-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FnDTKR3VVI42I6Y3siuJzrXnCO61tsbguXC42wjFCjLHBGNBQW+3LYI5G2G02yDy 3d0OORLtOkY18bmJ86OEmg== 0000093469-97-000005.txt : 19970501 0000093469-97-000005.hdr.sgml : 19970501 ACCESSION NUMBER: 0000093469-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970430 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITTWAY CORP /DE/ CENTRAL INDEX KEY: 0000093469 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 135616408 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04821 FILM NUMBER: 97591532 BUSINESS ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 BUSINESS PHONE: 3128311070 MAIL ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD SHARES INC DATE OF NAME CHANGE: 19900321 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD POWER & LIGHT CORP DATE OF NAME CHANGE: 19660905 10-Q 1 MARCH 31, 1997 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (Zip Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (April 21, 1997). Common Stock 3,938,832 Class A Stock 17,042,444 PITTWAY CORPORATION AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 1997 INDEX PART I. FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Statement of Income - Three Months Ended March 31, 1997 and 1996 3 Consolidated Balance Sheet - March 31, 1997 and December 31, 1996 4 - 5 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 - 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 12 - 14 ITEM 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 14 2 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited; Dollars in Thousands, Except Per Share Data) 1997 1996 NET SALES.................................. $301,158 $257,477 OPERATING EXPENSES: Cost of sales............................ 184,091 157,637 Selling, general and administrative...... 87,698 75,609 Depreciation and amortization............ 8,416 6,810 280,205 240,056 OPERATING INCOME........................... 20,953 17,421 OTHER INCOME (EXPENSE): Gain on sale of investment............... 13,162 Gain from Cylink stock offering.......... 23,432 Income from marketable securities, investments and other interest......... 1,515 833 Interest expense......................... (2,614) (1,990) Miscellaneous, net....................... (78) 187 (1,177) 35,624 INCOME BEFORE INCOME TAXES................. 19,776 53,045 INCOME TAXES............................... 7,480 19,757 NET INCOME................................. $ 12,296 $ 33,288 NET INCOME PER SHARE OF COMMON AND CLASS A STOCK ....................... $ .59 $ 1.59 CASH DIVIDENDS DECLARED PER SHARE: Common................................... $ .067 $ .067 Class A.................................. $ .083 $ .083 AVERAGE NUMBER OF SHARES OUTSTANDING (in thousands) .......................... 20,959 20,912 See accompanying notes. 3 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1997 AND DECEMBER 31, 1996 (Unaudited; Dollars in Thousands) March 31, December 31, 1997 1996 ASSETS CURRENT ASSETS: Cash and equivalents................... $ 9,282 $ 32,409 Marketable securities.................. 24,033 26,026 Accounts and notes receivable, less allowance for doubtful accounts of $10,654 and $9,670................... 212,618 208,182 Inventories............................ 230,052 203,254 Future income tax benefits............. 18,260 19,358 Prepayments, deposits and other........ 12,104 10,287 506,349 499,516 PROPERTY, PLANT AND EQUIPMENT, at cost: Buildings.............................. 43,843 43,413 Machinery and equipment................ 238,190 224,268 282,033 267,681 Less: Accumulated depreciation......... (140,835) (132,867) 141,198 134,814 Land................................... 2,739 2,787 143,937 137,601 INVESTMENTS: Marketable securities.................. 40,650 37,814 Investment in affiliate................ 31,797 31,183 Real estate and other ventures......... 39,467 39,242 Leveraged leases....................... 19,380 19,515 131,294 127,754 OTHER ASSETS: Goodwill, less accumulated amortization of $10,266 and $9,707... 84,444 54,068 Other intangibles, less accumulated amortization of $10,748 and $10,668.. 4,881 5,022 Notes receivable....................... 7,570 8,070 Miscellaneous.......................... 7,009 7,062 103,904 74,222 $885,484 $839,093 See accompanying notes. 4 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1997 AND DECEMBER 31, 1996 (Unaudited; Dollars in Thousands) March 31, December 31, 1997 1996 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable........................... $ 84,853 $ 46,525 Long-term debt due within one year...... 5,041 3,933 Dividends payable....................... 1,728 1,724 Accounts payable........................ 100,534 102,077 Accrued expenses........................ 49,878 53,937 Income taxes payable.................... 10,136 5,685 Retirement and deferred compensation plans.................... 6,625 6,782 Unearned income......................... 4,476 3,538 263,271 224,201 LONG-TERM DEBT, less current maturities... 84,499 87,916 DEFERRED LIABILITIES: Income taxes............................ 66,715 65,738 Other................................... 13,242 14,366 79,957 80,104 STOCKHOLDERS' EQUITY: Preferred stock, none issued............ Common capital stock, $1 par value- Common stock.......................... 3,939 3,939 Class A stock......................... 17,042 16,987 Capital in excess of par value.......... 24,231 21,714 Retained earnings....................... 402,366 391,753 Cumulative marketable securities valuation adjustment.................. 14,958 12,453 Cumulative foreign currency translation adjustment............................ (4,779) 26 457,757 446,872 $885,484 $839,093 See accompanying notes. 5 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited; Dollars in Thousands) 1997 1996 Cash Flows From Operating Activities: Net Income....................................... $ 12,296 $ 33,288 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 8,416 6,810 Gain on sale of investment, net of taxes....... (8,149) Gain from Cylink stock offering, net of taxes.. (14,507) Deferred income taxes.......................... 781 (1,354) Retirement and deferred compensation plans..... 165 2,159 Income/loss from investments adjusted for cash distributions received............... (732) 102 Provision for losses on accounts receivable.... 1,191 1,168 Change in assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts and notes receivable.... (3,422) (7,113) Increase in inventories...................... (25,843) (9,217) Increase in prepayments and deposits......... (1,626) (1,574) (Decrease) increase in accounts payable and accrued expenses....................... (5,388) 2,063 Increase in income taxes payable............. 4,558 13,586 Other changes, net............................. (609) (955) Net cash (used) provided by operating activities. (10,213) 16,307 Cash Flows From Investing Activities: Capital expenditures............................. (15,073) (6,962) Proceeds from sale of investment, net of taxes... 10,748 Proceeds from the sale of marketable securities.. 8,308 4,186 Purchases of marketable securities............... (5,081) (2,500) Disposition of property and equipment............ 127 141 Additions to investments......................... (558) (Increase) decrease in notes receivable.......... (1,685) 145 Net assets of businesses acquired, net of cash... (33,421) (2,682) Net cash (used) provided by investing activities. (46,825) 2,518 Cash Flows From Financing Activities: Net increase (decrease) in notes payable......... 39,000 (1,093) Proceeds of long-term debt....................... 492 75 Repayments of long-term debt..................... (4,574) (507) Stock options exercised.......................... 878 Dividends paid................................... (1,679) (1,711) Net cash provided (used) by financing activities. 34,117 (3,236) Effect of Exchange Rate Changes on Cash............ (206) 6 Net (Decrease) Increase in Cash and Equivalents.... (23,127) 15,595 Cash and Equivalents at Beginning of Period........ 32,409 31,407 Cash and Equivalents at End of Period.............. $ 9,282 $ 47,002 See accompanying notes. 