-----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, FBVAhqIDJ1bubsF18JHPJcHpUhQnPGk/buzuck7VRMeXiRadq55gm+H4VPqsNrPk L+FxdLzVWJNBNrwn2+llMg== 0000093469-99-000005.txt : 19990322 0000093469-99-000005.hdr.sgml : 19990322 ACCESSION NUMBER: 0000093469-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 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-K SEC ACT: SEC FILE NUMBER: 001-04821 FILM NUMBER: 99568903 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1998 Commission File No. 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Suite 700, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (ZIP Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $1.00 par value New York Stock Exchange Class A Stock, $1.00 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non- affiliates of the Registrant (based on closing sales prices on March 4, 1999): $823,000,000. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (March 4, 1999): Common Stock - 7,877,664 shares outstanding; Class A Stock - 34,842,357 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 6, 1999 are incorporated by reference into Part III of this report. PITTWAY CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K For The Year Ended December 31, 1998 PART I Page Item 1 Business 1-6 Item 2 Properties 7-8 Item 3 Legal Proceedings 9-10 Item 4 Submission of Matters to a Vote of Security Holders 10 PART II Item 5 Market For Registrant's Common Equity and Related Stockholder Matters 11 Item 6 Selected Financial Data 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-15 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 16 Item 8 Financial Statements and Supplementary Data 17-38 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 39 PART III Item 10 Directors and Executive Officers of the Registrant 39 Item 11 Executive Compensation 39 Item 12 Security Ownership of Certain Beneficial Owners and Management 39 Item 13 Certain Relationships and Related Transactions 39 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 39 SIGNATURES 40 PART I Item 1. Business (a) General Development of Business Pittway Corporation ("Pittway" or "Registrant"), was incorporated under Delaware law in 1925. Pittway and its subsidiaries are referred to herein collectively as the "Company". The Company operates principally in two reportable segments. The Alarm Manufacturing segment designs, manufactures and sells an extensive line of burglar and commercial fire alarm equipment and other security products. Manufacturing sales are made through the Alarm Distribution segment, numerous other unaffiliated distributors and directly to a limited number of third-party customers. The Alarm Distribution segment sells only to third-party customers alarm and other security products manufactured by the Company and by other companies. In August 1998, the Company distributed its investment in Penton Media, Inc. ("Penton," formerly known as Penton Publishing, Inc.) to stockholders in a tax-free spin-off. Financial and other information for periods prior to the spin-off have been restated to reflect the discontinuation of the publishing business. Penton is a diversified business media company that publishes magazines and electronic information products, produces trade shows and conferences, and provides marketing and business development products and services, including direct mail lists, research and custom publishing. Acquisitions and dispositions of businesses by the Company, other than the discontinued operations discussed above, in each of the five years ended December 31, 1998 were not significant to the Company's sales or results of operations. In March 1998, Cylink Corporation ("Cylink"), an affiliate of the Company (see "Real Estate and Other Ventures" in Item 1(c), below), sold its wireless division for $60.5 million. The Company increased the carrying value of its investment in Cylink by $6.6 million and recorded an after- tax gain of $4.2 million, or $.10 per diluted share, to reflect its equity in the gain on this divestiture. In September 1997, Cylink acquired Algorithmic Research, an information security company, for cash and Cylink stock totaling $76.3 million. The Company increased the carrying value of its investment in Cylink by $6.4 million and recorded a $4.0 million after-tax gain, or $.09 per diluted share, as a result of the stock issued in the acquisition and reduced the carrying value of its investment in Cylink by $18.9 million and recorded an $11.8 million after-tax expense, or $.28 per diluted share, for its equity in Cylink's write-off of "in-process technology" acquired in the transaction. In February 1996, Cylink made an initial public offering of its common stock. The Company increased its carrying value of this investment to reflect the increase in the Company's equity in Cylink's net book value. An after-tax gain of $14.4 million, or $.34 per diluted share was recorded on the increase in Cylink's equity. In February 1996, the Company sold 13% of its investment in United States Satellite Broadcasting Company, Inc. ("USSB") as part of an initial public offering of USSB common stock. The sale resulted in an after-tax gain of $8.1 million or $.19 per diluted share. See "Real Estate and Other Ventures" in Item 1(c), below. During the first half of 1994, the Company sold its 16.67% ownership in First Alert, Inc., a manufacturer of residential fire protection products, as part of an initial public offering of that company's common stock. The sale resulted in an after-tax gain of $11.8 million or $.28 per diluted share. 1 (b) Financial Information about Industry Segments Financial information relating to segments for each of the three years ended December 31, 1998 is set forth in Note 14 ("Segment Information") to the Consolidated Financial Statements on pages 35-36. (c) Narrative Description of Business The principal operations, products and services rendered by the Company, are as follows: Alarm Manufacturing Segment This segment designs, manufactures and sells an extensive line of burglar and commercial fire alarm equipment and other security products for the protection of life and property. The segment manufactures alarm, access, lighting and other controls for a variety of low-voltage systems and peripheral devices which are monitored by and interact with these controls, including: system smoke detectors, wireless transmitters, motion detectors, glass break sensors, audible/visible warning devices, closed circuit television (CCTV) equipment, keypads, video transmission devices, and numerous contacts, switches and connectors. The Company markets and sells its control devices and peripheral devices to: (a) company-owned distribution centers in North America, Europe and the Pacific Rim; (b) over 400 engineered systems distributors in North America and (c) original equipment manufacturers and distributors worldwide. Over 80% of the Company's sales originate from the United States. The Company's products are sold under numerous brand names including: Fire- Lite, Notifier, Fire Control Instruments (fire controls), System Sensor (system smoke detectors), Javelin (CCTV equipment), Northern Computer and Xetron (access controls), MicroLite (lighting controls), Ademco, FBI and First Alert Professional (complete security systems and peripherals). Raw materials essential to the Company's businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available from more than one supplier and no serious shortages or delays have been en- countered. Certain raw materials used in producing some of the Company's products can be obtained only from one or two suppliers, the shortage of which could adversely impact production of alarm equipment and commercial fire detectors by the Company. The Company believes that the loss of any other single source of supply would not have a material adverse effect on its overall business. Through its NESCO subsidiary the Company offers a wide variety of services to independent distributors of its fire alarm systems products, including assistance with system design, bonding, technical help, training, marketing and administrative support. The Company also offers AlarmNet to alarm companies in major U.S. markets. AlarmNet is a wireless cellular-like communication network designed to transmit alarm signals by radio instead of over telephone lines. The Company also offers First Alert Professional, a brand name marketing program to independent burglar alarm dealers. Sales and marketing methods common to this industry segment include communications through the circulation of catalogs and merchandising bulletins (print and electronic), direct mail campaigns, and national and local advertising in trade publications. The Company's principal advantages in marketing are its reputation, broad product line, high quality products, extensive integrated distribution networks, efficient customer service, competitive prices and brand names. 2 Within the industry there is competition from large and small manufac- turers in both the domestic and foreign markets. While competitors will continue to introduce new products similar to those sold by the Company, the Company believes that its research and development efforts and the breadth and quality of its distribution network will permit it to remain competitive. Alarm Distribution Segment This segment distributes fire, security and other electrical products manufactured by the Company and by other companies. By offering a broad line of alarm and other low voltage products, the Company provides a full range of services to more than 40,000 independent alarm dealers and installers which range in size from one person operations to the largest national alarm service companies. In every major domestic market area, quick delivery is provided through ADI, the Company's regional warehouses and convenience center outlets. ADI is the largest wholesale distributor of alarms and other low voltage products in North America specializing in burglar alarm, fire alarm, CCTV, access control, intercom, central vacuum, voice and data cabling, and sound and communications products. Various products sold through ADI are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under Company brand names, others are resold under supplier brand names. In the Canadian, Mexican and overseas markets, alarm and other low voltage products are sold through the Company's distribution centers, authorized distributors and sales agents. Real Estate and Other Ventures The Company is involved in the marketing, sale and development of land near Tampa, Florida for residential and commercial use. Saddlebrook East Village, a 2,000 acre parcel of land, is approved for development as a master planned community. The West Village, formerly called Saddlebrook Corporate Center, a nearby 450 acre parcel, originally planned as a business park for mixed use development, was partially converted to a residential community due to the demand for residential housing. Principal competition comes from other residential and commercial developments in Florida. The Company owns 8,606,085 shares (29.6% of the shares outstanding) of Cylink, a leading supplier of network information security products that enable the secure transmission of data over private local area networks and wide area networks and public packet switched networks, such as the Internet. In March 1998, Cylink sold its line of spread spectrum radio products that are used for wireless voice and data communication for $60.5 million. Cylink acquired Algorithmic Research, an information security company, in September 1997. The Company owns 3,781,375 shares (4.2% of the shares outstanding) of USSB, a company which provides subscription television programming via high-power direct broadcast satellite to households throughout the Continental U.S. In December 1998, Hughes Electronics Corporation ("Hughes") and USSB announced that they had reached agreement whereby Hughes would acquire USSB for approximately $1.3 billion with a minimum and maximum price per share of $10.50 to $18.00 based on the market value of Hughes stock during a specified period of time. In early 1999 Pittway sold one million of its 3.8 million shares of USSB at an average selling price of $15.18 per share and will sell its remaining shares if the acquisition is completed. Additionally, the Company has a 40% interest in a partnership that provides loans to security businesses as well as other management services, a 30% interest in a cable manufacturer and an 11% interest in a specialized cellular communications company that uses cellular system control channels. 3 The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties located primarily in Chicago. See Item 7 of this Form 10-K. The Company also has invested, as a 5% limited partner, in numerous apartment complexes located in Chicago, Indianapolis, San Jose and Washington, D.C. which provide certain tax advantages. Also, the Company is an equity participant in leveraged leases of an aircraft and communications satellite transponders. Other Information Patents and Trademarks - While the Company owns or is licensed under a number of patents which are cumulatively important to each of its business units, the loss of any single patent or group of patents would not have a material adverse effect on the Company's overall business. Products manufactured by the Company are sold primarily under its own trademarks and tradenames. Some products purchased and resold by the Company's distribution business are sold under Company tradenames while others are sold under supplier tradenames. Customers - Neither of the Company's alarm segments is dependent upon a single customer or a few customers. In the past two years, both alarm segments have developed significant national account business from several major companies in the U.S. residential alarm market. However, the loss of any one of these customers would not have a material adverse effect on the Company's results of operations. No single customer accounts for 10% of the Company's revenues. Research and Development - The Company is engaged in programs to develop and improve products as well as develop new and improved manufacturing methods. Expenditures for Company sponsored research and development activities in the Alarm Manufacturing segment were $33.2 million in 1998, $24.3 million in 1997 and $18.1 million in 1996. These costs, which are expensed in the Company's consolidated income statement, were associated with a number of products in varying stages of development, none of which represents a significant item of cost or is projected to be a significant addition to the Company's line of products. Product Liability - Due to the nature of the fire and security alarm business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. It is likely, due to the present litigious atmosphere in the United States, that additional claims and lawsuits will be filed in future years. The Company believes that it maintains sufficient insurance to cover this exposure. Environmental Matters - The Company anticipates that compliance with various laws and regulations relating to protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position. Employees - At December 31, 1998, there were approximately 7,600 persons employed by the Company, including 4,600 employed in the United States. Approximately 1,200 of the employees working in the United States were represented by labor unions. The Company considers its relations with its employees and the unions representing certain of its employees to be good. 4 Risks and Uncertainties - In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 1998 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Risks associated with acquisition strategy - The Company's strategy includes the acquisition of businesses that complement or augment the Company's existing products and services. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approvals, including antitrust approvals. Any acquisitions completed by the Company may be made at substantial premiums over the fair value of the net assets of the acquired companies. There can be no assurance that the Company will be able to complete future acquisitions or that the Company will be able to successfully integrate and operate any acquired businesses. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms which are not favorable to the Company and, in the case of equity financing, may result in dilution to the Company's stockholders. Competition - The Company encounters and expects to continue to encounter significant competition in the sale of its products and services. The Company's competitors include a number of large multinational corporations, some of which may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. Competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. There can be no assurance that the Company's current products, products under development, or ability to develop new technologies will be sufficient to enable it to compete effectively. Risks associated with international operations - International sales account for 17% of the Company's 1998 consolidated revenues and the Company intends to continue to expand its presence in international markets. International revenues are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by the Company in foreign markets where payment for the Company's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse impact on the Company's business and results of operations. Rapid and significant technological change and new products - The markets for the Company's products are characterized by rapid and significant technological change, evolving industry standards and frequent new product introductions and enhancements. Many of the Company's products and products under development are technologically innovative, and require significant planning, design, development and testing, at the technological, product and manufacturing process levels. These activities can require significant commitments of capital, personnel and other resources by the Company. In addition, products that are competitive in the Company's markets are frequently characterized by rapid and significant technological change due to industry standards that may change and by the introduction of new products and technologies that render existing products and technologies uncompetitive or obsolete. There can be no assurance that any of the products currently being developed by the Company, or those to be developed in the future, will be technologically feasible or accepted by the marketplace, that any such development will be completed in any particular time frame, or that the Company's products or proprietary technologies will not become uncompetitive or obsolete. 5 Possible adverse effect from changes in governmental regulations - The Company competes in several markets which involve compliance by its customers with Federal, state, local and foreign regulations. The Company develops, configures and markets its products to meet customer needs created by such regulations. These regulations may be amended in response to new scientific evidence or political or economic considerations. Any significant change in regulations could adversely affect demand for the Company's products in regulated markets. Risks associated with dependence on capital spending policies - The level of capital spending by users of the Company's products can have a significant effect on the Company's revenues. Such spending is based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of equipment, public policy, and the effects of different economic cycles. Any decrease in such spending could have a material adverse effect on the Company's business and results of operations. Dependence on patents and proprietary rights - The Company seeks to obtain patents and protect trade secrets for significant new technologies, products and processes because of the length of time and expense associated with bringing new products through the development process and to the marketplace. The Company's success depends in part on its ability to develop patentable products and obtain and enforce patent protection for its products both in the U.S. and in other countries. The Company owns numerous U.S. and foreign patents, and intends to file additional applications for patents as appropriate to cover its products. No assurance can be given that patents will issue from any pending or future patent applications owned by or licensed to the Company or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any issued patents owned by or licensed to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. The Company could incur substantial costs in defending itself in suits brought against it or in suits in which the Company may assert its patent rights against others. If the outcome of any such litigation is unfavorable to the Company, the Company's business and results of operations could be materially adversely affected. The Company relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. Pending litigation - The Company is a party in a lawsuit which arose out of the development of a resort and a portion of the adjoining residential properties owned and developed by the Company as well as patent infringement lawsuits (see Item 3). The Company is also, in the normal course of business, subject to a number of lawsuits and claims, both actual and potential in nature. If the outcome of any such litigation is unfavorable to the Company, the Company's business and operations could be materially adversely affected. (d) Financial Information About Foreign and Domestic Operations and Export Sales Financial information concerning foreign and domestic operations and export sales is set forth in Note 14 ("Segment Information") to the Consolidated Financial Statements on pages 35-36. 6 Item 2. Properties The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm Manufacturing Segment - Syosset, New York (1) N/A 319,000 Syosset, New York (3) 2002 14,000 Syosset, New York (1) 1999 6,000 Syosset, New York (1) 2000 33,000 Torrance, California (1) 2001 12,000 Miami, Florida (2) 2002 16,000 El Paso, Texas (2) 2005 19,000 El Paso, Texas (2) 2002 97,000 Louisville, Kentucky (3) 2002 7,000 Jeffersontown, Kentucky (2) 2003 10,000 Raleigh, North Carolina (1) 1999 8,000 Northford, Connecticut (1) N/A 252,000 Lisle, Illinois (3) 2002 5,000 St. Charles, Illinois (1) 2003 158,000 St. Charles, Illinois (1) 2004 100,000 West Chicago, Illinois (1) 2003 21,000 West Chicago, Illinois (3) 2002 5,000 Norcross, Georgia (3) 2001 6,000 Waltham, Massachusetts (1) 2002 50,000 Baulkham Hills, Australia (1) 2001 50,000 Melbourne, Australia (2) 2002 6,000 Sydney, Australia (2) 2001 30,000 Alleur, Belgium (2) 2000 6,000 Toronto, Canada (2) 2001 15,000 Concord, Ontario, Canada (2) 2000 11,000 Lichfield Staffs, England (4) 2009 20,000 Burgess Hill, England (4) N/A 60,000 Tyne & Wear, England (1) 1999 12,000 Chesire, UK (1) 2013 33,000 East Kilbride, Scotland (1) N/A 15,000 Hilden, Germany (2) 2000 8,000 Xi'an, China (1) N/A 20,000 Tsuen Wan, NT, Hong Kong (2) 2001 8,000 Milan, Italy (1) N/A 14,000 Trieste, Italy (1) N/A 103,000 Arezzo, Italy (1) 2001 5,000 Juarez, Mexico (4) 2008 71,000 Juarez, Mexico (4) 2004 83,000 Juarez, Mexico (4) 2007 148,000 Madrid, Spain (2) 2000 11,000 Madrid, Spain (2) 2004 5,000 Barcelona, Spain (2) 2005 6,000 7 Principal Lease Approximate Location Use Expiration Square Feet Alarm Distribution Segment - Syosset, New York (1) N/A 35,000 Beuerwijk, The Netherlands (2) 2003 12,000 Milan, Italy (2) 2001 10,000 Distribution Centers - Superhub Locations: Atlanta, Georgia (2) 2007 116,000 Reno, Nevada (2) 2008 140,000 Louisville, Kentucky (2) 2007 190,000 Pine Brook, New Jersey (2) 2008 121,000 Hub Locations: Boston, Massachusetts (2) 1999 30,000 Milford, Connecticut (2) 2008 18,000 Los Angeles, California (2) 1999 30,000 Chicago, Illinois (2) 2005 40,000 Clearwater, Florida (2) 2004 50,000 Memphis, Tennessee (2) 2006 15,000 Richmond, Virginia (2) 2004 14,000 Phoenix, Arizona (2) 2004 15,000 Dallas, Texas (2) 2008 76,000 Denver, Colorado (2) 1999 25,000 Detroit, Michigan (2) 2000 15,000 New Orleans, Louisiana (2) 2007 10,000 Seattle, Washington (2) 2006 25,000 Toronto, Canada (2) 2007 26,000 Montreal, Canada (2) 2000 11,000 San Leandro, California (2) 2000 34,000 General Corporate - Chicago, Illinois (3) 2001 12,000 Other properties in the Alarm Distribution segment include 93 full-line convenience centers, in addition to those hub locations listed above, which function as retail-like sales distribution outlets to serve the North American market. These 93 centers are under leases expiring through 2008 and range in size from 1,200 to 18,000 square feet. The Company believes the above facilities are adequate for its present needs. (1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing N/A Not applicable - facilities are owned by the Company 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 developed by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860) alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the grounds that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998 the trial court entered an order limiting the scope of a retrial in light of the appellate court's ruling. At an October 27, 1998 pretrial conference, the parties agreed to a mediation hearing. If the hearing is unsuccessful in settling the matter, retrial is expected to begin in 1999. Until October 14, 1989, Saddlebrook disputed responsibility for ultimate liability and costs (including costs of corrective action). On that date, the Company and Saddlebrook entered into an agreement with regard to such matters. The agreement, as amended and restated on July 16, 1993, provides for the Company and Saddlebrook to split equally the costs of the defense of the litigation and the costs of certain related litigation and proceedings, the costs of the ultimate judgment, if any, and the costs of any mandated remedial work. On August 16, 1995, Interactive Technologies, Inc. ("ITI" - plaintiff) commenced a lawsuit in U.S. District Court against the Company alleging patent infringement. The plaintiff claimed the Company infringed on their patent by making, using and selling certain security system products in the United States, and that the infringement was willful. Plaintiff initially sought unspecified damages, and an injunction. The Company denied infringement, maintaining the plaintiff's patent was invalid, as well as unenforceable because the plaintiff committed inequitable conduct before the Patent Office when applying for the patent. During discovery, the plaintiff informed the Company it was seeking damages measured by its lost profits or not less than a reasonable royalty on sales of the Company. 9 Fact discovery in the action closed on January 17, 1997. The Court conducted a Markman hearing in October 1997 to construe the patent claims asserted by plaintiff and issued its Order interpreting the claims on October 24, 1997. The Company moved for summary judgment of non- infringement. On December 2, 1997 the Court issued its Order granting partial summary judgment that the Company's products did not literally infringe the patent claims, and denying summary judgment of no infringement. Jury trial started on January 7, 1998. During the trial, the plaintiff indicated it was seeking lost profits and royalty damages of up to $66.8 million. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. On March 9, 1998 the jury handed down a verdict against the Company awarding damages of $36.0 million. The jury found that the Company did not willfully infringe. The Court entered judgment on the jury's verdict on April 9, 1998. Consequently, the Company recorded a provision of $43.0 million in the first quarter of 1998, which considers the judgment and interest. The Company filed post-trial motions on April 20, 1998 for judgment as a matter of law in favor of the Company which were denied. The Company has appealed the verdict. Appeal briefs have been filed and oral arguments on the appeal were heard on March 4, 1999. A verdict is expected sometime in the third or fourth quarter of 1999. In August 1998, ITI filed a second lawsuit against the Company which alleges that certain of the Company's products not specified in the prior litigation infringe on the same patent. This action has been stayed pending the outcome of the appeal of the jury award. The Company in the normal course of business is subject to a number of claims and lawsuits, both actual and potential in nature. The ultimate outcome of the ITI matter under appeal is uncertain but will result in significant damages should the Company lose the appeal. While management believes that the ultimate outcome of the other aforementioned lawsuits and resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. Item 4. Submission of Matters to a Vote of Security Holders None. 10 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The Company's Common stock (ticker symbol PRY) and Class A stock (ticker symbol PRYA) are traded on the New York Stock Exchange. As of December 31, 1998, stockholders of record totaled approximately 400 for Common and 750 for Class A. The spin-off of Penton was completed on August 7, 1998. The spin-off distribution consisted of one share of Penton common stock for each share of Pittway stock outstanding, without distinction between Pittway's Common and Class A shares. Immediately following the distribution, the price of Pittway's Common and Class A shares declined approximately 26% reflecting the initial market value of the new Penton common stock. The following table sets forth, on a quarterly basis, the high and low prices for the Common and Class A stock on the New York Stock Exchange, along with cash dividends declared, adjusted to reflect the two-for-one stock split paid in September 1998. Common Class A Dividends Declared High Low High Low Common Class A 1998 Quarter: First $36.50 $31.63 $36.81 $31.13 $.0333 $.0417 Second 42.50 34.81 39.59 35.38 .0333 .0417 Third 38.25 20.00(a) 37.50 17.91(a) .0217(b) .0300(b) Fourth 33.94(a) 19.88(a) 33.06(a) 20.00(a) .0217(b) .0300(b) 1997 Quarter: First $27.63 $24.94 $27.50 $24.25 $.0333 $.0417 Second 27.94 24.75 28.56 24.31 .0333 .0417 Third 32.25 25.13 32.50 25.00 .0333 .0417 Fourth 34.50 29.94 35.00 30.00 .0333 .0417 (a) Market prices after August 10 reflect the spin-off of Penton. (b) Penton's initial quarterly dividend was set at $.03 per share (equivalent to $.015 per Pittway share). The total quarterly dividends received initially by a Pittway Common or Class A stockholder who retained the Penton stock represent increases of approximately 10% and 8%, respectively, from Pittway's prior quarterly dividend. 11 Item 6. Selected Financial Data The following selected financial information has been derived from the Company's consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. Information shown is in thousands, except per share amounts. 1998 1997 1996 1995 1994 Continuing Operations - Net Sales $1,326,646 $1,143,772 $923,453 $754,406 $601,297 Operating Income 61,442(a) 82,501 63,705 47,303 38,920 Net Earnings 36,897(a)(b) 40,608(c) 61,692(d) 31,784 38,109(e) Per Share (Basic)(f) .87(a)(b) .97(c) 1.48(d) .76 .91(e) Per Share (Diluted)(f) .86(a)(b) .96(c) 1.46(d) .76 .91(e) Capital Expenditures 37,380 43,318 45,367 36,902 20,491 Depreciation and Amortization 35,694 28,141 22,288 15,226 14,504 Discontinued Operations - Net Earnings 5,031 14,906 11,350 8,588 6,727 Per Share (Basic)(f) .12 .35 .27 .21 .16 Per Share (Diluted)(f) .11 .35 .27 .20 .16 Net Income - 41,928(a)(b) 55,514(c) 73,042(d) 40,372 44,836(e) Per Share (Basic)(f) .99(a)(b) 1.32(c) 1.75(d) .97 1.07(e) Per Share (Diluted)(f) .97(a)(b) 1.31(c) 1.73(d) .96 1.07(e) Cash Dividends Declared - Per Common Share (f) .110 .133 .133 .133 .133 Per Class A Share (f) .143 .167 .167 .167 .167 At Year End - Assets of Continuing Operations 1,075,055 852,297 770,251 604,481 498,580 Investment in Discontinued Operations - 58,397 47,058 51,362 44,879 Total Assets 1,075,055 910,694 817,309 655,843 543,459 Long-Term Debt 104,609 95,215 87,714 85,710 4,783 Stockholders' Equity 495,164 487,134 446,872 363,026 328,130 Per Outstanding Share (f) 11.61 11.60 10.68 8.68 7.85 Market Price Per Share (f): Common 33.81 34.47 26.07 22.13 13.00 Class A 33.06 34.82 26.75 22.59 13.42
