-----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, Spr6VxCpY0OJJHG0DMRxp7Ugxoxa7PW2Gpi1MeNBLd1VAIWeOANqAxj/FDZ8rYbS gGNmiT4SPg+dW/DRyqnMbA== 0000093469-99-000007.txt : 19990507 0000093469-99-000007.hdr.sgml : 19990507 ACCESSION NUMBER: 0000093469-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITTWAY CORP /DE/ CENTRAL INDEX KEY: 0000093469 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 135616408 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04821 FILM NUMBER: 99611692 BUSINESS ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 BUSINESS PHONE: 3128311070 MAIL ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD SHARES INC DATE OF NAME CHANGE: 19900321 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD POWER & LIGHT CORP DATE OF NAME CHANGE: 19660905 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (Zip Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (April 14, 1999). Common Stock 7,877,664 Class A Stock 34,860,06 PITTWAY CORPORATION AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 1999 INDEX PART I. FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Statement of Operations - Three Months Ended March 31, 1999 and 1998 3 Consolidated Balance Sheet - March 31, 1999 and December 31, 1998 4-5 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7-10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 14-16 ITEM 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 17 2 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited; Dollars in Thousands, Except Per Share Data) 1999 1998 CONTINUING OPERATIONS - NET SALES................................ $381,906 $304,139 OPERATING EXPENSES: Cost of sales.......................... 240,011 192,332 Selling, general and administrative.... 104,751 82,039 Provision for patent litigation........ 43,000 Depreciation and amortization.......... 10,991 8,423 355,753 325,794 OPERATING INCOME (LOSS).................. 26,153 (21,655) OTHER INCOME (EXPENSE): Gain on sale of securities............. 11,002 Change in equity of affiliate.......... (832) 7,284 Income from marketable securities and other interest................... 1,301 779 Interest expense....................... (4,004) (3,501) Income from investments................ 219 223 Miscellaneous, net..................... 226 29 7,912 4,814 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... 34,065 (16,841) PROVISION (CREDIT) FOR INCOME TAXES...... 12,873 (6,498) INCOME (LOSS) FROM CONTINUING OPERATIONS. 21,192 (10,343) INCOME FROM DISCONTINUED OPERATIONS NET OF INCOME TAXES OF $1,666............ 2,348 NET INCOME (LOSS).......................... $ 21,192 $ (7,995) INCOME (LOSS) PER SHARE OF COMMON AND CLASS A STOCK Basic: Continuing operations.......... $ .50 $ (.25) Discontinued operations........ .06 Net income (loss).............. $ .50 $ (.19) Diluted: Continuing operations.......... $ .49 $ (.25) Discontinued operations........ .06 Net income (loss).............. $ .49 $ (.19) CASH DIVIDENDS DECLARED PER SHARE: Common................................... $ .0217 $ .0333 Class A.................................. $ .0300 $ .0417 AVERAGE SHARES OUTSTANDING (000's)......... 42,679 42,043 AVERAGE SHARES AND DILUTIVE EQUIVALENTS OUTSTANDING (000'S).......... 43,668 42,043 See accompanying notes. 3 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1999 AND DECEMBER 31, 1998 (Unaudited; Dollars in Thousands) March 31, December 31, 1999 1998 ASSETS CURRENT ASSETS: Cash and equivalents................... $ 5,056 $ 16,998 Marketable securities.................. 53,004 44,200 Accounts and notes receivable, less allowance for doubtful accounts of $12,583 and $12,173.................. 269,115 263,127 Inventories............................ 284,052 252,947 Future income tax benefits............. 32,044 32,870 Prepayments, deposits and other........ 11,926 10,666 655,197 620,808 PROPERTY, PLANT AND EQUIPMENT, at cost: Buildings.............................. 38,779 39,645 Machinery and equipment................ 240,693 225,835 279,472 265,480 Less: Accumulated depreciation......... (142,095) (132,679) 137,377 132,801 Land................................... 2,430 2,481 139,807 135,282 INVESTMENTS: Marketable securities (USSB)........... 47,631 51,994 Investment in affiliate (Cylink)....... 20,784 21,616 Real estate and other ventures......... 49,146 49,131 Leveraged leases....................... 15,945 16,821 133,506 139,562 OTHER ASSETS: Goodwill, less accumulated amortization of $10,892 and $9,642... 139,322 134,686 Other intangibles, less accumulated amortization of $6,175 and $6,266.... 2,930 2,906 Notes receivable....................... 16,363 15,862 Miscellaneous.......................... 25,943 25,949 184,558 179,403 $1,113,068 $1,075,055 See accompanying notes. 4 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1999 AND DECEMBER 31, 1998 (Unaudited; Dollars in Thousands) March 31, December 31, 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable........................... $ 96,133 $ 92,395 Long-term debt due within one year...... 15,475 16,719 Accounts payable........................ 179,707 167,773 Accrued liabilities..................... 