchases of marketable securities............... (2,988) (5,081) Disposition of property and equipment............ 162 127 Additions to investments......................... (5) - Increase in notes receivable..................... (3,025) (1,685) Net assets of businesses acquired, net of cash... - (33,421) Net cash used by investing activities............ (9,994) (46,825) Cash Flows From Financing Activities: Net (decrease) increase in notes payable......... (2,023) 39,000 Proceeds of long-term debt....................... 2,248 492 Repayments of long-term debt..................... (1,866) (4,574) Stock options exercised.......................... 74 878 Dividends paid................................... (1,688) (1,679) Net cash (used) provided by financing activities. (3,255) 34,117 Effect of Exchange Rate Changes on Cash............ (191) (206) Net Decrease in Cash and Equivalents............... (15,671) (23,127) Cash and Equivalents at Beginning of Period........ 41,334 32,409 Cash and Equivalents at End of Period.............. $ 25,663 $ 9,282 See accompanying notes. 6 PITTWAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited; Dollars in Thousands) NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company" or "Registrant"). The accompanying consolidated financial statements are unaudited but reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements contained herein. However, the financial statements and related notes do not include all disclosures normally provided in the Company's Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 2. CHANGE IN ACCOUNTING POLICY Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. (SFAS) 130 "Reporting Comprehensive Income." The statement requires the addition of comprehensive income and its components in the Company's annual financial statements. Other comprehensive income (loss) includes cumulative foreign currency translation adjustments and unrealized investment gains and losses, which are not included in income under current accounting principles. Total comprehensive income (loss) for the quarters ended March 31 were: 1998 1997 Net income (loss) $ (7,995) $ 12,296 Other comprehensive income (loss) 1,894 (2,300) Total comprehensive income (loss) $ (6,101) $ 9,996 NOTE 3. PENDING DIVESTITURE In December 1997, the Company announced its Penton Publishing subsidiary ("Penton") had signed a letter of intent to acquire another business media company, contingent on the Company spinning off Penton to the Company's shareholders in a tax-free distribution. The acquisition and related spin-off are subject to the execution of a definitive combination agreement and receipt of a favorable ruling on the spin-off from the Internal Revenue Service, among other conditions. At such time as the principal conditions are satisfied, subsequent financial disclosures will reflect Penton as a discontinued operation, including restatement of prior periods. The following pro forma information presents the historical quarterly results as restated to reflect Penton as a discontinued operation. The 7 pro forma results are presented for informational purposes only and do not purport to be indicative of the results of operations, which would actually have been obtained if the transactions had occurred in such periods, or which may exist or be obtained in the future. March 31, 1998 1997 Net sales from continuing operations $304,138 $252,492 Income from continuing operations Before special items $ 12,378 $ 9,570 Special items (a) (22,721) - Income (loss) from continuing operations (10,343) 9,570 Income from discontinued operations 2,348 2,726 Net income (loss) $ (7,995) $ 12,296 Per share of Common and Class A stock: Basic - Income (loss) from continuing operations $ (.49) $ .46 Income from discontinued operations .11 .13 Net income $ (.38) $ .59 Diluted - Income (loss) from continuing operations $ (.49) $ .45 Income from discontinued operations .11 .13 Net income $ (.38) $ .58 (a) Special items include the after-tax charge of $26,875 ($1.27 per diluted share) for patent litigation (see note 9) and the after-tax gain of $4,154 ($.20 per diluted share) on Cylink's divestiture of its wireless division (see note 7). NOTE 4. ACQUISITIONS In the first quarter of 1997, the Company acquired the assets and businesses of a domestic manufacturer and distributor of fire controls and a producer of trade shows and conferences. The total purchase price for these businesses was $33,421 cash, $2,453 in notes as well as future contingent payments up to $3,250 tied to future earnings of the acquired companies through 1999. These acquisitions were accounted for as purchase transactions in the consolidated financial statements from their respective dates of acquisition. The impact on consolidated results of operations was not significant. NOTE 5. INVENTORIES The recorded value of inventories at March 31, 1998 and December 31, 1997 approximate current cost and consist