10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Suite 700, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (ZIP Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $1.00 par value American Stock Exchange Class A Stock, $1.00 par value American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant (based on closing sales prices on March 2, 1995): $468,343,000. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (March 2, 1995): Common Stock - 2,626,024 shares outstanding; Class A Stock - 11,314,700 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1994 Annual Report to Stockholders are incorporated by reference into Parts I and II of this report. Portions of the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 11, 1995 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, 1994 PART I Page Item 1 Business 3-7 Item 2 Properties 8-9 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 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8 Financial Statements and Supplementary Data 11 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 11 PART III Item 10 Directors and Executive Officers of the Registrant 11 Item 11 Executive Compensation 12 Item 12 Security Ownership of Certain Beneficial Owners and Management 12 Item 13 Certain Relationships and Related Transactions 12 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 12 SIGNATURES 13 2 PART I Item 1. Business (a) General Development of Business Standard Shares, Inc. ("Standard") was incorporated under Delaware law in 1925. On December 28, 1989, Pittway Corporation ("Old Pittway"), a Pennsylvania corporation incorporated in 1950, merged into Standard through an exchange of stock and Standard changed its name to Pittway Corporation ("Pittway" or "Registrant"). Prior to the merger Standard owned 50.1% of Old Pittway. The merger was accounted for in a manner similar to a pooling of interests, using historical book values. Pittway and its subsidiaries are referred to herein collectively as the "Company". The Company operates in two reportable industry segments: alarm and other security products, and publishing. During the first half of 1994, the Company sold its 16.67% ownership in First Alert, Inc., a manufacturer of residential fire protection products, as part of an initial public offering of that company's common stock. Financial information relating to this transaction is set forth in Note 12 ("Fair Value of Financial Instruments") to the Consolidated Financial Statements contained in the 1994 Annual Report to Stockholders, page 35, which Note is incorporated herein by reference. In April 1993, the Company distributed its investment in the AptarGroup, Inc. (formerly known as the Seaquist Division packaging group) to stockholders in a tax-free spinoff. AptarGroup, Inc. is a manufacturer of aerosol valves, dispensing pumps and closures which are sold to packagers and marketers in the personal care, fragrance/cosmetics, pharmaceutical, household products and food industries. In October 1992, the Company sold its Barr Company, a contract packager for marketers of aerosol and liquid fill (non- aerosol) personal and household products, to a Canadian packaging company. In July 1992, the Company sold its First Alert/BRK Electronics business to a new company formed by BRK management and an investment firm. Financial information relating to these transactions is set forth in Note 1 ("Discontinued Operations") to the Consolidated Financial Statements contained in the 1994 Annual Report to Stockholders, page 31, which Note is incorporated herein by reference. In 1991, the Company sold its expedited ground transportation service business to its local management. (b) Financial Information about Industry Segments Financial information relating to industry segments for each of the three years ended December 31, 1994 is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1994 Annual Report to Stockholders, pages 35-36, which Note is incor- porated herein by reference. 3 (c) Narrative Description of Business The principal operations, products and services rendered by the Company: Alarm and Other Security Products Segment This segment involves the design, manufacture and sale of an extensive line of burglar alarm, commercial fire detection and alarm components and systems and the distribution of alarm and other security products manufactured by other companies. By offering a broad line of alarm products needed for security systems, the Company provides a full range of services to independent alarm dealers and installers which range in size from one-person operations to the largest national alarm service companies. In every major domestic market area, quick delivery is provided through the Company's computerized regional warehouses and convenience center outlets, authorized distributors and dealers. Various products sold through the alarm system distribution group are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under the Company's Ademco brand name, others are resold under brand names owned by its suppliers. In the Canadian and overseas markets, alarm and other security products are sold through the Company's distribution centers, authorized distributors and sales agents. The Company also offers AlarmNet to alarm companies in major U.S. markets. AlarmNet is a wireless cellular-like communication network designed to transmit security alarm signals by radio instead of over telephone lines. Commercial fire detectors and fire controls are sold through the Company's regional warehouses, electrical and building supply wholesalers and alarm and fire safety distributors. Raw materials essential to the Company's businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available from more than one supplier and no serious shortages or delays have been 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 a brand name marketing program to independent burglar alarm dealers. Sales and marketing methods common to this industry segment include communications through the circulation of catalogs and merchandising bulletins, direct mail campaigns, and national and local advertising in trade publications. The Company's principal advantages in marketing are its reputation, broad product line, high quality products, extensive integrated distribution network, efficient customer service, competitive prices and brand names. 4 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. Publishing Segment This segment is a publisher of 43 national business and trade publications with other businesses in the marketing-communications field. The Company's publications serve both specific industries and broad functional markets which include specialized manufacturing, service industries, technical and professional fields and general management. Most publications are distributed on a monthly basis with several others distributed on a biweekly, annual or biennial frequency. One magazine is subscription-based; the other publications are generally distributed free through controlled circulation. The principal source of revenue is from the sale of advertising space within the magazines. Other facets of the business include: the operation of a printing plant for the printing and production of most of the Company's publications and those of other publishers; a national mail-marketing and direct mail production organization; a majority- owned subsidiary specializing in the design, development and conduct of courses and conferences for managerial, professional and technical personnel; research and telemarketing services; direct-response card mailer service and special publications. Within the publishing and marketing communications fields, competition exists in the form of other publications and media communication businesses. Reductions in advertising schedules by domestic industrial companies due to economic and other competitive pressures directly impacts the display advertising levels of the Company's publishing segment. The Company competes with one or more other magazines for advertising revenue in each of its magazine titles. The Company's principal sales advantages include relevant editorial content and innovative marketing complemented by specialized multi-magazine supplements. The Company believes that its competitive position also benefits from improvements in manufacturing productivity and from cost control programs. The Company places great emphasis on providing quality products and services to its customers. Real Estate and Other Ventures The Company is involved in the marketing and sale and development of land near Tampa, Florida for residential and commercial use. Fairway Village is an improved residential property being developed into single family homes situated adjacent to a major resort. Saddlebrook Village, a 2,000 acre parcel of land nearby, is approved for development as a master planned community. Saddlebrook Corporate Center, a nearby 450 acre parcel, is a master planned business park for mixed use development including light manufacturing, research and development, distribution and warehousing, retail and other businesses. Principal competition comes from other residential and commercial developments in Florida. 5 The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties in Chicago, Dallas, Los Angeles and Boston. See Item 7 of this Form 10-K. The Company also has invested, as a 5% limited partner, in three rental apartment complexes located in Chicago and Washington, D.C. which provide certain tax advantages. The Company also has a 45% interest in a leading manufacturer of commercial data encryption, wireline, and spread spectrum wireless products; a 5% equity interest in a satellite broadcast company which began operations in mid-1994; and a 12% interest in a developer of wireless signaling equipment for communication between fixed points. Other Information Patents and Trademarks - While the Company owns or is licensed under a number of patents which are cumulatively important to its business, the loss of any single patent or group of patents would not have a material adverse effect on the Company's overall business. Products manufactured by the Company are sold primarily under its own trademarks and tradenames. Some products purchased and resold by the Company's alarm and security products business are sold under the Company's tradenames while others are sold under tradenames owned by its suppliers. Customers - Neither of the Company's industry segments is dependent upon a single customer or a few customers. The loss of any one or more of these customers would not have a material adverse effect on the Company's results of operations. Research and Development - The Company is engaged in programs to develop and improve products as well as develop new and improved manufacturing methods. Expenditures for Company sponsored research and development activities in the alarm and other security products segment were $11.8 million in 1994, $10.8 million in 1993 and $10.0 million in 1992. These costs 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. Acquisitions and Dispositions - Acquisitions of businesses by the Company in each of the three years ended December 31, 1994 were not significant to the Company's sales or results of operations. Dispositions by the Company, other than the discontinued operations previously discussed in the "General Development of Business" section, in each of the three years ended December 31, 1994 were not significant to the Company's sales or results of operations. 