6 PITTWAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited; Dollars in Thousands) NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company" or "Registrant"). Summarized financial information for the limited real estate partnership ventures and other affiliates is omitted because, when considered in the aggregate, they do not constitute a significant subsidiary. The accompanying consolidated financial statements are unaudited but reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements contained herein. However, the financial statements and related notes do not include all disclosures normally provided in the Company's Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. NOTE 2. ACQUISITIONS In the first quarter of 1997, the Company acquired the assets and businesses of a domestic manufacturer and distributor of fire controls and a producer of trade shows and conferences. The total purchase price for these businesses was $33,421 cash and $2,453 in notes. These acquisitions were accounted for as purchase transactions in the consolidated financial statements from their respective dates of acquisition. The impact on consolidated results of operations was not significant. NOTE 3. INVENTORIES The recorded value of inventories at March 31, 1997 and December 31, 1996 approximate current cost and consist of the following: 1997 1996 Raw materials $ 49,428 $ 41,568 Work in process 19,737 19,560 Finished goods - Manufactured by the Company 76,528 69,020 Manufactured by others 84,361 73,106 $230,054 $203,254 7 NOTE 4. MARKETABLE SECURITIES Information about the Company's marketable securities at March 31, 1997 and December 31, 1996 is as follows: 1997 1996 Current - Adjustable Rate Preferred Stocks - Aggregate cost $ 24,734 $ 27,937 Net unrealized holding loss (701) (1,911) Aggregate fair value $ 24,033 $ 26,026 Non-Current - USSB Common Stock - Aggregate cost $ 15,789 $ 15,789 Unrealized holding gain 24,861 22,025 Aggregate fair value $ 40,650 $ 37,814 In February 1996, the Company sold 13% of its investment in United States Satellite Broadcasting Company, Inc. (USSB) as part of an initial public offering of USSB's common stock. The sale of the shares resulted in an after-tax gain of $8,149, or $.39 per share. The net unrealized gain on the preferred stock and USSB common stock held at March 31, 1997 is included, net of $9,202 deferred taxes, in stockholders' equity under the caption "cumulative marketable securities valuation adjustment". Realized gains and losses are based upon the specific identification method. Such gains and losses on the adjustable rate preferred stock, for the quarters ended March 31, 1997 and 1996 were not significant. NOTE 5. INVESTMENT IN AFFILIATE The investment in affiliate consists of the Company's interest in Cylink Corporation (Cylink), which is carried at equity. The carrying value of this investment was increased by $23,432 in the first quarter of 1996 to reflect the increase in the Company's equity in Cylink's net book value as a result of an initial public offering in February 1996. The after-tax gain recorded on the increase in Cylink's equity was $14,507, or $.69 per share. The quoted market value of the Company's investment in Cylink was $71,000 at March 31, 1997. NOTE 6. EARNINGS PER SHARE Net income per share of common capital stock is based on the combined weighted average number of Common and Class A shares outstanding during each period and does not include Class A shares issuable upon exercise of stock options or for other stock awards because the dilutive effect is not significant. 8 NOTE 7. LEGAL PROCEEDINGS In 1989 a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. In December 1994, Saddlebrook's motion for summary judgment based on collateral estoppel was granted on the ground that Plaintiffs' claims were fully retried and rejected in a related administrative proceeding. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. A hearing is set for May 15, 1997 to determine the scope of the three issues remaining for retrial. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature including a lawsuit claiming patent infringement that is scheduled for trial in 1997. While management believes that resolution of the patent infringement suit and other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company attained $301.2 million of sales in the first quarter of 1997, a 17% increase over the first quarter of 1996. The increase principally reflects higher sales levels in the Company's alarm group segment. For the quarter, domestic sales grew 16% while international sales increased 18%. International business relates to the alarm group segment and represents 15% and 14% of total consolidated sales for the first quarter of 1997 and 1996, respectively. Approximately two-thirds of the foreign sales growth in 1997 is from expansion of European operations. Gross profit increased at about the same rate as sales. Selling, general and administrative expenses increased 16% in the first quarter of 1997 as a result of increased costs associated with the higher sales volume. Alarm Group sales of $252.5 million the first quarter of 1997 and $211.8 million for the first quarter of 1996 accounted for 84% and 82%, respectively, of consolidated revenues, reflecting a 19% increase between periods. This growth was due to continuing gains in market share in key product areas and ongoing expansion in the worldwide alarm systems market. Late in 1996, the Company received significant future equipment and distribution commitments from two large installation companies, which are expected to be reflected more fully in the Company's second half results. Operating income for this segment increased 14% for the quarter primarily because of the expanded sales volume partially offset by higher operating costs. Publishing sales grew 8% to $48.7 million for the first quarter of 1997 over $45.1 million in 1996. Operating income increased 48% to $4.9 million for the quarter. These favorable results were achieved through a combination of increased revenues and stable operating costs. There was also some benefit in 1997 from paper price reductions after sharp price increases in the latter part of 1995 and the first half of 1996. Depreciation and amortization expense increased 24% in 1997 mainly as a result of capital additions in the alarm segment. Other income (expense) in 1996 included a pretax gain of $13.2 million on the sale of 622,500 shares of USSB stock in connection with its initial public offering and a pretax gain of $23.3 million on the increase in the book value of the Company's investment in Cylink resulting from its initial public offering. Excluding these gains, other income (expense) remained fairly consistent between periods as increased interest expense from higher borrowing levels was offset by increased earnings recorded on the Company's investments. 10 Effective tax rates were 37.8% and 37.2% in the first quarter of 1997 and 1996, respectively. ACCOUNTING CHANGE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" ("EPS"). The statement replaces primary EPS with basic EPS, which excludes dilution, and requires presentation of both basic and diluted EPS on the face of the income statement. Diluted EPS is computed similarly to the current fully diluted EPS. The statement is effective for financial statements issued for periods ending after December 15, 1997, and requires restatement of all prior- period EPS data presented. The adoption of this statement is not expected to materially affect either current or prior-period EPS. FINANCIAL CONDITION The Company's financial condition remained strong during the first quarter of 1997. Management anticipates that operations, borrowings and marketable securities will continue to be the primary source of funds needed to meet ongoing programs for capital expenditures, to finance acquisitions and investments and to pay dividends. In the first quarter of 1997, income before depreciation and amortization provided $20.7 million of net cash which was used, in addition to $10.2 million of cash, to finance the net increase in working capital items including a $25.8 million increase in inventory balances. Two acquisitions were completed in the quarter which were financed through $33.4 million of short term borrowings. Additional net short term borrowings of $5.6 million, $3.2 million of net proceeds from the sale of marketable securities, $0.9 million of proceeds from the exercise of stock options and $12.9 million of cash were used to fund $15.1 million in capital expenditures, $1.7 million of dividends paid to stockholders, a net increase of $1.7 million in notes receivable and the net repayment of $4.1 million of long-term debt. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest up to $11.1 million in certain affordable housing ventures through 2003. 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 weak commercial real estate market of the past several years. Such events have no effect on net income although they do have a negative impact on the Company's cash position because tax payments become due when the properties are sold or returned 11 to the lenders. The Company has approximately $4.3 million accrued at March 31, 1997 to fully cover the remaining tax payments that would be due if all the properties were sold or returned to the lenders. The Company presently intends to hold its existing investments in preferred stocks, USSB and Cylink although occasional sales of preferred and USSB stocks may be made selectively as conditions warrant. **** This quarterly report, other than historical financial information, contains forward-looking statements that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1996. These include risks and uncertainties relating to government regulation, competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860), alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. 12 As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the ground that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. A hearing is set for May 15, 1997 to determine the scope of the three issues remaining for retrial. 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. The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature including a lawsuit claiming patent infringement that is scheduled for trial in 13 1997. While management believes that resolution of the patent infringement suit and other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Number Description 10 Employment Agreement with Daniel J. Ramella dated as of January 1, 1997. 27 Financial Data Schedule (submitted only in electronic format) (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PITTWAY CORPORATION (Registrant) By /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President and Treasurer (Duly Authorized Officer and Principal Financial Officer) Date: April 30, 1997 14 EX-10 2 RAMELLA EMPLOYMENT AGREEMENT Exhibit 10 Form 10-Q Pittway Corporation March 31, 1997 EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1997, between Penton Publishing, Inc., a Delaware corporation (the "Company"), and Daniel J. Ramella ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the chief operating officer of the Company and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") or the Chairman and Chief Executive Officer of the Company to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title President of the Company, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of the Company for so long as the Board nominates him to that position and he is elected to it, and as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the Chairman and Chief Executive Officer of the Company. (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity, and, provided such activities do not have more than a de minimis effect on Executive's performance of his duties under this Agreement, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Company and the business and affairs of any subsidiary or affiliate. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the Cleveland metropolitan area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Company. 3. Compensation and Benefits. (a) Salary. The Company agrees to pay Executive a salary during the Employment Period, in semi-monthly installments. Executive's initial salary shall be $330,000 per annum. Executive's salary may be increased by the Board from time to time. (b) Bonus(es). The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (c) Expense Reimbursement. The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. Executive acknowledges that under the Company's current air travel reimbursement policy, reimbursement is limited to coach fare (plus Executive's cost of any upgrade certificates used to upgrade to first class) on travel within the United States and is limited to business class fare on travel to and from foreign cities. (d) Standard Executive Benefits Package. In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company, in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (e) Additional Benefits. In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or from a comparable insurer acceptable to the Company; (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and the maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan (the "SERP"), effective January 1, 1996, a copy of -2- which, as currently in effect, is attached hereto as Exhibit A, except that the beginning date for accrual of a benefit shall be January 1, 1997. (f) Indemnification. With respect to Executive's acts or failures to act during the Employment Period in his capacity as a director, officer, employee or agent of the Company, Executive shall be entitled to indemnification from the Company, and to liability insurance coverage (if any), on the same basis as other directors and officers of the Company. 4. Adjustments. Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that if there is a significant reduction in the level of the business to which Executive's duties under this Agreement relate, or if all or any significant part of such business is disposed of by the Company and/or its subsidiaries or affiliates during the Employment Period but Executive thereafter remains an employee of the Company, the Board may make adjustments in Executive's duties, responsibility and authority, and in Executive's compensation, as the Board deems appropriate to reflect such reduction or disposition. 5. Employment Period. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, the third anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than two years, unless the Employment Period shall have ended early pursuant to (c) below or either party shall have given the other party written notice that the extension provision in this sentence shall no longer apply, the Employment Period shall be extended for an additional calendar year (unless Executive's sixty-fifth birthday occurs during such additional calendar year, in which event the Employment Period shall be extended only until such birthday). In no event shall the Employment Period be extended beyond the Executive's sixty-fifth birthday except by mutual written agreement of the Company and Executive. (c) Notwithstanding (a) and (b) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); -3- (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5(b) hereof shall no longer apply shall not constitute a "Termination by Executive for Good Reason"); provided that if the Good Reason identified in such notice is the Good Reason set forth in paragraph 5(e)(ii) hereof, the Company may, at its option, defer the effective date of such termination for up to ninety (90) additional days; or (vii) Executive's termination of Executive's employment for any reason other than Good Reason, by means of advance written notice to the Company at least one hundred twenty (120) days prior to the effective date of such termination identifying such termination as a Termination by Executive with Advance Notice ("Termination by Executive with Advance Notice") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5(b) hereof shall no longer apply shall not constitute a "Termination by Executive with Advance Notice"). (d) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude; (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates which harms or damages any of them to any extent; (iv) conduct by Executive that brings the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Executive for Good Reason or a Termination by -4- Executive with Advance Notice shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 8 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (e) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary to an amount less than "Executive's Reference Salary" (i.e., Executive's initial salary or, in the event the Employment Period has been extended pursuant to paragraph 5(b) hereof, Executive's salary on the date on which the most recent such extension occurred); or (ii) the Company's giving notice that the extension provision in the first sentence of paragraph 5(b) hereof