-----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, B3F3vNPI/1Y9BqAXCa/0dgBqH4WzY403Q1UFVxVQTdhqvJZ++fVWve1fR5AcRX8Y rtcbgBb8MGpDljQYJjAW2w== 0000093469-98-000002.txt : 19980324 0000093469-98-000002.hdr.sgml : 19980324 ACCESSION NUMBER: 0000093469-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 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-K405 SEC ACT: SEC FILE NUMBER: 001-04821 FILM NUMBER: 98570739 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-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 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, Suite 700, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (ZIP Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $1.00 par value New York Stock Exchange Class A Stock, $1.00 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant (based on closing sales prices on March 19, 1998): $1,051,398,000. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (March 19, 1998): Common Stock - 3,938,832 shares outstanding; Class A Stock - 17,095,468 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1997 Annual Report to Stockholders are incorporated by reference into Parts I and II of this report. Portions of the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 are incorporated by reference into Part III of this report. PITTWAY CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K For The Year Ended December 31, 1997 PART I Page Item 1 Business 3-10 Item 2 Properties 10-12 Item 3 Legal Proceedings 12-14 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market For Registrant's Common Equity and Related Stockholder Matters 14 Item 6 Selected Financial Data 14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8 Financial Statements and Supplementary Data 15 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 15 PART III Item 10 Directors and Executive Officers of the Registrant 15 Item 11 Executive Compensation 15 Item 12 Security Ownership of Certain Beneficial Owners and Management 15 Item 13 Certain Relationships and Related Transactions 15 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 SIGNATURES 17 2 PART I Item 1. Business (a) General Development of Business Pittway Corporation ("Pittway" or "Registrant"), was incorporated under Delaware law in 1925. Pittway and its subsidiaries are referred to herein collectively as the "Company". The Company operates in two reportable industry segments: alarm and other security products, and publishing. In December 1997, the Company announced that its Penton Publishing subsidiary ("Penton") had signed a letter of intent to acquire another business media company, contingent on the Company spinning off Penton to the Company's stockholders in a tax-free distribution. The acquisition and related spin-off are subject to the execution of a definitive combination agreement and receipt of a favorable ruling on the spin-off from the Internal Revenue Service, among other conditions. At such time as the principal conditions are satisfied, subsequent financial disclosures will reflect Penton as a discontinued operation, including restatement of prior periods. The Company expects the transaction will be completed in the second or third quarter of 1998. See information set forth under the heading "Supplemental Information" appearing on pages 40-41 of the Company's 1997 Annual Report to Stockholders which is incorporated herein by reference. Acquisitions and dispositions of businesses by the Company, other than the discontinued operations discussed below, in each of the five years ended December 31, 1997 were not significant to the Company's sales or results of operations. In September 1997, Cylink Corporation ("Cylink"), an affiliate of the Company (see "Real Estate and Other Ventures" in Item 1(c), below), acquired Algorithmic Research, an information security company, for cash and Cylink stock totaling $76.3 million. The Company increased the carrying value of its investment in Cylink by $6.4 million and recorded a $4.0 million after-tax gain, or $.19 per share (basic and diluted), as a result of the stock issued in the acquisition and reduced the carrying value of its investment in Cylink by $18.9 million and recorded an $11.8 million after-tax expense, or $.56 per share (basic and diluted), for its equity in Cylink's write-off of "in-process technology" acquired in the transaction. In February 1996, Cylink made an initial public offering of its common stock. The Company increased its carrying value of this investment to reflect the increase in the Company's equity in Cylink's net book value. An after-tax gain of $14.4 million, or $.69 per share ($.68 diluted) was recorded on the increase in Cylink's equity. In February 1996, the Company sold 13% of its investment in United States Satellite Broadcasting Company, Inc. ("USSB") as part of an initial public offering of USSB common stock. The sale resulted in an after-tax gain of $8.1 million or $.39 per share (basic and diluted). See "Real Estate and Other Ventures" in Item 1(c), below. 3 During the first half of 1994, the Company sold its 16.67% ownership in First Alert, Inc., a manufacturer of residential fire protection products, as part of an initial public offering of that company's common stock. The sale resulted in an after-tax gain of $11.8 million or $.57 per share. In April 1993, the Company distributed its investment in AptarGroup, Inc. (formerly known as the Seaquist Division packaging group) to stockholders in a tax-free spin-off. AptarGroup, Inc. is a manufacturer of aerosol valves, dispensing pumps and closures which are sold to packagers and marketers in the personal care, fragrance/cosmetics, pharmaceutical, household products and food industries. (b) Financial Information about Industry Segments Financial information relating to industry segments for each of the three years ended December 31, 1997 is set forth in Note 14 ("Segment Information") to the Consolidated Financial Statements contained in the 1997 Annual Report to Stockholders, pages 36-37, which Note is incorporated herein by reference. (c) Narrative Description of Business The principal operations, products and services rendered by the Company: Alarm and Other Security Products Segment This segment involves the design, manufacture and sale of an extensive line of burglar and commercial fire alarm equipment, closed circuit television, access control and other alarm components and systems as well as the distribution of alarm, fire, security and other electrical products manufactured by other companies. By offering a broad line of alarm products needed for security systems, the Company provides a full range of services to independent alarm dealers and installers which range in size from one person operations to the largest national alarm service companies. In every major domestic market area, quick delivery is provided through the Company's computerized regional warehouses and convenience center outlets (ADI), authorized distributors and dealers. ADI is the largest wholesale distributor of security, low voltage and voice and data cabling products in North America specializing in burglar alarm, fire alarm, CCTV, access control, intercom, central vacuum and sound & communications sales. Various products sold through ADI are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under the Company's Ademco brand name, others are resold under brand names owned by its suppliers. In the Canadian, Mexican and overseas markets, alarm and other security products are sold through the Company's distribution centers, authorized distributors and sales agents. The Company also offers AlarmNet to alarm companies in major U.S. markets. AlarmNet is a wireless cellular-like communication network designed to transmit alarm signals by radio instead of over telephone lines. The Company also offers First Alert Professional, a brand name marketing program to independent burglar alarm dealers. Commercial fire detectors and fire controls are sold through the Company's regional warehouses, electrical and building supply wholesalers and alarm and fire safety distributors. These products are primarily sold under the Company's Fire-Lite, Notifier, Fire Control Instruments and System Sensor brand names. 4 Raw materials essential to the Company's businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available from more than one supplier and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the Company's products can be obtained only from one or two suppliers, the shortage of which could adversely impact production of alarm equipment and commercial fire detectors by the Company. The Company believes that the loss of any other single source of supply would not have a material adverse effect on its overall business. Through its NESCO subsidiary the Company offers a wide variety of services to independent distributors of its fire alarm systems products, including assistance with system design, bonding, technical help, training, marketing and administrative support. Sales and marketing methods common to this industry segment include communications through the circulation of catalogs and merchandising bulletins, direct mail campaigns, and national and local advertising in trade publications. The Company's principal advantages in marketing are its reputation, broad product line, high quality products, extensive integrated distribution network, efficient customer service, competitive prices and brand names. Within the industry there is competition from large and small manufacturers in both the domestic and foreign markets. While competitors will continue to introduce new products similar to those sold by the Company, the Company believes that its research and development efforts and the breadth and quality of its distribution network will permit it to remain competitive. Publishing Segment This segment is a publisher of 33 national business and trade publications. The Company's publications serve both specific industries and broad functional markets which include specialized manufacturing, service industries, technical and professional fields and general management. Most publications are distributed on a monthly basis with several others distributed on a biweekly, annual or biennial frequency. The publications are generally distributed free through controlled circulation. The principal source of revenue is from the sale of advertising space within the magazines. A variety of magazine-related products and services are also offered including: directories, trade shows and conferences; readership lists, specialty publications, custom publishing, research and telemarketing operations, CD-ROMs, on-line computer services, and direct-response card mailer service. Other facets of the business include: the operation of a printing plant for the printing and production of most of the Company's publications and those of other publishers; a national direct mail marketing organization serving the pharmaceutical and business services markets and providing a complete line of services, from creative and printing to mailing service capabilities. Within the publishing and marketing communications fields, competition exists in the form of other publications and media communication businesses. Reductions in advertising schedules by domestic industrial companies due to economic and other competitive pressures directly impacts the display advertising levels of the Company's publishing segment. The Company competes with one or more other magazines for advertising revenue in each of its magazine titles. The Company's principal sales advantages include relevant 5 editorial content and innovative marketing complemented by specialized multi-magazine supplements. The Company believes that its competitive position also benefits from improvements in productivity and from cost control programs. The Company places great emphasis on providing quality products and services to its customers. Real Estate and Other Ventures The Company is involved in the marketing, sale and development of land near Tampa, Florida for residential and commercial use. Saddlebrook East Village, a 2,000 acre parcel of land, is approved for development as a master planned community. A major shopping mall developer signed a contract to acquire 250 acres of this land. If the land purchase is closed (the developer could take up to 24 months to complete the planning and permitting process), a sizeable regional mall will be built on the site. Another developer has signed a letter of intent to acquire the adjacent land, which it wants to use for residential development. The West Village, formerly called Saddlebrook Corporate Center, a nearby 450 acre parcel, originally planned as a business park for mixed use development, was partially converted to a residential community due to the demand for residential