6 Product Liability - Due to the nature of the alarm security business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. This exposure has been lessened by the sale of First Alert/BRK Electronics. It is likely, due to the present litigious atmosphere in the United States, that additional claims and lawsuits will be filed in future years. The Company believes that it maintains sufficient insurance to cover this exposure. While it believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the financial impact of claims and lawsuits which may be filed in the future. Environmental Matters - The Company anticipates that compliance with various laws and regula- tions relating to protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position. Employees - At December 31, 1994, there were approximately 5,400 persons employed by the Company, including 4,500 employed in the United States. Approximately 1,100 of these employees were represented by labor unions. The Company considers its relations with its employees and the unions representing its employees to be good. (d) Financial Information About Foreign and Domestic Operations and Export Sales Financial information concerning foreign and domestic operations and export sales is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1994 Annual Report to Stockholders, pages 35-36, which Note is incorporated herein by reference. 7 Item 2. Properties The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- Syosset, New York (1) N/A 360,000 Syosset, New York (3) 1997 14,000 Torrance, California (1) 1997 48,000 Northford, Connecticut (1) N/A 179,000 St. Charles, Illinois (1) 2003 158,000 St. Charles, Illinois (1) 2004 50,000 West Chicago, Illinois (1) 1998 21,000 San Antonio, Texas (3) 1995 14,000 Melbourne, Australia (2) 1995 5,000 Sydney, Australia (2) 1998 25,000 Montreal, Canada (2) 1995 8,000 Toronto, Canada (2) 1997 7,000 Brighton, England (1) 1997 24,000 Milan, Italy (1) N/A 14,000 Milan, Italy (2) 1998 8,000 Trieste, Italy (1) N/A 40,000 Juarez, Mexico (4) 1999 68,000 Madrid, Spain (2) 1998 8,000 Distribution Centers Hub Locations: Atlanta, Georgia (2) 1995 29,000 Boston, Massachusetts (2) 1999 14,000 Los Angeles, California (2) 1999 30,000 Chicago, Illinois (2) 2005 40,000 Clearwater, Florida (2) 2004 27,000 Dallas, Texas (2) 1996 24,000 Detroit, Michigan (2) 1995 10,000 Greensboro, North Carolina (2) 1995 7,000 Memphis, Tennessee (2) 2006 15,000 Fairfield, New Jersey (2) 1996 16,000 Pensauken, New Jersey (2) 1995 26,000 Richmond, Virginia (2) 2004 14,000 Louisville, Kentucky (2) 1999 60,000 Publishing Segment- Cleveland, Ohio (3) 2000 179,000 Cleveland, Ohio (2) 1996 30,000 Berea, Ohio (5) N/A 100,000 New York, New York (3) 1996 10,000 Dunedin, Florida (3) 1995 8,000 Safety Harbor, Florida (1) 1995 19,000 Tampa, Florida (1) 1999 30,000 General Corporate- Chicago, Illinois (3) 2001 12,000 8 Other properties in the alarm and other security products segment include 67 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 67 centers are under leases expiring through 2004 and range in size from 1,500 to 22,000 square feet. Other properties in the publishing segment include 12 sales and/or editorial offices under leases expiring through 2003 located in major cities throughout the United States. The Company believes the above facilities are adequate for its present needs. (1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing (5) Printing N/A Not applicable - facilities are owned by the Company Item 3. Legal Proceedings On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and currently under development by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860), alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The 9 plaintiffs have 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, on the ground that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs have filed for a rehearing which was denied. Until October 14, 1989, Saddlebrook disputed responsibility for ultimate liability and costs (including costs of corrective action). On that date, the Company and Saddlebrook entered into an agreement with regard to such matters. The agreement, as amended and restated on July 16, 1993, provides for the Company and Saddlebrook to split equally the costs of the defense of the litigation and the costs of certain related litigation and proceedings, the costs of the ultimate judgment, if any, and the costs of any mandated remedial work. Subject to certain conditions, the agreement permits Saddlebrook to obtain subordinated loans from the Company to enable Saddlebrook to pay its one-half of the costs of the latter two items. No loans have been made to date. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. 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 Stock- holder Matters The information set forth under the heading "Market Prices, Security Holders and Dividend Information" appearing on page 39 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information set forth under the heading "Supplemental Information - Five Year Summary of Selected Financial Data" appearing on page 39 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the heading "Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition" appearing on pages 40-41 of the Company's 1994 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto, together with the report thereon of Price Waterhouse LLP dated February 22, 1995, appearing on pages 25- 38 of the Company's 1994 Annual Report to Stockholders are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Information required to be furnished in this part of the Form 10-K has been omitted because the Registrant will file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than April 30, 1995. Item 10. Directors and Executive Officers of the Registrant The information set forth under the headings "Nominees for Election by the Holders of Class A Stock", "Nominees for Election by the Holders of Common Stock", "Executive Officers" and "Section 16(a) Reports" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 11, 1995 is incorporated herein by reference. 11 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 11, 1995 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 11, 1995 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 11, 1995 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 schedules filed as a part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on pages 14-15 of this Form 10-K and are incorporated herein by reference. Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 18-19 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 quarter for which this report is filed. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PITTWAY CORPORATION (Registrant) BY /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President and Treasurer Date: March 24, 1995 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 24, 1995. /s/ Neison Harris /s/ E. David Coolidge III Neison Harris, Director and E. David Coolidge III, Director Chairman of the Board /s/ King Harris /s/ Anthony Downs King Harris, Director, President Anthony Downs, Director and Chief Executive Officer /s/ Paul R. Gauvreau /s/ Leo A. Guthart Paul R. Gauvreau, Principal Leo A. Guthart, Director Financial and Accounting Officer /s/ Eugene L. Barnett /s/ Irving B. Harris Eugene L. Barnett, Director Irving B. Harris, Director /s/ Sidney Barrows /s/ William W. Harris Sidney Barrows, Director William W. Harris, Director /s/ Fred Conforti /s/ Jerome Kahn, Jr. Fred Conforti, Director Jerome Kahn, Jr., Director 13 PITTWAY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following documents are filed as a part of this report: Page reference in Annual Report to Stockholders Financial Statements required by Item 8 of this Form: Consolidated Balance Sheet at December 31, 1994 and 1993................ 26-27 For each of the three years ended December 31, 1994 - Consolidated Statement of Income........ 25 Consolidated Statement of Cash Flows.... 28 Consolidated Statement of Stockholders' Equity.................. 29 Summary of Accounting Policies and Notes to Consolidated Financial Statements...... 30-37 Report of Independent Accountants............. 38 Page reference in Form 10-K Financial Statement Schedule required by Article 12 of Regulation S-X: Report of Independent Accountants on Financial Statement Schedule.............. 16 Consolidated Financial Statement Schedule - VIII. Valuation and Qualifying Accounts.. 17 14 PITTWAY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Continued - The consolidated financial statements of Pittway Corporation, listed in the above index together with the Report of Independent Accountants, which are included in the Company's 1994 Annual Report to Stockholders, are incorporated herein by reference. All other schedules have been omitted because the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. With the exception of the aforementioned information and information incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7 and 8) of this Form 10-K, the Company's 1994 Annual Report to Stockholders is not deemed to be filed as part of this report. The individual financial statements of the Company have been omitted because Pittway Corporation is primarily an operating company and the restricted net assets of subsidiaries together with the equity in undistributed earnings of equity investees is less than 25 percent of consolidated net assets. 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. 15 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Pittway Corporation Our audits of the consolidated financial statements referred to in our report dated February 22, 1995 appearing on page 38 of the 1994 Annual Report to Stockholders of Pittway Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in the index on page 14 of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. As discussed in Notes 4 and 7 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois February 22, 1995 16 PITTWAY CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (Dollars in Thousands)
Balance at Charges to Deductions Balance beginning costs and from at end of period expenses reserve (A) of period 1994 Allowance for doubtful accounts $5,521 $3,167 $2,340 $6,348 Inventory obsolescence reserve 5,222 1,925 621 6,526 Valuation allowance-deferred income taxes 5,620 (941) 4,679 1993 Allowance for doubtful accounts $5,867 $2,938 $3,284 $5,521 Inventory obsolescence reserve 4,583 2,641 2,002 5,222 Valuation allowance-deferred income taxes 4,842(B) 778 5,620 1992 Allowance for doubtful accounts $6,948 $2,806 $3,887 $5,867 Inventory obsolescence reserve 5,557 1,657 2,631 4,583 (A) Write-off of accounts considered uncollectible, net of recoveries, or write-off of obsolete inventory. Also includes valuation accounts of acquired or divested companies and foreign currency translation adjustments, net. (B) Balance established January 1, 1993 with the adoption of Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes".