shall no longer apply; or (iii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. Post-Employment Period Payments. (a) If the Employment Period ends on the date on which (without any extension thereof) it is then scheduled to end pursuant to paragraph 5 hereof, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any), expense reimbursements or benefits other than: (i) any salary which has accrued but is unpaid, and any reimbursable expenses which have been incurred but are unpaid, and any unexpired vacation days which have accrued under the Company's vacation policy, but are unused as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP or any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment, (iii) any benefits to which Executive is entitled under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and (iv) any other amount(s) payable pursuant to the succeeding provisions of this paragraph 6. (b) If the Employment Period ends pursuant to paragraph 5 hereof on Executive's sixty-fifth birthday, or if the Employment Period ends early pursuant to paragraph 5 hereof on account of Executive's death, Retirement or Termination for Disability, the Company shall make no further payments to Executive except as contemplated in (a)(i), (ii) and (iii) above. -5- (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect for a period of twenty-four (24) months after the last day of the month in which the Employment Period ends, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall pay any such subsequent amounts to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) or, if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America Illinois in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. In addition, the Company shall reimburse Executive (net after taxes on the receipt of such reimbursement) for any premiums paid by Executive for health insurance provided to Executive (for Executive and his dependents) by the Company subsequent to the end of the Employment Period pursuant to the requirements of COBRA as in effect on the date of this Agreement. It is expressly understood that the Company's payment obligations under this subparagraph (d) shall cease in the event Executive breaches any of his agreements in paragraph 7 or 8 hereof. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination by Executive with Advance Notice, the Company shall make no further payments to Executive except as contemplated in subparagraph (a), clauses (i), (ii) and (iii) above. 7. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement, as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the Chairman and Chief Executive Officer of the Company unless and -6- except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the Chairman and Chief Executive Officer of the Company. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, work product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. 8. Non-Compete, Non-Solicitation. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees (i) that during the Employment Period he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, the business-to-business publishing business or any other business then actively being conducted by the Company or any of its subsidiaries or affiliates, and (ii) that for two years after the Employment Period he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, assist Reed-Elsevier PLC, Chilton Company (a division of Capital Cities/ABC, Inc.), CMP Publications, Inc. or any subsidiary or affiliate of any of them, or any successor or assignee of any of them, in engaging or being engaged in the business activity of publishing a magazine or electronic media product that directly competes with any magazine or electronic media product then being published by, conducting a trade show that directly competes with any trade show then being conducted by, or creating or disseminating any other product that competes directly with any product then being created or disseminated by, the Company or any of its subsidiaries or affiliates. (c) Executive further agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ. -7- (d) Nothing in this paragraph 8 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 9. Enforcement. Because Executive's services are unique and because Executive has access to Confidential Information and work product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 8 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 10. Executive Representations. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 11. Survival. Paragraphs 7 and 8 hereof shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 12. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: Mr. Daniel J. Ramella 2204 Land's End Lane Westlake, OH 44145 -8- Notices to the Company: Mr. Thomas L. Kemp Chairman and Chief Executive Officer Penton Publishing, Inc. 1100 Superior Avenue Cleveland, OH 44114 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 13. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 14. Payment of Certain Costs and Expenses. (a) Prevailing Party's Litigation Expenses. In the event of litigation between the Company and Executive related to this Agreement, the non-prevailing party shall reimburse the prevailing party for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by the prevailing party in connection therewith. (b) Change of Control of Company. Without limiting the generality of subparagraph (a) above, in the event that there is a Change of Control of the Company, if the Company thereafter wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America Illinois in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than (i) Pittway or (ii) one or more members of the Harris Group (as currently defined in Pittway Corporation's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of Pittway Corporation possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 15. Complete Agreement. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as -9- of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 16. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 17. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to: (i) Pittway or any subsidiary or affiliate thereof in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 18. Choice of Law. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of Ohio. 19. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PENTON PUBLISHING, INC. By /s/ Thomas L. Kemp Thomas L. Kemp Chairman and CEO /s/ Daniel J. Ramella DANIEL J. RAMELLA -10- Exhibit A to Exhibit 10 Pittway Corporation March 31, 1997 Form 10-Q PITTWAY CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN SECTION 1 Introduction 1.1 The Plan and Its Effective Date. This Pittway Corporation Supplemental Executive Retirement Plan (the "plan") has been established by Pittway Corporation (the "company"), effective January 1, 1996. 1.2 Purpose. The company maintains the Pittway Corporation Retirement Plan (As Amended and Restated Effective as of January 1, 1989) (as the same may hereafter be amended, the "retirement plan"), which is intended to meet the requirements of a "qualified plan" under the Internal Revenue Code of 1986, as amended (the "Code"). While the Code places limitations on the maximum benefits which may be paid from a qualified plan and the maximum amount of an employee's compensation that may be taken into account for determining benefits payable under a qualified plan, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), permits the payment under an "unfunded plan" of benefits which may not be paid under a qualified plan because of such limitations. The purpose of the plan is to provide certain key employees of the company and its subsidiaries with certain benefits which may not be provided under the retirement plan because of the maximum compensation limitation of the Code. SECTION 2 Eligibility and Benefits 2.1 Eligibility. Each key employee of the company or a subsidiary of the company (a "participant") who participates in the retirement plan and who is a party to an employment agreement with the company or a subsidiary of the company substantially in the form attached hereto as Exhibit 1 (as the same may hereafter be amended, his "Employment Agreement") that provides for his participation in the plan shall participate in the plan, subject to the conditions and limitations of the plan. It is expressly understood that variations among the participants' Employment Agreements may result in differences in the numbered paragraphs thereof in which corresponding provisions appear (for example, the non-competition provisions which are in paragraph 10 of Exhibit 1 attached hereto, or variations thereof, may be in paragraph 10 of certain of the Employment Agreements but in paragraph 9 of others). Accordingly, each reference in the plan to a particular numbered paragraph of a participant's Employment Agreement shall be deemed to be a reference to the paragraph thereof, if any, which corresponds to the identically numbered paragraph of Exhibit 1. 