of the following: Mar. 31, Dec. 31, 1998 1997 Raw materials $ 59,597 $ 59,405 Work in process 20,915 17,852 Finished goods - Manufactured by the Company 94,375 89,771 Manufactured by others 90,079 75,628 $264,966 $242,656 8 NOTE 6. MARKETABLE SECURITIES Information about the Company's marketable securities at March 31, 1998 and December 31, 1997 is as follows: Mar. 31, Dec. 31, 1998 1997 Current - Adjustable Rate Preferred Stocks - Aggregate cost $ 12,502 $ 16,558 Net unrealized holding (loss) gain (62) 25 Aggregate fair value $ 12,440 $ 16,583 Non-Current - USSB Common Stock - Aggregate cost $ 15,789 $ 15,789 Unrealized holding gain 18,952 14,226 Aggregate fair value $ 34,741 $ 30,015 Realized gains and losses are based upon the specific identification method. Such gains and losses on the adjustable rate preferred stock, for the quarters ended March 31, 1998 and 1997 were not significant. NOTE 7. INVESTMENT IN AFFILIATE The investment in affiliate consists of the Company's interest in Cylink Corporation (Cylink), which is carried at equity. In March 1998 Cylink sold its wireless division for $60.5 million. The Company increased the carrying value of its investment in Cylink by $6,646 and recorded an after-tax gain of $4,154, or $.20 per diluted share, to reflect its equity in the gain on this divestiture. At March 31, 1998, the Company's 8.6 million shares of Cylink stock had a quoted market value of $124,250. The summarized results of operations of Cylink for the quarters ended March 31, 1998 and 1997 are as follows: Mar. 31, Mar. 31, 1998 1997 Revenue $15,829 $9,352 Gross profit 12,218 6,542 Income (loss) from continuing operations 1,082 (85) Net income 23,706 1,107 NOTE 8. EARNINGS PER SHARE Basic net income per common share amounts were calculated by dividing earnings by the combined weighted average number of Class A and Common shares outstanding. Diluted net income per share amounts were based on the same reported earnings but assume the issuance of Class A stock upon exercise of outstanding stock options and distributable as performance and bonus share awards. For the first quarter of 1998 there were 410,000 potential Class A shares related to these options and awards that were excluded from the calculation as they would have had an anti-dilutive effect. 9 NOTE 9. LEGAL PROCEEDINGS In 1989 a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. In December 1994, Saddlebrook's motion for summary judgment based on collateral estoppel was granted on the ground that Plaintiffs' claims were fully retried and rejected in a related administrative proceeding. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998, the trial court entered an order limiting the scope of the retrial in light of the appellate court's ruling. On April 13, 1998, plaintiffs moved for reconsideration of the trial court's April 1, 1998 order. The trial court must rule definitively on the scope before the retrial can take place, which is expected to begin in 1998. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. In 1995 a lawsuit was brought against the Company by Interactive Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of up to $66,800 on account of Company sales of products which the plaintiff alleges infringed on its patent. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. The Company moved for summary judgment of non- infringement and, in December 1997, the Court issued its order granting the Company partial summary judgment, stating its products did not literally infringe upon plaintiff's patent claims. In March 1998, the jury handed down a verdict against the Company, which was entered by the Court in April 1998, awarding damages of $35,954. The jury found that the Company did not willfully infringe. The company has recorded a provision of $43,000 in the first quarter of 1998 which considers the judgment, interest and legal costs. The company strongly believes it has meritorious defenses in its post-trial motions and, if necessary, on appeal, and is vigorously defending itself. The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature. While management believes that resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company attained $356.6 million of sales in the first quarter of 1998, an 18 percent increase over the first quarter of 1997. Operating income increased 24 percent and net earnings increased 20 percent excluding two special items, an after-tax charge of $26.9 million related to a patent lawsuit with ITI Technologies and a one-time after- tax gain of $4.2 million from a divestiture by Cylink Corporation, a 29 percent owned affiliate of the Company. The provision for litigation considers the Court's judgment entered on the jury's verdict awarding damages, interest and legal costs. The revenue increase principally reflects higher sales levels in the Company's alarm group segment. For the quarter, domestic sales grew 18 percent while international