17 INDEX TO EXHIBITS Sequential Number and Description of Exhibit Page Number*** 3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended February 29, 1988). 3.2 Certificate of Amendment to Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990). 3.3 Bylaws of Registrant (incorporated by reference to Exhibit 4.3 of the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990). 4. The Registrant hereby agrees to provide the Commission, upon request, copies of such instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries as are specified in Item 601(b)(4)(iii) of Regulation S-K. 10.1 Amended and Restated Merger Agreement and Plan of Reorganization (incorporated by reference to Exhibit 2 of the Registrant's Form S-4 Registration Statement No. 33 - 31519 filed with the Commission on October 11, 1989). 10.2 Pittway Corporation 1990 Stock Awards Plan, as amended, (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33 - 54753 filed with the Commission on July 27, 1994). 10.3 Agreement of employment dated as of July 1, 1990 with Sal F. Marino, as amended (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.)** 10.4 Second Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1993 (incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)** 18 INDEX TO EXHIBITS - cont'd. Sequential Number and Description of Exhibit Page Number*** 10.5 Third Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1994.** 10.6 Agreement of Employment dated July 2, 1973 with Leo A. Guthart, as amended (incorporated by reference to Exhibit 10(f) of the Registrant's Form S-4 Registration Statement No. 33-31519 filed with the Commission on October 11, 1989).** 13. 1994 Annual Report to Stockholders.* 21. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 27. Financial Data Schedule (submitted only in electronic format). * Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Form 10-K. ** This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of Form 10-K. *** This information appears only in the manually signed original of this Form 10-K. 19 EX-10.5 2 EMPLOYMENT AGREEMENT - SAL MARINO EXHIBIT 10.5 PITTWAY CORPORATION DECEMBER 31, 1994 FORM 10-K THIRD EXTENSION AND AMENDMENT Reference is made to the Agreement of Employment dated July 1, 1990, as extended and amended by the Extensions and Amendments dated as of June 30, 1992 (the "1992 Agreement") and December 31, 1993 (the "1993 Agreement"), by and between Penton Publishing, Inc. (the "Corporation") and Sal F. Marino ("Marino"). The 1993 Agreement provides that the "term of employment" thereunder expires on December 31, 1994 unless extended by the Corporation and Marino. The Corporation and Marino desire to extend such "term of employment", and in connection therewith to make certain amendments to the 1993 Agreement. Accordingly, the Corporation and Marino hereby agree as follows: 1. Paragraph 1 of the 1993 Agreement is amended in its entirety to read as follows: "1. This Agreement shall become effective at 12:01 a.m., EDT, on the date hereof and Marino's employment by the Corporation shall continue until December 31, 1995 (or such later date as the Corporation and Marino may agree upon in writing during the term of employment (as defined below)), unless earlier terminated by Marino's death or pursuant to Paragraph 6. The period from the date hereof to and including the first to occur of December 31, 1995 (or such later date), the date of Marino's death, or the date of termination pursuant to Paragraph 6, is herein referred to as the "term of employment"." 2. The first sentence of Paragraph 3 of the 1993 Agreement is amended in its entirety to read as follows: "The Corporation agrees to pay Marino a salary during the term of employment, which shall be payable in equal monthly installments at a rate not less than THREE HUNDRED THIRTY THOUSAND DOLLARS ($330,000.00) per year. IN WITNESS WHEREOF, the undersigned have executed this Third Extension and Amendment as of December 31, 1994. PENTON PUBLISHING, INC. By: /s/ King Harris As Its: Vice President /s/ Sal F. Marino Sal F. Marino EX-13 3 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 PITTWAY CORPORATION DECEMBER 31, 1994 FORM 10-K Pittway Corporation and Subsidiaries Consolidated Statement of Income For The Years Ended December 31, 1994, 1993 and 1992 (Dollars in Thousands, Except Per Share)
1994 1993 1992 Continuing Operations: Net Sales........................... $778,026 $650,105 $568,301 Operating Expenses: Cost of sales..................... 475,420 398,756 346,034 Selling, general and administrative.................. 232,524 200,088 185,369 Depreciation and amortization..... 20,160 17,249 14,829 728,104 616,093 546,232 Operating Income.................... 49,922 34,012 22,069 Other Income (Expense): Gain on sale of investment....... 19,506 Income from marketable securities and other interest.. 3,955 2,855 2,585 Interest expense................. (3,250) (2,789) (3,344) Income from investments.......... 2,506 2,573 1,831 Miscellaneous, net............... 1,206 (511) (1,288) 23,923 2,128 (216) Income From Continuing Operations Before Income Taxes............... 73,845 36,140 21,853 Income Taxes (Note 4): Current.......................... 27,301 8,436 4,055 Deferred......................... 1,708 6,464 5,338 29,009 14,900 9,393 Income From Continuing Operations... 44,836 21,240 12,460 Income From Discontinued Operations (Note 1): Earnings from discontinued operations, net of income taxes of $3,560 and $11,578, respectively..................... 6,940 18,380 Net gain on sale of discontinued operations, net of income taxes of $9,779........................... 16,558 Cumulative effect of change in accounting for income taxes...... 3,106 10,046 34,938 Income Before Cumulative Effect of Changes in Accounting Principles.... 44,836 31,286 47,398 Cumulative Effect of Changes in Accounting For Income Taxes and Postretirement Benefits............. 1,535 Net Income............................ $ 44,836 $ 32,821 $ 47,398 Per Share of Common and Class A Stock (Note 5): Income from continuing operations... $ 3.22 $ 1.52 $ .90 Income from discontinued operations. .72 2.52 Cumulative effect of changes in accounting principles............. .11 Net income.......................... $ 3.22 $ 2.35 $ 3.42 Average number of shares outstanding (in thousands)(Note 5).. 13,941 13,941 13,851 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 25 Pittway Corporation and Subsidiaries Consolidated Balance Sheet December 31, 1994 and 1993 (Dollars in Thousands, Except Per Share)
ASSETS 1994 1993 Current Assets: Cash and equivalents......................... $ 10,359 $ 1,908 Marketable securities........................ 34,313 31,407 Accounts and notes receivable, less allowance for doubtful accounts of $6,348 in 1994 and $5,521 in 1993.......... 137,747 115,947 Inventories (Note 3)......................... 124,801 100,065 Future income tax benefits (Note 4).......... 17,879 15,232 Prepayments, deposits and other.............. 11,805 7,974 336,904 272,533 Property, Plant and Equipment, at cost: Buildings.................................... 24,769 25,530 Machinery and equipment...................... 157,061 132,168 181,830 157,698 Less: Accumulated depreciation.............. 94,426 81,375 87,404 76,323 Land......................................... 2,369 2,403 89,773 78,726 Investments: Real estate and other ventures............... 56,261 51,153 Leveraged leases (Note 9) ................... 22,752 21,954 79,013 73,107 Other Assets: Goodwill, less accumulated amortization of $7,193 in 1994 and $6,159 in 1993....... 40,935 40,357 Other intangibles, less accumulated amortization of $9,597 in 1994 and $8,288 in 1993............................. 6,256 6,658 Notes receivable............................. 4,370 5,362 Miscellaneous................................ 6,036 5,234 57,597 57,611 $563,287 $481,977 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 26
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 Current Liabilities: Notes payable (Note 8)......................... $ 46,232 $ 30,859 Long-term debt due within one year (Note 8).... 5,184 5,649 Dividends payable.............................. 1,758 1,757 Accounts payable............................... 58,246 44,489 Accrued expenses............................... 41,391 33,744 Income taxes payable........................... 10,093 4,911 Retirement and deferred compensation plans..... 1,148 605 Unearned income................................ 5,797 5,320 169,849 127,334 Long-Term Debt, less current maturities (Note 8): Capitalized leases, principally at 5%, due in monthly installments through 2000............ 2,519 Notes payable, 8.6%, due in annual installments through 1995.................... 3,750 Other.......................................... 2,569 2,333 5,088 6,083 Deferred Liabilities: Income taxes (Note 4).......................... 54,158 51,883 Other.......................................... 6,062 4,613 60,220 56,496 Stockholders' Equity: Preferred stock, authorized 2,000,000 shares; none issued.................................. Common capital stock, $1 par value (Note 5) - Common stock, authorized 30,000,000 shares; 2,626,024 shares issued and outstanding..... 2,626 2,626 Class A stock, authorized 24,000,000 shares; 11,314,700 shares issued and outstanding.... 11,315 11,315 Capital in excess of par value................. 28,348 28,348 Retained earnings.............................. 291,756 253,628 Cumulative marketable securities valuation adjustment................................... (3,050) Cumulative foreign currency translation adjustment................................... (2,865) (3,853) 328,130 292,064 $563,287 $481,977
Page 27 Pittway Corporation and Subsidiaries Consolidated Statement of Cash Flows For The Years Ended December 31, 1994, 1993 and 1992 (Dollars in Thousands)