2.2 Accrued Benefit. For 1995 and for each full calendar year and any final fraction of a calendar year of a participant's Employment Period (as such term is defined in such participant's Employment Agreement), the participant shall accrue a benefit under the plan equal to 1.85 percent of that portion of his earnings (as defined in section 2.3 below) for such year or fraction that is in excess of the "maximum dollar limitation" (as defined below) for such year or fraction and is less than $300,000. For purposes of the plan, "maximum dollar limitation" means, for any year or fraction of a year, the greater of $150,000 or the dollar amount of any higher maximum limitation on annual compensation taken into account under a qualified plan for such year or fraction of a year determined by the Secretary of Treasury or his delegate or by law under section 401(a)(17) of the Code; it being understood that annual compensation for purposes of such limitation is computed differently from "earnings" for purposes of the plan. A participant's accrued benefits under the plan shall be referred to hereinafter as the participant's "supplemental retirement benefits." 2.3 Earnings. For purposes of the plan, a participant's "earnings" for any year or fraction means his total, regular cash compensation paid for such year or fraction for services rendered to the Pittway Companies (as such term is defined in the retirement plan) during such year or fraction, consisting solely of his salary and his annual discretionary cash bonus, if any, for such year. It is expressly understood that a participant's "earnings" do not include any other compensation, including, without limitation, any of the following: (a) Long-term incentive compensation; (b) Unused vacation pay; (c) Special cash bonuses; (d) Any income realized for Federal income tax purposes as a result of the grant or exercise of an option or options to acquire shares of stock of a Pittway Company, the receipt or exercise of any stock appreciation right or payment, or the disposition of shares acquired by the exercise of such an option or right; -2- (e) Any noncash compensation, including any amounts contributed by the participant's employer(s) for his benefit under the retirement plan or any other retirement or benefit plan, arrangement, or policy maintained by his employer(s); (f) Any reimbursements for medical, dental or travel expenses, automobile allowances, relocation allowances, educational assistance allowances, awards and other special allowances; (g) Any income realized for Federal income tax purposes as a result of (i) group life insurance, (ii) the personal use of an employer-owned automobile, or (iii) the transfer of restricted shares of stock or restricted property of a Pittway Company, or the removal of any such restrictions; (h) Any severance pay paid as a result of the participant's termination of employment (it being expressly understood that any amount(s) taken into account pursuant to the final sentence of section 2.8 below shall not be deemed severance pay for purposes hereof); or (i) Any compensation paid or payable to the participant, or to any governmental body or agency on account of the participant, under the terms of any state, Federal or foreign law requiring the payment of such compensation because of the participant's voluntary or involuntary termination of employment with any Pittway Company. Notwithstanding the foregoing, a participant's "earnings" do include (i) any salary reduction amount elected by the participant and credited to a cafeteria plan (as defined in section 125(c) of the Code) or a qualified cash or deferred arrangement (as defined in section 401(k) of the Code) and (ii) the initial value ascribed to any performance shares award the participant elects to receive in lieu of a portion of his annual discretionary cash bonus. 2.4 Payment of Benefits. Each participant's Employment Agreement provides that in no event shall his Employment Period be extended beyond his 65th birthday except by mutual agreement of the participant and his employer. Subject to the conditions and limitations of the plan, upon a participant's attainment of age 65 years, he shall be entitled to a monthly benefit payable for his life commencing upon his attainment of age 65 years in an amount equal -3- to one-twelfth (1/12) of the sum of the participant's accrued supplemental retirement benefits. A participant's supplemental retirement benefits shall be paid to him in the form described below that applies to the participant; provided, however, that in lieu of payment in the normal form described below, the participant may irrevocably elect, within thirty (30) days after his commencement of participation in the plan, to receive his supplemental retirement benefits in a single lump sum as soon as practicable after his attainment of age 65 years. A participant's "supplemental retirement benefit commencement date" means the date as of which the initial payment (or, in the case of a single lump sum, full payment) of the supplemental retirement benefits to which the participant is entitled is payable. Subject to the conditions and limitations of the plan, a participant's supplemental retirement benefit commencement date shall normally be the first day of the calendar month coincident with or next following the participant's attainment of age 65 years. Notwithstanding the immediately preceding sentence, if a participant's Employment Period under his Employment Agreement terminates prior to his attainment of age 65 years and he is eligible, and elects, to receive early retirement benefits under the retirement plan, and if the participant requests a supplemental retirement benefit commencement date prior to his attainment of age 65 years, then with (but only with) the consent of the committee (as defined in section 3.1 below), the participant's supplemental retirement benefit commencement date shall be such earlier date, if any, selected by the committee. Supplemental retirement benefits that are paid in a lump sum, or commence, before the participant's attainment of age 65 years, if any, shall be subject to actuarial reduction in accordance with section 2.5 below. (a) Life Annuity. If a participant does not have a spouse (as defined in section 2.7 below) on his supplemental retirement benefit commencement date, and if he has not elected pursuant to the preceding provisions of this section 2.4 to receive his supplemental retirement benefits in a single lump sum, payment of his supplemental retirement benefits shall be during his lifetime on a life annuity basis. (b) Joint and Survivor Annuity. If a participant has a spouse (as defined in section 2.7 below) on his supplemental retirement benefit commencement date, payment of his supplemental retirement benefits shall be in the form of a joint and 50 percent survivor annuity unless the participant has theretofore elected pursuant to the preceding provisions of this section 2.4 to have his benefits provided in a single lump sum. Such joint and 50 percent survivor -4- annuity shall consist of a reduced monthly benefit continuing during the participant's lifetime, and if such spouse is living at the time of the participant's death, payment of 50 percent of such monthly benefit shall be made to such spouse until such spouse's death occurs. The amount of the participant's and such spouse's benefits under this subsection shall be calculated so that it is the actuarial equivalent of the supplemental retirement benefits to which the participant would otherwise be entitled under the plan. If such spouse predeceases the participant, or if the participant and such spouse cease to be married after the participant's supplemental retirement benefit commencement date, there shall be no adjustment to the participant's monthly payments and no supplemental retirement benefits shall be payable to any person after the participant's death. 