housing. Principal competition comes from other residential and commercial developments in Florida. The Company owns 8,606,085 shares (29.6% of the shares outstanding) of Cylink Corporation (Cylink) a leading supplier of network information security products that enable the secure transmission of data over private local area networks and wide area networks and public packet switched networks, such as the Internet. Cylink further offers a line of spread spectrum radio products that are used for wireless voice and data communications. On March 13, 1998, Cylink announced a pending sale of this wireless business for $60.5 million. Cylink acquired Algorithmic Research, an information security company, in September 1997. The Company also owns 3,781,375 shares (4.2% of the shares outstanding) of United States Satellite Broadcasting Company Inc. (USSB), a company which provides subscription television programming via high-power direct broadcast satellite to households throughout the Continental U.S. Both of these companies made initial public offerings of their respective stocks in February of 1996. Additionally, the Company has approximately an 8.5% interest in a joint venture that develops wireless signaling equipment for communication between fixed points and a 10% interest in a company that enhances data transmission over cellular telephone networks. The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties located primarily in Chicago. See Item 7 of this Form 10-K. The Company also has invested, as a 5% limited partner, in six rental apartment complexes located in Chicago, Indianapolis, San Jose and three near Washington, D.C. which provide certain tax advantages. The Company is an equity participant in leveraged leases of an aircraft and communications satellite transponders. Other Information Patents and Trademarks - While the Company owns or is licensed under a number of patents which are cumulatively important to each of its business units, the loss of any single patent or group of patents would not have a material adverse effect on the Company's overall business. 6 Products manufactured by the Company are sold primarily under its own trademarks and tradenames. Some products purchased and resold by the Company's alarm and security products distribution business are sold under the Company's tradenames while others are sold under tradenames owned by its suppliers. Customers - Neither of the Company's industry segments is dependent upon a single customer or a few customers. In 1997, the Alarm and Other Security Products Segment developed significant national account business from several major companies in the U.S. residential alarm market. The loss of any one of these customers would not have a material adverse effect on the Company's results of operations. Research and Development - The Company is engaged in programs to develop and improve products as well as develop new and improved manufacturing methods. Expenditures for Company sponsored research and development activities in the alarm and other security products segment were $24.3 million in 1997, $18.1 million in 1996 and $16.6 million in 1995. These costs, which are expensed in the Company's consolidated income statement, were associated with a number of products in varying stages of development, none of which represents a significant item of cost or is projected to be a significant addition to the Company's line of products. Product Liability - Due to the nature of the fire and security alarm business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. This exposure was reduced by the sale of First Alert/BRK Electronics in 1992. It is likely, due to the present litigious atmosphere in the United States, that additional claims and lawsuits will be filed in future years. The Company believes that it maintains sufficient insurance to cover this exposure. Environmental Matters - The Company anticipates that compliance with various laws and regulations relating to protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position. Employees - At December 31, 1997, there were approximately 7,800 persons employed by the Company, including 5,700 employed in the United States. Approximately 1,400 of the employees working in the United States were represented by labor unions. The Company considers its relations with its employees and the unions representing its employees to be good. Risks and Uncertainties - In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in 7 the future could affect, the Company's actual results and could cause its actual results in 1998 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Risks associated with acquisition strategy - The Company's strategy includes the acquisition of businesses that complement or augment the Company's existing products and services. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approvals, including antitrust approvals. Any acquisitions completed by the Company may be made at substantial premiums over the fair value of the net assets of the acquired companies. There can be no assurance that the Company will be able to complete future acquisitions or that the Company will be able to successfully integrate any acquired businesses. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms which are not favorable to the Company and, in the case of equity financing, may result in dilution to the Company's stockholders. Competition - The Company encounters and expects to continue to encounter significant competition in the sale of its products and services. The Company's competitors include a number of large multinational corporations, some of which may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. Competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. There can be no assurance that the Company's current products, products under development, or ability to develop new technologies will be sufficient to enable it to compete effectively. Risks associated with international operations - International sales account for 14% of the Company's 1997 consolidated revenues and the Company intends to continue to expand its presence in international markets. International revenues are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by the Company in foreign markets where payment for the Company's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse impact on the Company's business and results of operations. Rapid and significant technological change and new products - The markets for the Company's products are characterized by rapid and significant technological change, evolving industry standards and frequent new product introductions and enhancements. Many of the Company's products and products under development are technologically innovative, and require significant planning, design, development and testing, at the technological, product and manufacturing process levels. These activities can require significant commitments of capital, personnel and other resources by the Company. 8 In addition, products that are competitive in the Company's markets are frequently characterized by rapid and significant technological change due to industry standards that may change and by the introduction of new products and technologies that render existing products and technologies uncompetitive or obsolete. There can be no assurance that any of the products currently being developed by the Company, or those to be developed in the future, will be technologically feasible or accepted by the marketplace, that any such development will be completed in any particular time frame, or that the Company's products or proprietary technologies will not become uncompetitive or obsolete. Possible adverse effect from changes in governmental regulations - The Company competes in several markets which involve compliance by its customers with Federal, state, local and foreign regulations. The Company develops, configures and markets its products to meet customer needs created by such regulations. These regulations may be amended in response to new scientific evidence or political or economic considerations. Any significant change in regulations could adversely affect demand for the Company's products in regulated markets. Risks associated with dependence on capital spending policies - The level of capital spending by users of the Company's products can have a significant effect on the Company's revenues. Such spending is based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of equipment, public policy, and the effects of different economic cycles. Any decrease in such spending could have a material adverse effect on the Company's business and results of operations. Dependence on patents and proprietary rights - The Company seeks to obtain patents and protect trade secrets for significant new technologies, products and processes because of the length of time and expense associated with bringing new products through the development process and to the marketplace. The Company's success depends in part on its ability to develop patentable products and obtain and enforce patent protection for its products both in the U.S. and in other countries. The Company owns numerous U.S. and foreign patents, and intends to file additional applications for patents as appropriate to cover its products. No assurance can be given that patents will issue from any pending or future patent applications owned by or licensed to the Company or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any issued patents owned by or licensed to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. The Company could incur substantial costs in defending itself in suits brought against it or in suits in which the Company may assert its patent rights against others. If the outcome of any such litigation is unfavorable to the Company, the Company's business and results of operations could be materially adversely affected. The Company relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. 9 Risks associated with potential spin-off - In December 1997, the Company announced its Penton Publishing subsidiary had signed a letter of intent to acquire another business media company, contingent on the Company spinning off Penton to the Company's stockholders in a tax-free distribution. The acquisition and related spin-off are subject to the execution of a definitive combination agreement and receipt of a favorable ruling on the spin-off from the Internal Revenue Service, among other conditions. There can be no assurance that the acquisition will be completed, that the Company will receive a favorable ruling from the Internal Revenue Service or that any of the other conditions will be met. (Also see "Risks associated with acquisition strategy," above.) Pending litigation - The Company is a party in a lawsuit which arose out of the development of a resort and a portion of the adjoining residential properties owned and developed by the Company as well as a patent infringement lawsuit (see Item 3). The Company is also, in the normal course of business, subject to a number of lawsuits and claims, both actual and potential in nature. If the outcome of any such litigation is unfavorable to the Company, the Company's business and operations could be materially adversely affected. (d) Financial Information About Foreign and Domestic Operations and Export Sales Financial information concerning foreign and domestic operations and export sales is set forth in Note 14 ("Segment Information") to the Consolidated Financial Statements contained in the 1997 Annual Report to Stockholders, pages 36-37, which Note is incorporated herein by reference. Item 2. Properties The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- Syosset, New York (1) N/A 310,000 Syosset, New York (2) 2014 10,000 Syosset, New York (3) 2002 14,000 Syosset, New York (1) 1999 6,000 Syosset, New York (1) 2000 33,000 Syosset, New York (2) 1998 34,000 Torrance, California (1) 1998 48,000 Miami, Florida (2) 2002 16,000 El Paso, Texas (2) 2001 19,000 El Paso, Texas (2) 2002 97,000 Louisville, Kentucky (3) 2002 7,000 Louisville, Kentucky (3) 1998 4,000 Jeffersontown, Kentucky (2) 2002 7,000 Raleigh, North Carolina (1) 1998 8,000 Northford, Connecticut (1) N/A 252,000 Lisle, Illinois (3) 2002 5,000 St. Charles, Illinois (1) 2003 158,000 St. Charles, Illinois (1) 2004 100,000 West Chicago, Illinois (1) 1998 21,000 Norcross, Georgia (3) 1998 6,000 10 Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- (continued) Waltham, Massachusetts (1) 2002 50,000 Melbourne, Australia (2) 1998 5,000 Sydney, Australia (2) 1998 25,000 Alleur, Belgium (2) 2000 6,000 Toronto, Canada (2) 1998 7,000 Concord, Ontario, Canada (2) 2000 11,000 Lichfield Staffs, England (4) 2014 20,000 Burgess Hill, England (4) N/A 60,000 Tyne & Wear, England (1) 1999 7,000 East Kilbride, Scotland (1) N/A 