1994 1993 1992 Cash Flows From Continuing Operating Activities: Income from continuing operations........... $ 44,836 $ 21,240 $ 12,460 Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: Depreciation and amortization............. 20,160 17,249 14,829 Gain on sale of investment, net of taxes.. (11,776) Deferred income taxes..................... 1,708 6,464 5,338 Retirement and deferred compensation plans.................................... 2,010 1,231 (325) Income/loss from investments adjusted for cash distributions received................... (931) 330 (1,678) Provision for losses on accounts receivable............................... 3,167 2,938 2,806 Change in assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts and notes receivable....................... (26,882) (23,340) (16,835) Increase in inventories................. (23,669) (13,946) (3,639) Increase (decrease) in accounts payable and accrued expenses........... 19,919 (930) 4,762 Increase (decrease) in income taxes payable................................ 7,137 7,284 (6,758) Other changes, net...................... (1,759) 2,149 (4,508) Net cash provided by continuing operations................................. 33,920 20,669 6,452 Cash Flows From Investing Activities: Capital expenditures........................ (28,246) (29,478) (17,187) Proceeds from the sale of investment, net of taxes of $9,730..................... 14,776 Proceeds from the sale of marketable securities................................. 29,297 39,529 Purchases of marketable securities.......... (37,261) (37,914) (32,831) Disposition of property and equipment....... 795 585 1,256 Additions to investments.................... (10,112) (12,317) (19,370) Dispositions of publications................ 650 100 Collections of notes receivable............. 4,267 5,434 1,630 Net assets of businesses acquired, net of cash................................ (5,921) (3,430) (4,208) Net cash used by investing activities....... (31,755) (37,591) (70,610) Cash Flows From Financing Activities: Net increase (decrease) in notes payable.... 14,802 29,200 (7,477) Proceeds of long-term debt.................. 3,585 1,996 Repayments of long-term debt................ (5,488) (5,405) (12,201) Dividends paid.............................. (6,707) (5,722) (17,372) Net cash provided (used) in financing activities................................. 6,192 20,069 (37,050) Effect of exchange rate changes on cash...... 94 (166) (447) Cash Flows From Discontinued Operations: Net proceeds from divestitures, net of income taxes of $9,779..................... 81,580 Cash used by operating, investing and financing activities................... (4,711) (2,007) Net cash (used) provided by discontinued operations................................. (4,711) 79,573 Net increase (decrease) in cash and equivalents................................. 8,451 (1,730) (22,082) Cash and equivalents at beginning of period.. 1,908 3,638 25,720 Cash and equivalents at end of period........ $ 10,359 $ 1,908 $ 3,638 Supplemental cash flow disclosure: Interest paid............................... $ 3,388 $ 2,804 $ 3,752 Income taxes paid........................... 22,173 8,939 31,591 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 28 Pittway Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity For The Years Ended December 31, 1994, 1993 and 1992 (Dollars in Thousands, Except Per Share)
Cumulative Cumulative Marketable Foreign Capital In Securities Currency Common Stock Class A Stock Excess of Retained Valuation Translation Shares Par Value Shares Par Value Par Value Earnings Adjustment Adjustment Balance - December 31, 1991........ 2,626,024 $2,626 11,199,939 $11,200 $24,868 $347,666 $13,218 Net income........................ 47,398 Cash dividends declared: Common stock - $.60 per share.... (1,576) Class A stock - $1.10 per share.. (12,350) Shares issued pursuant to performance awards............... 114,761 115 3,480 Currency translation adjustment... (17,144) Balance - December 31, 1992........ 2,626,024 2,626 11,314,700 11,315 28,348 381,138 (3,926) Net income........................ 32,821 Cash dividends declared: Common stock - $.45 per share.... (1,183) Class A stock - $.55 per share... (6,222) Distribution of AptarGroup, Inc. common stock to stockholders..... (152,926) (90) Currency translation adjustment... 163 Balance - December 31, 1993........ 2,626,024 2,626 11,314,700 11,315 28,348 253,628 (3,853) Cumulative effect of change in accounting for marketable securities....................... $ 141 Net income........................ 44,836 Cash dividends declared: Common stock - $.40 per share.... (1,051) Class A stock - $.50 per share... (5,657) Marketable securities valuation adjustment............. (3,191) Currency translation adjustment... 988 Balance - December 31, 1994........ 2,626,024 $2,626 11,314,700 $11,315 $28,348 $291,756 $(3,050) $(2,865) See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 29 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"). The Company follows the equity method of accounting for its investments in greater than 20%-owned but less than majority-owned affiliates. All significant intercompany accounts and transactions have been eliminated. Except where otherwise indicated, the following notes relate to continuing operations consisting principally of alarm systems businesses and trade publishing. Certain prior year amounts in the consolidated statement of cash flows have been reclassified to conform to the current year classification. Cash Equivalents Cash equivalents are generally comprised of highly liquid instruments with original maturities of three months or less, such as treasury bills, certificates of deposit, commercial paper and time deposits. Marketable Securities On January 1, 1994 the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires the Company to record its investments in certain debt and equity securities available-for- sale at market value. Changes in market value for these securities are reported, net of tax, in a separate component of stockholders' equity until realized. Prior to the adoption of SFAS No. 115, these securities were valued at the lower of aggregate cost or market. SFAS No. 115 does not apply to investments accounted for using the equity method or for which readily determinable market values are not available. As a result of adopting SFAS No. 115, a $141 unrealized gain, net of tax, was recorded to stockholders' equity at January 1, 1994. The adoption of this Statement had no impact on net income and prior year financial statements are not restated. Inventories Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead. Cost of substantially all domestic inventories is determined by using the last-in, first-out (LIFO) method, while the remaining inventories are valued primarily using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. Depreciation expense amounted to $17,492, $14,664 and $12,526 in 1994, 1993 and 1992, respectively. Investments Real estate and other ventures - These investments consist principally of equity interests in limited real estate partnerships, land held for development, an affiliate that manufactures encryption and data communication devices, a residential security products company sold in 1994 and a satellite broadcast company. The Company's adjusted basis in certain of the limited real estate partnerships is carried at zero, the affiliate is carried at equity and investments in other partnerships and ventures are carried on a cost basis. Cash distributions received from these partnerships and ventures, other than the affiliate, were recorded as income from investments. Leveraged leases - The Company's investment in leveraged leases consists of the rentals receivable net of the principal and interest on the related nonrecourse debt, estimated residual value of the leased property and unearned income. The unearned income is recognized as income from investments over the lease term. Intangible Assets Management believes that goodwill, trademarks and tradenames acquired in purchase transactions have continuing value. It is the Company's policy to amortize such costs over periods of up to 40 years except for the costs of such assets acquired prior to 1970. Intangible assets of approximately $3,356 related to pre-1970 acquisitions are not being amortized because the Company believes there has been no diminution of value. Other intangibles acquired in purchase transactions or developed, consisting of non-compete agreements, customer mailing lists, patents and software development costs, are capitalized and amortized over their estimated useful lives. Research and Development Expenses Research and development costs are expensed as incurred. These costs amounted to $11,849, $10,814 and $10,040 in 1994, 1993 and 1992, respectively. Advertising Expenses Advertising costs are expensed as incurred. These costs amounted to $15,440, $13,707 and $13,807 in 1994, 1993 and 1992, respectively. Income Taxes Provisions for income taxes recognize the tax effects of all transactions entering into the determination of net income for financial statement purposes, irrespective of when such transactions are reported for income tax purposes. In general, depreciation is computed on a straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. Deferred income taxes and future income tax benefits have been recognized for all temporary differences. Page 30 Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes (see Note 4). Product Liability and Workers Compensation Claims Provisions are made for estimated losses from product liability and workers compensation claims which are not covered by insurance. Translation of Foreign Currencies The functional currency of the Company's foreign operations is the local currency. Accordingly, assets and liabilities of foreign operations are translated to U.S. dollars at the rates of exchange on the balance sheet date; income and expense are translated at the average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate section of stockholders' equity. Transaction gains and losses are reflected in miscellaneous income and amounted to income (expense) of $373, $(523) and $(1,020) in 1994, 1993 and 1992, respectively. __________________________________________________________________________ Notes To Consolidated Financial Statements (Dollars in Thousands, Except Per Share) Note 1 - Discontinued Operations The Company distributed its investment, carried at $153,016, in the Seaquist packaging group (now known as AptarGroup, Inc.) to stockholders in a