2.5 Actuarial Equivalent. A benefit shall be actuarially equivalent to another benefit if the actuarial reserve required to provide such benefit is equal to the actuarial reserve required to provide such other benefit, computed on the basis of the same actuarial assumptions, interest rates, tables, methods and procedures, including reduction factors for commencement of payments prior to attainment of age 65 years, that are used for purposes of the retirement plan as in effect on the applicable date that a benefit payment amount is determined. 2.6 Pre-Retirement Surviving Spouse Benefit. If a participant dies prior to his supplemental retirement benefit commencement date, no supplemental retirement benefits under the plan shall be paid or payable with respect to the participant; provided, however, that if the participant has a spouse (as defined in section 2.7 below) at the time of his death, such spouse shall be entitled to receive a monthly benefit for such spouse's lifetime equal to 50 percent of the amount of monthly benefit that would have been payable to the participant in the form of a joint and 50 percent survivor annuity if he had terminated employment as of the date of his death with entitlement to supplemental retirement benefits under the plan and the committee (as defined in section 3.1 below) had permitted his supplemental retirement benefit commencement date to occur on the first day of the calendar month coincident with or next following the date of his death, taking into account actuarial reduction for commencement prior to the participant's attainment of age 65 years. The first payment to the spouse shall be made as of the first day of the calendar month coincident with or next following the date of the participant's death and the final payment shall be made as of the -5- first day of the calendar month during which the spouse's death occurs. If, prior to the participant's death, the participant had elected pursuant to section 2.4 above to receive his supplemental retirement benefits in a single lump sum, in lieu of the monthly payments described above, such spouse shall be entitled to receive a single lump sum equal to 50 percent of the lump sum value of the participant's supplemental retirement benefits as of the date of his death, taking into account actuarial factors for payment prior to the participant's attainment of age 65 years. Such lump sum payment shall be made to such spouse as soon as practicable following the participant's death. 2.7 Spouse. For purposes of the plan, a person will be considered the "spouse" of a participant as of any date if and only if such person and the participant have been married in a religious or civil ceremony recognized under the laws of the state where the marriage was contracted and the marriage remains legally effective. Any person who is not, or who has ceased to be, a participant's "spouse" on the participant's supplemental retirement benefit commencement date (or, in the event of the participant's death prior to his supplemental retirement benefit commencement date, the date of his death) shall not be considered the participant's "spouse" for purposes of the plan. 2.8 Forfeiture; Early Termination of Employment Period. If the participant's Employment Period ends early pursuant to paragraph 5 of his Employment Agreement on account of a Termination for Cause or a Termination by Executive with Advance Notice (as such terms are defined, respectively, in his Employment Agreement), or if after the participant's Employment Period ends (whether or not early and regardless of the reason) the participant breaches any of his agreements in paragraph 7, 9 or 10 of his Employment Agreement, the participant shall forfeit all of his supplemental retirement benefits, if any, under the plan, no benefit under the plan shall thereafter be payable to or with respect to the participant or his spouse, and any benefit under the plan theretofore paid to or with respect to the participant or his spouse must be repaid to the company by the participant or his spouse promptly upon demand. If the participant's Employment Period ends early pursuant to paragraph 5 of his Employment Agreement on account of a Termination without Cause or a Termination by Executive for Good Reason (as such terms are defined, respectively, in his Employment Agreement), the participant's supplemental retirement benefits under the plan shall be the supplemental retirement benefits the participant would have been entitled to under the plan had his Employment Period remained in effect until the earlier of the date on which (without any extension thereof) such Employment Period was then scheduled to -6- end pursuant to his Employment Agreement or the date of his death and had the participant's salary in effect as of the last day of his Employment Period (or, if greater, his Executive's Reference Salary (as such term is defined in his Employment Agreement)) continued until the earlier of such dates and been paid at the times such salary would have been paid, and had the participant received no further annual cash bonus. 2.9 Funding. The plan is intended to be non-qualified for purposes of the Code and unfunded for purposes of the Code and ERISA. Benefits payable under the plan to a participant and/or his spouse, as the case may be, shall be paid directly by the company. The company shall not be required to segregate on its books or otherwise any amount to be used for payment of supplemental retirement benefits under the plan. Each participant and spouse is solely an unsecured creditor of the company with respect to any benefit payable with respect to a participant hereunder. SECTION 3 General Provisions 3.1 Committee. The plan shall be administered by the plan administrative committee of the retirement plan (the "committee"). The committee shall have, to the extent appropriate, the same powers, rights, duties and obligations with respect to the plan as it has with respect to the retirement plan. Each determination provided for in the plan shall be made by the committee under such procedure as may from time to time be prescribed by the committee and shall be made in the absolute discretion of the committee. Any determination so made shall be conclusive. 3.2 Employment Rights. Neither the establishment of, nor participation in, the plan shall be construed to give any participant the right to be retained in the service of the Pittway Companies or to any benefits not specifically provided by the plan. 3.3 Taxes and Withholding. Each participant (or his spouse, as applicable) shall be responsible for any taxes imposed on him (or his spouse) ("taxes") by reason of the establishment of, or his participation in, the plan, including, without limitation, any Federal, state and/or local income or employment taxes imposed on benefits or potential benefits under the plan (or on the value thereof) in advance of the participant's receipt of such benefits or potential benefits. The company or a subsidiary of the company may deduct any taxes from payroll or other payments due the participant or his spouse. The committee shall deduct from all payments under the plan any taxes required -7- to be withheld, including, without limitation, any Federal, state and/or local income or employment taxes. In the event that such deductions and/or withholdings are not sufficient to pay the taxes, the participant (or his spouse) shall promptly remit the deficit to the company upon its request. 3.4 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state, the interests of participants and their spouses under the plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily transferred, assigned, alienated or encumbered. No participant shall have any right to any benefit payments hereunder prior to his termination of employment with the Pittway Companies. 3.5 Payment with Respect to Incapacitated Participants or Beneficiaries. If any person entitled to benefits under the plan is under a legal disability or in the committee's opinion is incapacitated in any way so as to be unable to manage his financial affairs, the committee may direct the payment of such benefit to such person's legal representative or to a relative or friend of such person for such person's benefit, or the committee may direct the application of such benefits for the benefit of such person in any manner which the committee may select that is consistent with the plan. Any payments made in accordance with the foregoing provisions of this section shall be a full and complete discharge of any liability for such payments. 