sales increased 22 percent. International business relates primarily to the alarm group segment and represents 15 percent and 14 percent of total consolidated sales for the first quarter of 1998 and 1997, respectively. Gross profit increased in the quarter as a result of higher sales volume and an improvement in the gross margin to 36.6% from 36.1% in 1997 as a result of a change in sale mix toward manufactured products. Selling, general and administrative expenses increased 19 percent in the first quarter of 1998 as a result of increased costs associated with the higher sales volume. Alarm Group sales increased 20 percent during the quarter to $304.1 million while operating income - excluding the provision for patent litigation - increased 29 percent to $23.2 million. Double-digit sales increases were recorded by all of the major alarm operations. Ademco's growth reflected the full impact of major account business which increased sharply in 1997 but was relatively small during the first quarter of last year. Improvements in operational efficiency helped Ademco and ADI offset to some degree the narrower margins from this major account business. Both System Sensor and Notifier/Fire-Lite, the two major operations within the Pittway Systems Technology Group, posted significant increases in sales and profits compared to last year's first quarter despite weakened international business impacted by currency and other economic problems in Asia and selected other third world markets. Publishing revenues increased 8 percent to $52.5 million. Operating income decreased 4 percent to $4.7 million, reflecting period costs incurred by the newly acquired trade show businesses without any significant contribution of revenue. These companies will have a favorable impact on Penton's results, primarily in the fourth quarter when the majority of the larger shows are held. The Company expects the previously announced spin-off of the publishing business to be completed either late in the second or early in the third quarter, subject to signing a definitive combination agreement with a merger partner and receiving a favorable tax ruling from the Internal Revenue Service, among other conditions. 11 Depreciation and amortization expense increased 24 percent in 1997 mainly as a result of capital additions in the alarm segment, and to a lesser extent, intangible assets acquired in the 1997 acquisitions. Other income (expense) in 1998 included a pretax gain of $6.4 million resulting from Pittway's equity in a gain recorded by Cylink Corporation (a 29% owned affiliate) on the divestiture of its wireless division. In the first quarter of 1998, interest expense increased over the 1997 first quarter, reflecting higher borrowing levels while earnings recorded on the Company's investments were slightly higher. Effective tax rates were 37.7% and 37.8% in the first quarter of 1998 and 1997, respectively. FINANCIAL CONDITION The Company's financial condition remained strong during the first quarter of 1998. 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 the first quarter of 1998, income before depreciation, amortization the net gain on the Cylink divestiture, and the net provision for patent litigation provided $25.2 million of net cash which was primarily used, in addition to $2.2 million of cash, to finance the net increase in working capital items. Additional cash of $13.3 million along with $4.1 million of net proceeds from the sale of marketable securities and $0.4 million of net proceeds from long-term debt and $.1 million of proceeds from the exercise of stock options were used to fund $11.2 million in capital expenditures, a net increase of $3.0 million in notes receivable from customers, the net repayment of $2.0 million in notes payable and $1.7 million of dividends paid to stockholders. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest up to $23.3 million in certain affordable housing ventures through 2005. The Company has real estate investments in various limited partnerships with interests in commercial rental properties, which may be sold or turned over to lenders. Such events have no effect on net income although they do have a negative impact on the Company's cash position because tax payments become due when the properties are sold or returned to the lenders. The Company has approximately $4.3 million accrued at March 31, 1998 to fully cover the remaining tax payments that would be due if all the properties were sold or returned to the lenders. The Company presently intends to hold its existing investments in preferred stocks, USSB and Cylink although occasional sales of preferred and USSB stocks may be made selectively as conditions warrant. 