tax-free spinoff on April 22, 1993. In July 1992, the Company sold its First Alert/BRK Electronics business to a new company formed by BRK management and an investment firm. The sale price was $87,154 plus a 16 2/3% ownership interest (sold in 1994) in the new company valued at $5 million. In October 1992, the Company sold its Barr packaging division operations, excluding real estate, for $4,205 cash and a $3,200 two-year note. The net after-tax gain on the 1992 divestitures amounted to $16,558, or $1.20 per share. Net sales of the discontinued operations prior to their respective dispositions were $117,473 and $451,092 in 1993 and 1992, respectively. Note 2 - Acquisitions and Dispositions During 1994, the Company acquired the assets and businesses of a direct mail production company, a designer of wide area network building control monitoring systems, a manufacturer of glass break sensors and a designer of closed-circuit television, access control and alarm systems. The total purchase price for these businesses was $5,921 cash. The Company also sold a publication for $650 cash. During 1993, the Company acquired the assets and business of a domestic access control manufacturer and two publications for $3,430 cash. During 1992, the Company acquired the assets and business of a domestic manufacturer of lighting control equipment and two publications for $4,208 cash. The Company sold a publication for $100 cash and a $400 note. All the aforementioned acquisitions were accounted for as purchase transactions. The impact of these acquisitions on consolidated results of operations was not significant. These companies have been included in the consolidated financial statements from their respective dates of acquisition or to the dates of disposition. Note 3 - Inventories At December 31, 1994 and 1993 approximately 87% and 86%, respectively, of the total inventories are accounted for by the LIFO method. At year end, inventories consist of: 1994 1993 Raw materials........................ $ 32,520 $ 23,313 Work-in-process...................... 11,653 9,311 Finished goods - Manufactured by the Company........ 43,096 33,912 Manufactured by others............. 37,794 34,087 Total........................... 125,063 100,623 Less LIFO reserve.................... (262) (558) $124,801 $100,065 The LIFO reserve represents the excess of FIFO cost, which approximates current cost, over the LIFO value of inventory. Note 4 - Income Taxes Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". The cumulative effect of the change as of January 1, 1993 was a benefit of $1,965 ($.14 per share) for continuing operations and $3,106 ($.22 per share) for discontinued operations. As a result of the 1993 increase in the U.S. federal income tax rate from 34% to 35%, the effect in 1993 was to increase the federal income tax provision by $1,202 consisting of $400 ($.03 per share) related to 1993 income and $802 ($.06 per share) to increase prior accumulated deferred taxes. Page 31 Income from continuing operations before income taxes consists of: 1994 1993 1992 Domestic income..................... $73,204 $39,985 $23,969 Foreign income (loss)............... 641 (3,845) (2,116) $73,845 $36,140 $21,853 The provision for income taxes consists of: 1994 1993 1992 Current - Federal........................ $22,819 $ 5,819 $ 2,383 State and local................ 3,660 2,000 1,335 Foreign........................ 822 617 337 27,301 8,436 4,055 Deferred - Federal........................ 1,576 7,131 5,284 Foreign........................ 132 (667) 54 1,708 6,464 5,338 $29,009 $14,900 $ 9,393 The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income from continuing operations before income taxes is as follows: 1994 1993 1992 Income tax at statutory rate....... $25,846 $12,649 $ 7,430 Tax effect of - State income taxes, net of federal benefit................. 2,379 1,300 879 U.S. income tax rate increase on cumulative timing differences... 802 Foreign operations............... 730 1,296 1,112 Reserves no longer required...... (800) Other items, net................. 54 (347) (28) Actual income tax provision........ $29,009 $14,900 $ 9,393 Effective income tax rate.......... 39.3% 41.2% 43.0% During 1992 deferred income taxes (benefits) provided for temporary differences in the recognition of revenue and expense for tax and financial statement purposes consisted principally of the following: purchased tax benefit leases - $(2,556); real estate ventures - $3,775; leveraged leases - $1,900; retirement and deferred compensation plans - $1,130; inventory valuation - $495; and bad debts - $233. The components of the deferred tax liabilities (assets) at December 31, 1994 and 1993 are comprised of the following: 1994 1993 Leveraged leases......................... $ 20,290 $ 16,689 Real estate ventures - Affordable housing.................... 6,809 5,309 Other................................. 17,029 15,210 Purchased tax benefit leases............. 5,023 5,952 Depreciation............................. 1,831 2,293 State income taxes, net of federal benefit........................ 6,007 5,354 Other ................................... 2,963 1,076 Total deferred tax liabilities........... 59,952 51,883 Inventory valuation...................... (6,254) (5,503) Tax loss carryforwards................... (4,679) (5,620) State income taxes, net of federal benefit........................ (2,519) (2,420) Bad debts................................ (2,041) (2,044) Workers compensation..................... (2,575) (1,191) Marketable securities valuation.......... (2,033) Other ................................... (8,251) (4,074) Total deferred tax assets................ (28,352) (20,852) Valuation allowance...................... 4,679 5,620 Net deferred tax liability............... $36,279 $36,651 The valuation allowance relates to tax loss carryforwards of which $1,224 as of December 31, 1994 will be credited to goodwill when and if utilized. The Company's federal income tax returns have been examined through 1990 without material adjustment of reported income. Note 5 - Capital Stock and Earnings per Share 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 2.5 cents per share more than dividends declared on Common stock (up to a maximum of 10 cents per share per year). The 2.5 cents premium was increased to 12.5 cents for each dividend declared in the ten quarters beginning with the third quarter of 1990 and ending with the fourth quarter of 1992. As provided in a 1989 corporate charter amendment creating the Class A stock, the increase in Class A dividends was required due to the relative market prices of Common and Class A stock during the three months ended June 28, 1990. Beginning with dividends declared in the second quarter of 1993, the quarterly dividends on Common stock and Class A stock were reduced by $.05 as a result of the spinoff of AptarGroup, Inc. on April 22, 1993. Page 32 Net income per share of common capital stock is based on the combined weighted average number of Class A and Common shares outstanding which does not include shares issuable upon exercise of outstanding non-qualified stock options or shares distributable as performance share awards because the dilutive effect is not significant. Note 6 - Stock Options and Awards The Company's 1990 stock awards plan (as amended in 1994) provides for the issuance of up to 1,000,000 shares of Class A stock to employees pursuant to options, performance share rights and other awards. Certain awards are payable in the form of Class A stock or cash. Performance share rights and non-qualified options vest ratably over terms of three years and five years and are exercisable up to ten years from date of grant. During 1993 the Compensation Committee amended the options then outstanding to reflect the valuation of AptarGroup, Inc. spunoff in April 1993 by increasing the options granted by 10,500 shares. During 1992, the Company vested and issued shares or paid in cash all performance share rights then outstanding. Activity in options and performance share rights for Class A stock is summarized as follows (prices shown are per share): 1994 1993 Outstanding at beginning of year............ 149,543 10,000 Rights granted ($30.13)..................... 17,595 Options granted ($34.50 and $25.63)......... 90,184 121,948 Outstanding at end of year ($9.48 to $34.50 and $9.48 to $30.13).............. 239,727 149,543 Exercisable at end of year.................. 0 0 Available for grant......................... 635,731 225,915 In addition, the Company has granted other awards which provide additional deferred compensation based on the fair market value or the increase in fair market value of the Company's Class A stock. The cost of these compensation agreements is provided currently as it relates to prior service and ratably over the employees' future employment as it applies to future service. Awards of performance share rights are expensed as compensation at the date of grant. Expense under all of these arrangements amounted to $1,065, $1,180, and $2,098 in 1994, 1993 and 1992, respectively. Note 7 - Retirement Plans The Company has various noncontributory retirement plans covering substantially all current and certain former domestic employees. Retirement benefits for employees in foreign countries are generally provided by national statutory programs. Benefits for domestic employees are based on years of service and annual compensation as defined by each plan. The Company's policy is to fund pension costs accrued. The components of net pension cost (income) for the plans consist of: 1994 1993 1992 Service cost - benefits earned during the year................... $ 3,618 $ 3,154 $ 3,181 Interest cost on projected benefit obligation........................ 3,851 3,410 3,181 Actual return on plan assets........ 4,840 (12,563) (11,745) Net amortization and deferred gains and losses........................ (13,071) 5,165 5,567 Net pension (income) cost........... $ (762) $ (834) $ 184 In 1994 the Company increased accrued benefits for active non-union employees for service prior to December 31, 1993 by 20%. The benefit improvement increased the projected benefit obligation by $3,342 and reduced the net pension income for the year by approximately $760. In 1992 the Company recognized a curtailment gain of $1,845 resulting from a net decrease in projected benefit obligations (less unrecognized prior service costs) of employees of the divisions sold. This gain is included in the net gain on disposal of discontinued operations. The reconciliation of the funded status of the plans at year end follows: 1994 1993 Actuarial present value of benefit obligations - Vested benefit obligation......... $(48,332) $(39,426) Nonvested benefit obligation...... (1,321) (952) Accumulated benefit obligation.. (49,653) (40,378) Excess of projected benefit obligation over accumulated benefit obligation................ (9,873) (11,724) Projected benefit obligation........ (59,526) (52,102) Plan assets at fair value........... 78,885 86,734 Plan assets in excess of projected benefit obligation...... 19,359 34,632 Unrecognized net gain............... (10,101) (21,969) Unrecognized prior service cost..... 4,625 1,921 Unamortized transition net asset.... (8,790) (10,254) Prepaid pension cost included in the consolidated balance sheet. $ 5,093 $ 4,330 Page 33 Plan assets consist primarily of U.S. government obligations, investment grade corporate bonds and common and preferred stocks. The projected benefit obligation was determined using an assumed discount rate of 7% and an assumed rate of increase in compensation of 5% for both years. The expected long- term rate of return on plan assets was 7% for both years. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", which requires the accrual of the expected cost of retiree medical and life insurance benefits over the period the employee provides services to the Company. Prior to the change, costs were charged to expense as incurred. The cumulative effect reported in the 1993 consolidated statement of income is an after-tax charge of $430, or $(.03) per share. The annual expense for these postretirement benefits was not significant in 1994, 1993 or 1992. Note 8 - Debt The average annual interest rate on short-term notes payable was approximately 6.1% (5.8% domestic and 10.1% foreign) and 4.3% (3.6% domestic and 11.8% foreign) at December 31, 1994 and 1993, respectively. There are no compensating balance or commitment fee requirements associated with these short-term borrowings. Under the terms of the 8.6% notes payable due in 1995, retained earnings available for dividends amounted to $100,420 at December 31, 1994. The Company has guaranteed indebtedness of $1,250 relating to real estate ventures in which it participates. Aggregate long-term maturities due annually for the five years beginning in 1995 are $5,184, $916, $881, $1,825, $763 and $703 thereafter. Note 9 - Leveraged Leases The Company is an equity participant in leveraged leases of aircraft and communication satellite transponders. As the Company has no general liability for the nonrecourse debt attributable to the acquisition of such assets, the debt has been offset against the related rentals receivable. The net investment in leveraged leases consists of: 1994 1993 Rentals receivable (net of principal and interest on nonrecourse debt). $14,500 $15,069 Estimated residual value............ 13,205 13,641 Unearned and deferred income........ (4,953) (6,756) Investment in leveraged leases...... 22,752 21,954 Deferred income taxes............... (20,290) (16,689) Net investment...................... $ 2,462 $ 5,265 A summary of the components of income from leveraged leases follows: 1994 1993 1992 Income before income taxes.......... $ 1,142 $ 1,706 $ 1,414 Current income tax benefit.......... 3,201 3,711 1,700 Deferred income taxes............... (3,601) (4,183) (1,900) Income from leveraged leases........ $ 742 $ 1,234 $ 1,214 Minimum annual rent receivable (net of principal and interest on nonrecourse debt) under leveraged leases for the next five years beginning with 1995 are $1,148, $469, $982, $2,065, $1,751 and an aggregate of $8,085 thereafter. 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 2005. 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 1995 are $13,230, $12,039, $10,652, $9,457, $8,485 and an aggregate of $12,325 thereafter. Rental commitments are stated net of minimum sublease rentals aggregating $4,739. Total rent expense (including taxes, insurance and maintenance when included in the rent) amounted to $16,426, $15,484 and $14,365 in 1994, 1993 and 1992, 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 currently under development by the Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. On remand to the trial court, Saddlebrook's motion for summary judgment, on the ground that plaintiffs' claims were fully retried and rejected in a related administrative proceeding, was granted in December 1994. Plaintiffs have filed for a rehearing which was denied. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. The Company has committed to invest up to a total of $7.5 million for certain ventures through 1997. Page 34 The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature. While management believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. Note 12 - 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: 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets - Marketable securities.......... $ 34,313 $ 34,313 $ 31,407 $ 31,642 Investment in First Alert stock 5,000 15,000 Other investments.............. 31,525 36,525 21,708 29,000 Notes receivable............... 5,047 5,569 9,321 11,021 Financial liabilities - Long-term debt................. (10,272) (10,071) (11,732) (12,032) The estimated fair values of marketable securities (all available-for- sale) are based on quoted market prices. At December 31, 1994, marketable securities consisted of adjustable rate preferred stocks, which had gross unrealized holding losses of $5,083. At December 31, 1993, marketable securities consisted of adjustable rate preferred stocks, which had gross unrealized holding gains of $233 and gross unrealized holding losses of $70, and of municipal bonds, which had gross unrealized gains of $72. Realized gains and losses on sales of marketable securities are based upon the specific identification method. Such gains totaled $330 and $398 in 1994 and 1993, respectively, and losses totaled $305 and $207 in 1994 and 1993, respectively. In 1994 the Company sold its 16.67% ownership in First Alert, Inc. as part of an initial public offering of First Alert, Inc. common stock. The sale resulted in a pretax gain of $19,506. The estimated fair values of the notes receivable and long-term debt were calculated based upon the present value of estimated cash flows using appropriate discount rates. The estimated fair values of the Company's investments which are considered financial instruments (investments in affordable housing projects, a satellite broadcasting company and, in 1993, First Alert, Inc., a residential security products company) were based upon available financial and other information. 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 13 - Segment Information The Company operates principally in two industry segments. The Alarm and Other Security Products segment involves the design, manufacture and sale of an extensive line of burglar alarm and commercial fire detection and alarm components and systems and the distribution of alarm and other security products manufactured by other companies. The Publishing segment is engaged in the publication of national business magazines with other businesses in the marketing-communications field. Sales within and between segments and geographic areas are made at approximate arm's-length prices. Operating income consists of sales less operating expenses. Sales and expenses which were not related to or identifiable with specific segments are included in General Corporate and Other. Identifiable assets are those assets that are specifically identified with the industry segments and geographic areas in which operations are conducted. Eliminations include sales between segments and geographic areas and related intercompany accounts. Export sales were not material and no single customer accounted for ten percent of sales. Page 35
Depreciation Operating Identifiable Capital and Industry Segments Net Sales Income Assets * Expenditures Amortization 1994 Alarm and Other Security Products... $600,643 $ 45,173 $336,730 $ 20,381 $ 13,993 Publishing.......................... 176,729 11,002 87,007 7,755 5,656 General Corporate and Other......... 654 (6,253) 139,550 110 511 Consolidated........................ $778,026 $ 49,922 $563,287 $ 28,246 $ 20,160 1993 Alarm and Other Security Products... $482,787 $ 33,416 $268,151 $ 23,117 $ 11,464 Publishing.......................... 164,627 7,206 78,733 6,265 5,185 General Corporate and Other......... 2,691 (6,610) 135,093 96 600 Consolidated........................ $650,105 $ 34,012 $481,977 $ 29,478 $ 17,249 1992 Alarm and Other Security Products... $401,250 $ 23,644 $225,394 $ 12,366 $ 9,714 Publishing.......................... 163,063 6,844 76,665 4,777 4,468 General Corporate and Other......... 3,988 (8,419) 134,299 44 647 Consolidated........................ $568,301 $ 22,069 $436,358 $ 17,187 $ 14,829 Geographic Areas 1994 Domestic Operations................. $721,956 $ 48,206 $503,853 European Operations................. 48,063 119 49,580 Other Foreign Operations............ 31,238 882 10,279 Eliminations........................ (23,231) 715 (425) Consolidated........................ $778,026 $ 49,922 $563,287 1993 Domestic Operations................. $606,199 $ 35,919 $446,244 European Operations................. 38,024 (1,094) 34,598 Other Foreign Operations............ 27,243 9 10,618 Eliminations........................ (21,361) (822) (9,483) Consolidated........................ $650,105 $ 34,012 $481,977 1992 Domestic Operations................. $524,922 $ 23,137 $400,543 European Operations................. 37,495 (646) 31,933 Other Foreign Operations............ 24,189 (513) 10,199 Eliminations........................ (18,305) 91 (6,317) Consolidated........................ $568,301 $ 22,069 $436,358 * Excludes investment in discontinued operations of $137,648 in 1992.