(a) Includes patent litigation provision of $43,000 or $26,875 after taxes ($.64 per share; $.62 diluted) (b) Includes the Company's equity in the after-tax gain on Cylink's disposal of its discontinued operations of $4,154, or $.10 per share (basic and diluted). (c) Includes the Company's equity in the after-tax gain on Cylink capital transactions of $3,997 and the after-tax expense for Cylink's write- off of "acquired in-process technology" of $11,839. These items decreased net income by $7,842, or $.19 per share (basic and diluted). (d) Includes the after-tax gain on the sale of investment in USSB and gain from Cylink stock offering of $8,149, or $.19 per share (basic and diluted) and $14,413, or $.34 per share (basic and diluted). (e) Includes net gain on sale of First Alert stock of $11,776, or $.28 per share (basic and diluted). (f) Per share data reflect the 2-for-1 stock split declared in September 1998 and the 3-for-2 stock split declared in January 1996. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto. RESULTS OF CONTINUING OPERATIONS Sales increased in 1998 to $1.33 billion, by 16% over 1997 sales which were 24% higher than 1996. Domestic sales grew 15% in 1998 and 25% in 1997 while international sales increased 21% in 1998 and 17% in 1997. International business represents 17% of total consolidated sales in 1998 and 16 % in 1997. Most of the foreign sales growth in 1998 and 1997 is derived from expansion of European operations. Gross profit increased 15% in 1998 and 25% in 1997 principally due to the expanded sales levels. Excluding the $43 million provision for patent litigation recorded in 1998, selling, general and administrative expenses increased 11% in 1998 and 24% in 1997 principally as a result of increased costs associated with the higher sales volume. Alarm Manufacturing sales increased 11% in 1998 and 30% in 1997. Virtually every business unit recorded increased sales in both 1998 and 1997. The volume at all of the manufacturing units benefited in 1998 and 1997 from the continued acceptance of numerous new product offerings and from expanded worldwide distribution capabilities. The 1998 acquisitions, which accounted for less than 2% of segment sales for the year, were made primarily to expand the Company's overall product line in both domestic and international markets. The largest sales increase in 1998 occurred in domestic commercial fire alarm products due to new product development and increased market penetration. The largest sales increase in 1997 occurred in domestic burglar alarm products, aided by major new accounts. Operating income for the manufacturing segment increased 11% in 1998 and 34% in 1997 primarily because of the expanded sales volume. Research and development expense increased 37% to $33.2 million in 1998 and increased 35% to $24.3 million in 1997 as the Company expended record amounts on research and new product development. Alarm Distribution sales accounted for 62% of consolidated sales in 1998 (60% in 1997) and increased 19% in 1998 and 24% in 1997. The increased volume was due primarily to significant growth in national account business of the Alarm Manufacturing segment. Sales volume also expanded due to expansion of its outlet network, both internally and from acquisitions. The largest 1998 acquisition, a west coast distributor, contributed less than 3% of segment sales. Operating income for the distribution segment increased 15% in both 1998 and 1997. The percentage increase in operating income was lower than the percentage increase in sales in both years due to higher sales to the lower margin national accounts and due to overall pricing pressure stemming from ongoing consolidation in the alarm installation market. Operating income was also reduced in 1997 by increased distribution costs as a result of a strike at a major U.S.-based package carrier and the reengineering of the domestic distribution hub system. Depreciation and amortization expense increased both in 1998 and 1997, principally as a result of capital additions associated with the expansion of the Alarm Manufacturing segment. 13 Other income (expense) in 1998, 1997 and 1996 was significantly impacted by the change in the Company's equity investment in Cylink. The 1998 change in Cylink equity includes a $5.4 million pretax charge from Cylink's continuing operations and a $6.6 million pretax gain from the divestiture of its wireless division. The 1997 change in Cylink equity includes a $1.8 million pretax credit from operations and two special items recorded in connection with an acquisition made by Cylink: a $6.4 million pretax gain as a result of the stock issued in the acquisition and an $18.9 million pretax expense for the Company's equity in Cylink's write-off of "acquired in-process technology." The 1996 change in Cylink equity includes a $23.3 million pretax gain resulting from Cylink's initial public offering. Other income (expense) in 1996 included a pretax gain of $13.2 million on the sale of 622,500 shares of USSB stock in connection with its initial public offering. Excluding Cylink, other income (expense) was more favorable in 1998 due to increased cash distributions from real estate ventures and a gain on the sale of an investment partially offset by increased interest expense on higher borrowing levels. Excluding Cylink and the 1996 USSB gain, other income (expense) was less favorable in 1997 principally due to increased interest expense from higher borrowing levels and increased foreign currency transaction losses from the strong U.S. dollar and UK pound against other key international currencies. Effective tax rates were 34.9% in 1998, 35.8% in 1997, and 36.0% in 1996. An analysis of the Company's effective tax rate appears in Note 7 to the Consolidated Financial Statements. DISCONTINUED OPERATIONS Sales and earnings from the publishing business decreased in 1998 due to the spin-off of Penton Media, Inc. in August 1998. Earnings also declined in 1998 due to period costs related to trade shows held subsequent to the spin-off, higher interest and amortization expenses related to 1997 acquisitions and costs related to the spin-off. Sales increased 9% in 1997 compared with 1996 and operating income increased 35%. These favorable results were achieved through a combination of increased magazine advertising revenues, a newly acquired trade show held in the second quarter of 1997, and containment of operating costs. PRO FORMA INFORMATION Following are pro forma results from continuing operations excluding (a) the provision for patent litigation, (b) the Company's equity in Cylink's operations, (c) the 1996 gain on the sale of USSB stock and (d) related tax effects: 1998 1997 1996 Net sales $1,326,646 $1,143,772 $ 923,453 Operating income $ 104,442 $ 82,501 $ 63,705 Income before income taxes $ 98,484 $ 74,032 $ 59,711 Provision for income taxes 35,446 26,710 20,714 Net income $ 63,038 $ 47,322 $ 38,997 Net income per diluted share $ 1.46 $ 1.11 $ .92 14 FINANCIAL CONDITION The Company's financial condition remained strong through 1998. Net working capital at the end of 1998 was $271.5 million compared to $269.3 million at the end of 1997. Management anticipates that operations, borrowings and marketable securities will continue to be the primary source of funds needed to meet ongoing programs for capital expenditures, to finance acquisitions and investments and to pay dividends. In 1998, the $100.6 million generated from net income from continuing operations excluding depreciation, amortization, the provision for patent litigation, the change in equity of Cylink and other non-cash items was partially used to fund the $28.2 million net increase in inventories, receivables and other working capital items. The $72.4 million net cash generated from operating activities, together with short-term borrowings of $57.4 million, net proceeds from the increase in long term debt of $11.1 million, $6.7 million received on the exercise of stock options and $4.7 million from discontinued operations were used to finance nine acquisitions completed in the period totaling $85.7 million (in addition to $4.1 million of Pittway Class A stock and $11.0 of debt assumed), $37.4 million of capital expenditures, a $16.2 million increase in notes receivable, $16.5 million of net purchases of marketable securities, $3.3 million of additions to investments and $6.3 million of dividends. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest up to $45.9 million in certain affordable housing ventures through 2005. The Company has real estate investments in various limited partnerships with interests in commercial rental properties carried at a zero basis which are being offered for sale. Cash distributions received from these ventures are recorded as other income. The Company has approximately $3.3 million accrued at December 31, 1998 to cover the deferred income tax liability that would be due if all the properties were sold. In December 1998 Hughes Electronics Corporation ("Hughes") and USSB announced that they had reached agreement whereby Hughes would acquire USSB for approximately $1.3 billion with a minimum and maximum price per share of $10.50 and $18.00. In early 1999 the Company sold one million of its 3.8 million shares of USSB, generating approximately $11.1 million in cash after taxes. The Company will sell its remaining shares if the acquisition is completed and expects to realize a minimum of $22.6 million in cash after-taxes on the transaction. In the event the Company loses its appeal of the unfavorable verdict in the ITI litigation (see Note 11 to the financial statements), an after- tax payment of $26.9 million would be required. INFLATION The impact of inflation on the Company's results of operations has not been significant in recent years. YEAR 2000 ISSUE All work necessary to upgrade the Company's systems for Year 2000 (Y2K) compliance is expected to be completed in a timely fashion and should not involve a significant amount of the Company's resources. The Company's Y2K project is proceeding on schedule. Although the Company expects its critical systems to be compliant, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible loss of technical resources to perform the work, failure to identify all susceptible systems, noncompliance by third parties whose systems and operations impact the Company, and other similar uncertainties. Due to the general uncertainty inherent in the Y2K problem, resulting in part from the uncertainty of Y2K readiness of customers, third-party suppliers and other vendors, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. 15 Item 7a. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in interest rates and foreign exchange rates. However, the Company does not utilize hedging arrangements in the ordinary course of business to manage its risks because exposure to fluctuations in interest and foreign exchange rates is immaterial to the Company's consolidated financial statements. The Company does not use derivatives or other financial instruments for trading purposes and is not a party to any leveraged derivatives. A comparison of the carrying values and estimated fair values of the Company's consolidated financial instruments is set forth in Note 13 ("Fair Value of Financial Instruments") to the Consolidated Financial Statements on pages 34-35. **** This annual report, other than historical financial information, contains forward-looking statements that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of this annual report on Form 10-K. These include risks and uncertainties relating to pending litigation, government regulation, competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. 16 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page Financial Statements: Consolidated Balance Sheet at December 31, 1998 and 1997 19-20 For each of the three years ended December 31, 1998 - Consolidated Statement of Income 18 Consolidated Statement of Cash Flows 21 Consolidated Statement of Stockholders' Equity 22 Summary of Accounting Policies and Notes to Consolidated Financial Statements 23-37 Report of Independent Accountants 38 Report of Management 38 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 41 All other schedules have been omitted because the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. Summarized financial information for the limited real estate partnerships and other ventures is omitted because, when considered in the aggregate, they do not constitute a significant subsidiary. 17 PITTWAY CORPORATION Consolidated Statement of Income For the Years Ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share) 1998 1997 1996 Continuing Operations - Net Sales $1,326,646 $1,143,772 $ 923,453 Operating Expenses: Cost of sales 841,501 723,547 587,323 Selling, general and administrative 345,009 309,583 250,137 Patent litigation provision (Note 11) 43,000 Depreciation and amortization 35,694 28,141 22,288 1,265,204 1,061,271 859,748 Operating Income 61,442 82,501 63,705 Other Income (Expense Gain on sale of investment 13,162 Change in equity of affiliate (Note 5) 1,175 (10,742) 23,494 Income from marketable securities and other interest 3,674 3,156 3,138 Interest expense (13,153) (10,852) (8,590) Income from investments 6,302 833 1,551 Miscellaneous, net (2,781) (1,606) (93) (4,783) (19,211) 32,662 Income Before Income Taxes 56,659 63,290 96,367 Income Taxes (Note 7): Current 36,123 28,430 27,529 Deferred (16,361) (5,748) 7,146 19,762 22,682 34,675 Income From Continuing Operations 36,897 40,608 61,692 Discontinued Operations - Earnings from discontinued operations, net of income taxes of $4,018, $10,632 and $7,763 5,648 14,906 11,350 Provision for divestiture expenses, net of income tax benefit of $383 (617) Income From Discontinued Operations 5,031 14,906 11,350 Net Income $ 41,928 $ 55,514 $ 73,042 Per Share of Common and Class A Stock (Note 12): Basic: Income from continuing operations $ .87 $ .97 $ 1.48 Income from discontinued operations .12 .35 .27 Net income $ .99 $ 1.32 $ 1.75 Diluted: Income from continuing operations $ .86 $ .96 $ 1.46 Income from discontinued operations .11 .35 .27 Net income $ .97 $ 1.31 $ 1.73 Average Shares Outstanding (000's) (Note 12) 42,350 41,958 41,842 Average Shares and Dilutive Equivalents Outstanding (000's) (Note 12) 43,240 42,502 42,278
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. 18 PITTWAY CORPORATION Consolidated Balance Sheet December 31, 1998 and 1997 (Dollars in thousands, except per share) 1998 1997 ASSETS Current Assets: Cash and equivalents $ 16,998 $ 29,257 Marketable securities 44,200 27,583 Accounts and notes receivable, less allowance for doubtful accounts of $12,173 in 1998 and $9,691 in 1997 263,127 199,222 Inventories (Note 3) 252,947 240,228 Future income tax benefits (Note 7) 32,870 16,246 Prepayments, deposits and other 10,666 8,823 620,808 521,359 Property, Plant and Equipment: Buildings 39,645 38,250 Machinery and equipment 225,835 194,479 265,480 232,729 Less: Accumulated depreciation 132,679 109,118 132,801 123,611 Land 2,481 2,307 135,282 125,918 Investments: Marketable securities 51,994 30,015 Investment in affiliate (Note 5) 21,616 20,441 Real estate and other ventures 49,131 43,388 Leveraged leases (Note 6) 16,821 18,559 139,562 112,403 Other Assets: Goodwill, less accumulated amortization of $9,642 in 1998 and $7,293 in 1997 134,686 54,964 Other intangibles, less accumulated amortization of $6,266 in 1998 and $5,489 in 1997 2,906 3,207 Notes receivable 15,862 7,534 Investment in discontinued operations 58,397 Miscellaneous 25,949 26,912 179,403 151,014 $1,075,055 $ 910,694 See Summary of Accounting Policies and Notes to Consolidated Financial Statements. 19 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable (Note 4) $ 92,395 $ 32,336 Long-term debt due within one year (Note 4) 16,719 5,730 Dividends payable 1,240 1,719 Accounts payable 167,773 151,410 Accrued expenses 59,484 43,166 Income taxes payable 6,136 7,175 Retirement and deferred compensation plans 5,580 10,562 349,327 252,098 Long-Term Debt (Note 4): Notes payable, 6.70% and 6.81%, due in annual installments of $5 million beginning 1999 with the balance due 2005 70,000 75,000 Capitalized leases, principally at 5.0% - 7.6%, due in monthly installments through 2005 10,176 9,049 Other 24,433 11,166 104,609 95,215 Deferred Liabilities: Income taxes (Note 7) 71,114 62,611 Litigation (Note 11) 43,000 Other 11,841 13,636 125,955 76,247 Stockholders' Equity: Preferred stock, authorized 2,000,000 shares; none issued Common capital stock, $1 par value (Note 12) - Common stock, authorized 120,000,000 shares; 7,877,664 and 3,938,832 shares issued and outstanding in 1998 and 1997, respectively 7,878 3,939 Class A stock, authorized 100,000,000 shares; 34,763,291 and 17,052,543 shares issued and outstanding in 1998 and 1997, respectively 34,763 17,052 Capital in excess of par value 18,671 24,523 Retained earnings 417,363 440,536 Accumulated other comprehensive income (loss) - Marketable securities valuation adjustment 22,416 8,823 Foreign currency translation adjustment (5,927) (7,739) 495,164 487,134 $1,075,055 $ 910,694 20 PITTWAY CORPORATION Consolidated Statement of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share) 1998 1997 1996 Cash Flows From Continuing Operating Activities: Income from continuing operations $ 36,897 $ 40,608 $ 61,692 Adjustments to reconcile income from continuing operations to cash provided by continuing operating activities: Depreciation and amortization 35,694 28,141 22,288 Gain on sale of investment, net of taxes (8,149) Equity in affiliate, net of taxes (734) 6,714 (14,547) Deferred income taxes (677) (1,741) (1,750) Retirement and deferred compensation plans (5,110) 7,060 6,947 Income/loss from investments adjusted for cash distributions received 1,853 292 619 Provision for losses on accounts receivable 5,462 4,298 4,222 Provision for patent litigation, net of taxes 26,875 Loss (gain) on sale of assets 304 453 (112) Change in current assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts receivable (38,479) (27,578) (36,399) Decrease (increase) in inventories 1,883 (39,913) (48,387) (Increase) decrease in prepayments and deposits (363) (1,454) 1,388 Increase in accounts payable and accrued expenses 7,213 17,090 49,846 Increase in income taxes payable 1,034 1,936 114 Other changes, net 546 (433) (822) Net cash provided by operating activities 72,398 35,473 36,950 Cash Flows From Investing Activities: Capital expenditures (37,380) (43,318) (45,367) Proceeds from the sale of investment, net of taxes 10,748 Net (increase) decrease in marketable securities (16,489) 591 502 Dispositions of property and equipment 392 259 736 Additions to investments (3,339) (3,592) (4,566) Net (increase) decrease in notes receivable (16,179) 2,922 (4,434) Net assets of businesses acquired, net of cash received (85,748) (23,815) (3,263) Net cash used by investing activities (158,743) (66,953) (45,644) Cash Flows From Financing Activities: Net increase in notes payable 57,387 26,778 1,730 Proceeds of long-term debt 20,227 12,314 5,284 Repayments of long-term debt (9,079) (8,377) (5,284) Stock options exercised 6,736 1,060 133 Dividends paid (6,286) (6,736) (6,752) Net cash provided (used) by financing activities 68,985 25,039 (4,889) Effect of Exchange Rate Changes on Cash 352 (269) 210 Net Cash Provided by Discontinued Operations 4,749 3,489 15,653 Net (Decrease) Increase in Cash and Equivalents (12,259) (3,221) 2,280 Cash and Equivalents at Beginning of Year 29,257 32,478 30,198 Cash and Equivalents at End of Year $ 16,998 $ 29,257 $ 32,478 Supplemental Cash Flow Disclosure: Interest paid $ 12,868 $ 10,950 $ 8,517 Income taxes paid $ 30,365 $ 25,490 $ 26,343
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. 21 PITTWAY CORPORATION Consolidated Statement of Stockholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share) Accumulated Common Stock Class A Stock Capital In Other Total Total Par Par Excess of Retained Comprehensive Stockholders' Comprehensive Shares Value Shares Value Par Value Earnings Income (Loss) Equity Income (Loss) Balance - December 31, 1995 3,938,832 $3,939 16,973,313 $16,973 $ 21,423 $325,420 $ (4,729) $ 363,026 Net income 73,042 73,042 $ 73,042 Cash dividends declared: Common stock (1,051) (1,051) Class A stock (5,658) (5,658) Shares issued pursuant to stock options 14,309 14 291 305 Net unrealized gains on marketable securities 14,472 14,472 14,472 Foreign currency translation adjustments 2,736 2,736 2,736 Balance - December 31, 1996 3,938,832 3,939 16,987,622 16,987 21,714 391,753 12,479 446,872 $ 90,250 Net income 55,514 55,514 $ 55,514 Cash dividends declared: Common stock (1,051) (1,051) Class A stock (5,680) (5,680) Shares issued pursuant to stock options and awards 64,921 65 2,809 2,874 Net unrealized losses on marketable securities (3,630) (3,630) (3,630) Foreign currency translation adjustments (7,765) (7,765) (7,765) Balance - December 31, 1997 3,938,832 3,939 17,052,543 17,052 24,523 440,536 1,084 487,134 $ 44,119 Net income 41,928 41,928 $ 41,928 Shares issued pursuant to stock options and awards 345,876 346 11,352 11,698 Shares issued for acquisition 58,163 58 4,042 4,100 Cash dividends declared: Common stock (868) (868) Class A stock (4,938) (4,938) Distribution of Penton Media, Inc. Common stock to stockholders (59,295) (19) (59,314) (19) Two-for-one stock split 3,938,832 3,939 17,306,709 17,307 (21,246) Net unrealized gains on marketable securities 13,593 13,593 13,593 Foreign currency translation adjustments 1,831 1,831 1,831 Balance - December 31, 1998 7,877,664 $7,878 34,763,291 $34,763 $ 18,671 $417,363 $ 16,489 $ 495,164 $ 57,333
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. 22 SUMMARY OF ACCOUNTING POLICIES (Dollars in thousands) Basis of Presentation The consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company"). Periods prior to 1998 have been restated to reflect the discontinuation of the publishing business which was spun off in 1998 (Note 1). Except where otherwise indicated, the following notes relate to continuing operations. The Company follows the equity method of accounting for its investments in greater than 20%-owned but less than majority-owned affiliates. All share and per share data, as appropriate, reflect a 2-for-1 stock split paid September 11, 1998 (Note 12). All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are generally comprised of highly liquid instruments with original maturities of three months or less, such as treasury bills, certificates of deposit, commercial paper and time deposits. Marketable Securities Current marketable securities consist principally of auction rate preferred stocks. Non-current marketable securities consist of stock in United States Satellite Broadcasting Company, Inc. ("USSB"), a satellite broadcast company. The Company records its investments in marketable securities at market value. Changes in market value for these securities are reported, net of tax, in a separate component of stockholders' equity until realized. Inventories Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead. Cost of substantially all domestic inventories is determined by using the last-in, first-out (LIFO) method, while the remaining inventories are valued primarily using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. Depreciation expense amounted to $32,559, $25,880 and $20,638 in 1998, 1997 and 1996, respectively. 23 Investments Investment in affiliate consists of an equity interest in Cylink Corporation ("Cylink"), a manufacturer of commercial data encryption devices and software. The Company accounts for its investment in Cylink under the equity method. Real estate and other ventures consist principally of equity interests in limited real estate partnerships and land held for development. The Company's adjusted basis in certain of the limited real estate partnerships is carried at zero, and investments in other partnerships and ventures are carried on a cost basis. Cash distributions accruing from these partnerships and ventures are recorded as income from investments. Leveraged leases consist of the rentals receivable net of the principal and interest on the related nonrecourse debt, estimated residual value of the leased property and unearned income. The unearned income is recognized as income from investments over the lease term. Intangible Assets Management believes that goodwill, trademarks and tradenames acquired in purchase transactions have continuing value. It is the Company's policy to amortize such costs over periods of up to 40 years except for the costs of such assets acquired prior to 1970. Intangible assets of approximately $2,052 related to pre-1970 acquisitions are not being amortized because the Company believes there has been no diminution of value. Other intangibles acquired in purchase transactions or developed, consisting of non-compete agreements, patents and software development costs, are capitalized and amortized over their estimated useful lives. The carrying value of intangible assets is periodically reviewed by the Company and impairment is recognized when the projected, undiscounted net pretax cashflows derived from such intangible assets are less than their carrying value. Comprehensive Income Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income." The Statement requires the addition of comprehensive income and its components in financial statement format. Other comprehensive income (loss) includes cumulative foreign currency translation adjustments and unrealized investment gains and losses, which are not included in income under current accounting principles. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The unrealized gains/losses on marketable securities are net of income tax (benefit) of $8,411, $(2,137), and $8,812 in 1998, 1997 and 1996, respectively. Net unrealized gains/losses on marketable securities includes reclassification adjustments for gains (losses) realized in income from the sale of securities of $80, $156 and $(318) in 1998, 1997 and 1996, respectively. Research and Development Expenses Research and development costs are expensed as incurred. These costs amounted to $33,243, $24,316, and $18,077 in 1998, 1997 and 1996, respectively. 24 Advertising and Promotion Expenses Advertising and promotion costs are expensed as incurred. These costs amounted to $12,298, $11,627 and $10,355 in 1998, 1997 and 1996, respectively. Income Taxes Provisions for income taxes recognize the tax effects of all transactions entering into the determination of net income for financial statement purposes, irrespective of when such transactions are reported for income tax purposes. Deferred income taxes and future income tax benefits have been recognized for all temporary differences. Translation of Foreign Currencies The functional currency of the Company's foreign operations is the local currency. Accordingly, assets and liabilities of foreign operations are translated to U.S. dollars at the rates of exchange on the balance sheet date; income and expense are translated at the average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate section of stockholders' equity. Transaction gains and losses are reflected in miscellaneous income and amounted to net expenses of $1,087, $1,041 and $102 in 1998, 1997 and 1996, respectively. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue accounting for stock-based compensation using the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's Class A stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for other stock-based awards is based on the quoted market price of the Company's Class A stock at the date of grant for performance and bonus share awards and, for stock appreciation rights, the changes in such stock price during each subsequent reporting period. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share) Note 1 - Discontinued Operations In December 1997 the Company announced its intention to distribute its investment in Penton Media, Inc. ("Penton"), a wholly-owned subsidiary of the Company, to stockholders in a tax-free spin-off. The distribution was completed on August 7, 1998. A provision was recorded in the second quarter for divestiture expenses totaling $617 net of taxes ($.02 per diluted share). At December 31, 1997 the investment in the net assets of the discontinued operations consisted of: Current assets $ 39,126 Current liabilities (64,346) Net current liabilities (25,220) Net property, plant and equipment 27,242 Other non-current assets 76,923 Non-current liabilities (20,548) $ 58,397 Net sales of the discontinued operations prior to their disposition were $126,137, $204,931 and $188,122 for 1998, 1997 and 1996, respectively. Note 2 - Acquisitions During 1998, the Company acquired the assets and businesses of a domestic manufacturer of access control systems, a domestic distributor of alarm and other security products, a Canadian manufacturer of video transmission equipment and six overseas alarm businesses for stock and cash totaling $89,848 plus debt assumed of $10,979. On a date no later than 2003, the Company has agreed to purchase the remaining minority interest in one of the foreign businesses at a formula price tied to future earnings but not to exceed $14,400. The six overseas operations consist of two manufacturers of fire alarm controls, one manufacturer of CCTV surveillance domes, one distributor of fire alarm systems and two distributors of security and fire alarm products. During 1997, the Company acquired the assets and businesses of a foreign distributor of alarm and other security products and one domestic and one foreign manufacturer and distributor of fire control products. The total purchase price for these businesses was $23,815 cash paid and $6,359 of debt assumed. During 1996, the Company acquired the assets and businesses of two foreign distributors of alarm systems and a domestic manufacturer of glass break sensors. The total purchase price for these businesses was $3,263 cash and $3,516 of debt assumed. All the aforementioned acquisitions were accounted for as purchase transactions. The impact of these acquisitions on consolidated results of operations was not significant. These companies have been included in the consolidated financial statements from their respective dates of acquisition. The excess of the aggregate purchase price over the fair market value of net assets acquired of $80,997, $24,966 and $5,262 in 1998, 1997 and 1996, respectively, are being amortized over periods up to 40 years. 