69,217 66,304 Income taxes payable.................... 12,651 6,136 373,183 349,327 LONG-TERM DEBT, less current maturities... 103,304 104,609 DEFERRED LIABILITIES: Income taxes............................ 74,437 71,114 Litigation.............................. 43,000 43,000 Other................................... 8,010 11,841 125,447 125,955 STOCKHOLDERS' EQUITY: Preferred stock, none issued............ Common capital stock, $1 par value- Common stock.......................... 7,878 7,878 Class A stock......................... 34,860 34,763 Capital in excess of par value.......... 20,365 18,671 Retained earnings....................... 437,338 417,363 Accumulated other comprehensive income (loss)- Marketable securities valuation adjustment.............. 22,282 22,416 Foreign currency translation adjustment........................ (11,589) (5,927) 511,134 495,164 $1,113,068 $1,075,055 See accompanying notes. 5 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited; Dollars in Thousands) 1999 1998 CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Income (loss) from continuing operations......... $ 21,192 $(10,343) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization.................. 10,991 8,423 Gain on sale of securities, net of taxes....... (6,876) Equity in affiliate, net of taxes.............. 520 (4,553) Deferred income taxes.......................... 4,406 (200) Retirement and deferred compensation plans..... (2,094) 505 Income/loss from investments adjusted for cash distributions received............... 658 189 Provision for losses on accounts receivable.... 2,048 784 Provision for patent litigation, net of taxes.. 26,875 Changes in assets and liabilities, excluding effects from acquisitions and foreign currency adjustments: Increase in accounts receivable.............. (4,411) (13,075) Increase in inventories...................... (27,208) (21,452) (Increase) decrease in prepayments and deposits............................... (1,072) 4 Increase in accounts payable and accrued liabilities................................ 13,093 8,361 Increase in income taxes payable............. 7,248 3,336 Other changes, net............................. (497) (59) Net cash provided (used) by operating activities. 17,998 (1,205) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................. (15,742) (10,092) Proceeds from the sale of securities, net of taxes................................... 11,052 Net (increase) decrease in current marketable securities.......................... (8,833) (406) Disposition of property and equipment............ 644 160 Additions to investments......................... (43) (5) Increase in notes receivable..................... (2,712) (3,025) Net assets of business acquired, net of cash..... (15,493) Net cash used by investing activities............ (31,127) (13,368) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in notes payable......... 4,651 (2,137) Proceeds of long-term debt....................... 110 2,248 Repayments of long-term debt..................... (2,218) (1,850) Stock options exercised.......................... 90 74 Dividends paid................................... (1,221) (1,688) Net cash provided (used) by financing activities. 1,412 (3,353) EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (225) (191) NET CASH USED BY DISCONTINUED OPERATIONS........... (1,345) NET DECREASE IN CASH AND EQUIVALENTS............... (11,942) (19,462) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........ 16,998 29,257 CASH AND EQUIVALENTS AT END OF PERIOD.............. $ 5,056 $ 9,795 See accompanying notes. 6 PITTWAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited; Dollars in Thousands) NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company" or "Registrant"). Amounts for the quarter ended March 31, 1998 have been restated to reflect the discontinuation of the publishing business which was spun off in 1998. Except where otherwise indicated, the following notes relate to continuing operations. All share and per share data, as appropriate, reflect a 2-for-1 stock split paid September 11, 1998. The accompanying consolidated financial statements are unaudited but reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements contained herein. However, the financial statements and related notes do not include all disclosures normally provided in the Company's Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE 2. DISCONTINUED OPERATIONS On August 7, 1998 the Company distributed its investment in Penton Media, Inc. ("Penton"), a wholly-owned subsidiary of the Company, to stockholders in a tax-free spin-off. Net sales of the discontinued operations prior to their disposition were $52,485 for the quarter ended March 31, 1998. NOTE 3. COMPREHENSIVE INCOME Total comprehensive income (loss) for the quarters ended March 31 was: 1999 1998 Net income (loss) $ 21,192 $ (7,995) Other comprehensive income (loss) (5,796) 1,894 Total comprehensive income (loss) $ 15,396 $ (6,101) NOTE 4. ACQUISITION In the first quarter of 1999, the Company acquired the assets and business of a domestic distributor of alarm and other security products. The total purchase price for this business was $15,493 cash plus $311 of debt assumed. The acquisition was accounted for as a purchase transactions in the consolidated financial statements from the date of acquisition. The impact on consolidated results of operations was not significant. 