Page 36 Note 14 - Quarterly Results (Unaudited) Quarterly results of operations for the years ended December 31, 1994 and 1993 are shown below: 1994 Quarters Total First Second Third Fourth For Year Net Sales............... $176,543 $189,220 $202,026 $210,237 $778,026 Gross Profit............ 66,468 68,503 72,314 75,161 282,446 Income from Continuing Operations Before Gain on Sale of Investment. 7,707 7,882 8,296 9,175 33,060 Gain on Sale of Investment............ 10,249 1,527 11,776 Net Income.............. 17,956 9,409 8,296 9,175 44,836 Per Share Income from Continuing Operations Before Gain on Sale of Investment. .55 .56 .60 .66 2.37 Gain on Sale of Investment............ .74 .11 .85 Net Income.............. 1.29 .67 .60 .66 3.22 1993 Quarters Total First Second Third Fourth For Year Net Sales............... $151,777 $158,414 $165,296 $174,618 $650,105 Gross Profit............ 55,356 56,583 58,309 63,852 234,100 Income from Continuing Operations ........... 5,169 4,477 5,159 6,435 21,240 Income (Loss) from Discontinued Operations............ 9,459(a) 1,267 (680)(b) 10,046 Cumulative Effect of Accounting Changes.... 1,535 1,535 Net Income.............. 16,163 5,744 5,159 5,755 32,821 Per Share Income from Continuing Operations............ .37 .32 .37 .46 1.52 Income (Loss) from Discontinued Operations............ .68(a) .09 (.05)(b) .72 Cumulative Effect of Accounting Changes.... .11 .11 Net Income.............. 1.16 .41 .37 .41 2.35 (a) Includes a $3,106 benefit ($.22 per share) for a change in accounting for income taxes. (b) Represents additional estimated settlement costs of outstanding claims. Page 37 Report of Independent Accountants To the Board of Directors and Stockholders of Pittway Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Pittway Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Pittway Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 4 and 7 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/ Price Waterhouse LLP Chicago, Illinois February 22, 1995 Management's Responsibility for Financial Statements The financial statements of Pittway Corporation and its consolidated subsidiaries, and all other information presented in this Annual Report, are the responsibility of the management of the Company. These statements have been prepared in accordance with generally accepted accounting principles and reflect in all material respects the substance of events and transactions that should be included. Management is responsible for the accuracy and objectivity of the financial statements, including estimates and judgments reflected therein, and fulfills this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. Management believes that the internal accounting controls in use are satisfactory to provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations, and that the financial records are reliable for the purpose of preparing financial statements. Independent accountants were selected by the Board of Directors, upon the recommendation of the Audit Committee, to audit the financial statements in accordance with generally accepted auditing standards. Their audits, as well as those of the Company's internal audit department, include a review of internal accounting control policies and procedures and selective tests of transactions. The Audit Committee of the Board of Directors, which consists of three directors who are not officers or employees of the Company, meets regularly with management, the internal auditors and the independent accountants to review matters relating to financial reporting, internal accounting controls, and auditing. The independent accountants have unrestricted access to the Audit Committee. /s/ King Harris /s/ Paul R. Gauvreau President and Chief Executive Officer Financial Vice President and Treasurer Page 38 Supplemental Information (Dollars in Thousands, Except Per Share Data) Five Year Summary of Selected Financial Data
1994 1993 1992 1991 1990 Operating Results Net Sales of Continuing Operations... $778,026 $650,105 $568,301 $516,343 $505,243 Operating Income from Continuing Operations......................... 49,922 34,012 22,069 11,621 16,192 Income from Continuing Operations.... 44,836(a) 21,240 12,460 4,371 10,596 Income from Discontinued Operations.. 10,046 34,938(b) 21,145 13,467 Cumulative Effect of Changes in Accounting Principles.............. 1,535 Net Income........................... 44,836(a) 32,821 47,398(b) 25,516 24,063 Per Share: Income from Continuing Operations.. 3.22(a) 1.52 .90 .32 .77 Income from Discontinued Operations .72 2.52(b) 1.53 .97 Cumulative Effect of Changes in Accounting Principles............ .11 Net Income......................... 3.22(a) 2.35 3.42(b) 1.85 1.74 Cash Dividends Declared Per Share: Common............................. .40 .45 .60 .60 .60 Class A............................ .50 .55 1.10 1.10 .90 Capital Expenditures................. 28,246 29,478 17,187 13,872 14,813 Depreciation and Amortization........ 20,160 17,249 14,829 13,783 13,567 At Year End Assets of Continuing Operations...... 563,287 481,977 436,358 371,375 346,121 Investment in Discontinued Operations 137,648 198,433 199,832 Total Assets......................... 563,287 481,977 574,006 569,808 545,955 Long-Term Debt....................... 5,088 6,083 9,601 21,584 27,149 Stockholders' Equity(c).............. 328,130 292,064 419,501 399,578 388,277 Per Share(c)....................... 23.54 20.95 30.09 28.90 28.13 Market Price Per Share (c): Common............................. 39.00 34.00 38.00 33.13 23.00 Class A............................ 40.25 32.25 34.50 29.38 17.38 (a) Includes net gain on sale of First Alert stock of $11,776, or $.85 per share. (b) Includes net gain on disposal of discontinued operations of $16,558, or $1.20 per share. (c) Stockholders' equity and market prices at December 31, 1994 and 1993 reflect the spinoff of AptarGroup, Inc. in April 1993.
Market Prices, Security Holders and Dividend Information The Company's Common (ticker symbol PRY) and Class A (ticker symbol PRYA) stock are traded on the American Stock Exchange. As of December 31, 1994, stockholders of record totaled approximately 600 for Common and 1,200 for Class A. The following table sets forth, on a quarterly basis, the high and low prices for the Common and Class A stock on the American Stock Exchange, along with the cash dividends declared.
Common Class A Dividends Declared High Low High Low Common Class A 1994 Quarter: First........ $39 $31 1/2 $34 3/4 $31 3/8 $ .10 $.125 Second....... 40 3/4 34 38 1/8 33 1/2 .10 .125 Third........ 39 1/2 35 1/4 38 3/8 33 3/4 .10 .125 Fourth....... 40 36 1/2 40 5/8 35 5/8 .10 .125
Common Class A Dividends Declared(a) High Low High Low Common Class A 1993 Quarter: First........ $44 $37 7/8 $39 1/8 $33 7/8 $ .15 $.175 Second....... 43 1/4 18 1/2 38 1/2 17 7/8 .10 .125 Third........ 28 1/2 24 26 5/8 21 7/8 .10 .125 Fourth....... 34 25 32 3/8 24 3/8 .10 .125 (a) Dividends were reduced in the second quarter of 1993 as a result of the spinoff of AptarGroup, Inc. in April 1993.