15,000 Hilden, Germany (2) 2000 8,000 Purmerend, The Netherlands (2) N/A 25,000 Xi'an, China (1) N/A 20,000 Tsuen Wan, NT, Hong Kong (2) 1999 8,000 Milan, Italy (1) N/A 14,000 Milan, Italy (2) 2001 10,000 Trieste, Italy (1) N/A 40,000 Arezzo, Italy (1) 2001 5,000 Juarez, Mexico (4) 2008 71,000 Juarez, Mexico (4) 2004 83,000 Juarez, Mexico (4) 2007 148,000 Madrid, Spain (2) 2000 11,000 Barcelona, Spain (2) 2005 6,000 Distribution Centers Superhub Locations: Atlanta, Georgia (2) 2007 125,000 Reno, Nevada (2) 2008 323,000 Louisville, Kentucky (2) 2007 190,000 Pine Brook, New Jersey (2) 1998 37,000 Hub Locations: Boston, Massachusetts (2) 1999 14,000 Milford, Connecticut (2) 2008 18,000 Los Angeles, California (2) 1999 30,000 Chicago, Illinois (2) 2005 40,000 Clearwater, Florida (2) 2004 27,000 Memphis, Tennessee (2) 2006 15,000 Richmond, Virginia (2) 2004 14,000 Phoenix, Arizona (2) 2004 15,000 Dallas, Texas (2) 2008 76,000 Denver, Colorado (2) 1999 11,000 Detroit, Michigan (2) 2000 15,000 New Orleans, Louisiana (2) 2007 10,000 Seattle, Washington (2) 2006 25,000 Toronto, Canada (2) 2007 26,000 Montreal, Canada (2) 2000 11,000 Publishing Segment- Cleveland, Ohio (3) 2000 179,000 Cleveland, Ohio (2) 2001 28,000 Berea, Ohio (5) N/A 100,000 Chicago, Illinois (3) 2003 9,000 New York, New York (3) 2000 10,000 11 Principal Lease Approximate Location Use Expiration Square Feet Publishing Segment (continued) Dunedin, Florida (3) 2000 13,000 Tampa, Florida (2) 1999 19,000 Tampa, Florida (5) 2000 15,000 Hasbrouck Heights, New Jersey (3) 2001 22,000 General Corporate- Chicago, Illinois (3) 2001 12,000 Other properties in the alarm and other security products segment include 92 full-line convenience centers, in addition to those hub locations listed above, which function as retail-like sales distribution outlets to serve the North American market. These 92 centers are under leases expiring through 2008 and range in size from 1,200 to 10,000 square feet. Other properties in the publishing segment include 14 sales and/or editorial offices under leases expiring through 2003 located in major cities throughout the United States and one in the United Kingdom. The Company believes the above facilities are adequate for its present needs. (1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing (5) Printing N/A Not applicable - facilities are owned by the Company Item 3. Legal Proceedings On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860) alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's 12 governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the grounds that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. A hearing took place on May 15, 1997 to determine the scope of the three issues remaining for retrial. The trial court must rule on the scope before the retrial can take place, which is expected to begin in 1998. 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 in the normal course of business is subject to a number of lawsuits and claims, both actual and potential in nature. While management believes that the ultimate outcome of the aforementioned lawsuit and resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. On August 16, 1995, Interactive Technologies, Inc. ("ITI" - plaintiff) commenced a lawsuit in U.S. District Court against the Company alleging patent infringement. The plaintiff claimed the Company infringed on their patent by making, using and selling certain security system products in the United States, and that the infringement was willful. Plaintiff initially sought unspecified damages, and an injunction. The Company denied infringement, maintaining the plaintiff's patent was invalid, as well as unenforceable because the plaintiff committed inequitable conduct before the Patent Office when applying for the patent. During discovery, the plaintiff informed the Company it was seeking damages measured by its lost profits or not less than 13 a reasonable royalty on sales of the Company. Fact discovery in the action closed on January 17, 1997. The Court conducted a Markman hearing in October 1997 to construe the patent claims asserted by plaintiff and issued its Order interpreting the claims on October 24, 1997. The Company moved for summary judgment of non-infringement. On December 2, 1997 the Court issued its Order granting partial summary judgment that the Company's products did not literally infringe the patent claims, and denying summary judgment of no infringement. Jury trial started on January 7, 1998. During the trial, the plaintiff indicated it was seeking lost profits and royalty damages of up to $66.8 million. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. Recent Events - ITI Litigation Update On March 9, 1998 the jury handed down a verdict against the Company awarding damages of approximately $36 million. The jury did not award trebling of damages because they found that the Company did not willfully infringe. Although the verdict has been handed down, judgment on the jury's verdict is not expected to be entered by the court until April 8, 1998. The Company intends to file post-trial motions and appeal if the motions are unsuccessful. The Company believes it has meritorious defenses in such post-trial motions and appeal. The ultimate outcome of this matter is uncertain but will result in significant damages should the Company lose the appeal. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market For Registrant's Common Equity and Related Stock- holder Matters The information set forth under the heading "Market Prices, Security Holders and Dividend Information" appearing on page 41 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information set forth under the heading "Supplemental Information -Five Year Summary of Selected Financial Data" appearing on page 40 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the heading "Management's Discussion and Analysis" appearing on pages 42-43 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. 14 Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto, together with the report thereon of Price Waterhouse LLP dated February 18, 1998, appearing on pages 23-38 of the Company's 1997 Annual Report to Stockholders are incorporated herein by reference. The Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto incorporated by reference in the Form 10-K should be read in conjunction with information contained in "Recent Events - ITI Litigation Update" included in Item 3 herein and the Form 8-K filed with the Securities and Exchange Commission on March 10, 1998. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Information required to be furnished in this part of the Form 10-K has been omitted because the Registrant will file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than April 30, 1998. Item 10. Directors and Executive Officers of the Registrant The information set forth under the headings "Nominees for Election by the Holders of Class A Stock", "Nominees for Election by the Holders of Common Stock", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference. Item 11. Executive Compensation The information set forth under the headings "Compensation Committee Interlocks and Insider Participation", "Compensation", "Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the headings "Certain Transactions" (and the information set forth under the heading "Compensation Committee Interlocks and Insider Participation" which is cross-referenced under the heading "Certain Transactions") in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference. 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial statements and financial statement schedule filed as a part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule on page 18 of this Form 10-K and are incorporated herein by reference. Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 21-23 of this Form 10-K, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit to this report pursuant to Item 14 (c) of Form 10-K is so identified on the Index to Exhibits. (b) On December 1, 1997, the Registrant filed a report on Form 8-K announcing that its Penton Publishing subsidiary had signed letters of intent to acquire three separate business media companies. One of the acquisitions is contingent on the Registrant spinning off Penton to the Registrant's shareholders in a tax-free distribution which, in turn, is subject to the receipt of a favorable ruling from the Internal Revenue Service. On March 10, 1998, the Registrant filed a report on Form 8-K announcing that a jury in the U.S. District Court in St. Paul, Minnesota handed down a verdict the previous day in ITI's patent suit against the Registrant relating to ITI's U.S. Patent 4,855,713. The patent relates to a method of entering wireless transmitter identity codes into security system control panels. The jury verdict awarded damages of approximately $36 million. The Registrant intends to appeal the verdict. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PITTWAY CORPORATION (Registrant) BY /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President, Treasurer And Chief Financial Officer Date: March 23, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 23, 1998. /s/ Neison Harris /s/ E. David Coolidge III Neison Harris, Director and E. David Coolidge III, Director Chairman of the Board /s/King Harris /s/ Anthony Downs King Harris, Director, President Anthony Downs, Director and Chief Executive Officer /s/ Paul R. Gauvreau /s/ Leo A. Guthart Paul R. Gauvreau, Principal Leo A. Guthart, Director Financial and Accounting Officer /s/ Eugene L. Barnett /s/ Irving B. Harris Eugene L. Barnett, Director Irving B. Harris, Director /s/ Sidney Barrows /s/ William W. Harris Sidney Barrows, Director William W. Harris, Director /s/ Fred Conforti /s/ Jerome Kahn, Jr. Fred Conforti, Director Jerome Kahn, Jr., Director 17 PITTWAY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following documents are filed as a part of this report: Page reference in Annual Report to Stockholders Financial Statements required by Item 8 of this Form: Consolidated Balance Sheet at December 31, 1997 and 1996........................................ 24-25 For each of the three years ended December 31, 1997 - Consolidated Statement of Income..................... 23 Consolidated Statement of Cash Flows................. 26 Consolidated Statement of Stockholders' Equity....... 27 Summary of Accounting Policies and Notes to Consolidated Financial Statements.................... 28-38 Report of Independent Accountants...................... 39 Page reference in Form 10-K Financial Statement Schedule required by Article 12 of Regulation S-X: Report of Independent Accountants on Financial Statement Schedule................................... 19 Consolidated Financial Statement Schedule II Valuation and Qualifying Accounts.................... 20 The consolidated financial statements of Pittway Corporation, listed in the above index together with the Report of Independent Accountants, which are included in the Company's 1997 Annual Report to Stockholders, are incorporated herein by reference. All other schedules have been omitted because the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. Summarized financial information for the limited real estate partnerships and other ventures is omitted because, when considered in the aggregate, they do not constitute a significant subsidiary. With the exception of the aforementioned information and information incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7 and 8) of this Form 10-K, the Company's 1997 Annual Report to Stockholders is not deemed to be filed as part of this report. 18 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Pittway Corporation Our audits of the consolidated financial statements referred to in our report dated February 18, 1998 appearing on page 39 of the 1997 Annual Report to Stockholders of Pittway Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in the index on page 18 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois February 18, 1998 19 PITTWAY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in Thousands)
Balance at Charges to Deductions Balance beginning costs and from at end of period expenses reserve (A) of period 1997 Allowance for doubtful accounts $9,670 $4,960 $2,533 $12,097 Inventory obsolescence reserve 8,512 4,998 4,463 9,047 1996 Allowance for doubtful accounts $8,493 $5,170 $3,993 $9,670 Inventory obsolescence reserve 6,613 2,686 787 8,512 1995 Allowance for doubtful accounts $6,348 $4,901 $2,756 $8,493 Inventory obsolescence reserve 6,526 1,464 1,377 6,613 (A) Write-off of accounts considered uncollectible, net of recoveries, or write-off of obsolete inventory. Also includes valuation accounts of acquired or divested companies and foreign currency translation adjustments, net.