7 NOTE 5. INVENTORIES The recorded value of inventories at March 31, 1999 and December 31, 1998 approximate current cost and consist of the following: Mar. 31, Dec. 31, 1999 1998 Raw materials $ 60,881 $ 57,763 Work in process 20,998 22,089 Finished goods - Manufactured by the Company 112,010 98,199 Manufactured by others 90,163 74,896 $284,052 $252,947 NOTE 6. MARKETABLE SECURITIES Information about the Company's marketable securities at March 31, 1999 and December 31, 1998 is as follows: Mar. 31, Dec. 31, 1999 1998 Current - Auction Rate Preferred Stocks - Aggregate cost $ 53,032 $ 44,198 Net unrealized holding (loss) gain (28) 2 Aggregate fair value $ 53,004 $ 44,200 Non-Current - USSB Common Stock - Aggregate cost $ 11,614 $ 15,789 Unrealized holding gain 36,017 36,205 Aggregate fair value $ 47,631 $ 51,994 Realized gains and losses are based upon the specific identification method. Such gains and losses on the auction rate preferred stock, for the quarters ended March 31, 1999 and 1998 were not significant. In the first quarter of 1999 the Company recorded a $6,876 ($.16 per diluted share) gain, net of taxes, on the sale of one million of its 3.8 million shares of USSB at an average selling price of $15.18 per share. NOTE 7. INVESTMENT IN AFFILIATE The investment in affiliate consists of the Company's interest in Cylink Corporation (Cylink), which is carried at equity. At March 31, 1999, the Company's 8.6 million shares of Cylink stock had a quoted market value of $34,424. 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. 8 The summarized results of operations of Cylink for the quarters ended March 31, 1999 and 1998 (as restated by Cylink in December 1998) are as follows: 1999 1998 Revenue $11,885 $ 8,062 Gross profit 7,773 5,431 Loss from continuing operations $(4,065) $(3,375) Loss from discontinued operations (259) Gain on disposal of discontinued operations 22,776 Net income (loss) $(4,065) $19,142 Net income previously reported $23,706 NOTE 8. EARNINGS PER SHARE Basic net income per share amounts were calculated by dividing earnings by the combined weighted average number of Class A and Common shares outstanding. Diluted net income per share amounts were based on the same reported earnings but assume the issuance of Class A stock upon exercise of outstanding stock options and distributable as performance and bonus share awards. For the first quarter of 1998 there were 819,000 potential Class A shares related to these options and awards that were excluded from the calculation as they would have had an anti- dilutive effect. NOTE 9. SEGMENT INFORMATION Segment information for the quarters ended March 31, excluding the 1998 provision for patent litigation were: 1999 1998 Sales Alarm Manufacturing $227,054 $174,080 Alarm Distribution 232,185 185,845 General Corporate and Other 33 Less inter-segment sales (77,333) (55,819) $381,906 $304,139 Operating Income Alarm Manufacturing $ 22,640 $ 17,028 Alarm Distribution 8,999 6,640 General Corporate and Other (2,312) (1,941) Less intercompany profit in inventories (3,174) (382) $ 26,153 $ 21,345 NOTE 10. LEGAL PROCEEDINGS In 1989 a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the 9 Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. In December 1994, Saddlebrook's motion for summary judgment based on collateral estoppel was granted on the ground that Plaintiffs' claims were fully retried and rejected in a related administrative proceeding. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998, the trial court entered an order limiting the scope of the retrial in light of the appellate court's ruling. At an April 1, 1999 pretrial conference the retrial was scheduled to commence in January 2000. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. In 1995 a lawsuit was brought against the Company by Interactive Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of up to $66,800 on account of Company sales of products which the plaintiff alleged infringed on its patent. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. The Company moved for summary judgment of non- infringement and, in December 1997, the Court issued its order granting the Company partial summary judgment, stating its products did not literally infringe upon plaintiff's patent claims. In March 1998, the jury handed down a verdict against the Company awarding damages of $35,954. The jury found that the Company did not willfully infringe. The Company recorded a provision of $43,000 in the first quarter of 1998 which considers the judgment and interest. The Company 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. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company attained $381.9 million of sales in the first quarter of 1999, a 25.6 percent increase over the first quarter of 1998. Income from continuing operations amounted to $21.2 million in 1999 compared to a loss of $10.3 million in 1998. The swing in earnings between years was dramatically affected by the inclusion of two special items and the Cylink results for both years. The special items are an after-tax gain of $6.9 million ($.16 per diluted share) recorded in 1999 on the sale of USSB stock and an after-tax charge of $26.9 million ($.64 per diluted share) recorded in 1998 for patent litigation. The change in the Company's 29 percent share of Cylink results included an after-tax gain on the 1998 sale of Cylink's wireless communications business of $4.2 million ($.10 per diluted share). Pro forma operating results after excluding discontinued operations, the provision for patent litigation, changes in Pittway's equity investment in Cylink, the gain on sale of USSB stock and related tax effects are as follows: 1999 1998 Net sales $381,906 $304,139 Operating expenses: Cost of sale 240,011 192,332 Selling, general and administrative 104,751 82,039 Depreciation and amortization 10,991 8,423 355,753 282,794 Operating income 26,153 21,345 Interest expense (4,004) (3,501) Other income (expense), net 1,746 1,031 Income before income taxes 23,895 18,875 Provision for income taxes 9,059 6,896 Net income $ 14,836 $ 11,979 Net income per diluted share of Common and Class A stock $ .34 $ .28 Average number of shares and dilutive securities outstanding (000's) 43,668 42,862 Domestic sales increased 23 percent in 1999 while international sales increased 40 percent. International business represented 18 percent of total consolidated sales in 1999 and 16 percent in 1998. Approximately 60 percent of the foreign sales growth was derived from businesses acquired since the 1998 first quarter. Cost of sales increased 24.8 percent, which was less than the increase in sales due to operating efficiencies. Excluding the $43 million provision for patent litigation recorded in 1998, selling, general and administrative expenses increased 27.7 percent in 1999 principally as a result of increased costs associated with the higher sales volumes of both the Manufacturing and Distribution segments. 11 Alarm Manufacturing sales increased 30 percent during the quarter, leading to a 33 percent increase in operating income. The segment's operating margin improved to 10.0 percent of sales from 9.8 percent in 1998. The increased volume reflects the benefit of the continued acceptance of numerous new product offerings and from expanded worldwide distribution capabilities. Businesses acquired since the 1998 first quarter accounted for 10 percent of segment sales in 1999. Sales to the Distribution segment accounted for 34 percent of Manufacturing revenue in 1999 and 32 percent in 1998. Such sales increased 38.5 percent over the prior year. A large portion of the increase resulted from building inventory for the Distribution segment to meet increased customer demand, particularly for national accounts. This build-up is expected to lessen as the year progresses. Alarm Distribution sales increased 25 percent during the quarter, leading to a 36 percent increase in operating income. The segment's operating margin improved to 3.9 percent of sales in 1999 from 3.6 percent in 1998. Much of the increased volume originated from significant growth in national account business for products manufactured by the Alarm Manufacturing segment. Sales volume also expanded due to expansion of its outlet network, both internally and from acquisitions. Businesses acquired since the 1998 first quarter accounted for 7 percent of segment sales in 1999. Depreciation and amortization expense increased 30 percent in 1998 mainly as a result of capital additions in the Manufacturing segment, and to a lesser extent, equipment and intangible assets acquired in the 1998 and 1999 acquisitions. Other income (expense) in 1999 included an $11.0 million pretax gain on the sale of USSB stock. Other income in 1998 included a pretax gain of $6.7 million resulting from Pittway's equity in a gain recorded by Cylink Corporation on the divestiture of its wireless division. In the first quarter of 1999, the Company recorded a loss of $.8 million as its share of Cylink's operating results versus income, before the divestiture gain, of $.6 million in 1998. The increase in interest expense over the 1998 first quarter, reflecting higher borrowing levels, was offset by higher income from the Company's marketable securities. Effective tax rates were 37.8 percent and 38.6 percent in the first quarter of 1999 and 1998, respectively. DISCONTINUED OPERATIONS Included in the 1998 first quarter results is $2.3 million ($.06 per diluted share) of income from Penton Media, Inc., which was spun-off in August 1998. 