26 Note 3 - Inventories At December 31, 1998 and 1997 approximately 86% and 88%, respectively, of the total inventories are accounted for by the LIFO method. The recorded value of inventory approximates current cost. At year end, inventories consist of: 1998 1997 Raw materials $ 57,763 $ 58,322 Work-in-process 22,089 16,501 Finished goods - Manufactured by the Company 98,199 89,777 Manufactured by others 74,896 75,628 $252,947 $240,228 Note 4 - Debt The average annual interest rate on short-term notes payable was approximately 5.8% (5.6% domestic and 7.1% foreign) and 6.5% (6.2% domestic and 8.1% foreign) at December 31, 1998 and 1997, respectively. There are no compensating balance or commitment fee requirements associated with these short-term borrowings. The Company has guaranteed indebtedness of $1,250 relating to real estate ventures in which it participates. The Company's capitalized lease obligations are collateralized by certain equipment. Other long-term debt bears interest principally at 4% to 9%, with maturities through 2009. Aggregate long-term maturities due annually for the five years beginning in 1999 are $16,719, $25,055, $8,521, $8,725, $7,648 and an aggregate of $54,660 thereafter. Note 5 - Investment in Affiliate The Company's investment in Cylink consists of 8,606,085 shares of common stock. See Note 13 regarding the fair value of the investment. In March 1998 Cylink sold its wireless division for $60.5 million. The Company increased the carrying value of its investment in Cylink by $6,646 and recorded an after-tax gain of $4,154, or $.10 per diluted share, to reflect its equity in the gain on this divestiture. An after- tax charge of $541, or $.01 per diluted share, resulting from the restatement by Cylink of its 1997 earnings is included in the Company's 1998 fourth quarter results of operations. In September 1997, Cylink acquired Algorithmic Research, an information security company, for cash and Cylink stock totaling $76,263. The Company increased the carrying value of its investment in Cylink by $6,396 and recorded a $3,997 after-tax gain, or $.09 per diluted share, as a result of the stock issued in the acquisition and reduced the carrying value of its investment in Cylink by $18,943 and recorded an $11,839 after-tax expense, or $.28 per diluted share, for its equity in Cylink's write-off of "in-process technology" acquired in the transaction. In February 1996, the carrying value of the investment in Cylink was increased by $23,279 to reflect the increase in the Company's equity in Cylink's net book value as a result of an initial public offering. The after-tax gain recorded on the increase in Cylink's equity was $14,413, or $.34 per diluted share. 27 Summarized results of operations of Cylink for the years ended December 31, 1998 and 1997 (as restated) are as follows: 1998 1997 Sales $ 42,760 $ 47,690 Gross profit 25,862 33,704 Write-off of "in-process technology" (63,920) Loss from continuing operations $(17,356) $(64,955) (Loss) income from discontinued operations (259) 3,210 Gain on disposal of discontinued operations 22,776 Net income (loss) $ 5,161 $(61,745) Summarized financial position of Cylink at December 31, 1998 and 1997 (as restated) is as follows: 1998 1997 Current assets $ 79,537 $ 58,137 Non-current assets 14,781 18,418 Current liabilities (18,950) (10,152) Non-current liabilities (147) (269) Stockholders' equity $ 75,221 $ 66,134 Note 6 - Leveraged Leases The Company is an equity participant in leveraged leases of an aircraft and communication satellite transponders. As the Company has no general liability for the nonrecourse debt attributable to the acquisition of such assets, the debt has been offset against the related rentals receivable. The net investment in leveraged leases consists of: 1998 1997 Rentals receivable (net of principal and interest on nonrecourse debt) $ 9,831 $ 11,900 Estimated residual value 11,432 11,432 Unearned and deferred income (4,442) (4,773) Investment in leveraged leases 16,821 18,559 Deferred income taxes (16,180) (18,597) Net investment $ 641 $ (38) A summary of the components of income from leveraged leases follows: 1998 1997 1996 Income (loss) before income taxes $ 222 $ (81) $ 433 Income tax benefit (cost) - Current (2,495) (1,005) (911) Deferred 2,417 1,033 759 Income (loss) from leveraged leases $ 144 $ (53) $ 281 Minimum annual rentals receivable (net of principal and interest on nonrecourse debt) under leveraged leases for the next five years beginning with 1999 are $1,751, $3,487, $483, $98, $98 and an aggregate of $3,914 thereafter. 28 Note 7 - Income Taxes Income before income taxes consists of: 1998 1997 1996 Domestic income $48,407 $58,849 $90,658 Foreign income 8,252 4,441 5,709 $56,659 $63,290 $96,367 The provision for income taxes consists of: 1998 1997 1996 Current - Federal $ 26,415 $22,905 $22,116 State and local 4,406 2,764 2,951 Foreign 5,302 2,761 2,462 36,123 28,430 27,529 Deferred - Federal (12,980) (5,321) 6,132 State and local (1,972) (260) 836 Foreign (1,409) (167) 178 (16,361) (5,748) 7,146 $ 19,762 $22,682 $34,675 The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate of 35% to income before income taxes is as follows: 1998 1997 1996 Income tax at statutory rate $ 19,831 $22,152 $33,728 Tax effect of - State income taxes, net of Federal benefit 1,582 1,628 2,462 Foreign operations 1,004 1,040 642 Domestic tax credits (1,737) (1,306) (649) Other items, net (918) (832) (1,508) Actual income tax provision $ 19,762 $22,682 $34,675 Effective income tax rate 34.9% 35.8% 36.0% 29 The components of the deferred tax liabilities (assets) at December 31, 1998 and 1997 are comprised of the following: 1998 1997 Deferred tax liabilities - Leveraged leases $ 16,180 $ 18,597 Real estate ventures - Affordable housing 22,467 16,799 Other 3,287 4,308 Prepaid pension 9,695 9,253 Investment in affiliate 6,362 5,760 Investment in USSB 13,790 5,418 Purchased tax benefit leases 2,550 3,091 Depreciation 1,592 291 State income taxes, net of Federal benefit 685 4,497 Other 3,823 1,744 Total deferred tax liabilities 80,431 69,758 Deferred tax assets - Patent litigation (15,050) Inventory valuation (9,983) (9,153) Tax loss carryforwards (5,777) (4,967) Deferred compensation (4,501) (7,339) Bad debts (2,628) (2,231) Workers compensation (2,852) (1,428) Other (7,173) (3,242) Total deferred tax assets (47,964) (28,360) Valuation allowance 5,777 4,967 Net deferred tax liability $ 38,244 $ 46,365 The valuation allowance relates to tax loss carryforwards of which $892 as of December 31, 1998 will be credited to goodwill when and if utilized. The Company's federal income tax returns have been examined through 1995 without material adjustment of reported income. Note 8 - Stock Options and Awards The Company's 1990 stock awards plan (the "Plan"), as amended in 1998 and adjusted for the September 1998 2-for-1 stock split, provides for the issuance of up to 6,400,000 shares of Class A stock to employees pursuant to options, performance and bonus share awards, stock appreciation rights ("SARs") and other awards. Certain awards are payable in the form of Class A stock or cash. Performance share awards vest ratably over terms of five years or less. Options and SARs vest over a three year period and are exercisable up to ten years from date of grant. Shares are issued or cash is paid pursuant to performance and bonus share awards upon specified maturity dates. During 1998, the Compensation Committee accelerated the vesting of awards held by Penton employees prior to the Penton spin-off and amended all other outstanding options and awards to reflect the valuation of the spin-off resulting in an increase of 685,312 options and awards. Activity in options, performance and bonus share awards under the Plan, restated for the 2-for-1 stock split and the Penton spin-off, as provided by the Plan, follows: 30 1998 1997 1996 Outstanding at beginning of year 2,819,135 2,283,428 1,604,081 Granted 949,027 728,903 743,648 Exercised (671,583) (190,496) (61,600) Cancelled (41,669) (2,700) (2,700) Outstanding at end of year 3,054,910 2,819,135 2,283,428 Exercisable at end of year 990,623 927,577 531,311 Shares available for grant 2,405,407 688,397 1,399,391 Weighted average exercise price information follows: 1998 1997 1996 Outstanding at beginning of year $13.44 $10.99 $ 8.46 Granted 24.73 20.27 15.93 Exercised 12.91 10.36 4.59 Cancelled 19.03 16.02 16.02 Outstanding at end of year 16.99 13.44 10.99 Exercisable at end of year 8.59 7.46 6.14 The following non-qualified options outstanding at December 31, 1998 exclude 375,680 performance and bonus share awards, of which 96,813 are issuable in 1999: Range of Outstanding Exercisable Exercise Average Average Average Prices Shares Price Life (yrs) Shares Price $20-$27 1,283,742 $23.33 7.1 $11-$16 745,470 $13.75 6.7 340,605 $11.05 $ 3-$ 9 650,018 $ 7.30 4.7 650,018 $ 7.30 The Company's 1998 and 1996 stock option plans for non-employee directors ("Directors' Plans") provide for the issuance of up to a total of 195,000 shares of Class A stock which are awarded at the market value on the date of the award. Options for 7,830 and 62,400 shares were granted in 1998 and 1996 at an average exercise price per share of $26.22 and $18.27, respectively. Options for 59,830 and 57,200 shares were outstanding at December 31, 1998 and 1997 of which 42,308 and 31,200 shares, respectively, were exercisable. Options for 5,200 shares were exercised in 1998 and 5,200 shares were cancelled in 1997. Options expire at the earlier of maturity (up to ten years from the date of grant) or five years after the optionee ceases to be a member of the Board. The fair value of options at date of grant was $7.88 in 1998, $8.63 in 1997 and $6.99 in 1996 for the Plan and $9.39 and $7.95 in 1998 and 1996 for the Directors' Plans. These values were determined by the Black- Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively: interest rate of 5.5%, 5.6% and 6.4%; an expected life of 5 years, 8 years and 8 years; a volatility of 26%, 27% and 27%; and annual dividends of $.12 per share for all three years. Total expense under these plans was $1,870, $4,086 and $4,558 in 1998, 1997 and 1996, respectively. If the Company had adopted SFAS No. 123 with respect to options, net income would have been $38,583 or $.89 per diluted share in 1998, $53,112, or $1.25 per diluted share in 1997, and $71,685, or $1.70 per diluted share in 1996. The pro forma effect on net income in 1996 is not representative of the effect in future years because it does not take into consideration options granted prior to 1995. 31 Note 9 - Retirement Plans The Company has various noncontributory retirement plans covering substantially all current and certain former domestic employees. Retirement benefits for employees in foreign countries are generally provided by national statutory programs. Benefits for domestic employees are based on years of service and annual compensation as defined by each plan. The components of net pension expense for the domestic plans consist of: 1998 1997 1996 Service cost $ 4,059 $ 3,348 $ 2,890 Interest cost 2,689 2,358 2,092 Expected return on plan assets (5,406) (4,838) (4,394) Amortization of transition asset (624) (624) (624) Amortization of prior service cost 234 238 238 Recognized (gains) losses (126) 566 798 Net pension expense $ 826 $ 1,048 $ 1,000 The expected return on plan assets and recognition of gains and losses are based upon an allocation of deferred gains and losses and plan assets made between the Company and Penton Media, Inc. in connection with the spin-off. The assets and obligations of the domestic plans for continuing operations are summarized as follows: 1998 1997 Change in benefit obligation - Projected benefit obligation at beginning of year $38,561 $33,856 Service cost 4,059 3,348 Interest cost 2,689 2,358 Actuarial loss 842 689 Benefits paid (1,888) (1,690) Projected benefit obligation at end of year $44,263 $38,561 Change in plan assets - Fair value of plan assets at beginning of year $78,186 $68,313 Actual return on plan assets (6,177) 11,563 Benefits paid (1,888) (1,690) Fair value of plan assets at end of year $70,121 $78,186 Funded status of plans - Plan assets in excess of projected benefit obligation $25,858 $39,625 Unrecognized loss (gain) 368 (12,183) Unrecognized prior service cost 632 866 Unamortized transition net asset (1,248) (1,872) Prepaid pension cost $25,610 $26,436 Assumptions as of December 31 - Discount rate 7% 7% Expected return on plan assets 7% 7% Rate of compensation increase 5% 5% 32 Note 10 - Lease Commitments The Company leases certain manufacturing facilities, warehouses, office space and equipment under noncancelable operating leases expiring at various dates through the year 2013. Most of the leases contain renewal options and certain equipment leases include options to purchase during or at the end of the lease term. Minimum annual rental commitments under all noncancelable leases for the next five years beginning with 1999 are $22,506, $19,608, $16,048, $13,043, $10,233 and an aggregate of $28,075 thereafter. Rental commitments are stated net of minimum sublease rentals aggregating $3,352. Total rent expense (including taxes, insurance and maintenance when included in the rent) amounted to $21,066, $15,941 and $12,021 in 1998, 1997 and 1996, respectively. Note 11- Contingencies and Commitments In 1989 a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. In December 1994, Saddlebrook's motion for summary judgment based on collateral estoppel was granted on the ground that Plaintiffs' claims were fully retried and rejected in a related administrative proceeding. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998, the trial court entered an order limiting the scope of the retrial in light of the appellate court's ruling. At an October 27, 1998 pretrial conference, the parties agreed to a mediation hearing. If the hearing is unsuccessful in settling the matter, retrial is expected to begin in 1999. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. In 1995 a lawsuit was brought against the Company by Interactive Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of up to $66,800 on account of Company sales of products which the plaintiff alleged infringed on its patent. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. The Company moved for summary judgment of non-infringement and, in December 1997, the Court issued its order granting the Company partial summary judgment, stating its products did not literally infringe upon plaintiff's patent claims. In March 1998, the jury handed down a verdict against the Company awarding damages of $35,954. The jury found that the Company did not willfully infringe. The Company recorded a provision of $43,000 in the first quarter of 1998 which considers the judgment and interest. The Company has appealed the verdict. In August 1998, ITI filed a second lawsuit against the Company which alleges that certain of the Company's products not specified in the prior litigation infringe on the same patent. This action has been stayed pending the outcome of the appeal of the jury award. The Company believes that the ultimate outcome of this lawsuit will not have a material adverse effect on its financial statements. The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature. While management believes that resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. The Company has committed to invest up to a total of $45.9 million in certain affordable housing real estate ventures through 2005. 33 Note 12 - Capital Stock and Earnings Per Share At the May 1998 annual stockholders' meeting, stockholders approved an increase in the number of authorized shares to 100,000,000 for Class A stock and 120,000,000 for Common stock. In July 1998 the Board of Directors declared a 2-for-1 stock split in the form of a 100% stock dividend on the Company's Common and Class A stock, payable September 11, 1998 to stockholders of record September 1, 1998. In January 1996 the Board of Directors declared a 3-for-2 stock split in the form of a 50% stock dividend on the Company's Common and Class A stock, payable March 1, 1996 to stockholders of record February 14, 1996. The effect of this split is presented retroactively within stockholders' equity at December 31, 1995 by transferring the par value for the additional shares issued from the capital in excess of par value account to the common stock accounts. All historical share and per share data, as appropriate, reflect these stock splits. Except for voting and dividend rights, the two classes of common capital stock are identical. Class A stockholders are entitled to one-tenth vote per share and have the right to elect 25% of all directors, but not less than two. Common stockholders are entitled to one vote per share and have the right to elect the remaining number of directors. Upon a change of control of the Company (as defined in the Company's certificate of incorporation), the Class A stock will automatically be changed into Common stock. Cash dividends declared on Class A stock are required to be 0.83 cents per share more than dividends declared on Common stock (up to a maximum of 3.33 cents per share per year). In recognition of the spin-off of Penton Media, Inc. on August 7, 1998 and the 2-for-1 stock split, the Board of Directors reduced the dividend on Common stock to an annual rate of 8.68 cents per share and the dividend on Class A stock to an annual rate of 12 cents per share. Cash dividends declared, in 1998, 1997 and 1996, adjusted for the stock split, were 11, 13.3 and 13.3 cents per share, respectively, for Common stock and 14.3, 16.7 and 16.7 cents per share, respectively, for Class A stock. Basic net income per common share amounts were calculated by dividing earnings by the combined weighted average number of Class A and Common shares outstanding. Diluted net income per share amounts were based on the same reported earnings but assume the issuance of Class A stock upon exercise of outstanding stock options and distributable as performance and bonus share awards. Note 13 - Fair Value of Financial Instruments The carrying amount of cash and equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximates fair value because of the short maturity of these instruments. The following table presents the carrying amounts and estimated fair values of the Company's other financial instruments at year end: 1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets - Current marketable securities $ 44,200 $ 44,200 $ 27,583 $ 27,583 Investment in USSB 51,994 51,994 30,015 30,015 Investment in Cylink 21,616 31,197 20,441 83,909 Affordable housing investments 23,160 23,160 22,542 22,542 Notes receivable 19,276 19,251 8,092 8,074 Financial liabilities - Long-term debt (121,328) (122,707) (100,945) (99,434) 34 The estimated fair values of marketable securities, the investment in USSB and the investment in affiliate are based on quoted market prices. The estimated fair values of the Company's investments in affordable housing projects were based upon available financial and other information. The estimated fair values of the notes receivable and long- term debt were calculated based upon the present value of estimated cash flows using appropriate discount rates. At December 31, 1998 and 1997, current marketable securities consisted of auction rate preferred stocks, which had gross unrealized holding gains of $2 and $25, respectively. Realized gains and losses on sales of marketable securities are based upon the specific identification method and were not significant in 1998, 1997 or 1996. In December 1998, Hughes Electronics Corporation ("Hughes") and USSB announced that they had reached agreement whereby Hughes would acquire USSB for approximately $1.3 billion with a minimum and maximum price per share of $10.50 to $18.00 based on the market value of Hughes stock during a specified period of time. In early 1999 Pittway sold one million of its 3.8 million shares of USSB at an average selling price of $15.18 per share and will sell its remaining shares if the acquisition is completed. In 1996 the Company sold 13% of its investment in USSB as part of an initial public offering of USSB common stock. The sale resulted in an after-tax gain of $8,149, or $.19 per diluted share. The Company recorded a charitable donation of appreciated shares of USSB stock in 1996 resulting in a tax benefit of $849, or $.02 per diluted share. Unrealized holding gains in this investment were $36,205 and $14,226 at December 31, 1998 and 1997, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts and the estimates presented above may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. Note 14 - Segment Information The Company operates principally in two reportable segments. The Alarm Manufacturing segment designs, manufactures and sells an extensive line of burglar and commercial fire alarm equipment and other security products. Manufacturing sales are made through the Alarm Distribution segment and directly to third-party customers. The Company's management has aggregated its alarm manufacturing businesses as one reportable segment due to strong similarities in the economic characteristics, nature of products and services, production processes, types of customers, regulatory environment and distribution methods used. The Alarm Distribution segment sells only to third-party customers alarm and other security products manufactured by the Company and by other companies. The Company principally evaluates performance based on sales and operating income. Sales within and between segments and geographic areas are made at approximate arm's-length prices. Sales and expenses which are not related to or identifiable with specific segments are included in General Corporate and Other. Identifiable assets are those assets that are specifically identified with the industry segments and geographic areas in which operations are conducted. General Corporate and Other assets include all prepaid pension costs, future tax benefits, marketable securities and other investments. Eliminations include sales between segments and geographic areas and related intercompany accounts. Export sales were not material and no single customer accounted for ten percent of sales. 35 1998 1997 1996 SEGMENTS Sales - Alarm Manufacturing $ 737,418 $ 664,256 $ 512,126 Alarm Distribution 822,348 691,570 558,005 General Corporate and Other 458 64 586 Less Manufacturing sales to Distribution (233,578) (212,118) (147,264) $1,326,646 $1,143,772 $ 923,453 Operating income - * Alarm Manufacturing $ 73,239 $ 66,119 $ 49,343 Alarm Distribution 31,615 27,534 24,032 General Corporate and Other (3,985) (6,785) (6,660) Eliminations 3,573 (4,367) (3,010) $ 104,442 $ 82,501 $ 63,705 Total assets - ** Alarm Manufacturing $ 602,383 $ 460,482 $ 375,008 Alarm Distribution 298,078 259,122 208,782 General Corporate and Other 253,773 203,850 231,282 Eliminations (79,179) (71,157) (44,821) $1,075,055 $ 852,297 $ 770,251 Capital expenditures - Alarm Manufacturing $ 30,782 $ 37,924 $ 41,815 Alarm Distribution 6,369 5,277 3,372 General Corporate and Other 229 117 180 $ 37,380 $ 43,318 $ 45,367 Depreciation and amortization - Alarm Manufacturing $ 31,038 $ 24,771 $ 19,672 Alarm Distribution 4,436 3,141 2,379 General Corporate and Other 220 229 237 $ 35,694 $ 28,141 $ 22,288 GEOGRAPHIC REGION Sales - Domestic $1,151,323 $ 999,756 $ 797,574 Foreign 227,611 188,038 160,765 Eliminations (52,288) (44,022) (34,886) $1,326,646 $1,143,772 $ 923,453 Total assets - ** Domestic $ 873,314 $ 705,857 $ 649,560 Foreign 218,479 161,994 145,710 Eliminations (16,738) (15,554) (25,019) $1,075,055 $ 852,297 $ 770,251 * Excludes $43,000 litigation provision recorded in 1998. ** Excludes investment in discontinued operations of $58,397 in 1997 and $47,058 in 1996. 36 Note 15 - Quarterly Results (Unaudited) Quarterly results of operations for the years ended December 31, 1998 and 1997 are shown below: First Second Third Fourth Total Net Sales 1998 $304,139 $325,538 $344,488 $352,481 $1,326,646 1997 252,492 285,158 306,536 299,586 1,143,772 Gross Profit 1998 $103,955 $109,255 $117,835 $121,541 $ 452,586 1997 84,337 96,940 103,668 109,400 394,345 Net Income (Loss) 1998 (b) $ (7,995)(a) $ 19,328 $ 16,661 $ 13,934 $ 41,928 1997 (b) 12,296 16,598 8,335 18,285 55,514 Net Income (Loss) Per Share - Basic 1998 (b) $ (.19)(a) $ .46 $ .39 $ .33 $ .99 1997 (b) .29 .40 .20 .44 1.32 Diluted 1998 (b) $ (.19)(a) $ .45 $ .38 $ .32 $ .97 1997 (b) .29 .39 .20 .43 1.31 (a) Includes after-tax patent litigation provision of $26,875 ($.64 per basic share, $.63 per diluted share) recorded in the 1998 first quarter. (b) Includes discontinued operations and changes in equity in Cylink after taxes, as follows: First Second Third Fourth Total Discontinued Operations - Income (loss) 1998 $ 2,348 $ 3,056 $ (373) $ 5,031 1997 2,726 4,883 3,225 $ 4,072 14,906 Per Share - Basic 1998 $ .06 $ .07 $ (.01) $ .12 1997 .06 .12 .08 $ .10 .35 Per Share - Diluted 1998 $ .06 $ .07 $ (.01) $ .11 1997 .06 .11 .08 $ .10 .35 Changes in equity in Cylink - Income (loss) 1998 $ 4,553 $ 386 $ (542) $ (3,663) $ 734 1997 384 238 (7,650) 314 (6,714) Per Share - Basic 1998 $ .11 $ .01 $ (.01) $ (.08) $ .02 1997 .01 .01 (.18) .01 (.16) Per Share - Diluted 1998 $ .11 $ .01 $ (.01) $ (.08) $ .02 1997 .01 .01 (.18) (.15) 37 Report of Independent Accountants To the Board of Directors and Stockholders of Pittway Corporation In our opinion, the consolidated financial statements, listed in the index appearing under Item 8 on page 17, present fairly, in all material respects, the financial position of Pittway Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Pittway Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Chicago, Illinois February 16, 1999 Report of Management Management's Responsibility for Financial Statements The financial statements of Pittway Corporation and its consolidated subsidiaries, and all other information presented in this Annual Report, are the responsibility of the management of the Company. These statements have been prepared in accordance with generally accepted accounting principles and reflect in all material respects the substance of events and transactions that should be included. Management is responsible for the accuracy and objectivity of the financial statements, including estimates and judgments reflected therein, and fulfills this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. Management believes that the internal accounting controls in use are satisfactory to provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations, and that the financial records are reliable for the purpose of preparing financial statements. Independent accountants were selected by the Board of Directors, upon the recommendation of the Audit Committee, to audit the financial statements in accordance with generally accepted auditing standards. Their audits, as well as those of the Company's internal audit department, include a review of internal accounting control policies and procedures and selective tests of transactions. The Audit Committee of the Board of Directors, which consists of three directors who are not officers or employees of the Company, meets regularly with management, the internal auditors and the independent accountants to review matters relating to financial reporting, internal accounting controls, and auditing. The independent accountants have unrestricted access to the Audit Committee. King Harris Paul R. Gauvreau President and Chief Executive Officer Financial Vice President, Treasurer and Chief Financial Officer 38 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Information required to be furnished in this part of the Form 10-K has been omitted because the Registrant will file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than April 30, 1998. Item 10. Directors and Executive Officers of the Registrant The information set forth under the headings "Nominees for Election by the Holders of Class A Stock", "Nominees for Election by the Holders of Common Stock", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 6, 1999 is incorporated herein by reference. Item 11. Executive Compensation The information set forth under the headings "Compensation Committee Interlocks and Insider Participation", "Compensation", "Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 6, 1999 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 6, 1999 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the headings "Certain Transactions" (and the information set forth under the heading "Compensation Committee Interlocks and Insider Participation" which is cross-referenced under the heading "Certain Transactions") in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 6, 1999 is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial statements and financial statement schedule - See index to Consolidated Financial Statements and Financial Statement Schedule at page 17 of this Form 10-K Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 42-43 of this Form 10-K, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit to this report pursuant to Item 14 (c) of Form 10-K is so identified on the Index to Exhibits. (b) No reports on Form 8-K have been filed during the fourth quarter of the year for which this report is filed. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PITTWAY CORPORATION (Registrant) By :/s/Paul R. Gauvreau Paul R. Gauvreau Financial Vice President, Treasurer and Chief Financial Officer Date: March 19, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 19, 1999. /s/ Neison Harris /s/ Anthony Downs Neison Harris, Director and Anthony Downs, Director Chairman of the Board /s/King Harris /s/ Leo A. Guthart King Harris, Director, President Leo A. Guthart, Director and Chief Executive Officer /s/ Paul R. Gauvreau /s/ Irving B. Harris Paul R. Gauvreau, Principal Irving B. Harris, Director Financial and Accounting Officer /s/ Eugene L. Barnett /s/ William W. Harris Eugene L. Barnett, Director William W. Harris, Director /s/ Fred Conforti /s/ Jerome Kahn, Jr. Fred Conforti, Director Jerome Kahn, Jr., Director /s/ E. David Coolidge III /s/ John McCarter E. David Coolidge III, Director John McCarter, Director 40 PITTWAY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in Thousands) Additions Balance at Charges to From Deductions Balance beginning costs and businesses from at end of of period expenses acquired reserve (a) Period 1998 Allowance for doubtful accounts $9,691 $5,462 $1,986 $4,966 $12,173 Inventory obsolescence reserve 9,047 3,926 1,221 1,784 12,410 1997 Allowance for doubtful accounts $7,601 $4,298 $ 319 $2,527 $ 9,691 Inventory obsolescence reserve 8,512 4,973 339 4,777 9,047 1996 Allowance for doubtful accounts $6,496 $4,223 $ 53 $3,171 $ 7,601 Inventory obsolescence reserve 6,613 2,686 29 816 8,512