3.6 Limitation of Liability. To the extent permitted by law, no person (including the company, any subsidiary of the company, the Board of Directors of the company (the "Board"), the board of directors of any subsidiary of the company, the committee, any present or former member of the Board or of the board of directors of any subsidiary of the company or of the committee, and any present or former officer of the company or of any subsidiary of the company) shall be personally liable for any act done or omitted to be done in good faith in the administration of the plan. 3.7 Controlling Law. The plan shall be construed in accordance with the provisions of ERISA and other Federal laws, to the extent such provisions are applicable to the plan. To the extent not inconsistent therewith, the plan shall be construed in accordance with the laws of the State of Illinois. 3.8 Gender and Number. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular and the singular shall include the plural. 3.9 Action by the Company. Any action required of or permitted by the company under the plan, including action by the company to amend the plan, shall be by -8- resolution of the Board or by a duly authorized committee of the Board or by a person or persons authorized by resolution of the Board or such committee. The procedure for amending the plan is that the plan shall be amended by the company's taking appropriate corporate action to effectuate any amendment considered by it to be advisable to be made. Appropriate corporate action includes action by resolution of the Board, by a committee authorized by the Board, or by a person or persons authorized by the Board or such committee, as provided above. 3.10 Successor to the Company. The term "company" as used in the plan shall include any successor to the company by reason of merger, consolidation, the purchase of all or substantially all of the company's assets or otherwise. 3.11 Miscellaneous. The plan shall be binding upon and inure to the benefit of the parties, their legal representatives, successors and assigns, and all persons entitled to benefits hereunder. Any notice given in connection with the plan shall be in writing and shall be delivered in person or by registered mail, return receipt requested. Any notice given by registered mail shall be deemed to have been given upon the date of delivery indicated on the registered mail return receipt, if correctly addressed. SECTION 4 Amendment and Termination While the company expects to continue the plan, it must necessarily reserve, and hereby does reserve, the right, either in general or as to one or more particular participants, to amend the plan from time to time or to terminate the plan at any time; provided (i) that no amendment of the plan with respect to a participant that reduces or eliminates any benefits such participant has accrued as of the effective date of such amendment shall be effective unless such participant consents to such amendment; and (ii) no amendment of the plan with respect to a participant whose Employment Period under his Employment Agreement has not yet ended that adversely affects such participant, or termination of the plan with respect to such a participant, by the company on any date shall be effective prior to the date on which (without any extension thereof) such participant's Employment Period is then scheduled to end pursuant to his Employment Agreement unless the participant consents to such amendment or termination. -9- IN WITNESS WHEREOF, this plan has been executed on behalf of the company by its duly authorized officers as of the day and year first above written. PITTWAY CORPORATION By: Its: Date: ATTEST By _________________________________ Its _____________________________ Date_____________________________ -10- Exhibit 1 to Exhibit A of Exhibit 10\ Pittway Corporation March 31, 1997 Form 10-Q EMPLOYMENT AGREEMENT AGREEMENT made as of January 1, 1996, between Pittway Corporation, a Delaware corporation (the "Company"), and ___________ ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the ____________of the ___________________ Group of the Company or any successor to such Group, in each case as constituted from time to time (the "Group"), and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") or the President of the Company to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title ____________________ of the Group, subject to the power of the Board to change such title from time to time. During the Employment Period, Executive shall also serve as a director of the Company for so long as the Board nominates him to that position and he is elected to it, as a ____________ of the Company for so long as the Board elects or appoints him to that position and as a director of any affiliate of the Company designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company. (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Group and the business and affairs of any other group of the Company, any division of the Company, or any subsidiary or affiliate of the Company (or any group or division thereof), engaged in the security, alarm or monitoring products business or any other business the same as or similar to or related to that then engaged in by the Group. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the __________________ area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Company. 3. Salary and Benefits. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $_______ per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to a supplemental executive retirement program, the principal terms of which are set forth in Exhibit A attached hereto: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional -2- coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or from a comparable insurer acceptable to the Company; (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and the maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A. 4. Adjustments. Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that if there is a significant reduction in the level of the business to which Executive's duties under this Agreement relate, or if all or any significant part of such business is disposed of by the Company and/or its subsidiaries or affiliates during the Employment Period but Executive thereafter remains an employee of the Company, the Board may make adjustments in Executive's duties, responsibility and authority, and in Executive's compensation, as the Board deems appropriate to reflect such reduction or disposition. 5. Employment Period. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, the third anniversary of the date hereof. (b) On each anniversary of the date hereof which precedes Executive's sixty-fifth birthday by more than two years, unless the Employment Period shall have ended early pursuant to (c) below or either party shall have given the other party written notice that the extension provision in this sentence shall no longer apply, the Employment Period shall be extended for an additional calendar year (unless Executive's sixty-fifth birthday occurs during such additional calendar year, in which event the Employment Period shall be extended only until such birthday). In no event shall the Employment Period be extended beyond the Executive's sixty-fifth birthday except by mutual written agreement of the Company and Executive. (c) Notwithstanding (a) and (b) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; -3- (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date of such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive for Good Reason"); or (vii) Executive's termination of Executive's employment for any reason other than Good Reason, by means of advance written notice to the Company at least one hundred eighty (180) days prior to the effective date of such termination identifying such termination as a Termination by Executive with Advance Notice ("Termination by Executive with Advance Notice") (it being expressly understood that Executive's giving notice that the extension provision in the first sentence of paragraph 5 (b) hereof shall no longer apply shall not constitute