12 FINANCIAL CONDITION The Company's financial condition remained strong during the first quarter of 1999. Net working capital at March 31, 1999 was $282.0 million, up from $271.5 million at December 31, 1998. Management anticipates that operations, borrowings and marketable securities will continue to be the primary sources of funds needed to meet ongoing programs for capital expenditures, to finance acquisitions and investments and to pay dividends. In the first quarter of 1999, the $30.8 million generated from income from continuing operations excluding depreciation, amortization, the provision for patent litigation, the change in equity of Cylink, the gain on sale of USSB stock, and other non-cash items was partially used to fund the net increase in working capital items. The $18.0 million of net cash generated from operating activities, together with short-term borrowings of $4.7 million, $11.1 million of proceeds from the sales of USSB stock and $11.9 million of cash were used primarily to finance a $15.5 million acquisition, $15.7 million of capital expenditures, $2.1 million net repayments of long term debt, a $2.7 million increase in notes receivable, $8.8 million of net purchases of marketable securities, and $1.2 million of dividends. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest up to $45.9 million in certain affordable housing ventures through 2005. The Company has real estate investments in various limited partnerships with interests in commercial rental properties, which may be sold or turned over to lenders. Such events have no effect on net income although they do have a negative impact on the Company's cash position because tax payments become due when the properties are sold or returned to the lenders. The Company has approximately $3.2 million accrued at March 31, 1999 to fully cover the remaining tax payments that would be due if all the properties were sold or returned to the lenders. The Company presently intends to hold its existing investments in preferred stocks and Cylink although occasional sales of preferred stocks may be made selectively as conditions warrant. In the first quarter of 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 continues to liquidate its USSB holdings based upon current favorable market prices and expects to sell all of its shares if the acquisition of USSB by Hughes Electronic Corporation is completed. In the event the Company loses its appeal of the unfavorable verdict in the ITI litigation (see Note 10 to the financial statements), an after- tax payment of $26.9 million would be required. 13 YEAR 2000 ISSUE All work necessary to upgrade the Company's systems for Year 2000 (Y2K) compliance is expected to be completed in a timely fashion and should not involve a significant amount of the Company's resources. The Company's Y2K project is proceeding on schedule. Although the Company expects its critical systems to be compliant, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible loss of technical resources to perform the work, failure to identify all susceptible systems, noncompliance by third parties whose systems and operations impact the Company, and other similar uncertainties. Due to the general uncertainty inherent in the Y2K problem, resulting in part from the uncertainty of Y2K readiness of customers, third-party suppliers and other vendors, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. **** This quarterly report, other than historical financial information, contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1998. These include risks and uncertainties relating to pending litigation, government regulation, competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Property Damage Claim On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook 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. 14 Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the grounds that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998 the trial court entered an order limiting the scope of a retrial in light of the appellate court's ruling. At an April 1, 1999 pretrial conference the retrial was scheduled to commence in January 2000. 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. 15 Patent Infringement Claim On August 16, 1995, Interactive Technologies, Inc. ("ITI" - plaintiff) commenced a lawsuit in U.S. District Court against the Company alleging patent infringement. The plaintiff claimed the Company infringed on their patent by making, using and selling certain security system products in the United States, and that the infringement was willful. Plaintiff initially sought unspecified damages, and an injunction. The Company denied infringement, maintaining the plaintiff's patent was invalid, as well as unenforceable because the plaintiff committed inequitable conduct before the Patent Office when applying for the patent. During discovery, the plaintiff informed the Company it was seeking damages measured by its lost profits or not less than a reasonable royalty on sales of the Company. Fact discovery in the action closed on January 17, 1997. The Court conducted a Markman hearing in October 1997 to construe the patent claims asserted by plaintiff and issued its Order interpreting the claims on October 24, 1997. The Company moved for summary judgment of non-infringement. On December 2, 1997 the Court issued its Order granting partial summary judgment that the Company's products did not literally infringe the patent claims, and denying summary judgment of no infringement. Jury trial started on January 7, 1998. During the trial, the plaintiff indicated it was seeking lost profits and royalty damages of up to $66.8 million. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. On March 9, 1998 the jury handed down a verdict against the Company awarding damages of $36.0 million. The jury found that the Company did not willfully infringe. The Court entered judgment on the jury's verdict on April 9, 1998. Consequently, the Company recorded a provision of $43.0 million in the first quarter of 1998, which 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. Other 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. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Number Description 10.1 Amendment To Employment Agreement between Pittway Corporation and Paul R. Gauvreau dated as of March 18, 1999. 10.2 Amendment To Employment Agreement between Pittway Corporation and Edward J. Schwartz dated as of March 18, 1999. 27 Financial Data Schedule (submitted only in electronic format) (b) No reports on form 8-K have been filed during the quarter for which this report is being filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PITTWAY CORPORATION (Registrant) By /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President, Treasurer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: May 5, 1999 17 EX-10.1 2 AMENDED AGREEMENT PRG Exhibit 10.1 Pittway Corporation March 31, 1999 Form 10-Q AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT made as of March 18, 1999 between Pittway Corporation, a Delaware corporation (the "Company"), and Paul R. Gauvreau ("Executive"). The Company and Executive are parties to an Employment Agreement made as of January 1, 1998 (the "Existing Employment Agreement"). The Company and Executive desire to amend the Existing Employment Agreement. Accordingly, the Company (pursuant to authorization from the Compensation Committee of its Board of Directors) and Executive agree as follows: Clause (iii) of paragraph 3(g) of the Existing Employment Agreement is amended and restated to read as follows: (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, with the beginning date for accrual of a benefit being January 1, 1995. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. PITTWAY CORPORATION By /s/ King Harris Its President /s/ Paul R. Gauvreau PAUL R. GAUVREAU EX-10.2 3 AMENDED AGREEMENT EJS Exhibit 10.2 Pittway Corporation March 31, 1999 Form 10-Q AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT made as of March 18, 1999 between Pittway Corporation, a Delaware corporation (the "Company"), and Edward J. Schwartz ("Executive"). The Company and Executive are parties to an Employment Agreement made as of January 1, 1998 (the "Existing Employment Agreement"). The Company and Executive desire to amend the Existing Employment Agreement. Accordingly, the Company (pursuant to authorization from the Compensation Committee of its Board of Directors) and Executive agree as follows: Clause (iii) of paragraph 3(g) of the Existing Employment Agreement is amended and restated to read as follows: (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, with the beginning date for accrual of a benefit being January 1, 1995 and with the following modifications (A) in the event Executive becomes entitled, and so long as Executive remains entitled, to a monthly benefit under section 2.4 of the SERP on account of accruals under section 2.2 thereof, the amount of such monthly benefit (if paid on a life annuity basis commencing upon Executive's attainment of age 65 years) shall be increased by an amount equal to the additional monthly benefit that would have been payable on such basis pursuant to the Pittway Corporation Retirement Plan had Executive commenced participation in that Plan on October 1, 1979 rather than on July 1, 1987 and had his total cash compensation from Standard Shares, Inc. for any plan year or fraction under that Plan occurring between such dates been treated for purposes of that Plan as having been earned from the Company during such plan year or fraction, and the aggregate benefit shall be payable as provided in section 2.4 of the SERP, and (B) if Executive dies prior to his supplemental retirement benefit commencement date under the SERP and has a spouse (as defined in section 2.7 thereof) at the time of his death, such spouse shall be entitled to an additional monthly benefit pursuant to section 2.6 of the SERP calculated based on such aggregate benefit (rather than on the monthly benefit on account of accruals under section 2.2 of the SERP). IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. PITTWAY CORPORATION By /s/ King Harris Its President /s/ Edward J. Schwartz EDWARD J. SCHWARTZ EX-27 4 FDS
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 5,056 53,004 281,698 12,583 284,052 655,197 281,902 142,095 1,113,068 373,183 103,304 0 0 42,738 468,396 1,113,068 381,906 381,906 240,011 240,011 9,570 2,048 4,004 34,065 12,873 21,192 0 0 0 21,192 .50 .49 Excluding the gain on sale of USSB stock and the change in equity in Cylink, income from continuing operations would have been $14.8 million ($.34 per diluted share).
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