(a) Deductions include write-off of accounts considered uncollectible, net of recoveries, or write-off of obsolete inventory and net foreign currency translation adjustments. 41 INDEX TO EXHIBITS* Sequential Number and Description of Exhibit Page Number*** 3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated June 23, 1987 (incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.3 Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated December 28, 1989 (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.4 Certificate of Amendment to Restated Certificate of Incorporation dated May 9, 1996 (incorporated by reference to Exhibit 3.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.5 Certificate of Amendment to Restated Certificate of Incorporation dated May 7, 1998 (incorporated by reference to Exhibit 3.5 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.6 Bylaws of Registrant, as amended. 4. Composite Conformed Copy of separate Note Purchase Agreements Dated as of December 15, 1995, each, between the Registrant and one of Metropolitan Life Insurance Company, Metropolitan Property and Casualty Insurance Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wausau, and West Coast Life Insurance Company without exhibits (incorporated by reference to Exhibit 4.0 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.1 Pittway Corporation 1990 Stock Awards Plan, as amended (incorporated by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement No. 333 - 71613 filed with the Commission on February 1, 1999). 10.2 Pittway Corporation 1998 Director Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Form S-8 Registration Statement No. 333 - 71617 filed with the Commission on February 1, 1999). 10.3 Pittway Corporation 1996 Director Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Form S-8 Registration Statement No. 333 - 12615 filed with the Commission on September 25, 1996). 42 10.4 Employment Agreement with Paul R. Gauvreau dated as of January 1, 1998.** 10.5 Employment Agreement with Edward J. Schwartz dated as of January 1, 1998.** 10.6 Employment Agreement with King Harris dated as of January 1, 1996. (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).** 10.7 Employment Agreement with Leo A. Guthart dated as of January 1, 1996. (incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).** 10.8 Combination Agreement, dated May 21, 1998, by and among Penton Media, Inc., DM Acquisition Corp., Pittway Corporation, Donohue Meehan Publishing Company, William C. Donohue, and John J. Meehan (incorporated by reference to Exhibit 2.1 of the Penton Media, Inc. S-1 Registration Statement Number 333-56877 filed on June 15, 1998). 13. 1998 Annual Report to Stockholders.* 21. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 27.1 Financial Data Schedule for the year ended December 31, 1998 (submitted only in electronic format). 27.2 Restated Financial Data Schedule for the first three quarters of 1998 (submitted only in electronic format). 27.3 Restated Financial Data Schedule for the year ended December 31, 1997 and 1996, and the first three quarters of 1997 (submitted only in electronic format). * This document, together with the Annual Report on Form 10-K, constitutes the 1998 Annual Report to Stockholders. This document, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Form 10-K. ** This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of Form 10-K. *** This information appears only in the manually signed original of this Form 10-K. 43 EX-3.6 2 BYLAWS Exhibit 3.6 Pittway Corporation December 31, 1998 Form 10-K PITTWAY CORPORATION (a Delaware corporation) ________ BY-LAWS ________ NAME-LOCATION Section 1. Name. The name of the Corporation is PITTWAY CORPORATION. Section 2. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware, and the name of the resident agent in charge thereof shall be The Corporation Trust Company. The Corporation may also have offices at such other places as the Board of Directors may from time to time appoint or the business of the Corporation may require. SEAL Section 3. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." One or more duplicate dies for impressing such seal may be kept and used. MEETINGS OF STOCKHOLDERS Section 4. Place of Meeting. All meetings of the stockholders shall be held at such place, within or without the State of Delaware, as is fixed in the notice of the meeting. Section 5. Annual Meeting. An annual meeting of the stockholders of the Corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on the first Monday of May in each year if not a legal holiday, and if a legal holiday, then on the next succeeding business day, not a Saturday, at 4:00 P.M. Central Daylight Savings Time. If for any reason any annual meeting shall not be held at the time herein specified, the same may be held at any time thereafter upon notice, as herein provided, or the business thereof may be transacted at any special meeting called for the purpose. Section 6. Special Meetings. Special meetings of stockholders may be called by the Chairman of the Board, the Chairman of the Executive Committee, the President, or a Vice-Chairman of the Board whenever the one so calling the meeting deems it necessary or advisable, and shall be called by the Chairman of the Board, the Chairman of the Executive Committee, the President, or a Vice-Chairman of the Board, whenever so directed in writing by a majority of the full Board of Directors (and, in the case of each of the Chairman of the Board and the President, whenever so required by the Certificate of Incorporation). Section 7. Notice of Meetings. Notice of the date, time and place of each annual and each special meeting of the stockholders shall be given to each of the stockholders entitled to vote at such meeting by mailing the same in a postage prepaid wrapper addressed to each such stockholder at his address as it appears on the books of the Corporation, or by delivering the same personally to any such stockholder, in lieu of such mailing, at least ten (10) days prior to, and not more than sixty (60) days before, such meeting, and meetings may be held without notice if all of the stockholders entitled to vote thereat are present in person or by proxy, or if notice thereof is waived by all such stockholders not present in person or by proxy, before or after the meeting. The notice of each special meeting of the stockholders shall set forth the purposes thereof and the business transacted at all special meetings of stockholders shall be confined to the purposes stated in the notice thereof. Section 8. Closing of Transfer Books. The Board of Directors may close the stock transfer books of the Corporation for a period not exceeding sixty (60) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or for a period not exceeding sixty (60) days in connection with obtaining the consent of stockholders for any purpose, provided, however, that in lieu of closing the stock transfer books as aforesaid the Board of Directors shall have the power to fix in advance a date not exceeding sixty (60) days and not less than ten (10) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or the final date for obtaining any such consent, as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting, entitled to receive payment of such dividend or to such allotment of rights or to exercise the right in respect of such change, conversion or exchange of capital stock, or to give such consent, and in such case only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights or to give such consent as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. Section 9. Organization. At each meeting of the stockholders, the Chairman of the Board, or in the case of vacancy in office or absence of the Chairman of the Board, one of the following officers present in the order stated: the Chairman of the Executive Committee, the President, the Vice-Chairmen of the Board in their order of rank, the Vice-Presidents in their order of rank and seniority, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast on such matter, shall act as chairman, and the Secretary, or, in the absence of the Secretary, an Assistant Secretary, or in the absence of both the Secretary and Assistant Secretaries, a person appointed by the chairman, shall act as secretary. Section 10. Voting at Stockholders' Meetings. At each meeting of the stockholders, every stockholder having the right to vote thereat shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to the date of said meeting, unless said instrument provides for a longer period. Stockholders shall have the voting rights specified in the Certificate of Incorporation. The vote for directors, and, upon the demand of any stockholder, the vote upon any question before the meeting, shall be by ballot. Section 11. Quorum and Adjournment. Except as otherwise provided by law or by the Certificate of Incorporation, at any meeting of the stockholders the presence, in person or by proxy, of the holders of shares of stock of the Corporation entitled to cast at least a majority of the votes which the outstanding stock entitled to vote thereat is entitled to cast on a particular matter shall be requisite and shall constitute a quorum entitled to take action with respect to that vote on that matter. If at any meeting of stockholders there shall be, with respect to a particular matter, less than a quorum so present, the stockholders present in person or by proxy and entitled to vote thereat on such matter may without further notice, following the completion of such action, if any, with respect to other matters as the stockholders present in person or by proxy and constituting a quorum to vote thereat on such matters desire to take, adjourn the meeting from time to time until a quorum with respect to such matter shall be present, but no business shall be transacted at any such adjourned meeting except such as might have been lawfully transacted had the meeting not been adjourned. Section 12. List of Stockholders. The Secretary shall prepare, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder, and such list shall be open to examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. DIRECTORS Section 13. Number of Directors. The number of directors constituting the full Board of Directors shall be such number, not less than eight (8), as shall from time to time be fixed by resolution of the Board of Directors. Vacancies, and newly created directorships resulting from any increase in the number of directorships, may be filled as provided in the Certificate of Incorporation. The directors, other than directors elected to fill vacancies or any new directorships resulting from any increase in the number of directors, shall be elected at the annual meeting of the stockholders and each director shall be elected to serve (unless removed) until his successor shall be elected and shall qualify. Section 14. Powers, Qualifications and Removal. The business of the Corporation shall be managed by the Board of Directors, except as may otherwise be provided in the Certificate of Incorporation. Any director may tender his resignation at any time. Directors may be removed at any time as provided by law. Section 15. Regular and Special Meetings of the Board. The Board of Directors may hold its meetings, whether organizational, regular or special, either within or without the State of Delaware. Regular meetings of the Board may be held with or without notice at such times and places as shall from time to time be determined by resolution of the Board. Whenever the time or place of a regular meeting of the Board shall have been determined by resolution of the Board, the meeting shall not be held pursuant to any subsequent resolution of the Board modifying its previous determination without first giving notice to each director of such modification. Special meetings of the Board shall be held whenever called in writing by the Chairman of the Board, the Chairman of the Executive Committee, the President, a Vice-Chairman of the Board, or any two (2) directors (at least one of whom shall have been elected by the holders of the Corporation's Common Stock of the par value of $1.00 per share). Notice of any modification of the time and place at which a regular meeting of the Board is to be held without notice, and notice of each special meeting of the Board, shall be given to each director at least twenty-four (24) hours before the meeting either personally, by telephone or by facsimile transmission or at least five (5) days before the meeting by mail to him to his residence or usual place of business. Meetings of the Board, whether regular or special, may be held at any time and place, and for any purpose, without notice, when all the directors are present or when all directors not present shall, in writing, waive notice of and consent to the holding of such meeting, which waiver and consent may be given after the holding of such meeting. Section 16. Organization. At every meeting of the Board, the Chairman of the Board, or in the case of vacancy in office or absence of the Chairman of the Board, one of the following officers present in the order stated: the Chairman of the Executive Committee, the President, the Vice-Chairmen of the Board in their order of rank, the Vice Presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the Secretary, or, in the absence of the Secretary, an Assistant Secretary, or in the absence of the Secretary and the Assistant Secretaries, any person appointed by the chairman of the meeting, shall act as secretary. Section 17. Quorum and Adjournment. At all meetings of the Board a majority of the full Board of Directors shall be necessary and sufficient to constitute a quorum for the transaction of business except as may otherwise be specifically provided in the Certificate of Incorporation or in these By-Laws; provided, that if a quorum of directors shall not be present at any duly called or regular meeting thereof, the directors present may adjourn said meeting from time to time for a period of not exceeding two (2) weeks in the aggregate and notice of any such adjourned meeting shall not be necessary unless an adjournment was taken sine die. COMMITTEES Section 18. Executive Committee. There shall be a committee of the Board of Directors designated as the Executive Committee, to consist of three (3) or more of the directors, as shall from time to time be appointed by resolution of the Board. Except as otherwise limited by resolution of the Board of Directors adopted on or after November 15, 1989 or by law, the Certificate of Incorporation or these By-Laws, the Executive Committee shall have and may exercise, when the Board is not in session, all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but the Executive Committee shall not have power to fill vacancies in the Board, or to change the membership of or to fill vacancies in the said Committee, to remove or replace the Chairman of the Executive Committee, or to amend these By-Laws. The Board shall have the power at any time to change the membership of the Executive Committee, to fill vacancies in it, or to dissolve it. The Executive Committee may make rules for the conduct of its business and may appoint such assistants as it shall from time to time deem necessary. A majority of the members of the Executive Committee shall constitute a quorum. Section 19. Audit Committee. There shall be a committee of the Board of Directors designated as the Audit Committee, to consist of not fewer than two members of the Board as shall from time to time be appointed by resolution of the Board. No member of the Board who is an officer or an employee of the Corporation or any subsidiary of the Corporation shall be eligible to serve on the Audit Committee. The Audit Committee shall review and, as it shall deem appropriate, approve internal accounting and financial controls for the Corporation and accounting principles and auditing practices and procedures to be employed in the preparation and review of financial statements of the Corporation. The Audit Committee shall make recommendations to the Board concerning the engagement of independent public accountants to audit the annual financial statements of the Corporation and its subsidiaries and shall arrange with such accountants the scope of the audit to be undertaken by such accountants. The Board shall have the power at any time to change the membership of the Audit Committee, to fill vacancies in it, or to dissolve it. The Audit Committee may make rules for the conduct of its business and may appoint such assistants as it shall from time to time deem necessary. A majority of the members of the Audit Committee shall constitute a quorum. Section 20. Other Committees. The Board of Directors may also, by resolution or resolutions passed by the affirmative vote therefor of the majority of the full Board of Directors, designate one or more other committees, which, to the extent provided in said resolution or resolutions, shall have and may exercise, when the Board is not in session, the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of the members of any such committee may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Section 21. Compensation of Directors. By resolution of the Board of Directors, the directors may be paid their expenses, if any, for attendance at each regular or special meeting of the Board or of any committee designated by the Board and may be paid a fixed sum for attendance at such meeting, or a stated salary as director, or both. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor; provided however that directors who are also salaried officers shall not receive fees or salaries as directors. OFFICERS Section 22. Designation, Term, Vacancies. The officers of the Corporation shall be a President, one or more Vice-Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, and such other officers, including a Chairman of the Board, a Chairman of the Executive Committee and one or more Vice-Chairmen of the Board, as the Board of Directors may from time to time deem necessary. Such officers may have and perform the powers and duties usually pertaining to their respective offices, the powers and duties respectively prescribed by law and by these By-Laws, and such additional powers and duties as may from time to time be prescribed by the Board. The same person may hold any two (2) offices. Only the Chairman of the Board, if any, the Chairman of the Executive Committee, if any, the President, and the Vice-Chairman of the Board, if any, need be members of the Board of Directors. As soon as practicable after the election of the Board at the annual meeting of stockholders, the Board shall elect the President, Secretary and Treasurer and, at their discretion, a Chairman of the Board, a Chairman of the Executive committee, such Vice-Chairmen of the Board and such Vice-Presidents as they shall determine, all of whom shall hold office until the regular annual meeting of the Board of Directors following their appointment or until their successors are appointed and qualify, provided that they, or any of them, may be removed at any time, with or without cause, by the affirmative vote therefor of a majority of the full Board of Directors. All other agents and employees of the Corporation shall hold office during the pleasure of the Board of Directors. Vacancies occurring among the officers of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 23. Chairman of the Board. The Chairman of the Board, if any, shall exercise such powers as may from time to time be specifically delegated to him by these By-Laws or by resolution of the Board of Directors. Section 24. Chairman of the Executive Committee. The Chairman of the Executive Committee, if any, shall preside at meetings of the Executive Committee and shall exercise such other powers as may from time to time be specifically delegated to him by these By-Laws or by resolution of the Board of Directors. Section 25. President. The President shall be the chief executive officer and the chief operating officer of the Corporation and shall exercise such other powers as may from time to time be specifically delegated to him by these By-Laws or by resolution of the Board of Directors. Subject to the Board of Directors, he shall have general charge of the entire business of the Corporation. He may sign certificates of stock and sign and seal bonds, debentures, contracts or other obligations authorized by the Board, and may, without previous authority of the Board, make such contracts as the ordinary conduct of the Corporation's business requires. He shall have the usual powers and duties vested in the President of a corporation. He shall have power to select and appoint all necessary officers and employees of the Corporation, except those selected by the Board of Directors, and to remove all such officers and employees, except those selected by the Board of Directors, and make new appointments to fill vacancies. He may delegate any of his powers to a Vice-President of the Corporation. He shall at all times be subject to the direction of the Board of Directors. Section 26. Vice-Chairmen of the Board. Each Vice-Chairman of the Board, if any, shall have such of the President's powers and duties as the President may from time to time delegate to him and shall exercise such other powers as may from time to time be specifically delegated to him by these By-Laws or by resolution of the Board of Directors. Section 27. Vice-Presidents. Each Vice-President shall have such of the President's powers and duties as the President may from time to time delegate to him, and each Vice-President shall have such other powers and perform such other duties as may be assigned to him by these By-Laws or by resolution of the Board of Directors. Section 28. Treasurer. The Treasurer shall have custody of such funds and securities of the Corporation as may come to his hands or be committed to his care by the Board of Directors. Whenever necessary or proper, he shall endorse on behalf of the Corporation, for collection, checks, notes, or other obligations, and shall deposit the same to the credit of the Corporation in such bank or banks or depositories, approved by the Board of Directors, as the Board of Directors or President may designate. He may sign receipts or vouchers for payments made to the Corporation, and the Board of Directors may require that such receipts or vouchers shall also be signed by some other officer to be designated by them. Whenever required by the Board of Directors, he shall render a statement of his cash accounts and such other statements respecting the affairs of the Corporation as may be required. He shall keep proper and accurate books of account. He shall perform all acts incident to the office of Treasurer, subject to the control of the Board. Section 29. Secretary. The Secretary shall have custody of the seal of the Corporation and when required by the Board of Directors, or when any instrument signed by another officer of the Corporation duly authorized to sign the same so requires, or when necessary to attest any proceedings of the stockholders or directors, shall affix it to any instrument requiring the same and shall attest the same with his signature, provided that the seal may be affixed by the President or a Vice-President or other officer of the Corporation to any document executed by either of them respectively on behalf of the Corporation which does not require the attestation of the Secretary. He shall attend to the giving and serving of notices of meetings. He shall have charge of such books and papers as properly belong to his office or as may be committed to his care by the Board of Directors. He shall perform such other duties as appertain to his office or as may be required by the Board of Directors. Section 30. Assistant Secretary. Each Assistant Secretary shall be vested with such powers and duties as may be delegated to him by the President or the Secretary and any act may be done or duty performed by an Assistant Secretary with like effect as though done or performed by the Secretary; and shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. Section 31. Assistant Treasurer. Each Assistant Treasurer shall be vested with such powers and duties as may be delegated to him by the President or the Treasurer, and any act may be performed by an Assistant Treasurer with like effect as though done or performed by the Treasurer; and shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. Section 32. Delegation. In case of the absence of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer or to any director. STOCK Section 33. Certificates of Stock. All certificates of shares of the capital stock of the Corporation shall be in such form not inconsistent with the Certificate of Incorporation, these By-Laws and the laws of the State of Delaware, as shall be approved by the Board of Directors, and shall be signed by the President or a Vice-President and by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer and shall bear the seal of the Corporation and shall not be valid unless so signed and sealed. Certificates countersigned by a duly appointed transfer agent and/or registered by a duly appointed registrar shall be deemed to be so signed and sealed whether the signatures be manual or facsimile signatures and whether the seal be a facsimile seal or any other form of seal. All certificates for each class of stock shall be consecutively numbered and the name of the person owning the shares represented thereby, his address, with the number of such shares and the date of issue, shall be entered on the Corporation's books. All certificates surrendered shall be cancelled and no new certificates issued until the former certificates for the same number of shares shall have been surrendered and cancelled, except in cases provided for herein. In case any officer or officers who shall have signed or whose facsimile signature or signatures shall have been affixed to any such certificate or certificates, shall cease to be such officer or officers of the Corporation before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation, and may be issued and delivered as though the person or persons who signed such certificates, or whose facsimile signature or signatures shall have been affixed thereto, had not ceased to be such officer or officers of the Corporation. Section 34. Transfers of Shares. Transfers of stock shall be made upon the books of the Corporation by the holder in person or by attorney, upon the surrender and cancellation of the certificate or certificates for such shares. But the Board of Directors may appoint one or more suitable banks and/or trust companies as transfer agents and/or registrars of transfers, for facilitating transfers of any class or series of stock of the Corporation by the holders thereof under such regulations as the Board of Directors may from time to time prescribe. Upon such appointment being made all certificates of such class or series thereafter issued shall be countersigned by one of such transfer agents and/or one of such registrars of transfers, and shall not be valid unless so countersigned. The transfer books of the Corporation may be closed for such period, not to exceed sixty (60) days, as the Board of Directors may direct previous to and on the day of the annual or any special meeting of the stockholders, and may also be closed by the Board of Directors for such time as may be deemed advisable for dividend purposes or allotment of rights, or determination of stockholders entitled to vote as provided in Section 8 hereof, and during such time as stock shall be transferable. Section 35. Addresses of Stockholders. Every stockholder shall furnish the Corporation with an address to which notices of meetings and all other notices may be served upon or mailed to him, and in default thereof notices may be addressed to him at his last known post-office address. Section 36. Stolen, Lost, Mutilated and Destroyed Certificates. The Board of Directors may in its sole discretion direct that a new certificate or certificates of stock may be issued in place of any certificate or certificates of stock theretofore issued by the Corporation, alleged to have been stolen, lost, mutilated or destroyed, and the Board of Directors when authorizing the issuance of such new certificate or certificates may, in its discretion, and as a condition precedent thereto, require the owner of such mutilated certificate to surrender the same and the owner of such stolen, lost, mutilated or destroyed certificate or certificates or his legal representatives to give to the Corporation, and to such registrar or registrars and/or transfer agent or transfer agents as may be authorized or required to countersign such new certificate or certificates, a bond in such sum as the Corporation may direct not exceeding double the value of the stock represented by the certificate alleged to have been stolen, lost, mutilated or destroyed, as indemnity against any claim that may be made against them or any of them for or in respect of the shares of stock represented by the certificate alleged to have been stolen, lost, mutilated or destroyed. Section 37. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the owner in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. DIVIDENDS AND FINANCE Section 38. The Board of Directors shall have power to fix and determine and to vary, from time to time, the amount of the working capital of the Corporation before declaring any dividends among its stockholders, and to direct and determine the use and disposition of any net profits or surplus, and to determine the date or dates for the declaration and payment of dividends, not inconsistent with those set forth in the Certificate of Incorporation, and to determine the amount of any dividend, and the amount of any reserves necessary in their judgment before declaring any dividends among its stockholders, and to determine the amount of the net profits of the Corporation from time to time available for dividends. BOOKS AND RECORDS Section 39. Subject to the provisions of the statute under which the Corporation is organized, the Corporation may keep its books outside the State of Delaware. The Board of Directors shall have power, from time to time, to determine whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of the Corporation (except such as may by statute be specifically open to inspection), or any of them shall be open to the inspection of the stockholders and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by statute or authorized by the directors. CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS Section 40. Contracts - How Executed. Subject to the provisions of the Certificate of Incorporation, the Board of Directors or the Executive Committee may authorize any officer or officers, fiscal agent or other agent or employee of the Corporation to enter into any contract or execute or deliver any instrument in the name of or on behalf of the Corporation and such authority may be general or confined to specific instances; and unless so authorized by the Board of Directors or by these By-Laws, no officer, fiscal or other agent or employee of the Corporation shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose. Section 41. Loans. Any officer or agent of the Corporation when authorized by the Board of Directors or the Executive Committee may negotiate loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances, when authorized by the Board of Directors, may make, execute and deliver promissory notes or other evidences of indebtedness of the Corporation, and pledge, hypothecate or transfer as security for the payment thereof securities or other property at any time held by the Corporation. No loans shall be contracted on behalf of the Corporation and no notes or other evidences of indebtedness shall be issued in its behalf unless and except as authorized by the Board of Directors or the Executive Committee. Section 42. Deposits. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such bank or trust companies or with such bankers or other depositories in the United States or elsewhere as the Board of Directors or the President may approve. Section 43. Checks, Drafts, Etc. All notes, drafts, acceptances, checks, endorsements or other evidences of indebtedness shall be signed by the President or a Vice-President and shall be countersigned by the Treasurer or an Assistant Treasurer of the Corporation, or by such officers as may, from time to time, be designated by resolution of the Board of Directors or the Executive Committee for that purpose. Endorse- ments for deposit to the credit of the Corporation in any of its duly authorized depositories may be made by the Treasurer or an Assistant Treasurer or by any other officer or agent who may be designated by resolution of the Board of Directors or the Executive Committee. Section 44. Safe Deposit Vaults. To the extent permitted by law, securities of the Corporation may be deposited in such safe deposit vaults in the United States or elsewhere as the Board of Directors or the Executive Committee may approve, and access to such vaults shall be only by such officer together with such additional officer or officers and/or responsible employee or employees as may from time to time be designated for the purpose by resolution of the Board of Directors. Section 45. Deposit of Securities for Safekeeping. From time to time, to the extent permitted by law, the Board of Directors may deposit for safekeeping with one or more banks, trust companies or other financial institutions to be selected by them in the United States or elsewhere, any securities owned by the Corporation and not otherwise deposited or pledged as security. Any and all securities so deposited may be withdrawn from time to time only by such officer of the Corporation together with such additional officer or officers and/or responsible employee or employees as may from time to time, to the extent permitted by law, be designated for the purpose by resolution of the Board of Directors. FISCAL YEAR Section 46. The fiscal year shall begin the first day of January in each year. NOTICES Section 47. Whenever under the provisions of these By-Laws notice is required to be given to any director, officer or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, by depositing the same in the post-office or letter-box, in a post-paid sealed wrapper, addressed to such stockholder, officer or director at such address as appears on the books of the Corporation, or, in default of other address, to such director, officer or stockholder at his last known post-office address and such notice shall be deemed to be given at the time when the same shall be thus mailed. Any stockholder, director or officer may waive any notice required to be given under these By-Laws by instrument in writing signed (either before or after the holding of any meeting in respect of which the notice is required) by such stockholder, director or officer and filed with the Corporation. The presence of a director at any meeting of the Board shall be deemed a waiver of notice thereof by him. STOCK OF OTHER CORPORATIONS Section 48. The Chairman of the Board, if any, the Chairman of the Executive Committee, if any, the President, each Vice-Chairman of the Board, if any, and each Vice-President are authorized on behalf of the Corporation, in person or (to the extent permitted by law) by proxy, to attend, act and vote at meetings of the stockholders, partners or other holders of equity or voting rights of any corporation, partnership, limited liability company or other entity in which the Corporation shall hold stock or any other equity interest or any voting rights, and to exercise thereat any and all rights and powers incident to the ownership of such stock or other equity interest or voting rights, and to execute waivers of notice of such meetings and calls therefor. Such officers are also authorized on behalf of the Corporation to execute written consents and the like with respect to actions to be taken without meetings of stockholders, partners or other holders of equity or voting rights of any such corporation, partnership, limited liability company or other entity. The Board of Directors may also authorize any other director, officer or other person on behalf of the Corporation to take any and all of such actions, and authority may be given to exercise such authority either on one or more designated occasions, or generally on all occasions until revoked by the Board. REGISTRATION OF SECURITIES Section 49. Any stocks or securities owned by the Corporation may, if so determined by the Board of Directors, be registered either in the name of the Corporation or in the name of any nominee or nominees appointed for that purpose by the Board of Directors. AMENDMENTS Section 50. These By-Laws may be altered or amended by the holders of shares of stock of the Corporation entitled to vote with respect thereto, present in person or by proxy at any regular or special meeting of the stockholders, if notice of the proposed alteration or amendment be contained in the notice of the meeting, or by the affirmative vote therefor of a majority of the full Board of Directors, provided, however, that these By-Laws may not be altered or amended either by action of the stockholders or by action of the Board of Directors to make provisions contrary to or in conflict with or in any way modifying any provision of the Certificate of Incorporation. AS ADOPTED AT NOVEMBER 15, 1989 BOARD MEETING Revised March 1995 and March 1999 EX-10.4 3 EMPLOYMENT AGREEMENT PRG Exhibit 10.4 Pittway Corporation December 31, 1998 Form 10-K EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1998, between Pittway Corporation, a Delaware corporation (the "Company"), and Paul R. Gauvreau ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the chief financial officer and chief accounting officer of the Company, and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title Financial Vice President, Chief Financial Officer and Treasurer of the Company, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company (the "President"). (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Company, its subsidiaries and affiliates. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the Chicago metropolitan area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Company. 3. Salary and Benefits. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $290,000 per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or from a comparable insurer acceptable to the Company; (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and the maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan effective January 1, 1996 (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A, except that the beginning date for accrual of a benefit shall be January 1, 1998. 4. Adjustments. Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that if there is a significant reduction in the level of the business to which Executive's duties under this Agreement relate, but Executive thereafter remains an employee of the Company, the Board may make adjustments in Executive's duties, responsibility and authority, and in Executive's compensation, as the Board deems appropriate to reflect such reduction. 5. Employment Period. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, the third anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than two years, unless the Employment Period shall have ended early pursuant to (c) below or either party shall have given the other party written notice that the extension provision in this sentence shall no longer apply, the Employment Period shall be extended for an additional calendar year (unless Executive's sixty-fifth birthday occurs during such additional calendar year, in which event the Employment Period shall be extended only until such birthday). In no event shall the Employment Period be extended beyond the Executive's sixty-fifth birthday except by mutual written agreement of the Company and Executive. (c) Notwithstanding (a) and (b) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date of such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive for Good Reason"); or (vii) Executive's termination of Executive's employment for any reason other than Good Reason, by means of advance written notice to the Company at least one hundred eighty (180) days prior to the effective date of such termination identifying such termination as a Termination by Executive with Advance Notice ("Termination by Executive with Advance Notice") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive with Advance Notice"). (d) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude; (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates; (iv) conduct by Executive tending to bring the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Executive for Good Reason or a Termination by Executive with Advance Notice shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 10 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (e) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary to an amount less than "Executive's Reference Salary" (i.e., Executive's initial salary or, in the event the Employment Period has been extended pursuant to paragraph 5(b) hereof, Executive's salary on the date on which the most recent such extension occurred); or (ii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. Post-Employment Period Payments. (a) If the Employment Period ends on the date on which (without any extension thereof) it is then scheduled to end pursuant to paragraph 5 hereof, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any) or benefits other than: (i) any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment and (iii) any other amounts(s) payable pursuant to the succeeding provisions of this paragraph 6. (b) If the Employment Period ends pursuant to paragraph 5 hereof on Executive's sixty-fifth birthday, or if the Employment Period ends early pursuant to paragraph 5 hereof on account of Executive's death, Retirement or Termination for Disability, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect until the date on which (without any extension thereof) it was then scheduled to end, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half of the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such reduced amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. It is expressly understood that the Company's payment obligations under this (d) shall cease in the event Executive breaches any of his agreements in paragraph 7, 9 or 10 hereof. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination by Executive with Advance Notice, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. 7. Inventions and Other Intellectual Property. Executive agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, trademarks, slogans, product or other designs, advertising or marketing programs, and all similar or related information which relate to the Company's or any of its subsidiaries' or affiliates' actual or anticipated business, research and development or existing or future products or services and which are (or were prior to the date of this Agreement) conceived, developed or made by Executive, whether alone or jointly with others, while employed by the Company or any such subsidiary or affiliate or any predecessor thereof ("Work Product") belong to the Company or such subsidiary or affiliate. Executive will promptly disclose such Work Product to the President and perform all actions reasonably requested by the President (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 8. Limitation/Illinois Disclosure. Paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to the extent application thereof is prohibited by any law the benefits of which cannot be waived by Executive. Executive hereby waives the benefits of any such law to the maximum extent permitted by law. In accordance with Section 2872 of the Illinois Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is hereby advised that in the event and to the extent such Act is applicable to Executive, paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company or any of its subsidiaries or affiliates was used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or any of its subsidiaries or affiliates or to the Company's or any of its subsidiaries' or affiliates' actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company or any of its subsidiaries or affiliates. 9. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the President unless and except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the President. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, the Work Product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. 10. Non-Compete, Non-Solicitation. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business then actively being conducted by the Company or any of its subsidiaries or affiliates, in any geographic area in which the Company or any of its subsidiaries or affiliates is then conducting such business (whether through manufacturing or production, calling on customers or prospective customers, or otherwise). Notwithstanding the foregoing, subsequent to the Employment Period Executive may engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business activity which is not competitive with a business activity being conducted by the Company or any of its subsidiaries or affiliates at the time subsequent to the Employment Period Executive first engages or assists in such business activity (a "Non-competitive Business Activity"). (c) Executive further agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ, or any customer of the Company or of any of its subsidiaries or affiliates to quit or abandon its relationship, for any purpose whatsoever, or (ii) in connection with any business to which the first sentence of (b) above applies, except where such activity constitutes a Non-competitive Business Activity, call on, service, solicit or otherwise do business with any then current or prospective customer of the Company or of any of its subsidiaries or affiliates. (d) Nothing in this paragraph 10 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. Enforcement. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 7, 9 or 10 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 12. Executive Representations. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 14. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: Mr. Paul R. Gauvreau 4483 RFD Normandy Court Long Grove, IL 60047 Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 16. Payment of Certain Costs and Expenses. In the event that there is a Change of Control of the Company, if the Company thereafter wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if but only if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than one or more members of the Harris Group (as currently defined in the Company's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of the Company possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 17. Complete Agreement. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 18. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 19. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 20. Choice of Law. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of Illinois. 21. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ PAUL R. GAUVREAU Exhibit A to Exhibit 10.5 Pittway Corporation December 31, 1998 Form 10-K PITTWAY CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN SECTION 1 Introduction 1.1 The Plan and Its Effective Date. This Pittway Corporation Supplemental Executive Retirement Plan (the "plan") has been established by Pittway Corporation (the "company"), effective January 1, 1996. 1.2 Purpose. The company maintains the Pittway Corporation Retirement Plan (As Amended and Restated Effective as of January 1, 1989) (as the same may hereafter be amended, the "retirement plan"), which is intended to meet the requirements of a "qualified plan" under the Internal Revenue Code of 1986, as amended (the "Code"). While the Code places limitations on the maximum benefits which may be paid from a qualified plan and the maximum amount of an employee's compensation that may be taken into account for determining benefits payable under a qualified plan, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), permits the payment under an "unfunded plan" of benefits which may not be paid under a qualified plan because of such limitations. The purpose of the plan is to provide certain key employees of the company and its subsidiaries with certain benefits which may not be provided under the retirement plan because of the maximum compensation limitation of the Code. SECTION 2 Eligibility and Benefits 2.1 Eligibility. Each key employee of the company or a subsidiary of the company (a "participant") who participates in the retirement plan and who is a party to an employment agreement with the company or a subsidiary of the company substantially in the form attached hereto as Exhibit 1 (as the same may hereafter be amended, his "Employment Agreement") that provides for his participation in the plan shall participate in the plan, subject to the conditions and limitations of the plan. It is expressly understood that variations among the participants' Employment Agreements may result in differences in the numberedparagraphs thereof in which corresponding provisions appear (for example, the non- competition provisions which are in paragraph 10 of Exhibit 1 attached hereto, or variations thereof, may be in paragraph 10 of certain of the Employment Agreements but in paragraph 9 of others). Accordingly, each reference in the plan to a particular numbered paragraph of a participant's Employment Agreement shall be deemed to be a reference to the paragraph thereof, if any, which corresponds to the identically numbered paragraph of Exhibit 1. 2.2 Accrued Benefit. For 1995 and for each full calendar year and any final fraction of a calendar year of a participant's Employment Period (as such term is defined in such participant's Employment Agreement), the participant shall accrue a benefit under the plan equal to 1.85 percent of that portion of his earnings (as defined in section 2.3 below) for such year or fraction that is in excess of the "maximum dollar limitation" (as defined below) for such year or fraction and is less than $300,000. For purposes of the plan, "maximum dollar limitation" means, for any year or fraction of a year, the greater of $150,000 or the dollar amount of any higher maximum limitation on annual compensation taken into account under a qualified plan for such year or fraction of a year determined by the Secretary of Treasury or his delegate or by law under section 401(a)(17) of the Code; it being understood that annual compensation for purposes of such limitation is computed differently from "earnings" for purposes of the plan. A participant's accrued benefits under the plan shall be referred to hereinafter as the participant's "supplemental retirement benefits." 2.3 Earnings. For purposes of the plan, a participant's "earnings" for any year or fraction means his total, regular cash compensation paid for such year or fraction for services rendered to the Pittway Companies (as such term is defined in the retirement plan) during such year or fraction, consisting solely of his salary and his annual discretionary cash bonus, if any, for such year. It is expressly understood that a participant's "earnings" do not include any other compensation, including, without limitation, any of the following: (a) Long-term incentive compensation; (b) Unused vacation pay; (c) Special cash bonuses; (d) Any income realized for Federal income tax purposes as a result of the grant or exercise of an option or options to acquire shares of stock of a Pittway Company, the receipt or exercise of any stock appreciation right or payment, or the disposition of shares acquired by the exercise of such an option or right; (e) Any noncash compensation, including any amounts contributed by the participant's employer(s) for his benefit under the retirement plan or any other retirement or benefit plan, arrangement, or policy maintained by his employer(s); (f) Any reimbursements for medical, dental or travel expenses, automobile allowances, relocation allowances, educational assistance allowances, awards and other special allowances; (g) Any income realized for Federal income tax purposes as a result of (i) group life insurance, (ii) the personal use of an employer-owned automobile, or (iii) the transfer of restricted shares of stock or restricted property of a Pittway Company, or the removal of any such restrictions; (h) Any severance pay paid as a result of the participant's termination of employment (it being expressly understood that any amount(s) taken into account pursuant to the final sentence of section 2.8 below shall not be deemed severance pay for purposes hereof); or (i) Any compensation paid or payable to the participant, or to any governmental body or agency on account of the participant, under the terms of any state, Federal or foreign law requiring the payment of such compensation because of the participant's voluntary or involuntary termination of employment with any Pittway Company. Notwithstanding the foregoing, a participant's "earnings" do include (i) any salary reduction amount elected by the participant and credited to a cafeteria plan (as defined in section 125(c) of the Code) or a qualified cash or deferred arrangement (as defined in section 401(k) of the Code) and (ii) the initial value ascribed to any performance shares award the participant elects to receive in lieu of a portion of his annual discretionary cash bonus. 2.4 Payment of Benefits. Each participant's Employment Agreement provides that in no event shall his Employment Period be extended beyond his 65th birthday except by mutual agreement of the participant and his employer. Subject to the conditions and limitations of the plan, upon a participant's attainment of age 65 years, he shall be entitled to a monthly benefit payable for his life commencing upon his attainment of age 65 years in an amount equal to one-twelfth (1/12) of the sum of the participant's accrued supplemental retirement benefits. A participant's supplemental retirement benefits shall be paid to him in the form described below that applies to the participant; provided, however, that in lieu of payment in the normal form described below, the participant may irrevocably elect, within thirty (30) days after his commencement of participation in the plan, to receive his supplemental retirement benefits in a single lump sum as soon as practicable after his attainment of age 65 years. A participant's "supplemental retirement benefit commencement date" means the date as of which the initial payment (or, in the case of a single lump sum, full payment) of the supplemental retirement benefits to which the participant is entitled is payable. Subject to the conditions and limitations of the plan, a participant's supplemental retirement benefit commencement date shall normally be the first day of the calendar month coincident with or next following the participant's attainment of age 65 years. Notwithstanding the immediately preceding sentence, if a participant's Employment Period under his Employment Agreement terminates prior to his attainment of age 65 years and he is eligible, and elects, to receive early retirement benefits under the retirement plan, and if the participant requests a supplemental retirement benefit commencement date prior to his attainment of age 65 years, then with (but only with) the consent of the committee (as defined in section 3.1 below), the participant's supplemental retirement benefit commencement date shall be such earlier date, if any, selected by the committee. Supplemental retirement benefits that are paid in a lump sum, or commence, before the participant's attainment of age 65 years, if any, shall be subject to actuarial reduction in accordance with section 2.5 below. (a) Life Annuity. If a participant does not have a spouse (as defined in section 2.7 below) on his supplemental retirement benefit commencement date, and if he has not elected pursuant to the preceding provisions of this section 2.4 to receive his supplemental retirement benefits in a single lump sum, payment of his supplemental retirement benefits shall be during his lifetime on a life annuity basis. (b) Joint and Survivor Annuity. If a participant has a spouse (as defined in section 2.7 below) on his supplemental retirement benefit commencement date, payment of his supplemental retirement benefits shall be in the form of a joint and 50 percent survivor annuity unless the participant has theretofore elected pursuant to the preceding provisions of this section 2.4 to have his benefits provided in a single lump sum. Such joint and 50 percent survivor annuity shall consist of a reduced monthly benefit continuing during the participant's lifetime, and if such spouse is living at the time of the participant's death, payment of 50 percent of such monthly benefit shall be made to such spouse until such spouse's death occurs. The amount of the participant's and such spouse's benefits under this subsection shall be calculated so that it is the actuarial equivalent of the supplemental retirement benefits to which the participant would otherwise be entitled under the plan. If such spouse predeceases the participant, or if the participant and such spouse cease to be married after the participant's supplemental retirement benefit commencement date, there shall be no adjustment to the participant's monthly payments and no supplemental retirement benefits shall be payable to any person after the participant's death. 2.5 Actuarial Equivalent. A benefit shall be actuarially equivalent to another benefit if the actuarial reserve required to provide such benefit is equal to the actuarial reserve required to provide such other benefit, computed on the basis of the same actuarial assumptions, interest rates, tables, methods and procedures, including reduction factors for commencement of payments prior to attainment of age 65 years, that are used for purposes of the retirement plan as in effect on the applicable date that a benefit payment amount is determined. 2.6 Pre-Retirement Surviving Spouse Benefit. If a participant dies prior to his supplemental retirement benefit commencement date, no supplemental retirement benefits under the plan shall be paid or payable with respect to the participant; provided, however, that if the participant has a spouse (as defined in section 2.7 below) at the time of his death, such spouse shall be entitled to receive a monthly benefit for such spouse's lifetime equal to 50 percent of the amount of monthly benefit that would have been payable to the participant in the form of a joint and 50 percent survivor annuity if he had terminated employment as of the date of his death with entitlement to supplemental retirement benefits under the plan and the committee (as defined in section 3.1 below) had permitted his supplemental retirement benefit commencement date to occur on the first day of the calendar month coincident with or next following the date of his death, taking into account actuarial reduction for commencement prior to the participant's attainment of age 65 years. The first payment to the spouse shall be made as of the first day of the calendar month coincident with or next following the date of the participant's death and the final payment shall be made as of the first day of the calendar month during which the spouse's death occurs. If, prior to the participant's death, the participant had elected pursuant to section 2.4 above to receive his supplemental retirement benefits in a single lump sum, in lieu of the monthly payments described above, such spouse shall be entitled to receive a single lump sum equal to 50 percent of the lump sum value of the participant's supplemental retirement benefits as of the date of his death, taking into account actuarial factors for payment prior to the participant's attainment of age 65 years. Such lump sum payment shall be made to such spouse as soon as practicable following the participant's death. 2.7 Spouse. For purposes of the plan, a person will be considered the "spouse" of a participant as of any date if and only if such person and the participant have been married in a religious or civil ceremony recognized under the laws of the state where the marriage was contracted and the marriage remains legally effective. Any person who is not, or who has ceased to be, a participant's "spouse" on the participant's supplemental retirement benefit commencement date (or, in the event of the participant's death prior to his supplemental retirement benefit commencement date, the date of his death) shall not be considered the participant's "spouse" for purposes of the plan. 2.8 Forfeiture; Early Termination of Employment Period. If the participant's Employment Period ends early pursuant to paragraph 5 of his Employment Agreement on account of a Termination for Cause or a Termination by Executive with Advance Notice (as such terms are defined, respectively, in his Employment Agreement), or if after the participant's Employment Period ends (whether or not early and regardless of the reason) the participant breaches any of his agreements in paragraph 7, 9 or 10 of his Employment Agreement, the participant shall forfeit all of his supplemental retirement benefits, if any, under the plan, no benefit under the plan shall thereafter be payable to or with respect to the participant or his spouse, and any benefit under the plan theretofore paid to or with respect to the participant or his spouse must be repaid to the company by the participant or his spouse promptly upon demand. If the participant's Employment Period ends early pursuant to paragraph 5 of his Employment Agreement on account of a Termination without Cause or a Termination by Executive for Good Reason (as such terms are defined, respectively, in his Employment Agreement), the participant's supplemental retirement benefits under the plan shall be the supplemental retirement benefits the participant would have been entitled to under the plan had his Employment Period remained in effect until the earlier of the date on which (without any extension thereof) such Employment Period was then scheduled to end pursuant to his Employment Agreement or the date of his death and had the participant's salary in effect as of the last day of his Employment Period (or, if greater, his Executive's Reference Salary (as such term is defined in his Employment Agreement)) continued until the earlier of such dates and been paid at the times such salary would have been paid, and had the participant received no further annual cash bonus. 