12 ACCOUNTING CHANGES In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The statement requires the Company to report financial and descriptive information about its reportable segments, determined using the management approach (i.e., internal management reporting). The statement is effective for fiscal years beginning after December 15, 1997. The Company will disclose information of its segments as determined under methods prescribed by SFAS No. 131 in its 1998 annual report. **** This quarterly report, other than historical financial information, contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1997. These include risks and uncertainties relating to the potential spin-off of the Company's publishing business, pending litigation, government regulation, competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Property Damage Claim On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860), alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. 13 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 appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998, the trial court entered an order limiting the scope of a retrial in light of the appellate court's ruling. On April 13, 1998, plaintiffs moved for reconsideration of the trial court's April 1, 1998 order. The trial court has not yet ruled on plaintiffs' motion for consideration. 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 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. 14 Patent Infringement Claim On August 16, 1995, Interactive Technologies, Inc. commenced a lawsuit in U.S. District Court against the Company alleging patent infringement. The plaintiff claimed the Company infringed on their patent by making, using and selling certain security system products in the United States, and that the infringement was willful. Plaintiff initially sought unspecified damages, and an injunction. The Company denied infringement, maintaining the plaintiff's patent was invalid, as well as unenforceable because the plaintiff committed inequitable conduct before the Patent Office when applying for the patent. During discovery, the plaintiff informed the Company it was seeking damages measured by its lost profits or not less than a reasonable royalty on sales of the Company. Fact discovery in the action closed on January 17, 1997. The Court conducted a Markman hearing in October 1997 to construe the patent claims asserted by plaintiff and issued its Order interpreting the claims on October 14, 1997. The Company moved for summary judgment of non-infringement. On December 2, 1997 the Court issued its Order granting partial summary judgment that the Company's products did not literally infringe the patent claims, and denying summary judgment of no infringement. Jury trial started on January 7, 1998. During the trial, the plaintiff indicated it was seeking lost profits and royalty damages of up to $66.8 million. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. On March 9, 1998 the jury handed down a verdict against the Company awarding damages of $36.0 million. The jury found that the Company did not willfully infringe. The Court entered judgment on the jury's verdict on April 9, 1998. Consequently, the company recorded a provision of $43.0 million in the first quarter of 1998, which considers the judgment, interest and legal costs. The Company filed post-trial motions on April 20, 1998 for judgment as a matter of law in favor of the Company and alternatively, for a new trial. If the motions are unsuccessful the Company will appeal. The Company believes it has meritorious defense in its post-trial motions and appeal. The ultimate outcome of this matter is uncertain but will result in significant damages should the Company lose the appeal. Other The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature. While management believes that resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Number Description 27 Financial Data Schedule (submitted only in electronic format) (b) On March 10, 1998, the Registrant filed a report on Form 8-K which contained a press release announcing that a jury handed down a verdict the previous day in a patent suit against the Registrant awarding damages of approximately $36 million. The Registrant stated that it intends to appeal the verdict. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PITTWAY CORPORATION (Registrant) By /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President, Treasurer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: April 28, 1998 16 EX-27 2
5 1,000 3-MOS DEC-31-1998 MAR-31-1998 25,663 12,440 258,169 12,170 264,966 581,964 312,206 157,528 1,005,438 326,646 95,095 0 0 21,034 459,476 1,005,438 356,624 356,624 215,653 215,653 10,443 952 4,162 (12,827) (4,832) (7,995) 0 0 0 (7,995) (.38) (.38) Excluding a net after-tax charge of $26.9 million ($1.27 per diluted share) from patent litigation and an after-tax gain of $4.2 million ($.20 per diluted share) from a divestiture by Cylink Corporation, a 29 percent owned affiliate of the Company, net income would have been $14.7 million ($.69 per diluted share).
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