20 INDEX TO EXHIBITS Sequential Number and Description of Exhibit Page Number*** 3.1 Restated Certificate of Incorporation of Registrant, as amended (incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated December 28, 1989 (incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 3.3 Certificate of Amendment to Restated Certificate of Incorporation dated May 9, 1996 (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 3.4 Bylaws of Registrant, as amended (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 4. Composite Conformed Copy of separate Note Purchase Agreements Dated as of December 15, 1995, each, between the Registrant and one of Metropolitan Life Insurance Company, Metropolitan Property and Casualty Insurance Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wausau, and West Coast Life Insurance Company without exhibits(incorporated by reference to Exhibit 4.0 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.1 Pittway Corporation 1990 Stock Awards Plan, as amended (incorporated by reference to Exhibit 4.4 to the Registrant's Form S-8 Registration Statement No. 33 - 54753 filed with the Commission on July 27, 1994). 21 INDEX TO EXHIBITS - cont'd. Sequential Number and Description of Exhibit Page Number*** 10.2 Pittway Corporation 1996 Director Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Form S-8 Registration Statement No. 333 - 12615 filed with the Commission on September 25, 1996). 10.3 Employment Agreement with King Harris dated as of January 1, 1996. (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).** 10.4 Employment Agreement with Leo A. Guthart dated as of January 1, 1996. (incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).** 10.5 Employment Agreement with Thomas L. Kemp dated as of July 25, 1996. (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).** 10.6 Employment Agreement with Daniel J. Ramella dated as of January 1, 1997. (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q or the quarter ended March 31, 1997).** 13. 1997 Annual Report to Stockholders.* 21. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 27.1 Financial Data Schedule for the year ended December 31, 1997 (submitted only in electronic format). 27.2 Restated Financial Data Schedule for the years ended December 31, 1995 and 1996, and the first three quarters of 1996 (submitted only in electronic format). 22 INDEX TO EXHIBITS - cont'd. Sequential Number and Description of Exhibit Page Number*** 27.3 Restated Financial Data Schedule for the first three quarters of 1997 (submitted only in electronic format). * Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Form 10-K. ** This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of Form 10-K. *** This information appears only in the manually signed original of this Form 10-K. 23 EX-13 2 EXHIBIT 13 PITTWAY CORPORATION DECEMBER 31, 1997 FORM 10-K Pittway Annual Report 97 Integration The Key to Pittway's Future [Cover] Performance Highlights Record sales and operating income - - Alarm Group sales surpass $1 billion - - Penton sales exceed $200 million ...both for the first time All major alarm operations increase sales, profits and market share ADI opens its 100th convenience center location; Ademco International acquires Castoro (Italy) Notifier opens U.K. production facility and acquires Morley Electronic Fire Systems Ltd. (U.K.) Penton Publishing prepares for "spin-off" to Pittway shareholders and acquires A/E/C SYSTEMS International, Industrial Shows of America and Independent Exhibitions (U.K.) TABLE OF CONTENTS FINANCIAL HIGHLIGHTS 01 PRESIDENT'S LETTER 04 ALARM SYSTEMS 08 DISTRIBUTION 14 MEDIA SERVICES 18 FINANCIAL RESULTS 21 GROUP LOCATIONS AND DIVISIONS 44 CORPORATE INFORMATION 46 BOARD OF DIRECTORS 47 [Inside cover] Financial Highlights Dollars in thousands, except per share data 1997 1996 % Change Net Sales $1,348,703 $1,111,575 21% Operating Income 107,830 82,400 31% Income Excluding Special Items 63,356 50,480 26% Income (Loss) from Special Items (7,842) 22,562 Net Income 55,514 73,042 (24)% Per Common and Class A share (Basic): Income Excluding Special Items 3.02 2.41 25% Income (Loss) from Special Items (.37) 1.08 Net Income 2.65 3.49 (24)% Per Common and Class A share (Diluted): Income Excluding Special Items 2.98 2.39 25% Income (Loss) from Special Items (.37) 1.07 Net Income 2.61 3.46 (25)% Depreciation and Amortization 34,660 28,166 Capital Expenditures 48,768 50,189 Working Capital 244,039 275,315 Stockholders' Equity 487,134 446,872 Stockholders' Equity per Share 23.21 21.36 Number of Employees 7,800 6,800 sales (in millions) 93 650 94 778 95 946 96 1,112 97 1,349 Operating Income (in millions) 93 34.0 94 49.9 95 59.2 96 82.4 97 107.8 Return on Equity (in percentage) 93 7.4% 94 10.7% 95 11.7% 96 13.0% 97 14.5% Page 1 PITTWAY CORPORATION Alarm Group SERVICES Manufactures alarm and other controls for a wide variety of low-voltage systems and peripheral devices which are monitored and operated by these controls including: - - Wireless transmitters - - System smoke detectors - - Passive infrared motion sensors - - Glass break sensors - - Audible/visible warning devices - - Contacts, switches and connectors - - Access controls - - Lighting controls Markets and sells control devices and peripheral devices to: - - Over 40,000 alarm installation companies in North America, mostly through alarm distribution companies - - Over 300 engineered systems distributors in North America on a direct basis - - Original equipment manufacturers and distributors worldwide Distributes alarm components and low-voltage products through company owned centers in North America (100 locations), the United Kingdom, the Netherlands, Italy, Spain, Australia and Hong Kong. PERFORMANCE HIGHLIGHTS For eight years in a row, the Alarm Group has generated double digit growth in sales and operating earnings. Once again, the Group significantly increased its market share in the key areas of burglar and fire alarm controls, space protection devices, system smoke detectors and audible/visible devices. Sales (in millions) 93 483 94 601 95 754 96 923 97 1,144 Operating Income (in millions) 93 33.4 94 45.2 95 54.0 96 70.4 97 89.3 Segment Sales Alarm Group 85% Publishing Group 15% Page 2 PITTWAY CORPORATION Publishing Group SERVICES Publishes 33 magazines, including IndustryWeek, Electronic Design, Machine Design and New Equipment Digest, as well as directories, literature guides, card decks, CD-ROMs, websites and specialty publications that are read by more than 2,000,000 engineers, professionals and business people in a wide variety of fields. Nearly all of Penton's magazines are ranked #1 or #2 in their fields. Organizes and produces 55 U.S. and U.K.-based trade shows and conferences related to Penton magazines or topics of current interest. Prints all but one of Penton's magazines and 10 outside titles on high- speed presses in Berea, Ohio. Operates a direct mail marketing and custom printing company that services clients in the pharmaceutical, health care and business services markets. PERFORMANCE HIGHLIGHTS Penton Publishing achieved record sales and operating earnings with 21 of 33 magazines increasing advertising pages sold. Sales (in millions) 93 165 94 177 95 191 96 188 97 205 Operating Income (in millions) 93 7.2 94 11.0 95 11.9 96 18.7 97 25.3 Page 3 President's Letter President and Chief Executive Officer King Harris Driven by strong gains in sales and operating income in both its alarm and publishing businesses, Pittway achieved record results in terms of revenue and earnings in 1997. Overall company sales increased 21% to $1,348,703,000 and operating income jumped 31% to $107,830,000. Net income, before special items, advanced 26% to $63,356,000 or $3.02 per share ($2.98 diluted). Page 4 Penton and the Penton Spin-off On December 1 Pittway announced that its Penton Publishing subsidiary had signed a Letter of Intent with a privately held business media company to spin Penton off to Pittway shareholders, merge with the private company and create a publicly listed media company. The Penton spin-off/merger transaction is subject to the completion of a definitive Combination Agreement between Penton and the private business media company as well as a favorable ruling on the spin-off from the Internal Revenue Service. Pittway expects the spin-off/merger to be completed in the second or third quarter of 1998. Pittway's major announcement capped a remarkable year of achievement at Penton. Its revenues, up 9% to $204,931,000, and its operating income, up 35% to $25,329,000, hit all-time highs. It acquired three significant trade show companies - A/E/C SYSTEMS International, Industrial Shows of America (ISOA) and Independent Exhibitions (INDEX). It also announced other initiatives to strengthen the company's future prospects. Penton's aggressive expansion in the trade show/conference market - it now operates 55 trade show and conference events - reflects a strategy on its part to diversify its revenue streams so that it is not highly dependent on print advertising for revenue and profit growth. The trade show/conference companies acquired in 1997 have strong positions in the markets they serve and are led by experienced, entrepreneurial managers. A/E/C SYSTEMS, producer of the world's largest conference and trade show event for computer and high-tech solutions in the architectural, engineering and construction industries, had an excellent first year under Penton ownership. ISOA produces 24 industrial trade shows in the U.S. and Latin America which focus on the machine tool, plant maintenance, logistics and heating/venting/air conditioning markets. INDEX is an owner and producer of eight trade shows serving the computer, manufacturing and leisure markets in the U.K. It gives Penton a platform for exporting successful U.S. trade shows to Europe. Penton's willingness to move in new directions has contributed to organic growth as well. It has announced two new magazines for 1998, IW Growing Companies, a new edition of IndustryWeek that will be aimed at manufacturing companies employing less than 500 people, and Penton's Embedded Systems Development, an offshoot of Electronic Design. It will launch an exciting new Internet venture, called Design Selector Global, which will be run in partnership with an international consortium of media companies led by Findlay Publications of the U.K. It also will inaugurate a major new trade show, the International Manufacturing & Engineering Technology Congress, in Chicago in October of 1998. What makes Penton's future as a public company even brighter is the ongoing success of its core magazine properties. 