a "Termination by Executive with Advance Notice"). (d) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude, (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates; -4- (iv) conduct by Executive tending to bring the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Executive for Good Reason or a Termination by Executive with Advance Notice shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 10 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (e) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary to an amount less than "Executive's Reference Salary" (i.e., Executive's initial salary or, in the event the Employment Period has been extended pursuant to paragraph 5(b) hereof, Executive's salary on the date on which the most recent such extension occurred); or (ii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. Post-Employment Period Payments. (a) If the Employment Period ends on the date on which (without any extension thereof) it is then scheduled to end pursuant to paragraph 5 hereof, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any) or benefits other than: (i) any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP or any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment and (iii) any other amount(s) payable pursuant to the succeeding provisions of this paragraph 6. (b) If the Employment Period ends pursuant to paragraph 5 hereof on Executive's sixty-fifth birthday, or if the Employment Period ends early -5- pursuant to paragraph 5 hereof on account of Executive's death Retirement or Termination for Disability, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect until the date on which (without any extension thereof) it was then scheduled to end, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half of the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such reduced amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America Illinois in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. It is expressly understood that the Company's payment obligations under this (d) shall cease in the event Executive breaches any of his agreements in paragraph 7, 9 or 10 hereof. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination by Executive with Advance Notice, the Company shall make no further payments to Executive except as contemplated in (a) (i) and (ii) above. 7. Inventions and Other Intellectual Property. Executive agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, trademarks, slogans, product or other designs, advertising or marketing programs, and all similar or related information which relate to the Company's or any of its subsidiaries' or affiliates' actual or anticipated business, research and development or existing or future products or services and which are (or were prior to the -6- date of this Agreement) conceived, developed or made by Executive, whether alone or jointly with others, while employed by the Company or any such subsidiary or affiliate or any predecessor thereof ("Work Product") belong to the Company or such subsidiary or affiliate. Executive will promptly disclose such Work Product to the President of the Company and perform all actions reasonably requested by the President of the Company (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 8. Limitation/Illinois Disclosure. Paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to the extent application thereof is prohibited by any law the benefits of which cannot be waived by Executive. Executive hereby waives the benefits of any such law to the maximum extent permitted by law. In accordance with Section 2872 of the Illinois Employee Patent Act, Ill. Rev. Stat. Chap. 140, Sec. 301 et. seq. (1983), Executive is hereby advised that in the event and to the extent such Act is applicable to Executive, paragraph 7 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to any invention for which no equipment, supplies, facilities or trade secret information of the Company or any of its subsidiaries or affiliates was used and which was developed entirely on Executive's own time, unless (i) the invention relates to the business of the Company or any of its subsidiaries or affiliates or to the Company's or any of its subsidiaries' or affiliates' actual or demonstrably anticipated research or development or (ii) the invention results from any work performed by Executive for the Company or any of its subsidiaries or affiliates. 9. Confidential Information. Executive acknowl-edges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement, as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the President of the Company unless and except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the President of the Company. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, the Work Product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. -7- 10. Non-Compete, Non-Solicitation. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, the security, alarm or monitoring products business or any other business then actively being conducted by the Group, in any geographic area in which the Group is then conducting such business (whether through manufacturing or production, calling on customers or prospective customers, or otherwise). Notwithstanding the foregoing, subsequent to the Employment Period Executive may engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business activity which is not competitive with a business activity being conducted by the Group at the time subsequent to the Employment Period Executive first engages or assists in such business activity (a "Non-competitive Business Activity"). (c) Executive further agrees that during the Employment Period and for two years thereafter he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ, or any customer of the Company or of any of its subsidiaries or affiliates to quit or abandon its relationship, for any purpose whatsoever, or (ii) in connection with any business to which the first sentence of (b) above applies, except where such activity constitutes a Non-competitive Business Activity, call on, service, solicit or otherwise do business with any then current or prospective customer of the Company or of any of its subsidiaries or affiliates. (d) Nothing in this paragraph 10 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise -8- the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. Enforcement. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 7, 9 or 10 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 12. Executive Representations. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 13. Survival. Paragraphs 7, 9 and 10 hereof shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 14. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: ___________________ ___________________ ___________________ Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 -9- or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 16. Payment of Certain Costs and Expenses. In the event that there is a Change of Control of the Company, if the Company thereafter wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America Illinois in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if but only if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than one or more members of the Harris Group (as currently defined in the Company's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of the Company possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 17. Complete Agreement. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way. 18. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 19. Successors and Assigns. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to: (i) any subsidiary or -10- affiliate of the Company in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 20. Choice of Law. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of Illinois. 21. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. * * * * * -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By ___________________________ Its __________________________ ______________________________ [EXECUTIVE] -12- EX-27 3 MAR 1997 FINANCIAL DATA
5 1,000 3-MOS DEC-31-1997 MAR-31-1997 9,282 24,033 223,272 10,654 230,052 506,349 284,772 140,835 885,484 263,271 84,499 0 0 20,981 436,776 885,484 301,158 301,158 184,091 184,091 8,416 1,191 2,614 19,776 7,480 12,296 0 0 0 12,296 .59 .59
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