Page 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF CONTINUING OPERATIONS Sales increased 20% in 1994 and 14% in 1993 principally due to higher sales levels in the Company's alarm systems segment. Domestic sales increased 19% in 1994 and 15% in 1993. International sales, representing 10% of total consolidated sales in 1994 and 1993, relate to the alarm segment and increased 22% in 1994 and 6% in 1993. The larger increase in 1994 is primarily attributable to the expansion of European operations. Gross profit increased 21% in 1994 and 13% in 1993 principally due to the increased sales levels. Selling, general and administrative expenses increased 16% in 1994 and 8% in 1993 due to increased costs associated with the expanded sales volume. Alarm product sales accounted for 77% of consolidated revenues in 1994 (74% in 1993) and increased 24% in 1994 and 20% in 1993. The increases were due to a combination of overall market growth and, more significantly, increased market share. The latter has resulted from increasing customer preference for the service, systems and convenience offered by ADI, the Company's distribution business, and for numerous new products introduced by the Company's manufacturing units in recent years. In addition, ADI has benefitted from weakness at one of its major competitors. Operating income for the segment increased 35% in 1994 and 41% in 1993 primarily because of the expanded sales volume and manufacturing efficiencies. Research and development expense amounted to $11.8 million and $10.8 million in 1994 and 1993, respectively, reflecting continuing development and expansion of the Company's burglar and fire alarm products and systems. Publishing sales increased 7% in 1994 primarily due to a modest increase in the number of advertising pages sold coupled with a firming of advertising page rates and to higher ancillary product revenues. Sales for 1993 remained relatively unchanged from the 1992 level due to the media recession. Operating income increased 53% in 1994 and 5% in 1993 due to higher profits from non-advertising-page revenues and improved operating efficiencies in both years, in addition to increased advertising revenues for 1994. Depreciation and amortization expense increased both in 1994 and 1993 as a result of capital additions, principally in the alarm segment. Other income (expense) in 1994 included a $19.5 million pretax gain on the sale of First Alert, Inc. common stock. Excluding this gain, other income increased over 1993 primarily due to higher yields on marketable securities, a $896,000 favorable swing in foreign currency transaction effects, a gain on the sale of a publication and higher miscellaneous income. These favorable comparisons were partially offset by reduced income from leveraged leases and from an affiliate and higher interest expense. The effect of increased rates on a higher level of short-term borrowings was partly offset by lower long-term debt. Other income (expense) was more favorable in 1993 than in 1992 because of reduced translation losses, increased income from an affiliate and from leveraged leases, and reduced interest expense. While total borrowings increased in 1993, lower interest rates on short-term notes payable and the reduction in long-term debt resulted in a decrease in interest expense. Effective tax rates were 39.3% in 1994, 41.2% in 1993 and 43.0% in 1992. An analysis of the Company's effective tax rate appears in Note 4 to the Consolidated Financial Statements. The effect of the increase in the U.S. federal income tax rate from 34% to 35% in 1993 was to increase the federal income tax provision by $1.2 million ($.4 million related to 1993 income and $.8 million to increase prior accumulated deferred taxes). ACCOUNTING CHANGES Effective January 1, 1993 the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", and No. 109, "Accounting for Income Taxes". The cumulative effect on prior years of the changes in accounting principles as of January 1, 1993 was a $1.9 million benefit for income taxes and a $.4 million after-tax charge for postretirement benefits. Page 40 DISCONTINUED OPERATIONS Earnings from discontinued operations in 1993 is not comparable to 1992 due to the disposition of the Company's First Alert/BRK business in July 1992, the sale of the Barr packaging division in October 1992 and the spinoff of AptarGroup, Inc. in April 1993. Income from discontinued operations in 1993 was favorably impacted by a $3.1 million benefit from the adoption of SFAS No. 109. A net after-tax gain of $16.6 million was recorded on the 1992 divestitures. FINANCIAL CONDITION The Company's financial condition remained strong through 1994. 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 1994 the primary sources of the $33.9 million net cash provided by continuing operations were operating profits before depreciation and amortization. Such cash generated was partially used to finance the net increase in working capital items. The remaining cash generated from operations, along with a $12.9 million net increase in debt and $14.8 million net, after-tax proceeds from the sale of the First Alert investment, were used principally for capital expenditures of $28.2 million, additional investments of $10.1 million, dividends of $6.7 million, business acquisitions of $5.9 million and $8.0 million in net purchases of marketable securities. Indebtedness of approximately $3 million in 1994 arose from a sale-leaseback transaction on certain production equipment. Dividend payments were lower in 1993 than in 1992 because: the quarterly dividend normally paid in January was paid in December 1992; the dividends on Class A stock in 1992 included an extra $.10 per share per quarter related to the 1989 merger of Pittway and Standard Shares, Inc.; and quarterly dividends were reduced by $.05 per share in 1993 due to the spinoff of AptarGroup, Inc. The Company is continually investigating investment opportunities for growth in related areas and is presently committed to invest approximately $7.5 million in certain affordable housing ventures through 1997. The Company has real estate investments in various limited partnerships with interests in commercial rental properties which may be sold or turned over to lenders due to the present weak commercial real estate market. The Company's deferred income tax liability accounts fully cover the tax payments that would be due if properties were sold or returned to the lenders and such events would have no effect on income. However, any such tax payments would negatively impact the Company's cash position. The total amount of such deferred taxes amounted to approximately $15 million at December 31, 1994 after payment of $1.5 million in 1994 related to property turned over to lenders. The extent and timing of any additional payments is not readily determinable. Increases in the general level of interest rates in the U.S. occurring in 1994 and other market conditions adversely affected the market value of the Company's investment in marketable securities. As a result, the Company has recorded after-tax unrealized holding losses on marketable securities of $3 million as a reduction of stockholders' equity at December 31, 1994. The Company believes this decline is temporary and intends to hold the existing securities, although occasional sales and new purchases may be made selectively as conditions warrant. The impact of inflation on the Company's results of operations has lessened in recent years, although inflation does increase the Company's cost of doing business. The Company attempts to offset the impact of inflation through productivity and technological improvements, cost containment programs and by increasing its selling prices over time as allowed by market conditions. In addition, substantially all domestic inventories are valued on the last-in, first-out (LIFO) method, which generally results in reporting the cost of goods sold at approximately current costs. Page 41 EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1994 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 Automation Leasing Corp. New York 100 Ademconet, Inc. Delaware 100 Radscan, Inc. Delaware 100 FBX Corporation Delaware 100 Fire Burglary Instruments, Inc. New York 100 Ademco Security Group, Inc. California 100 Ademco Communications Partners, Inc. Delaware 100 Fire-Lite Alarms, Inc. Connecticut 100 Notifier Engineered Systems Company Delaware 100 MicroLite Corporation California 90 Penton Publishing, Inc. Delaware 100 Penton Learning Systems, Inc. Delaware 51 Quality Alert Institute, Inc. Delaware 100 Links Guide, Inc. Delaware 80 Curtin & Pease/Peneco, Inc. Florida 100 Pittway Real Estate, Inc. Florida 100 Chilpub, Inc. Delaware 100 Xetron Corporation Texas 100 Final Frontier Pittway I, Inc. Illinois 100 Final Frontier Pittway II, Inc. Illinois 100 Pittway Corporation of Canada Canada 100 Pittway Fire Safety, Inc. Delaware 100 Ademco de Juarez, S.A. de C.V. Mexico 100 ADI of Puerto Rico, Inc. Puerto Rico 100 Ademco Italia S.p.A. Italy 100 Ademco (Hong Kong) Limited Hong Kong 100 Pittway Foreign Sales Corp. U.S. Virgin Islands 100 EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1994 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 Notifier Espana, S.A. Spain 100 Notifier (Benelux) S.A. Belgium 100 Notifier Deutschland, GmbH Germany 100 Notifier, Ltd. (Singapore) Delaware 100 System Sensor, Ltd. (China) Delaware 100 Xi'an System Sensor Electronics, Ltd. China 55 Pittway UK Limited England 100 Notifier Limited (U.K.) England 100 System Sensor Limited (U.K.) England 100 Ademco-Sontrix Limited England 100 Pittway Australia Pty., Ltd. Australia 100 Ademco-Sontrix Espana, S.A. Spain 100 Pittway Electronics Italy S.r.l. Italy 100 Notifier Italia S.r.l. Italy 100 Pittway Tecnologica S.p.A. Italy 100 Notes: All of the above subsidiaries are included in the Registrant's consolidated financial statements. Parent-subsidiary or affiliate relationships are shown by marginal indentation. EX-23 5 CONSENT OF PRICE WATERHOUSE EXHIBIT 23 PITTWAY CORPORATION DECEMBER 31, 1994 FORM 10-K CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-35168 and 33-54753) of Pittway Corporation of our report dated February 22, 1995 appearing on page 38 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 16 of this Form 10-K. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois March 24, 1995 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1994 DEC-31-1994 10,359 34,313 144,095 6,348 124,801 336,904 184,199 94,426 563,287 169,849 5,088 13,941 0 0 314,189 563,287 778,026 778,026 475,420 475,420 20,160 3,167 3,250 73,845 29,009 44,836 0 0 0 44,836 3.22 3.22