21 of its 33 titles recorded increased revenue for the year. Machine Design, IndustryWeek, American Machinist, Contracting Business, Wireless Systems Design, Electronic Design and EEPN all turned in strong performances. Once the Penton spin-out is complete, Pittway will be a pure alarm system manufacturing and distribution company with a number of venture investments in promising growth fields. The Alarm Group Pittway's alarm business had its eighth straight year of impressive growth in sales, operating income and market share. Alarm sales surpassed one billion dollars for the first time, surging 24% to $1,143,722,000. Operating earnings kept pace, growing 27% to a record $89,285,000. During the 1990s Alarm Group sales and operating earnings have had a compound growth rate of 21% and 35% respectively, far outstripping the underlying growth rate of the worldwide alarm industry of 7-10% per year. Page 5 The most important development affecting the Alarm Group during the year was the addition of significant national account business from several major players in the U.S. residential alarm market. Pittway's Ademco Manufacturing Companies now supply equipment to a clear majority of the leading companies in this market. Ademco's ability to provide a full-line of wired, wireless, and wired/wireless residential and commercial equipment on a cost effective and timely basis to these companies has been the key to its success. Industry experts believe that only 15-20% of all U.S. homes have alarm systems. As consumers are made aware of all the new home control features offered by alarm systems, penetration of such integrated systems should grow and move into the 25-30% area. Ademco, as the leading supplier of integrated systems to the market, will definitely benefit from the market expansion. Growth in the residential alarm market was not the only Ademco success story in 1997. Ademco's commercial business expanded significantly, and a new organizational structure was created to facilitate future growth. A new sub-division, Ademco Commercial, was established in New York to coordinate all of Ademco's commercial activities with those of Javelin (closed circuit television equipment), AlarmNet (wireless data service provider) and Xetron (access control). Ademco Commercial's future appears to be very bright. It will begin marketing two new access control systems in 1998 and will begin supplying a U.S. version of Microtech's top-of-the-line Galaxy integrated burglar, fire and access control to a major U.S. alarm company. It will also be selling a broadened line of CCTV equipment under the Javelin brand name. AlarmNet, now a part of the Ademco Commercial Division, expanded its subscriber base to almost 100,000 and announced a very significant new partnership with Aeris Communications. AlarmNet will market a new wireless service based on Aeris's patented MicroBurst(TM) technology that permits existing cellular telephone networks to transmit data economically and efficiently without impacting voice traffic. Since the cellular network is widespread, the Aeris partnership should allow AlarmNet to offer its wireless service virtually everywhere in the United States and Southern Canada. A new low cost radio transmitter that incorporates Microburst(TM) technology has been designed and will be manufactured and sold by Ademco to support this new service. Ademco International made solid progress throughout the year as all its operating units increased their sales. Castoro, a large Italian alarm distributor, was acquired in May and merged into Ademco Italia, making Ademco the largest alarm distributor in Italy. In the area of manufacturing, new economies were gained in the market-leading Microtech product line by consolidating all U.K. production at Ademco's facility in Fradley, England (near Birmingham). ADI had another exceptional year of growth as its service center network expanded to 100 by year end. To better support these locations, ADI re-engineered and consolidated its distribution system from 14 shipping points to 4 super-hubs and 10 satellites. Operationally, the highlight of the year was ADI's superb handling of a strike at a major U.S.-based package carrier. Despite disruptions affecting both product supply and delivery, ADI maintained its high service levels and won additional business as a result. The breadth of ADI's business is growing as well. It announced that it planned to enter the multi- billion dollar structured cable/specialty wire business in 1998. ADI's 40,000 plus customer base of low voltage installers are active buyers of communications cable and related accessories. System Sensor continued to build its business while converting more customers over to its rapidly growing line of Low Profile detectors. It announced Filtrex(TM), a new, unique detector designed for installation in dusty and dirty environments and worked with Notifier to secure key Page 6 European approvals for the revolutionary very intelligent early warning detection system, VIEW(TM). VIEW(TM) systems continue to outperform the best aspiration-type smoke detection systems now on the market. System Sensor also started production at a new facility in Juarez, Mexico. Another bright spot for System Sensor in 1997 was the performance of its Audible/Visible and Waterflow business unit whose product sales grew rapidly thanks to SpectrAlert(TM) horn and horn/strobe combination devices. Easy to install and low in current consumption, SpectrAlert(TM) products have become a big hit with installers. Notifier/Fire-Lite and Fire Control Instruments (FCI), Pittway's fire controls companies, had strong years. Notifier began selling its new low cost emergency voice evacuation panel, the Fire Command 25/50; launched the AFP-300, a low cost intelligent control which can monitor VIEW(TM) detectors; made further enhancements to several intelligent controls; and introduced a number of new modules for its UniNet(TM) facilities monitoring system. It formed a new company, Notifier Integrated Systems, to support a growing dealer network charged with specifying, installing and servicing advanced integrated systems such as the UniNet(TM) 2000. In Europe Notifier began production at its new 60,000 square foot factory at Burgess Hill, Southwest of London. It also completed work on two new conventional fire alarm panels, made enhancements to its top- of-the-line AFP 4000 system, and opened a new sales/distribution operation in Sweden. In December Notifier U.K. announced that it had purchased Morley Electronic Fire Systems Limited, a well known manufacturer of intelligent/addressable fire alarm controls in the U.K. Morley brings a strong engineering team, a competitive fire controls line and a growing customer base into Pittway's European fire alarm marketing program. FCI, purchased by Pittway in January of 1997, moved its entire operation into a new facility in Waltham, Massachusetts. It announced a new voice evacuation system, the FireVac(R) 7200, as well as new Windows(R) - -based software to run its 7200 system. Though it is still the smallest operating entity within our Alarm Group, MicroLite had a very successful year, increasing sales by 44% and introducing a new line of lighting control products, the 600 Series. MicroLite continues to win nearly all the major sports stadium contracts let out for bid and is steadily finding new applications for its products. Other Investments There were several developments during the year that affected Pittway's non- operating investments. A major shopping mall developer signed a contract to acquire approximately 250 acres of Pittway land at Saddlebrook Village near Tampa. If the land purchase is closed (the developer could take up to 24 months to complete the planning and permitting process), a sizeable regional mall will be built on the site. Another developer has signed a letter of intent to acquire the adjacent land which it wants to use for residential development. All in all, Pittway's non-operating investments are worth between $150 and $200 million on an after-tax basis. The two most important investments are in the stock of Cylink Corporation (Pittway owns 8,606,085 shares) and United States Satellite Broadcasting Company, Inc., USSB, (Pittway owns 3,781,375 shares). King Harris President and Chief Executive Officer February 18, 1998 Page 7 Integrating Alarm Systems Ademco's VISTA(R): Integration in the home Pittway's remarkable growth in the 1990s can be attributed in large part to the success of its divisions in identifying key future needs in the markets they serve and then developing or acquiring products and services to meet those needs. Pittway continues to spend a great deal of effort trying to anticipate future market trends, and no trend is more important