2.9 Funding. The plan is intended to be non-qualified for purposes of the Code and unfunded for purposes of the Code and ERISA. Benefits payable under the plan to a participant and/or his spouse, as the case may be, shall be paid directly by the company. The company shall not be required to segregate on its books or otherwise any amount to be used for payment of supplemental retirement benefits under the plan. Each participant and spouse is solely an unsecured creditor of the company with respect to any benefit payable with respect to a participant hereunder. SECTION 3 General Provisions 3.1 Committee. The plan shall be administered by the plan administrative committee of the retirement plan (the "committee"). The committee shall have, to the extent appropriate, the same powers, rights, duties and obligations with respect to the plan as it has with respect to the retirement plan. Each determination provided for in the plan shall be made by the committee under such procedure as may from time to time be prescribed by the committee and shall be made in the absolute discretion of the committee. Any determination so made shall be conclusive. 3.2 Employment Rights. Neither the establishment of, nor participation in, the plan shall be construed to give any participant the right to be retained in the service of the Pittway Companies or to any benefits not specifically provided by the plan. 3.3 Taxes and Withholding. Each participant (or his spouse, as applicable) shall be responsible for any taxes imposed on him (or his spouse) ("taxes") by reason of the establishment of, or his participation in, the plan, including, without limitation, any Federal, state and/or local income or employment taxes imposed on benefits or potential benefits under the plan (or on the value thereof) in advance of the participant's receipt of such benefits or potential benefits. The company or a subsidiary of the company may deduct any taxes from payroll or other payments due the participant or his spouse. The committee shall deduct from all payments under the plan any taxes required to be withheld, including, without limitation, any Federal, state and/or local income or employment taxes. In the event that such deductions and/or withholdings are not sufficient to pay the taxes, the participant (or his spouse) shall promptly remit the deficit to the company upon its request. 3.4 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state, the interests of participants and their spouses under the plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily transferred, assigned, alienated or encumbered. No participant shall have any right to any benefit payments hereunder prior to his termination of employment with the Pittway Companies. 3.5 Payment with Respect to Incapacitated Participants or Beneficiaries. If any person entitled to benefits under the plan is under a legal disability or in the committee's opinion is incapacitated in any way so as to be unable to manage his financial affairs, the committee may direct the payment of such benefit to such person's legal representative or to a relative or friend of such person for such person's benefit, or the committee may direct the application of such benefits for the benefit of such person in any manner which the committee may select that is consistent with the plan. Any payments made in accordance with the foregoing provisions of this section shall be a full and complete discharge of any liability for such payments. 3.6 Limitation of Liability. To the extent permitted by law, no person (including the company, any subsidiary of the company, the Board of Directors of the company (the "Board"), the board of directors of any subsidiary of the company, the committee, any present or former member of the Board or of the board of directors of any subsidiary of the company or of the committee, and any present or former officer of the company or of any subsidiary of the company) shall be personally liable for any act done or omitted to be done in good faith in the administration of the plan. 3.7 Controlling Law. The plan shall be construed in accordance with the provisions of ERISA and other Federal laws, to the extent such provisions are applicable to the plan. To the extent not inconsistent therewith, the plan shall be construed in accordance with the laws of the State of Illinois. 3.8 Gender and Number. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular and the singular shall include the plural. 3.9 Action by the Company. Any action required of or permitted by the company under the plan, including action by the company to amend the plan, shall be by resolution of the Board or by a duly authorized committee of the Board or by a person or persons authorized by resolution of the Board or such committee. The procedure for amending the plan is that the plan shall be amended by the company's taking appropriate corporate action to effectuate any amendment considered by it to be advisable to be made. Appropriate corporate action includes action by resolution of the Board, by a committee authorized by the Board, or by a person or persons authorized by the Board or such committee, as provided above. 3.10 Successor to the Company. The term "company" as used in the plan shall include any successor to the company by reason of merger, consolidation, the purchase of all or substantially all of the company's assets or otherwise. 3.11 Miscellaneous. The plan shall be binding upon and inure to the benefit of the parties, their legal representatives, successors and assigns, and all persons entitled to benefits hereunder. Any notice given in connection with the plan shall be in writing and shall be delivered in person or by registered mail, return receipt requested. Any notice given by registered mail shall be deemed to have been given upon the date of delivery indicated on the registered mail return receipt, if correctly addressed. SECTION 4 Amendment and Termination While the company expects to continue the plan, it must necessarily reserve, and hereby does reserve, the right, either in general or as to one or more particular participants, to amend the plan from time to time or to terminate the plan at any time; provided (i) that no amendment of the plan with respect to a participant that reduces or eliminates any benefits such participant has accrued as of the effective date of such amendment shall be effective unless such participant consents to such amendment; and (ii) no amendment of the plan with respect to a participant whose Employment Period under his Employment Agreement has not yet ended that adversely affects such participant, or termination of the plan with respect to such a participant, by the company on any date shall be effective prior to the date on which (without any extension thereof) such participant's Employment Period is then scheduled to end pursuant to his Employment Agreement unlesss the participant consents to such amendment or termination. IN WITNESS WHEREOF, this plan has been executed on behalf of the company by its duly authorized officers as of the day and year first above written. PITTWAY CORPORATION By: Its: Date: ATTEST By _________________________________ Its _____________________________ Date_____________________________ Exhibit 1 to Exhibit A of Exhibit 10.5 Pittway Corporation December 31, 1998 Form 10-K EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1996, between Pittway Corporation, a Delaware corporation (the "Company"), and ___________ ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the ____________ of the ___________________ Group of the Company or any successor to such Group, in each case as constituted from time to time (the "Group"), and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") or the President of the Company to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title ____________________ of the Group, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of the Company for so long as the Board nominates him to that position and he is elected to it, as a ____________ of the Company for so long as the Board elects or appoints him to that position and as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company. (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Group and the business and affairs of any other group of the Company, any division of the Company, or any subsidiary or affiliate of the Company (or any group or division thereof), engaged in the security, alarm or monitoring products business or any other business the same as or similar to or related to that then engaged in by the Group. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the __________________ area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Company. 3. Salary and Benefits. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $_______ per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to a supplemental executive retirement program, the principal terms of which are set forth in Exhibit A attached hereto: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or from a comparable insurer acceptable to the Company; (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and the maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A. 4. Adjustments. Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that if there is a significant reduction in the level of the business to which Executive's duties under this Agreement relate, or if all or any significant part of such business is disposed of by the Company and/or its subsidiaries or affiliates during the Employment Period but Executive thereafter remains an employee of the Company, the Board may make adjustments in Executive's duties, responsibility and authority, and in Executive's compensation, as the Board deems appropriate to reflect such reduction or disposition. 5. Employment Period. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, the third anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than two years, unless the Employment Period shall have ended early pursuant to (c) below or either party shall have given the other party written notice that the extension provision in this sentence shall no longer apply, the Employment Period shall be extended for an additional calendar year (unless Executive's sixty-fifth birthday occurs during such additional calendar year, in which event the Employment Period shall be extended only until such birthday). In no event shall the Employment Period be extended beyond the Executive's sixty-fifth birthday except by mutual written agreement of the Company and Executive. (c) Notwithstanding (a) and (b) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date of such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive for Good Reason"); or (vii) Executive's termination of Executive's employment for any reason other than Good Reason, by means of advance written notice to the Company at least one hundred eighty (180) days prior to the effective date of such termination identifying such termination as a Termination by Executive with Advance Notice ("Termination by Executive with Advance Notice") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive with Advance Notice"). (d) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude, (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates; (iv) conduct by Executive tending to bring the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Exxecutive for Good Reason or a Termination by Executive with Advance Notice shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 10 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (e) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary to an amount less than "Executive's Reference Salary" (i.e., Executive's initial salary or, in the event the Employment Period has been extended pursuant to paragraph 5(b) hereof, Executive's salary on the date on which the most recent such extension occurred); or (ii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. Post-Employment Period Payments. (a) If the Employment Period ends on the date on which (without any extension thereof) it is then scheduled to end pursuant to paragraph 5 hereof, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any) or benefits other than: (i) any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP or any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment and (iii) any other amount(s) payable pursuant to the succeeding provisions of this paragraph 6. (b) If the Employment Period ends pursuant to paragraph 5 hereof on Executive's sixty-fifth birthday, or if the Employment Period ends early pursuant to paragraph 5 hereof on account of Executive's death Retirement or Termination for Disability, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect until the date on which (without any extension thereof) it was then scheduled to end, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half of the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such reduced amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America Illinois in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. It is expressly understood that the Company's payment obligations under this (d) shall cease in the event Executive breaches any of his agreements in paragraph 7, 9 or 10 hereof. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination by Executive with Advance Notice, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. 7. Inventions and Other Intellectual Property. Executive agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, trademarks, slogans, product or other designs, advertising or marketing programs, and all similar or related information which relate to the Company's or any of its subsidiaries' or affiliates' actual or anticipated business, research and development or existing or future products or services and which are (or were prior to the date of this Agreement) conceived, developed or made by Executive, whether alone or jointly with others, while employed by the Company or any such subsidiary or affiliate or any predecessor thereof ("Work Product") belong to the Company or such subsidiary or affiliate. Executive will promptly disclose such Work Product to the President of the Company and perform all actions reasonably requested by the President of the Company (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 8. Limitation/Illinois Disclosure. Paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to the extent application thereof is prohibited by any law the benefits of which cannot be waived by Executive. Executive hereby waives the benefits of any such law to the maximum extent permitted by law. In accordance with Section 2872 of the Illinois Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is hereby advised that in the event and to the extent such Act is applicable to Executive, paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company or any of its subsidiaries or affiliates was used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or any of its subsidiaries or affiliates or to the Company's or any of its subsidiaries' or affiliates' actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company or any of its subsidiaries or affiliates. 9. Confidential Information. Executive acknowl-edges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement, as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the President of the Company unless and except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the President of the Company. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, the Work Product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. 10. Non-Compete, Non-Solicitation. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, the security, alarm or monitoring products business or any other business then actively being conducted by the Group, in any geographic area in which the Group is then conducting such business (whether through manufacturing or production, calling on customers or prospective customers, or otherwise). Notwithstanding the foregoing, subsequent to the Employment Period Executive may engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business activity which is not competitive with a business activity being conducted by the Group at the time subsequent to the Employment Period Executive first engages or assists in such business activity (a "Non-competitive Business Activity"). (c) Executive further agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ, or any customer of the Company or of any of its subsidiaries or affiliates to quit or abandon its relationship, for any purpose whatsoever, or (ii) in connection with any business to which the first sentence of (b) above applies, except where such activity constitutes a Non-competitive Business Activity, call on, service, solicit or otherwise do business with any then current or prospective customer of the Company or of any of its subsidiaries or affiliates. (d) Nothing in this paragraph 10 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. Enforcement. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 7, 9 or 10 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 12. Executive Representations. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 14. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: ___________________ ___________________ ___________________ Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 16. Payment of Certain Costs and Expenses. In the event that there is a Change of Control of the Company, if the Company thereafter wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America Illinois in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if but only if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than one or more members of the Harris Group (as currently defined in the Company's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of the Company possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 17. Complete Agreement. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 18. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 19. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to: (i) any subsidiary or affiliate of the Company in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 20. Choice of Law. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of Illinois. 21. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. * * * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ [EXECUTIVE] - 9 - - 3 - 1313 - 1 - EX-10.5 4 EMPLOYMENT AGREEMENT EJS Exhibit 10.5 Pittway Corporation December 31, 1998 Form 10-K EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1998, between Pittway Corporation, a Delaware corporation (the "Company"), and Edward J. Schwartz ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as an executive officer of the Company, and shall have the duties, responsibilities and authority he has had in the past serving in such position, subject to the power of the Board of Directors of the Company (the "Board") to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title Vice President of the Company, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company (the "President"). (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention to the business and affairs of the Company, its subsidiaries and affiliates except for permitted vacation periods, reasonable periods of illness or other incapacity and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors, service on boards of directors, service for or on behalf of members of the Harris Group (as defined in the Company's Restated Certificate of Incorporation, as amended) and management of Executive's personal investments and business interests. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the Chicago metropolitan area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Company. 3. Salary and Benefits. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $195,000 per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or from a comparable insurer acceptable to the Company; (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and the maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan effective January 1, 1996 (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A, except that the beginning date for accrual of a benefit shall be January 1, 1998. 4. Adjustments. Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that if there is a significant reduction in the level of the business to which Executive's duties under this Agreement relate, but Executive thereafter remains an employee of the Company, the Board may make adjustments in Executive's duties, responsibility and authority, and in Executive's compensation, as the Board deems appropriate to reflect such reduction. 5. Employment Period. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, the third anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than two years, unless the Employment Period shall have ended early pursuant to (c) below or either party shall have given the other party written notice that the extension provision in this sentence shall no longer apply, the Employment Period shall be extended for an additional calendar year (unless Executive's sixty-fifth birthday occurs during such additional calendar year, in which event the Employment Period shall be extended only until such birthday). In no event shall the Employment Period be extended beyond the Executive's sixty-fifth birthday except by mutual written agreement of the Company and Executive. (c) Notwithstanding (a) and (b) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date of such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive for Good Reason"); or (vii) Executive's termination of Executive's employment for any reason other than Good Reason, by means of advance written notice to the Company at least one hundred eighty (180) days prior to the effective date of such termination identifying such termination as a Termination by Executive with Advance Notice ("Termination by Executive with Advance Notice") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive with Advance Notice"). (d) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude; (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates; (iv) conduct by Executive tending to bring the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Executive for Good Reason or a Termination by Executive with Advance Notice shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 10 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (e) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary to an amount less than "Executive's Reference Salary" (i.e., Executive's initial salary or, in the event the Employment Period has been extended pursuant to paragraph 5(b) hereof, Executive's salary on the date on which the most recent such extension occurred); or (ii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. Post-Employment Period Payments. (a) If the Employment Period ends on the date on which (without any extension thereof) it is then scheduled to end pursuant to paragraph 5 hereof, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any) or benefits other than: (i) any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment and (iii) any other amounts(s) payable pursuant to the succeeding provisions of this paragraph 6. (b) If the Employment Period ends pursuant to paragraph 5 hereof on Executive's sixty-fifth birthday, or if the Employment Period ends early pursuant to paragraph 5 hereof on account of Executive's death, Retirement or Termination for Disability, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect until the date on which (without any extension thereof) it was then scheduled to end, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half of the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such reduced amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. It is expressly understood that the Company's payment obligations under this (d) shall cease in the event Executive breaches any of his agreements in paragraph 7, 9 or 10 hereof. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination by Executive with Advance Notice, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. 7. Inventions and Other Intellectual Property. Executive agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, trademarks, slogans, product or other designs, advertising or marketing programs, and all similar or related information which relate to the Company's or any of its subsidiaries' or affiliates' actual or anticipated business, research and development or existing or future products or services and which are (or were prior to the date of this Agreement) conceived, developed or made by Executive, whether alone or jointly with others, while employed by the Company or any such subsidiary or affiliate or any predecessor thereof ("Work Product") belong to the Company or such subsidiary or affiliate. Executive will promptly disclose such Work Product to the President and perform all actions reasonably requested by the President (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 8. Limitation/Illinois Disclosure. Paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to the extent application thereof is prohibited by any law the benefits of which cannot be waived by Executive. Executive hereby waives the benefits of any such law to the maximum extent permitted by law. In accordance with Section 2872 of the Illinois Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is hereby advised that in the event and to the extent such Act is applicable to Executive, paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company or any of its subsidiaries or affiliates was used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or any of its subsidiaries or affiliates or to the Company's or any of its subsidiaries' or affiliates' actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company or any of its subsidiaries or affiliates. 9. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the President unless and except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the President. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, the Work Product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. 10. Non-Compete, Non-Solicitation. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business then actively being conducted by the Company or any of its subsidiaries or affiliates, in any geographic area in which the Company or any of its subsidiaries or affiliates is then conducting such business (whether through manufacturing or production, calling on customers or prospective customers, or otherwise). Notwithstanding the foregoing, subsequent to the Employment Period Executive may engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business activity which is not competitive with a business activity being conducted by the Company or any of its subsidiaries or affiliates at the time subsequent to the Employment Period Executive first engages or assists in such business activity (a "Non-competitive Business Activity"). (c) Executive further agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ, or any customer of the Company or of any of its subsidiaries or affiliates to quit or abandon its relationship, for any purpose whatsoever, or (ii) in connection with any business to which the first sentence of (b) above applies, except where such activity constitutes a Non-competitive Business Activity, call on, service, solicit or otherwise do business with any then current or prospective customer of the Company or of any of its subsidiaries or affiliates. (d) Nothing in this paragraph 10 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. Enforcement. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 7, 9 or 10 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 12. Executive Representations. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 14. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: Mr. Edward J. Schwartz 715 Valley Road Glencoe, IL 60022 Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 16. Payment of Certain Costs and Expenses. In the event that there is a Change of Control of the Company, if the Company thereafter wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if but only if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than one or more members of the Harris Group (as currently defined in the Company's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of the Company possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 17. Complete Agreement. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 18. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 19. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 20. Choice of Law. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of Illinois. 21. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ EDWARD J. SCHWARTZ Exhibit A to Exhibit 10.5 Pittway Corporation December 31, 1998 Form 10-K PITTWAY CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN SECTION 1 Introduction 1.1 The Plan and Its Effective Date. This Pittway Corporation Supplemental Executive Retirement Plan (the "plan") has been established by Pittway Corporation (the "company"), effective January 1, 1996. 1.2 Purpose. The company maintains the Pittway Corporation Retirement Plan (As Amended and Restated Effective as of January 1, 1989) (as the same may hereafter be amended, the "retirement plan"), which is intended to meet the requirements of a "qualified plan" under the Internal Revenue Code of 1986, as amended (the "Code"). While the Code places limitations on the maximum benefits which may be paid from a qualified plan and the maximum amount of an employee's compensation that may be taken into account for determining benefits payable under a qualified plan, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), permits the payment under an "unfunded plan" of benefits which may not be paid under a qualified plan because of such limitations. The purpose of the plan is to provide certain key employees of the company and its subsidiaries with certain benefits which may not be provided under the retirement plan because of the maximum compensation limitation of the Code. SECTION 2 Eligibility and Benefits 2.1 Eligibility. Each key employee of the company or a subsidiary of the company (a "participant") who participates in the retirement plan and who is a party to an employment agreement with the company or a subsidiary of the company substantially in the form attached hereto as Exhibit 1 (as the same may hereafter be amended, his "Employment Agreement") that provides for his participation in the plan shall participate in the plan, subject to the conditions and limitations of the plan. It is expressly understood that variations among the participants' Employment Agreements may result in differences in the numberedparagraphs thereof in which corresponding provisions appear (for example, the non- competition provisions which are in paragraph 10 of Exhibit 1 attached hereto, or variations thereof, may be in paragraph 10 of certain of the Employment Agreements but in paragraph 9 of others). Accordingly, each reference in the plan to a particular numbered paragraph of a participant's Employment Agreement shall be deemed to be a reference to the paragraph thereof, if any, which corresponds to the identically numbered paragraph of Exhibit 1. 