today than integration as it impacts the alarm and publishing markets. success at integration may be the key to Pittway's future. Yesterday's fantasy - a low-cost, fully automated, integrated control system that could operate a wide variety of devices in a home or business - is rapidly becoming today's reality! Ademco VISTA(R) systems - both hardwire and wireless - can already monitor remote intrusion, fire and temperature control sensors and report their status to central stations. They can turn lights and appliances on or off, control access, open garage doors, regulate electronic thermostats, activate paging systems, and be tied into audible or visible (CCTV) verification systems. In the future they are likely to perform an even broader range of control functions such as expanded appliance control, meter reading, and full energy management. Notifier integrated systems, while more upscale than their Ademco counterparts in terms of their sophistication and capabilities, offer significant cost savings and convenience benefits to commercial installers and end-users. They integrate multiple fire alarm systems into a unified and inexpensively operated UL(R) -listed platform and provide a bridge to monitor and control existing - and future - technologies, not only fire alarm panels, but also access control, CCTV, security systems, lighting and other critical processes to manage facilities locally or worldwide. Page 8 [pictures of Ademco's Two-Way Keyfob, VISTA(R) Wireless Smoke Detector and Thermostat Module with the following captions:] Ademco Two-Way Keyfob Winner of the 1997 Security Industry Association's New Product Award, the Two-Way Keyfob features wireless two-way feedback including both visual and audible status, similar to the keypad inside the home. Remote one-button operation gives users hand-held personal control of their VISTA(R) security systems, lights and appliances including garage doors. Ademco VISTA(R) Wireless Smoke Detector State of the art wireless smoke detection has been integrated into standard Ademco VISTA(R) panels for residential and commercial applications. Ademco Thermostat Module This new electronic set back thermostat can be tied into a VISTA(R) system and controlled on-site or remotely over the phone with a voice module. Page 10 Each year Ademco, Notifier, and other Pittway Alarm Group companies broaden their integrated systems product lines. 1997 was no exception as you can see on pages 12 and 13. Only a small number of homes or businesses are currently taking advantage of all the benefits that integrated control systems offer, but this situation is likely to change by the early 21st century. Alarm installation companies, who choose the equipment they wish to sell to end-users, are likely to standardize on integrated lines of equipment because they are easier to install and service, thanks to common programming formats, a single user interface, and common peripherals. Today's reality, which often involves different suppliers of burglar alarm, fire alarm, access control, and CCTV equipment (and therefore different programming languages, user interfaces, and peripherals), as well as periodic compatibility problems, will no longer be acceptable. These same alarm companies will also find the added revenue and profit potential of integrated systems appealing. End-users will increasingly ask for or specify integrated systems because of the convenience and cost saving benefits they offer. Whether in a home or business setting, dealing with one set of control stations, one set of user instructions and one installing/servicing firm is far easier than dealing with a multitude of user interfaces and many servicing companies. Page 11 [pictures of Javelin's Q-NET Digital Video Network, ASC's Temperature Sensor and Microtech's Galaxy Control and Keypad with the following captions:] Javelin Q-NET Digital Video Network The industry's first affordable remotely based CCTV system, Q-NET allows simultaneous operation and control of surveillance cameras, while monitoring almost real-time video of remote facilities over a LAN, WAN or GAN via a non-dedicated PC. Typical applications include monitoring of plant operations, campuses, inventory in remote warehouses, hospital high security areas, and banks. Q-NET seam-lessly integrates with access control, burglar, fire, and other security and building automation systems. Ademco Sensor Company Temperature Sensor Monitors temperature, then conveys information to a VISTA(R) control which forwards information to a remote central station. Ideal for protecting locations where temperature sensitive inventory is stored, such as computer rooms, floral shops, meat lockers, and even chicken coops (to ensure the most advantageous egg laying conditions!). Microtech Galaxy Control & Keypad This combination burglary (UL(R) approved), fire (UL(R) approval pending), and access control (UL(R) approved) system - featuring sleek, yet easy to read and easy to use keypads and a unique combination door control module/proximity card reader - will be deployed by a major U.S. commercial alarm installing company in 1998. Page 12 [pictures of Notifier's Integrated System UniNet(TM), Notifier and System Sensor's VIEW(TM) System and Fire-Lite and FCI's Voice Evaluation Controls with the following captions:] Notifier Integrated Systems UniNet(TM) UniNet(TM) 4.0 integrates multiple fire alarm systems into a unified and inexpensively operated UL(R) platform for facility and campus applications. UniNet(TM) 2000 provides a bridge to monitor and control existing and future technologies via common event handling and a user interface for fire, access control, video-badging, CCTV, security, lighting and other critical processes used to manage facilities locally or worldwide. Notifier & System Sensor VIEW(TM) System Sophisticated algorithms built into Notifier's fire control panel firmware and System Sensor's laser smoke detector ensure integrated operation of the Very Intelligent Early Warning system. Recent testing at major U.S. and European telecom facilities - witnessed by major engineering research and approval organizations - proved VIEW's(TM) viability as one of the leading early warning fire and smoke detection systems in the world. Fire-Lite & FCI Voice Evaluation Controls In anticipation of changing state and national occupancy codes, Fire- Lite added the Fire Command 25/50 Voice Evacuation control panel and FCI introduced the FireVac(R) 7200 Voice Evacuation control panel, both extensions to their standard fire alarm control lines. Page 13 Integrating Distribution ADI: The vital link between 40,000 customers and 300 suppliers Manufacturers of alarm and other low voltage equipment face increasing challenges in today's marketplace where products are becoming more sophisticated, system selling more commonplace, installing dealers more diverse, and the knowledge of basic products, software, and system architecture growing. Installers, for their part, face other challenges in a demanding end- user world. They are putting in increasing numbers of new systems and servicing larger and larger numbers and types of existing systems - from burglar to fire to access to other low-voltage systems. They cannot afford inventory stock-outs but want to minimize their on-hand inventory to conserve working capital. They need both pre- and post- sale technical assistance and support in laying out jobs, putting systems together, and troubleshooting problems. ADI provides the integrating link between manufacturers and installers throughout North America. Its unmatched product supply and logistics organization feeds products from over 300 suppliers to 40,000 installing dealers and delivers most shipments within 24 hours after receipt of an order. Its large technical support organization, now clustered in five regional offices, provides ordering and layout assistance for CCTV, access control, fire alarm, burglar alarm and other low voltage systems. Its marketing organization puts on product expositions each year in 42 different cities which bring manufacturer representatives and installing dealers together on a cost effective basis. Its promotions specialists work with Page 14 [pictures of ADI's Distribution Strategy, Expos and Service Center locations with the following captions:] ADI Distribution Strategy In 1997 and into 1998, ADI reengineered and consolidated its distribution system from 14 shipping points to 4 super-hubs and 10 satellites supporting its 100 service center locations. The strategically located super-hubs, in Atlanta (GA), Pinebrook (NJ), Louisville (KY) and Sparks (NV) now hold increased inventory levels in facilities ranging from 100,000 to 150,000 square feet. ADI Expos Hosting over 42 "mini" trade shows in 1997, ADI Expos provided a forum for new product introductions, education, and feedback, cementing its vital role as the integrating force for some 25,000 customers who might not have otherwise had the opportunity to learn and interact with suppliers. ADI Service Center locations Opening its 100th service center location in mid-1997, ADI is recognized as the premier alarm and low-voltage systems supplier in North America. Further expansion is anticipated in 1998. Page 16 manufacturers in setting up counter days, special sales events and product category specific catalogs. No other low voltage distributor in North America can offer as broad a range of services as ADI. Though ADI has become the distributor of choice of nearly all the leading alarm companies in the areas it serves, it constantly looks for ways to improve its operations. It has upgraded its order entry and billing systems and made them more flexible and responsive. ADI now offers a direct electronic link from its information and order entry system to customer locations. It has made its distribution system more efficient through the creation of four super-hubs, which stock its full range of 20,000 stock keeping units (SKUs). These super-hubs significantly increase the likelihood that customer orders will be shipped complete within 24 hours after they are received. They also make ADI's inventory management more efficient. Frequently ordered SKUs are stocked in all ADI branches including the super-hubs; less frequently ordered SKUs are stocked only at the super-hubs. These and other offerings, services, and improvements should solidify ADI's position as the vital link between customers and suppliers for many years. Page 17 Integrated Media Services Penton: Focusing on integrated marketing In the late 1980s Penton realized that its primary products - controlled circulation business-to-business magazines - were too narrowly focused to capture the increasing amount of advertising dollars its clients were putting into marketing and promotion vehicles such as trade shows, direct mail, company magazines and electronic media ventures. Penton's customers wanted to partner with media companies that dominated information markets by providing diverse arrays of integrated services. In the 1990s Penton has moved aggressively to develop the integrated media capabilities its customers want. It has launched or purchased trade shows that fit strategically with, and add value to, its magazines. It has added a variety of electronic media products and services to meet the expanding information needs of its 2,000,000-plus technical readers. It has purchased magazines in select markets to strengthen its competitive position and services to readers. It has disposed of magazines in markets it could not effectively dominate. It has launched conferences related to its magazines and trade shows. Penton's new focus on integrated product offerings can best be shown in three of the markets it serves - the design engineering market, the wireless segment of the electronics market, and the manufacturing management market. Long a core market for Penton, the design engineering group is anchored by Machine Design and completed by an array of vertically focused publications that include Computer-Aided Engineering, Page 18 [pictures of A/E/C Show Floor, Penton's Electronic Design Magazine Website and IndustryWeek Magazine and CD ROM with the following captions:] A/E/C Show Floor Extending Penton's reach into trade show management, A/E/C SYSTEMS International serves users of computer applications in the architectural, engineering, and construction markets, hosting 536 exhibitors and 30,000 attendees at its Spring and Fall shows. Penton's Electronic Design Magazine Website One of 26 Websites available from Penton properties, the Electronic Design home page (www.penton.com/ed) is the gateway for readers, advertisers, and suppliers to information about an array of media alternatives. IndustryWeek Manufacturing 1000 Magazine & CD ROM Extending its brand beyond its well regarded magazine, IndustryWeek (IW) conducted the first truly global study of manufacturers and created specialized CD-ROM products that provide detailed industry information in the form of searchable databases as well as companion publications that serve significant emerging segments of IW's core market. Page 20 Hydraulics & Pneumatics, Power Transmission Design, and The PT Distributor. With the 1997 acquisitions of A/E/C SYSTEMS International and Independent Exhibitions (INDEX), the launch of the International Manufacturing & Engineering Technology Congress in October of 1998, the continued growth of the Hydraulics & Pneumatics and Power Transmission Design Shows, and active Websites for many of its magazines, Penton continues to enhance its dominance of this key market. Penton has built the same kind of "multi-media" line-up in the fast growing wireless market. Three magazines - Microwaves & RF, Wireless Systems Design, and Communications Products - and the annual Microwaves & RF Product Data Directory - provide comprehensive printed information. Two growing and successful trade show/conference events - the Wireless Symposium and Exhibition and Portable By Design - together host 300 exhibitors and 12,000 attendees. In the wireless market, as in the design engineering market, online information on the group's Websites offers users a new media choice particularly suited to the market's innovative customers. While trade shows are key to diversifying service to many of Penton's markets, information users in the manufacturing management market respond to different media. IndustryWeek magazine has successfully used television, the Internet, and a year-round schedule of conferences to serve its advertisers and readers, build its well-known brand name, and expand its franchise. These and other integrated media groupings that Penton has developed over the last few years should position it for solid growth in the years to come. Page 21 FINANCIAL RESULTS PITTWAY CORPORATION CONSOLIDATED STATEMENT OF INCOME 23 CONSOLIDATED BALANCE SHEET 24 CONSOLIDATED STATEMENT OF CASH FLOWS 26 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 27 SUMMARY OF ACCOUNTING POLICIES 28 NOTES TO CONSOLIDATED FINANICAL STATEMENTS 30 REPORTS OF INDEPENDENT ACCOUNTANTS AND MANAGEMENT 39 SUPPLEMENTAL INFORMATION 40 MANAGEMENT'S DISCUSSION AND ANALYSIS 42 Page 22 CONSOLIDATED STATEMENT OF INCOME For The Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands, except per share)
____________________________________________________________________________ 1997 1996 1995 Net Sales $1,348,703 $1,111,575 $945,669 Operating Expenses: Cost of sales 818,107 678,903 581,694 Selling, general and administrative 388,106 322,106 283,717 Depreciation and amortization 34,660 28,166 21,014 1,240,873 1,029,175 886,425 Operating Income 107,830 82,400 59,244 Other Income (Expense): Gain on sale of investment 13,162 Gain on Cylink capital transactions 6,396 23,279 Equity in Cylink acquisition charge-off (18,943) Income from marketable securities and other interest 3,160 3,147 2,745 Interest expense (11,693) (8,624) (5,778) Income from investments 2,638 1,766 3,828 Miscellaneous, net (560) 350 4,039 (19,002) 33,080 4,834 Income Before Income Taxes 88,828 115,480 64,078 Income Taxes (Note 7): Current 38,205 34,580 30,634 Deferred (4,891) 7,858 (6,928) 33,314 42,438 23,706 Net Income $ 55,514 $ 73,042 $ 40,372 Net Income Per Share of Common and Class A Stock (Note 12): Basic $ 2.65 $ 3.49 $ 1.93 Diluted $ 2.61 $ 3.46 $ 1.92 Average Number of Shares Outstanding (in thousands) (Note 12) 20,979 20,921 20,912 Average Number of Shares and Dilutive Equivalents Outstanding (in thousands)(Note 12) 21,251 21,139 21,045 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 23 CONSOLIDATED BALANCE SHEET December 31, 1997 and 1996 (Dollars in thousands, except per share)
______________________________________________________________________________ ASSETS 1997 1996 Current Assets: Cash and equivalents $ 41,334 $ 32,409 Marketable securities 16,583 26,026 Accounts and notes receivable, less allowance for doubtful accounts of $12,097 in 1997 and $9,670 in 1996 228,584 208,182 Inventories (Note 3) 242,656 203,254 Future income tax benefits (Note 7) 18,617 19,358 Prepayments, deposits and other 12,709 10,287 560,483 499,516 Property, Plant and Equipment, at cost: Buildings 44,418 43,413 Machinery and equipment 254,972 224,268 299,390 267,681 Less: Accumulated depreciation 148,962 132,867 150,428 134,814 Land 2,733 2,787 153,161 137,601 Investments: Marketable securities 30,015 37,814 Investment in affiliate (Note 5) 20,441 31,183 Real estate and other ventures 43,388 39,242 Leveraged leases (Note 6) 18,559 19,515 112,403 127,754 Other Assets: Goodwill, less accumulated amortization of $12,410 in 1997 and $9,707 in 1996 125,062 54,068 Other intangibles, less accumulated amortization of $10,871 in 1997 and $10,668 in 1996 5,351 5,022 Notes receivable 7,534 8,070 Miscellaneous 7,456 7,062 145,403 74,222 $971,450 $839,093 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 24
_____________________________________________________________________________________ LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 Current Liabilities: Notes payable (Note 4) $ 64,031 $ 6,815 Long-term debt due within one year (Note 4) 8,206 3,933 Dividends payable 1,719 1,724 Accounts payable 159,493 141,787 Accrued expenses 60,114 53,937 Income taxes payable 7,116 5,685 Retirement and deferred compensation plans 10,562 6,782 Unearned income 5,203 3,538 316,444 224,201 Long-Term Debt, less current maturities (Note 4): Notes payable, 6.70% and 6.81%, due in annual installments of $5 million beginning 1999 with the balance due 2005 75,000 75,000 Capitalized leases, principally at 5.0%-7.6%, due in monthly installments through 2004 9,191 4,921 Other 11,166 7,995 95,357 87,916 Deferred Liabilities: Income taxes (Note 7) 58,065 65,738 Other 14,450 14,366 72,515 80,104 Stockholders' Equity: Preferred stock, authorized 2,000,000 shares; none issued Common capital stock, $1 par value (Note 12) - Common stock, authorized 42,000,000 shares; 3,938,832 shares issued and outstanding 3,939 3,939 Class A stock, authorized 36,000,000 shares; 17,052,543 and 16,987,622 shares issued and outstanding in 1997 and 1996, respectively 17,052 16,987 Capital in excess of par value 24,523 21,714 Retained earnings 440,536 391,753 Cumulative marketable securities valuation adjustment 8,823 12,453 Cumulative foreign currency translation adjustment (7,739) 26 487,134 446,872 $971,450 $839,093
Page 25 CONSOLIDATED STATEMENT OF CASH FLOWS For The Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands)