2.2 Accrued Benefit. For 1995 and for each full calendar year and any final fraction of a calendar year of a participant's Employment Period (as such term is defined in such participant's Employment Agreement), the participant shall accrue a benefit under the plan equal to 1.85 percent of that portion of his earnings (as defined in section 2.3 below) for such year or fraction that is in excess of the "maximum dollar limitation" (as defined below) for such year or fraction and is less than $300,000. For purposes of the plan, "maximum dollar limitation" means, for any year or fraction of a year, the greater of $150,000 or the dollar amount of any higher maximum limitation on annual compensation taken into account under a qualified plan for such year or fraction of a year determined by the Secretary of Treasury or his delegate or by law under section 401(a)(17) of the Code; it being understood that annual compensation for purposes of such limitation is computed differently from "earnings" for purposes of the plan. A participant's accrued benefits under the plan shall be referred to hereinafter as the participant's "supplemental retirement benefits." 2.3 Earnings. For purposes of the plan, a participant's "earnings" for any year or fraction means his total, regular cash compensation paid for such year or fraction for services rendered to the Pittway Companies (as such term is defined in the retirement plan) during such year or fraction, consisting solely of his salary and his annual discretionary cash bonus, if any, for such year. It is expressly understood that a participant's "earnings" do not include any other compensation, including, without limitation, any of the following: (a) Long-term incentive compensation; (b) Unused vacation pay; (c) Special cash bonuses; (d) Any income realized for Federal income tax purposes as a result of the grant or exercise of an option or options to acquire shares of stock of a Pittway Company, the receipt or exercise of any stock appreciation right or payment, or the disposition of shares acquired by the exercise of such an option or right; (e) Any noncash compensation, including any amounts contributed by the participant's employer(s) for his benefit under the retirement plan or any other retirement or benefit plan, arrangement, or policy maintained by his employer(s); (f) Any reimbursements for medical, dental or travel expenses, automobile allowances, relocation allowances, educational assistance allowances, awards and other special allowances; (g) Any income realized for Federal income tax purposes as a result of (i) group life insurance, (ii) the personal use of an employer-owned automobile, or (iii) the transfer of restricted shares of stock or restricted property of a Pittway Company, or the removal of any such restrictions; (h) Any severance pay paid as a result of the participant's termination of employment (it being expressly understood that any amount(s) taken into account pursuant to the final sentence of section 2.8 below shall not be deemed severance pay for purposes hereof); or (i) Any compensation paid or payable to the participant, or to any governmental body or agency on account of the participant, under the terms of any state, Federal or foreign law requiring the payment of such compensation because of the participant's voluntary or involuntary termination of employment with any Pittway Company. Notwithstanding the foregoing, a participant's "earnings" do include (i) any salary reduction amount elected by the participant and credited to a cafeteria plan (as defined in section 125(c) of the Code) or a qualified cash or deferred arrangement (as defined in section 401(k) of the Code) and (ii) the initial value ascribed to any performance shares award the participant elects to receive in lieu of a portion of his annual discretionary cash bonus. 2.4 Payment of Benefits. Each participant's Employment Agreement provides that in no event shall his Employment Period be extended beyond his 65th birthday except by mutual agreement of the participant and his employer. Subject to the conditions and limitations of the plan, upon a participant's attainment of age 65 years, he shall be entitled to a monthly benefit payable for his life commencing upon his attainment of age 65 years in an amount equal to one-twelfth (1/12) of the sum of the participant's accrued supplemental retirement benefits. A participant's supplemental retirement benefits shall be paid to him in the form described below that applies to the participant; provided, however, that in lieu of payment in the normal form described below, the participant may irrevocably elect, within thirty (30) days after his commencement of participation in the plan, to receive his supplemental retirement benefits in a single lump sum as soon as practicable after his attainment of age 65 years. A participant's "supplemental retirement benefit commencement date" means the date as of which the initial payment (or, in the case of a single lump sum, full payment) of the supplemental retirement benefits to which the participant is entitled is payable. Subject to the conditions and limitations of the plan, a participant's supplemental retirement benefit commencement date shall normally be the first day of the calendar month coincident with or next following the participant's attainment of age 65 years. Notwithstanding the immediately preceding sentence, if a participant's Employment Period under his Employment Agreement terminates prior to his attainment of age 65 years and he is eligible, and elects, to receive early retirement benefits under the retirement plan, and if the participant requests a supplemental retirement benefit commencement date prior to his attainment of age 65 years, then with (but only with) the consent of the committee (as defined in section 3.1 below), the participant's supplemental retirement benefit commencement date shall be such earlier date, if any, selected by the committee. Supplemental retirement benefits that are paid in a lump sum, or commence, before the participant's attainment of age 65 years, if any, shall be subject to actuarial reduction in accordance with section 2.5 below. (a) Life Annuity. If a participant does not have a spouse (as defined in section 2.7 below) on his supplemental retirement benefit commencement date, and if he has not elected pursuant to the preceding provisions of this section 2.4 to receive his supplemental retirement benefits in a single lump sum, payment of his supplemental retirement benefits shall be during his lifetime on a life annuity basis. (b) Joint and Survivor Annuity. If a participant has a spouse (as defined in section 2.7 below) on his supplemental retirement benefit commencement date, payment of his supplemental retirement benefits shall be in the form of a joint and 50 percent survivor annuity unless the participant has theretofore elected pursuant to the preceding provisions of this section 2.4 to have his benefits provided in a single lump sum. Such joint and 50 percent survivor annuity shall consist of a reduced monthly benefit continuing during the participant's lifetime, and if such spouse is living at the time of the participant's death, payment of 50 percent of such monthly benefit shall be made to such spouse until such spouse's death occurs. The amount of the participant's and such spouse's benefits under this subsection shall be calculated so that it is the actuarial equivalent of the supplemental retirement benefits to which the participant would otherwise be entitled under the plan. If such spouse predeceases the participant, or if the participant and such spouse cease to be married after the participant's supplemental retirement benefit commencement date, there shall be no adjustment to the participant's monthly payments and no supplemental retirement benefits shall be payable to any person after the participant's death. 2.5 Actuarial Equivalent. A benefit shall be actuarially equivalent to another benefit if the actuarial reserve required to provide such benefit is equal to the actuarial reserve required to provide such other benefit, computed on the basis of the same actuarial assumptions, interest rates, tables, methods and procedures, including reduction factors for commencement of payments prior to attainment of age 65 years, that are used for purposes of the retirement plan as in effect on the applicable date that a benefit payment amount is determined. 2.6 Pre-Retirement Surviving Spouse Benefit. If a participant dies prior to his supplemental retirement benefit commencement date, no supplemental retirement benefits under the plan shall be paid or payable with respect to the participant; provided, however, that if the participant has a spouse (as defined in section 2.7 below) at the time of his death, such spouse shall be entitled to receive a monthly benefit for such spouse's lifetime equal to 50 percent of the amount of monthly benefit that would have been payable to the participant in the form of a joint and 50 percent survivor annuity if he had terminated employment as of the date of his death with entitlement to supplemental retirement benefits under the plan and the committee (as defined in section 3.1 below) had permitted his supplemental retirement benefit commencement date to occur on the first day of the calendar month coincident with or next following the date of his death, taking into account actuarial reduction for commencement prior to the participant's attainment of age 65 years. The first payment to the spouse shall be made as of the first day of the calendar month coincident with or next following the date of the participant's death and the final payment shall be made as of the first day of the calendar month during which the spouse's death occurs. If, prior to the participant's death, the participant had elected pursuant to section 2.4 above to receive his supplemental retirement benefits in a single lump sum, in lieu of the monthly payments described above, such spouse shall be entitled to receive a single lump sum equal to 50 percent of the lump sum value of the participant's supplemental retirement benefits as of the date of his death, taking into account actuarial factors for payment prior to the participant's attainment of age 65 years. Such lump sum payment shall be made to such spouse as soon as practicable following the participant's death. 2.7 Spouse. For purposes of the plan, a person will be considered the "spouse" of a participant as of any date if and only if such person and the participant have been married in a religious or civil ceremony recognized under the laws of the state where the marriage was contracted and the marriage remains legally effective. Any person who is not, or who has ceased to be, a participant's "spouse" on the participant's supplemental retirement benefit commencement date (or, in the event of the participant's death prior to his supplemental retirement benefit commencement date, the date of his death) shall not be considered the participant's "spouse" for purposes of the plan. 2.8 Forfeiture; Early Termination of Employment Period. If the participant's Employment Period ends early pursuant to paragraph 5 of his Employment Agreement on account of a Termination for Cause or a Termination by Executive with Advance Notice (as such terms are defined, respectively, in his Employment Agreement), or if after the participant's Employment Period ends (whether or not early and regardless of the reason) the participant breaches any of his agreements in paragraph 7, 9 or 10 of his Employment Agreement, the participant shall forfeit all of his supplemental retirement benefits, if any, under the plan, no benefit under the plan shall thereafter be payable to or with respect to the participant or his spouse, and any benefit under the plan theretofore paid to or with respect to the participant or his spouse must be repaid to the company by the participant or his spouse promptly upon demand. If the participant's Employment Period ends early pursuant to paragraph 5 of his Employment Agreement on account of a Termination without Cause or a Termination by Executive for Good Reason (as such terms are defined, respectively, in his Employment Agreement), the participant's supplemental retirement benefits under the plan shall be the supplemental retirement benefits the participant would have been entitled to under the plan had his Employment Period remained in effect until the earlier of the date on which (without any extension thereof) such Employment Period was then scheduled to end pursuant to his Employment Agreement or the date of his death and had the participant's salary in effect as of the last day of his Employment Period (or, if greater, his Executive's Reference Salary (as such term is defined in his Employment Agreement)) continued until the earlier of such dates and been paid at the times such salary would have been paid, and had the participant received no further annual cash bonus. 2.9 Funding. The plan is intended to be non-qualified for purposes of the Code and unfunded for purposes of the Code and ERISA. Benefits payable under the plan to a participant and/or his spouse, as the case may be, shall be paid directly by the company. The company shall not be required to segregate on its books or otherwise any amount to be used for payment of supplemental retirement benefits under the plan. Each participant and spouse is solely an unsecured creditor of the company with respect to any benefit payable with respect to a participant hereunder. SECTION 3 General Provisions 3.1 Committee. The plan shall be administered by the plan administrative committee of the retirement plan (the "committee"). The committee shall have, to the extent appropriate, the same powers, rights, duties and obligations with respect to the plan as it has with respect to the retirement plan. Each determination provided for in the plan shall be made by the committee under such procedure as may from time to time be prescribed by the committee and shall be made in the absolute discretion of the committee. Any determination so made shall be conclusive. 3.2 Employment Rights. Neither the establishment of, nor participation in, the plan shall be construed to give any participant the right to be retained in the service of the Pittway Companies or to any benefits not specifically provided by the plan. 3.3 Taxes and Withholding. Each participant (or his spouse, as applicable) shall be responsible for any taxes imposed on him (or his spouse) ("taxes") by reason of the establishment of, or his participation in, the plan, including, without limitation, any Federal, state and/or local income or employment taxes imposed on benefits or potential benefits under the plan (or on the value thereof) in advance of the participant's receipt of such benefits or potential benefits. The company or a subsidiary of the company may deduct any taxes from payroll or other payments due the participant or his spouse. The committee shall deduct from all payments under the plan any taxes required to be withheld, including, without limitation, any Federal, state and/or local income or employment taxes. In the event that such deductions and/or withholdings are not sufficient to pay the taxes, the participant (or his spouse) shall promptly remit the deficit to the company upon its request. 3.4 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state, the interests of participants and their spouses under the plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily transferred, assigned, alienated or encumbered. No participant shall have any right to any benefit payments hereunder prior to his termination of employment with the Pittway Companies. 3.5 Payment with Respect to Incapacitated Participants or Beneficiaries. If any person entitled to benefits under the plan is under a legal disability or in the committee's opinion is incapacitated in any way so as to be unable to manage his financial affairs, the committee may direct the payment of such benefit to such person's legal representative or to a relative or friend of such person for such person's benefit, or the committee may direct the application of such benefits for the benefit of such person in any manner which the committee may select that is consistent with the plan. Any payments made in accordance with the foregoing provisions of this section shall be a full and complete discharge of any liability for such payments. 3.6 Limitation of Liability. To the extent permitted by law, no person (including the company, any subsidiary of the company, the Board of Directors of the company (the "Board"), the board of directors of any subsidiary of the company, the committee, any present or former member of the Board or of the board of directors of any subsidiary of the company or of the committee, and any present or former officer of the company or of any subsidiary of the company) shall be personally liable for any act done or omitted to be done in good faith in the administration of the plan. 3.7 Controlling Law. The plan shall be construed in accordance with the provisions of ERISA and other Federal laws, to the extent such provisions are applicable to the plan. To the extent not inconsistent therewith, the plan shall be construed in accordance with the laws of the State of Illinois. 3.8 Gender and Number. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular and the singular shall include the plural. 3.9 Action by the Company. Any action required of or permitted by the company under the plan, including action by the company to amend the plan, shall be by resolution of the Board or by a duly authorized committee of the Board or by a person or persons authorized by resolution of the Board or such committee. The procedure for amending the plan is that the plan shall be amended by the company's taking appropriate corporate action to effectuate any amendment considered by it to be advisable to be made. Appropriate corporate action includes action by resolution of the Board, by a committee authorized by the Board, or by a person or persons authorized by the Board or such committee, as provided above. 3.10 Successor to the Company. The term "company" as used in the plan shall include any successor to the company by reason of merger, consolidation, the purchase of all or substantially all of the company's assets or otherwise. 3.11 Miscellaneous. The plan shall be binding upon and inure to the benefit of the parties, their legal representatives, successors and assigns, and all persons entitled to benefits hereunder. Any notice given in connection with the plan shall be in writing and shall be delivered in person or by registered mail, return receipt requested. Any notice given by registered mail shall be deemed to have been given upon the date of delivery indicated on the registered mail return receipt, if correctly addressed. SECTION 4 Amendment and Termination While the company expects to continue the plan, it must necessarily reserve, and hereby does reserve, the right, either in general or as to one or more particular participants, to amend the plan from time to time or to terminate the plan at any time; provided (i) that no amendment of the plan with respect to a participant that reduces or eliminates any benefits such participant has accrued as of the effective date of such amendment shall be effective unless such participant consents to such amendment; and (ii) no amendment of the plan with respect to a participant whose Employment Period under his Employment Agreement has not yet ended that adversely affects such participant, or termination of the plan with respect to such a participant, by the company on any date shall be effective prior to the date on which (without any extension thereof) such participant's Employment Period is then scheduled to end pursuant to his Employment Agreement unlesss the participant consents to such amendment or termination. IN WITNESS WHEREOF, this plan has been executed on behalf of the company by its duly authorized officers as of the day and year first above written. PITTWAY CORPORATION By: Its: Date: ATTEST By _________________________________ Its _____________________________ Date_____________________________ Exhibit 1 to Exhibit A of Exhibit 10.5 Pittway Corporation December 31, 1998 Form 10-K EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1996, between Pittway Corporation, a Delaware corporation (the "Company"), and ___________ ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the ____________ of the ___________________ Group of the Company or any successor to such Group, in each case as constituted from time to time (the "Group"), and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") or the President of the Company to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title ____________________ of the Group, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of the Company for so long as the Board nominates him to that position and he is elected to it, as a ____________ of the Company for so long as the Board elects or appoints him to that position and as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company. (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Group and the business and affairs of any other group of the Company, any division of the Company, or any subsidiary or affiliate of the Company (or any group or division thereof), engaged in the security, alarm or monitoring products business or any other business the same as or similar to or related to that then engaged in by the Group. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the __________________ area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Company. 3. Salary and Benefits. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $_______ per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to a supplemental executive retirement program, the principal terms of which are set forth in Exhibit A attached hereto: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or from a comparable insurer acceptable to the Company; (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and the maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A. 4. Adjustments. Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that if there is a significant reduction in the level of the business to which Executive's duties under this Agreement relate, or if all or any significant part of such business is disposed of by the Company and/or its subsidiaries or affiliates during the Employment Period but Executive thereafter remains an employee of the Company, the Board may make adjustments in Executive's duties, responsibility and authority, and in Executive's compensation, as the Board deems appropriate to reflect such reduction or disposition. 5. Employment Period. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, the third anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than two years, unless the Employment Period shall have ended early pursuant to (c) below or either party shall have given the other party written notice that the extension provision in this sentence shall no longer apply, the Employment Period shall be extended for an additional calendar year (unless Executive's sixty-fifth birthday occurs during such additional calendar year, in which event the Employment Period shall be extended only until such birthday). In no event shall the Employment Period be extended beyond the Executive's sixty-fifth birthday except by mutual written agreement of the Company and Executive. (c) Notwithstanding (a) and (b) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date of such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive for Good Reason"); or (vii) Executive's termination of Executive's employment for any reason other than Good Reason, by means of advance written notice to the Company at least one hundred eighty (180) days prior to the effective date of such termination identifying such termination as a Termination by Executive with Advance Notice ("Termination by Executive with Advance Notice") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive with Advance Notice"). (d) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude, (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates; (iv) conduct by Executive tending to bring the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Exxecutive for Good Reason or a Termination by Executive with Advance Notice shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 10 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (e) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary to an amount less than "Executive's Reference Salary" (i.e., Executive's initial salary or, in the event the Employment Period has been extended pursuant to paragraph 5(b) hereof, Executive's salary on the date on which the most recent such extension occurred); or (ii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. Post-Employment Period Payments. (a) If the Employment Period ends on the date on which (without any extension thereof) it is then scheduled to end pursuant to paragraph 5 hereof, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any) or benefits other than: (i) any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP or any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment and (iii) any other amount(s) payable pursuant to the succeeding provisions of this paragraph 6. (b) If the Employment Period ends pursuant to paragraph 5 hereof on Executive's sixty-fifth birthday, or if the Employment Period ends early pursuant to paragraph 5 hereof on account of Executive's death Retirement or Termination for Disability, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect until the date on which (without any extension thereof) it was then scheduled to end, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half of the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such reduced amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America Illinois in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. It is expressly understood that the Company's payment obligations under this (d) shall cease in the event Executive breaches any of his agreements in paragraph 7, 9 or 10 hereof. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination by Executive with Advance Notice, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. 7. Inventions and Other Intellectual Property. Executive agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, trademarks, slogans, product or other designs, advertising or marketing programs, and all similar or related information which relate to the Company's or any of its subsidiaries' or affiliates' actual or anticipated business, research and development or existing or future products or services and which are (or were prior to the date of this Agreement) conceived, developed or made by Executive, whether alone or jointly with others, while employed by the Company or any such subsidiary or affiliate or any predecessor thereof ("Work Product") belong to the Company or such subsidiary or affiliate. Executive will promptly disclose such Work Product to the President of the Company and perform all actions reasonably requested by the President of the Company (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 8. Limitation/Illinois Disclosure. Paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to the extent application thereof is prohibited by any law the benefits of which cannot be waived by Executive. Executive hereby waives the benefits of any such law to the maximum extent permitted by law. In accordance with Section 2872 of the Illinois Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is hereby advised that in the event and to the extent such Act is applicable to Executive, paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company or any of its subsidiaries or affiliates was used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or any of its subsidiaries or affiliates or to the Company's or any of its subsidiaries' or affiliates' actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company or any of its subsidiaries or affiliates. 9. Confidential Information. Executive acknowl-edges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement, as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the President of the Company unless and except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the President of the Company. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, the Work Product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. 10. Non-Compete, Non-Solicitation. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, the security, alarm or monitoring products business or any other business then actively being conducted by the Group, in any geographic area in which the Group is then conducting such business (whether through manufacturing or production, calling on customers or prospective customers, or otherwise). Notwithstanding the foregoing, subsequent to the Employment Period Executive may engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business activity which is not competitive with a business activity being conducted by the Group at the time subsequent to the Employment Period Executive first engages or assists in such business activity (a "Non-competitive Business Activity"). (c) Executive further agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ, or any customer of the Company or of any of its subsidiaries or affiliates to quit or abandon its relationship, for any purpose whatsoever, or (ii) in connection with any business to which the first sentence of (b) above applies, except where such activity constitutes a Non-competitive Business Activity, call on, service, solicit or otherwise do business with any then current or prospective customer of the Company or of any of its subsidiaries or affiliates. (d) Nothing in this paragraph 10 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. Enforcement. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 7, 9 or 10 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 12. Executive Representations. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 14. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: ___________________ ___________________ ___________________ Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 16. Payment of Certain Costs and Expenses. In the event that there is a Change of Control of the Company, if the Company thereafter wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America Illinois in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if but only if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than one or more members of the Harris Group (as currently defined in the Company's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of the Company possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 17. Complete Agreement. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 18. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 19. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to: (i) any subsidiary or affiliate of the Company in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 20. Choice of Law. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of Illinois. 21. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. * * * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ [EXECUTIVE] 44 - 1 - EX-13 5 ANNUAL REPORT Exhibit 13 Pittway Corporation December 31, 1998 Form 10-K PITTWAY CORPORATION 1998 ANNUAL REPORT OPERATING HIGHLIGHTS Penton Media Spun Off to Shareholders Record Number of New Products Introduced $100 Million in Acquisitions Record Sales and Operating Earnings Sales (in millions) 94 601.3 95 754.4 96 923.5 97 1,143.8 98 1,326.6 Operating Income (in millions) 94 38.9 95 47.3 96 63.7 97 82.5 98 104.4 Return on Equity 94 9.7% 95 10.8% 96 11.5% 97 12.3% 98 14.0% FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data) Percent 1998 1997 Increase PRO FORMA (a) Net Sales $1,326,646 $1,143,772 16% Operating Income 104,442 82,501 27% Net Income 63,038 47,322 33% Net Income Per Common and Class A Share (Diluted) 1.46 1.11 32% HISTORICAL Continuing Operations: Net Sales 1,326,646 1,143,772 Operating Income (b) 61,442 82,501 Income from Continuing Operations (b) (c) 36,897 40,608 Discontinued Operations (d) 5,031 14,906 Net Income (b) (c) 41,928 55,514 Per Common and Class A Share (Diluted): Income from Continuing Operations (b) (c) .86 .96 Discontinued Operations (d) .11 .35 Net Income (b) (c) .97 1.31 Depreciation and Amortization (e) 35,694 28,141 Capital Expenditures (e) 37,380 43,318 Working Capital (e) 271,481 269,261 Stockholders' Equity (e) 495,164 428,737 Stockholders' Equity Per Share (e) 11.61 10.21 Number of Employees (e) 7,600 6,500 (a) Excludes provision for patent litigation, change in equity in Cylink and discontinued operations. (b) 1998 includes $43 million pre-tax provision for patent litigation ($26,875 after-tax; $.62 per diluted share). (c) Includes change in equity in Cylink: 1998 increase-$734 ($.02 per diluted share); 1997 decrease-$6,714 ($.15 per diluted share). (d) Penton Media, Inc. was spun off to shareholders on August 7, 1998. (e) Excludes discontinued operations. COMPOUND SALES GROWTH RATES: Year(s) One Three Five Pittway* 15.9% 20.7% 22.3% S&P 400 Industrials 0.5% 3.7% 4.8% *Continuing operations PITTWAY CLASS A STOCK PRICE AS OF DECEMBER 31: 1993 7.72 1994 9.78 1995 16.61 1996 19.81 1997 25.93 1998 33.06* * Prior year prices adjusted for stock splits and Penton spin-off. 5-year compound annual growth rate = 34%. TO OUR SHAREHOLDERS 1998 was a year of change, challenge and accomplishment for Pittway. We completed a record number of acquisitions during the year and spun off our Penton Media subsidiary to shareholders in August in a tax-free transaction. We achieved record sales and operating earnings in our alarm business and increased our industry-leading market share. Our net income from continuing operations, excluding special items, rose 33% to $63,038,000 or $1.46 per diluted share. The sales and operating earnings gains we achieved from continuing operations, excluding special items, 16% and 27% respectively, were especially impressive given the economic turmoil that affected many parts of the world including in Asia, Russia, the Middle East and Latin America. We did a first-rate job serving the needs of our major customers and, at the same time, reinforced our reputation as the premier supplier to the security and fire alarm industries. We launched a record number of new products and added a significant number of new engineers to our staff with expertise in growth markets like closed circuit television and access control. We had one major setback during the year, an adverse jury decision in a wireless patent suit with Interactive Technologies, Inc. (ITI). The adverse decision led to a one-time $43 million charge to pre-tax earnings in the first quarter. While appealing the decision and preparing for new ITI litigation relating to transmitter enrollment methods in wireless security systems, we took steps to make sure our wireless business would continue no matter what the outcome of these patent-related matters. We had mixed results with our non-operating investments during the year. Hughes Electronics Corporation, owner of DirecTV, announced at year-end that it had reached an agreement to acquire United States Satellite Broadcasting (USSB) for approximately $1.3 billion. In early 1999 Pittway sold one million of its 3,781,375 shares of USSB and will sell its remaining shares if the acquisition is completed as planned. We expect to realize a minimum after-tax gain of $18 million on the transaction. Cylink (we own 8,606,085 shares) sold its wireless business in March for a substantial profit, leading to a one-time pre-tax gain for Pittway of $6.6 million. Cylink also increased its data encryption sales but lost a significant amount of money in the process. Its marketing and product development costs remain high, especially for its newer internet/intranet systems. At the end of the year, Cylink installed a new top management team to address its ongoing challenges. As for our other non-operating investments, we signed an agreement with a real estate development firm late in October to sell approximately 1700 acres of land we own near Tampa for a mixed residential and commercial development. The land sale is contingent on the developer getting necessary permits and approvals for the contemplated project. We are also discussing the sale of additional property we own in Tampa with other developers. In September we split our stock two-for-one to increase our float. We also established a $.0868/share per year dividend ($.0217 per quarter) on our Common Stock and a $.12/share per year dividend ($.03 per quarter) on our Class A Stock. These dividends, when combined with Penton Media's $.12/share per year dividend, represent a modest 8% increase in the dividend received by Pittway stockholders before the Penton Media spin-off. There is one other matter to report which saddens all of us who have been associated with Pittway and its predecessor company, Standard Shares, over the last 40 years. Sidney Barrows, Vice-Chairman of the Company and long-time member of its Executive Committee, unexpectedly passed away in July. A brilliant lawyer who was respected by all his peers, Sid was an invaluable advisor to the Company as it grew from a small conglomerate into a large multinational firm. His passing was a great loss to all of us. EXTENDING OUR REACH Over the last nine years we at Pittway have worked hard to expand our alarm and communications business and position it to penetrate growing markets whether they be geographical or product-based. We have shown a willingness to invest significant amounts of money in market and product development, always believing that we could overcome start-up problems and end up with profitable extensions of our business. Our strategy has been very simple. We want to have a full range of alarm and monitoring equipment. We want to achieve design, performance and manufacturing excellence in all the product markets we serve. We want to be leaders, not followers, in new technology. We want the capability to reach our worldwide customer base quickly and efficiently. Finally, we want to give our customers outstanding support and service so they can succeed with their businesses. During the last eight years, a period in which our sales have grown at a 21% compound rate and our operating earnings at a 33% compound rate, we have made major strides toward realizing our strategic goals. In the area of product design and development, we have become the recognized worldwide leader in many key categories-burglar alarm controls, fire alarm controls, system smoke detectors and long-range radio systems. We are co-leader in short-range wireless systems and making headway at becoming the leader in space protection and fire alarm sounding devices. Our numerous engineering groups are turning out large numbers of new products, products which reinforce our existing leadership in key product categories and products which will enable us to significantly expand sales in key target markets. 1998 underscored our growing commitment to new product development. We launched a record number of new products including a self-contained wireless system (Lynx), a new wireless keypad receiver for wired/wireless alarm systems, a Low Profile detector with a built-in piezoelectronic sounder (1998 Product of the Show at the Spring International Security Conference in Las Vegas) and several new "intelligent" fire alarm controls. We continued to be "cutting edge" product developers. System Sensor extended its leadership in the specialty detector market by completing development of its remarkable dust-resistant Filtrex(tm) detector and by formally launching a new series of air duct detectors, the Innovair(tm) series. Notifier introduced a lower-cost version of its very intelligent early warning VIEW(tm) detection system. VIEW(tm) continues to outperform expensive and hard-to-install air sampling systems in telecommunications and clean room environments. Launching innovative new products in the alarm market does not, by itself, guarantee success. New products must offer more features, better value to users, and yet have lower costs to compete in an increasingly competitive and deflationary world. Ademco Sensor's new pet immune passive infrared motion sensors, System Sensor's newly improved SpectrAlert(tm) line of fire horn/strobes and Notifier's new manual pull station symbolize our success in meeting these design challenges. We should also point out that our new product development efforts are increasingly aimed at international markets. In Europe, for example, Notifier announced a key new intelligent fire control line which, as it gets approved throughout the region, should enable it to expand its share of the large European fire alarm market. Ademco-MicroTech launched new wired/wireless hybrid control lines which feature wireless components meeting the stringent requirements of European approval authorities. As several of our large international customers aggressively pursue the residential alarm market in Europe and other areas of the world, we will be able to service their need for flexible, cost-effective control systems. In Latin America, Eastern Europe and selected markets elsewhere, Ademco started selling a very low cost version of its VISTA(r) line, a product which should allow us to be competitive with low cost local competitors and establish a meaningful position in alarm markets worldwide. While we are very proud of our internal design capabilities, we recognize that the alarm market is growing fast in areas where we lack development expertise or need additional engineering resources. For this reason we have been actively acquiring companies around the world. The most notable acquisition we made in 1998, that of Northern Computers in December, greatly strengthens our position in the access control market. Northern is one of the largest manufacturers of access control systems in the world and has a very strong position in the small to mid- sized U.S. access control market. It is also moving into the upscale engineered access systems market and will be aided by work Pittway has been doing in this area. Northern will be a key platform for Pittway as it expands its integrated security systems business. We also filled other gaps in our overall product line when we acquired two companies in the rapidly expanding closed circuit television (CCTV) equipment market, Video Controls Limited (VCL) and Rapid Eye. VCL is one of England's leading manufacturers of surveillance camera domes and has excellent product technology. We believe that VCL can expand its European business and become a factor in the large North American market for domes. Surveillance domes are an important part of most CCTV systems and represent a $100 million market worldwide. Rapid Eye is a small company that manufactures advanced digital video transmission and storage equipment and specializes in remote surveillance systems such as those used to monitor automatic teller machines. We continued to actively expand our fire systems business worldwide. Notifier purchased one of Australia's leading fire controls companies, Forcal Services (Inertia Fire Systems), and then followed up that acquisition by buying an important regional fire equipment distributor in the Australian market, Safeguard. In England, Notifier fortified its market position by buying IAS, a small but well regarded fire controls company. The manufacturing operations of IAS and Morley (purchased late in 1997) are being transferred to Notifier's major assembly plant in Burgess Hill, England. Having an industry leading product design and development effort is, of course, critical to success in any market. But to be a true market leader, a company like Pittway has to provide its products in a timely manner to customers all over the world. Our first-rate product distribution system is one of our greatest strengths. At the start of the 1990s we already had a well earned reputation for product delivery thanks to our factory direct logistics capability and our rapidly expanding network of ADI, Ademco International, and Notifier distribution outlets. In the last eight years we have improved our delivery capabilities in every part of the world. ADI now has five major shipping hubs and 108 outlets throughout North America. In 1998 it purchased Alarm Suppliers, the largest burglar/fire alarm distributor in Northern California. In January of 1999 it acquired KingAlarm, a strong regional distributor, originally founded by Glenn Fischer, with outlets in New Jersey, New York and elsewhere in the United States. ADI now has full coverage in the North American market. Ademco International purchased a small alarm components distributor in France in September and another small distributor in the Netherlands which it merged into Security House, now the largest alarm distributor in its market. Ademco International now has strong distribution operations in Spain, Italy, the Netherlands, England, Australia and Hong Kong. Notifier substantially expanded its distribution capabilities in Australia, thanks to the two acquisitions mentioned earlier, and also established a new distribution business in Sweden. Notifier already has major company owned distribution operations in England, Spain, Italy, Germany, Belgium, and Hong Kong. Our company owned distribution operations abroad are augmented by a network of over 3,500 independent burglar/fire alarm distributors and over 600 fire equipment distributors in 46 countries on six continents. A substantial portion of the goods we market and distribute are produced by our own operations which are increasingly becoming worldwide in scope. We now have major assembly operations in England (burglar alarm components and fire controls), Italy (smoke detectors), Mexico (burglar alarm components, smoke detectors and horn/strobes), and China (smoke detectors). We have smaller assembly operations in Canada and Australia (fire alarm controls). We have invested tens of millions of dollars in flexible manufacturing systems at these facilities and are actively implementing "lean" manufacturing techniques to improve quality, shorten order response times, lower assembly costs and reduce working capital and the use of space. With all the progress we have made in product development, distribution and manufacturing, we still realize that outstanding customer support and technical assistance is a must if we are to retain our position as the alarm industry's leading supplier. In recent years we have expanded our service/support operations in the United States and have established over 50 sales/support offices in 15 countries abroad. We have also extended the reach of our highly successful independent dealer networks-Notifier, First Alert Professional and FCI. First Alert Professional, for example, now has 36 dealers in Latin America, 20 dealers in Canada, and 6 in England. Just 2 years ago First Alert Professional had no international dealers. Notifier now has engineered systems distributors in nearly every market of significance in the world. Over half its business is international; in 1990 only 12% of its business was offshore. FCI has strengthened its dealer network over the last two years by adding 51 distributors in North America. We have clearly come a long way over the last nine years extending our reach in terms of product development, manufacturing, distribution and customer service. Our challenge is to maintain our high standards and extend that reach more. King Harris, President and Chief Executive Officer February 17, 1999 NEW PRODUCTS: Lynx Ademco's quick-install residential wireless security system with full keypad, easy-to-read LCD display, English speaking voice response and voice memo. NBG-12 Series Notifier's non-coded, durable manual fire alarm pull station features single and dual-action versions with multiple mounting options. Vista(r) 5 Ademco Europe's low cost, wired control/communicator with advanced features and attractively styled LED keypads. AFC-600 Notifier's intelligent addressable fire alarm control panel with RISC based micro-processor and support for FlashScan(tm) digital device protocol. Innovair(tm) System Sensor's low profile, easily interconnectible duct smoke detector for HVAC applications, with industry-leading features including a supervised cover. 100 Series with sounder System Sensor's low profile, direct-wire intelligent smoke detector with built-in sounder and SmartCheck(tm) self-diagnostics. 5800 EU Series Ademco Europe's supervised wireless security system installs easily and requires no special programming tools or switch settings. Filtrex(tm) System Sensor's revolutionary new smoke detector provides early warning in dirty, dusty environments where traditional sensors are not practical. GROUP LOCATIONS AND DIVISIONS Pittway Security Group 165 Eileen Way Syosset, NY 11791 tel. 516-921-6704 Chairman and CEO Leo A. Guthart Ademco Distribution, Inc. (ADI) President Steven I. Roth Executive Vice Presidents Michael Cannata Joseph Cappelletti Senior Vice Presidents Dennis Babcock David Cook Vice Presidents Tom Braun John Burton Anthony Caputo Michael Chanenchuk Pat Comunale Mark Ingram Chris Lanier Stan Martin Martin Mueller James W. Rothstein Arthur Shaw Warren Stillwell Jordan Thomasson Ademco Distribution International Etobicoke, Ontario, Canada Vice President and Managing Director Ken Hall Alarm Device Manufacturing Company (ademco) President Roger B. Fradin Executive Vice Presidents Ben Cornett Martin Higgins Dennis Raefield Senior Vice Presidents Edward Freeman Herbert Lustig Vice presidents Steven Amodeo Mark Chekos Kathy Engel Gordon Hope Charles A. LaCarrubba John Lorenty Frank Marino Kevin O'Connor Martin Raphael Ron Rothman Joe Sausa Alvin Silver Nick Vitarelli Ademco de Juarez Juarez, Mexico General manager Manuel Rivera Ademco Sensor Company (ASC) Louisville, Kentucky President Ben Cornett Vice president Tom Polson APEX Raleigh, North Carolina President Jim Filer Fire Burglary Instruments (FBII) Syosset, NY Senior vice president Theodore Simon First Alert Professional Syosset, NY President Ivan Scharer Senior vice president Ken Weinstein Vice president Jeffrey Vollmar Radscan, Inc. (Alarmnet) Syosset, NY President Steven Winick StreetSmart San Diego, CA President Mike Lamb Vice president Mark O'Keefe Ademco Systems Group Syosset, NY President Dennis Raefield Vice president Tam Hulusi Government Systems Division Syosset, NY President John Sasso Javelin Systems Torrance, California President Graham Wallis Executive vice President Ray Payne Vice president Ron Levy Northern Computers, Inc. Milwaukee, WI President Joel Konicek Vice presidents Charles Baker James Vinson Ademco International Syosset, NY President Andreas Kramvis Vice presidents Paul Brennan Dean McCaskill Alan Wachtel Ademco MicroTech Limited East Kilbride, Scotland Managing director Jim Green Directors Robert Ebrey Jim Gemmill Paul Kenny Video Controls Ltd. Runcorn, United Kingdom Managing director Phill Burton Directors Keith Parkins John Prosser Ademco Asia-Pacific Limited Hong Kong, China General manager N.H. Lam Ademco Australia, Pty. Ltd. Managing director Barry Whitton Ademco-Canada Mississauga, Ontario President J.P. Chalmin Ademco-Italia S.p.A. Corsico, Italy Managing director Giordano Picchi Director Stefano Fratini SAS France Palaiseau, France General manager Bruno Creiche Security House The Netherlands Managing director Jos Mathot Ademco-Sontrix Espana, A.S. Madrid, Spain Managing director Pedro de Ibarrando Affiliate Cylink Corporation Sunnyvale, California Chairman Leo A. Guthart Pittway Systems Technology Group 4225 Naperville Road Suite 155 Lisle, IL 60532 tel. 630/577-3700 President and CEO Fred Conforti Vice president George Schoenfelder Notifier/Fire-Lite Alarms, Inc. Northford, Connecticut President Mark S. Levy Senior vice presidents Donald D. Anderson W. Allen Fritts Vice Presidents John A. Chetelat David M. DeMeo Paul L. Harris Fabian J. Skretta Frank N. Tomberlin Notifier Engineered Systems Company (NESCO) Atlanta, Georgia Vice President Kenneth A. Plummer Notifier Integrated Systems (NIS) Atlanta, Georgia Vice President Kenneth A. Plummer General Manager Nicholas G. Martello Notifier Integrated Systems (NIS) Louisville, Kentucky Vice President George J. Zamiar Notifier Europe Notifier Limited Burgess Hill, U.K. Managing Director Richard B. Marshall Morley/IAS Fire Systems Burgess Hill, U.K. Notifier AB Huddinge, Sweden General Manager Lennart Person Notifier Benelux S.A. Alleur, Belgium General Manager Wim Vandenberghe Notifier Deutschland GmbH Dusseldorf, Germany General Manager Holger Hesse Notifier Espana S.A. Barcelona, Spain General Manager Miguel Moreno Notifier Italia S.r.L. Milan, Italy General Manager Franco Dischi Notifier International Northford, CT. Senior Vice President W. Allen Fritts Vice President Paul L. Harris Notifier Canada Toronto, Canada Managing Director Ivan Spiegel Notifier Far East Kowloon, Hong Kong Managing Director Steve Higgins Notifier/Inertia Fire Systems New South Wales, Australia Managing Director David Callus Notifier Middle East Amman, Jordan Managing Director Gideon Golan Notifier Latin America Sao Paulo, Brazil Managing director George Clark System Sensor Division St. Charles, Illinois President and CEO John W. Hakanson Senior Vice President Gary L. Lederer Vice Presidents Nicholas Bellavia James B. Brown Aroon Chaddha Donald Malaker Audible/Visible & Waterflow Division St. Charles, Illinois Vice President and General Manager John Strauss System Sensor de Mexico SA de CV Juarez, Mexico general manager Agustin Sosa System Sensor Europe Horsham, U.K. Managing director David C. Harvey Pittway Tecnologica S.p.A. Trieste, Italy President Vincenzo Nesta System Sensor International St. Charles, Illinois Vice President and General Manager James B. Brown System Sensor Canada Mississauga, Canada Managing Director Peter Collier Xi'an System Sensor Electronics, Ltd. Xi'an, China General manager Li Ning Fire Control Instruments (FCI) Waltham, Massachusetts President and CEO Arthur S. Appel Vice Presidents Gregory Fowler Carl Hagarty Kenneth LaRocque Microlite Corporation West Chicago, Illinois President Richard LeBlanc Vice president Darrell Chelcun Pittway Real Estate Wesley Chapel, Florida Tel. 813-973-3685 President Paul R. Gauvreau Vice President Harold E. Rice, Jr. BOARD OF DIRECTORS Eugene L. Barnett (a) Chairman of the Audit Committee; Consultant, former Chairman of The Brand Companies Fred Conforti Vice President; President and CEO of the Pittway Systems Technology Group E. David Coolidge, III (a)(d)(e) CEO William Blair & Company (investment banker) Anthony Downs (a)(b) Chairman of the Compensation Committee; Senior Fellow, Brookings Institution (non-profit social policy research center) Leo A. Guthart (c)(d) Vice Chairman of the Board; Chairman of the Pittway Security Group; Chairman of the Board of Cylink Corporation Irving B. Harris (c)(d) Chairman of the Executive and Investment Committees; Chairman of the Board of The Acorn Investment Trust (mutual funds) King Harris(c)(e) President and CEO Nelson Harris (c) Chairman of the Board William W. Harris (b)(c)(e) Chairman of the Nominating Committee; Private Investor; Treasurer of KidsPac (political action committee) Jerome Kahn, Jr. (b) President of William Harris Investors, Inc. (investment advisors) John W. McCarter, Jr. (b) President and CEO Field Museum of Natural History Committee Membership: (a) Audit (b) Compensation (c) Executive (d) Investment (e) Nominating OFFICERS Neison Harris (83) Chairman of the Board Irving B. Harris (88) Chairman of the Executive Committee King Harris (55) President and CEO Leo A. Guthart (61) Vice Chairman of the Board Fred Conforti (57) Vice President Edward J. Schwartz (57) Vice President Paul R. Gauvreau (59) Financial Vice President, Treasurer and CFO James F. Vondrak (54) Corporate Secretary Philip McCanna (51) Controller CORPORATE INFORMATION General Offices 200 South Wacker Drive, Suite 700 Chicago, Illinois 60606-5802 Tel. 312-831-1070 Stock Transfer Agent and Registrar Harris Trust and Savings Bank P.O. Box A-3504 Chicago, Illinois 60690-9502 Tel. 800-942-5909 Independent Accountants PricewaterhouseCoopers LLP 200 East Randolph Drive Chicago, Illinois 60601 Counsel Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Pittway Common (PRY) and Class A (PRYA) stocks are listed on the New York Stock Exchange. A copy of the Company's December 31, 1998 Annual Report to the Securities and Exchange Commission on Form 10-K (excluding exhibits) is enclosed. These financial statements are available on-line at:www.pittway.com Pittway Corporation 200 South Wacker Drive Suite 700 Chicago, Illinois 60606-5802 EX-21 6 SUBSIDIARIES EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1998 FORM 10-K Approximate Percentage of State or Voting Securities Country of Owned by Name of Company Incorporation Immediate Parent Pittway Corporation Ademco Distribution, Inc. Delaware 100 ADI-Lenox Club, Inc. Delaware 100 Ademconet, Inc. Delaware 100 Radscan, Inc. Delaware 100 Fire Burglary Instruments, Inc. New York 100 Ademco Security Group, Inc. California 100 Ademco Communications Partners, Inc. Delaware 100 Fire-Lite Alarms, Inc. Connecticut 100 Notifier Engineered Systems Company Delaware 100 MicroLite Corporation California 100 Chilpub, Inc. Delaware 100 Final Frontier Pittway I, Inc. Illinois 100 Final Frontier Pittway II, Inc. Illinois 100 Pittway Corporation of Canada Canada 100 Pittway Fire Safety, Inc. Delaware 100 Ademco de Juarez, S.A. de C.V. Mexico 100 Ademco Asia Pacific Limited Hong Kong 100 Pittway Foreign Sales Corp. U.S. Virgin Islands 100 Fire Control Instruments, Inc. Delaware 100 Northern Computer, Inc. Wisconsin 100 EXHIBIT 21 - cont'd PITTWAY CORPORATION DECEMBER 31, 1997 FORM 10-K Approximate Percentage of State or Voting Securities Country of Owned by Name of Company Incorporation Immediate Parent Pittway Corporation (continued) Pittway International, Ltd. Delaware 100 ADI de Mexico S.A. de C.V. Mexico 100 Notifier de Mexico S.A. de C.V. Mexico 100 System Sensor de Mexico S.A. de C.V. Mexico 100 Notifier Espana S.A. Spain 100 Notifier (Benelux) S.A. Belgium 100 Notifier Deutschland GmbH Germany 100 Notifier, Ltd. (Singapore) Delaware 100 System Sensor, Ltd. Delaware 100 Xi'an System Sensor Electronics, Ltd. China 55 Pittway UK Limited England 100 Pittway Systems Tecnology Group Europe Ltd. England 100 Ademco Microtech Limited England 100 Ademco Australia Pty., Ltd. Australia 100 Ademco-Sontrix Espana, S.A. Spain 100 Notifier Ab Sweden 100 Video Controls Limited England 90 Notifier Italia S.r.l. Italy 100 Pittway Tecnologica S.p.A. Italy 100 Ademco Italia S.p.A. Italy 100 Ademco Security and Communications Group, B.V. Netherlands 100 Notifier Australia Pty., Ltd. Australia 60 ADI of Puerto Rico, Inc. Puerto Rico 100 Pittway France France 100 Securite Acces Systemes France 100 Pittway Australia Pty., Limited Australia 100 Pittway Intertia Pty., Limited Australia 100 Forcal Services Pty., Limited Australia 100 Notes: All of the above subsidiaries are included in the Registrant's consolidated financial statements. Parent-subsidiary or affiliate relationships are shown by marginal indentation. EX-23 7 CONSENT OF PWC EXHIBIT 23 PITTWAY CORPORATION DECEMBER 31, 1998 FORM 10-K CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-12615, 333-71613 and 333-71617) of Pittway Corporation of our report dated February 16, 1999 appearing on page 38 of this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois March 19, 1999 EX-27.1 8 SCHEDULE 1998
5 1,000 YEAR DEC-31-1998 DEC-31-1998 16,998 44,200 275,300 12,173 252,947 620,808 267,961 132,679 1,075,055 349,327 104,609 0 0 42,641 452,523 1,075,055 1,326,646 1,326,646 841,501 841,501 32,559 5,462 13,153 56,659 19,762 36,897 5,031 0 0 41,928 .99 .97 Excluding the provision for patent litigation and change in equity in Cylink income from continuing operations would have been $63.0 million ($1.46 per diluted share).
EX-27.2 9 SCHEDULE 1998 QRTRLY
5 Certain amounts in this financial data schedule have been reclassified to conform to the current year classification. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 9,796 20,925 18,929 27,940 28,415 33,125 223,689 241,643 258,121 9,802 10,423 11,028 261,308 262,163 258,853 538,234 569,059 585,375 243,989 255,467 264,009 116,187 124,207 133,242 943,599 1,000,790 944,451 261,321 283,529 271,507 94,970 99,325 98,578 0 0 0 0 0 0 21,034 21,218 42,581 459,476 493,840 423,943 943,599 1,000,790 944,451 304,139 629,677 974,165 304,139 629,677 974,165 192,332 400,764 618,754 192,332 400,764 618,754 8,423 16,876 24,366 783 1,866 3,044 3,501 6,573 9,832 (16,841) 9,240 35,687 (6,498) 3,311 12,724 (10,343) 5,929 22,963 2,348 5,404 5,031 0 0 0 0 0 0 (7,995) 11,333 27,994 (.19) .27 .66 (.18) .26 .65 Included in total assets is an investment in discontinued operations of $62.1 million and $60.7 million at March 31, 1998 and June 30, 1998, respectively. Excluding the patent litigation provision and the change in equity in Cylink, income from continuing operations would have been as follows: Mar-31-1998 $12.0 million ($ .28 per diluted share) Jun-30-1998 $27.9 million ($ .65 per diluted share) Sep-30-1998 $45.4 million ($1.05 per diluted share)
EX-27.3 10 SCHEDULE 1997
5 Certain amounts in this financial data schedule have been reclassified to conform to the current year classification. 1,000 YEAR 3-MOS 6-MOS 9-MOS YEAR DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 32,477 9,192 13,125 13,906 29,257 26,026 24,033 21,787 22,812 27,583 184,798 189,271 206,498 218,154 208,913 7,601 8,486 8,766 9,079 9,691 199,895 226,907 227,267 226,554 240,228 459,343 465,144 486,506 498,504 521,359 208,942 222,269 234,795 230,847 235,036 98,058 104,648 110,606 103,957 109,118 817,308 850,824 873,129 877,807 910,694 198,363 224,647 236,360 236,629 252,098 87,714 84,312 90,970 90,068 95,215 0 0 0 0 0 0 0 0 0 0 20,926 20,981 20,984 20,987 20,991 425,946 436,776 445,518 452,219 466,143 817,308 850,824 873,129 877,807 910,694 923,453 252,492 537,650 844,186 1,143,772 923,453 252,492 537,650 844,186 1,143,772 587,323 161,879 343,791 539,746 723,547 587,323 161,879 343,791 539,746 723,547 20,638 6,276 12,582 19,495 25,880 4,222 974 1,849 2,484 4,298 8,590 2,406 5,420 8,335 10,852 96,367 15,116 33,390 40,589 63,290 34,675 5,546 12,105 14,194 22,682 61,692 9,570 21,285 26,395 40,608 11,350 2,726 7,609 10,834 14,906 0 0 0 0 0 0 0 0 0 0 73,042 12,296 28,894 37,229 55,514 1.75 .29 .69 .89 1.32 1.73 .29 .68 .88 1.31 Included in total assets is an investment in discontinued operations of $47.1 million, $49.7 million, $46.2 million, $47.7 million and $58.4 million at December 31, 1996, March 31,1997, June 30, 1997, September 30, 1997 and December 31, 1997 respectively. Excluding the gain on sale of investment, in 1996, and the change in equity in Cylink, income from continuing operations would have been as follows: Dec-31-1996 $39.0 million ($.92 per diluted share) Mar-31-1997 $ 9.2 million ($.22 per diluted share) Jun-30-1997 $20.7 million ($.49 per diluted share) Sep-30-1997 $33.4 million ($.79 per diluted share) Dec-31-1997 $47.3 million ($1.11 per diluted share)
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