1997 1996 1995 Cash Flows From Operating Activities: Net income $ 55,514 $ 73,042 $ 40,372 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 34,660 28,166 21,014 Gain on sale of investment, net of taxes (8,149) Gain on Cylink capital transactions, net of taxes (3,997) (14,413) Equity in Cylink acquisition charge-off, net of taxes 11,839 Deferred income taxes (186) (876) (6,928) Retirement and deferred compensation plans 5,060 4,915 9,275 Income/loss from investments adjusted for cash distributions received (1,513) 404 2,277 Provision for losses on accounts receivable 4,960 5,170 4,901 Gain on sale of assets (582) (106) (2,575) Change in current assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts and notes receivable (26,316) (32,000) (34,229) Increase in inventories (38,982) (48,350) (17,457) (Increase) decrease in prepayments and deposits (824) 1,482 (2,068) Increase in accounts payable and accrued expenses 18,442 47,873 16,528 Increase (decrease) in income taxes payable 1,858 114 (4,480) Other changes, net (1,553) (1,211) (3,904) Net cash provided by operating activities 58,380 56,061 22,726 Cash Flows From Investing Activities: Capital expenditures (48,768) (50,189) (42,056) Proceeds from the sale of investment, net of taxes of $5,013 10,748 Proceeds from the sale of marketable securities 30,186 11,102 16,034 Purchases of marketable securities (18,595) (10,600) (5,846) Dispositions of property and equipment 263 793 3,202 Additions to investments (3,592) (4,566) (5,984) Dispositions of businesses 991 355 Decrease (increase) in notes receivable 2,947 (4,351) (1,194) Net assets of businesses acquired, net of cash (69,417) (3,263) (12,931) Net cash used by investing activities (105,985) (50,326) (48,420) Cash Flows From Financing Activities: Net increase (decrease)in notes payable 58,644 1,730 (22,990) Proceeds of long-term debt 12,269 5,284 81,693 Repayments of long-term debt (8,437) (5,338) (5,307) Stock options exercised 1,060 133 Dividends paid (6,736) (6,752) (6,699) Net cash provided (used) by financing activities 56,800 (4,943) 46,697 Effect of Exchange Rate Changes on Cash (270) 210 45 Net Increase in Cash and Equivalents 8,925 1,002 21,048 Cash and Equivalents at Beginning of Year 32,409 31,407 10,359 Cash and Equivalents at End of Year $ 41,334 $ 32,409 $ 31,407 Supplemental Cash Flow Disclosure: Interest paid $ 11,791 $ 8,552 $ 5,720 Income taxes paid $ 36,249 $ 35,166 $ 35,329 See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 26 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For The Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands, except per share)
Cumulative Cumulative Marketable Foreign Capital In Securities Currency Common Stock Class A Stock Excess of Retained Valuation Translation Shares Par Value Shares Par Value Par Value Earnings Adjustment Adjustment Balance - December 31, 1994 2,626,024 $2,626 11,314,700 $11,315 $28,348 $291,756 $(3,050) $(2,865) Net income 40,372 Cash dividends declared: Common stock - $.267 per share (1,051) Class A stock - $.333 per share (5,657) Shares issued pursuant to performance awards 996 1 52 Three-for-two stock split 1,312,808 1,313 5,657,617 5,657 (6,977) Marketable securities valuation adjustment 1,031 Currency translation adjustment 155 Balance - December 31, 1995 3,938,832 3,939 16,973,313 16,973 21,423 325,420 (2,019) (2,710) Net income 73,042 Cash dividends declared: Common stock - $.267 per share (1,051) Class A stock - $.333 per share (5,658) Shares issued pursuant to stock options 14,309 14 291 Marketable securities valuation adjustment 14,472 Currency translation adjustment 2,736 Balance - December 31, 1996 3,938,832 3,939 16,987,622 16,987 21,714 391,753 12,453 26 Net income 55,514 Cash dividends declared: Common stock - $.267 per share (1,051) Class A stock - $.333 per share (5,680) Shares issued pursuant to stock options and awards 64,921 65 2,809 Marketable securities valuation adjustment (3,630) Currency translation adjustment (7,765) Balance - December 31, 1997 3,938,832 $3,939 17,052,543 $17,052 $24,523 $440,536 $ 8,823 $(7,739) See Summary of Accounting Policies and Notes to Consolidated Financial Statements.
Page 27 SUMMARY OF ACCOUNTING POLICIES (Dollars in thousands) Basis of Presentation The consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company"). The Company follows the equity method of accounting for its investments in greater than 20%-owned but less than majority-owned affiliates. All share and per share data, as appropriate, reflect a 3-for-2 stock split paid March 1, 1996 (Note 12). All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are generally comprised of highly liquid instruments with original maturities of three months or less, such as treasury bills, certificates of deposit, commercial paper and time deposits. Marketable Securities Current marketable securities consist principally of adjustable rate preferred stocks. Non-current marketable securities consist of stock in United States Satellite Broadcasting Company, Inc. ("USSB"), a satellite broadcast company. The Company records its investments in marketable securities at market value. Changes in market value for these securities are reported, net of tax, in a separate component of stockholders' equity until realized. Inventories Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead. Cost of substantially all domestic inventories is determined by using the last-in, first-out (LIFO) method, while the remaining inventories are valued primarily using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. Depreciation expense amounted to $31,168, $25,661 and $21,100 in 1997, 1996 and 1995, respectively. Investments Investment in affiliate consists of an equity interest in Cylink Corporation ("Cylink"), a manufacturer of encryption and data communication devices. The Company accounts for its investment in Cylink under the equity method. Real estate and other ventures consist principally of equity interests in limited real estate partnerships and land held for development. The Company's adjusted basis in certain of the limited real estate partnerships is carried at zero, and investments in other partnerships and ventures are carried on a cost basis. Cash distributions accruing from these partnerships and ventures are recorded as income from investments. Leveraged leases consist of the rentals receivable net of the principal and interest on the related nonrecourse debt, estimated residual value of the leased property and unearned income. The unearned income is recognized as income from investments over the lease term. Page 28 Intangible Assets Management believes that goodwill, trademarks and tradenames acquired in purchase transactions have continuing value. It is the Company's policy to amortize such costs over periods of up to 40 years except for the costs of such assets acquired prior to 1970. Intangible assets of approximately $3,356 related to pre-1970 acquisitions are not being amortized because the Company believes there has been no diminution of value. Other intangibles acquired in purchase transactions or developed, consisting of non-compete agreements, customer mailing lists, patents and software development costs, are capitalized and amortized over their estimated useful lives. The carrying value of intangible assets is periodically reviewed by the Company and impairment is recognized when the projected, undiscounted net pretax cashflows derived from such intangible assets are less than their carrying value. Research and Development Expenses Research and development costs are expensed as incurred. These costs amounted to $24,316, $18,077 and $16,599 in 1997, 1996 and 1995, respectively. Advertising and Promotion Expenses Advertising and promotion costs are expensed as incurred. These costs amounted to $20,332, $20,512 and $17,500 in 1997, 1996 and 1995, respectively. Income Taxes Provisions for income taxes recognize the tax effects of all transactions entering into the determination of net income for financial statement purposes, irrespective of when such transactions are reported for income tax purposes. Deferred income taxes and future income tax benefits have been recognized for all temporary differences. Product Liability and Workers Compensation Claims Provisions are made for estimated losses from product liability and workers compensation claims which are not covered by insurance. Translation of Foreign Currencies The functional currency of the Company's foreign operations is the local currency. Accordingly, assets and liabilities of foreign operations are translated to U.S. dollars at the rates of exchange on the balance sheet date; income and expense are translated at the average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate section of stockholders' equity. Transaction gains and losses are reflected in miscellaneous income and amounted to net expenses of $1,041, $102 and $72 in 1997, 1996 and 1995, respectively. Stock-Based Compensation Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue accounting for stock-based compensation using the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's Class A stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for other stock-based awards is based on the quoted market price of the Company's Class A stock at the date of grant for performance and bonus share awards and, for certain of these awards and stock appreciation rights, the changes in such stock price during each subsequent reporting period. Page 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share) Note 1 - Pending Divestiture In December 1997, the Company announced that its Penton Publishing subsidiary ("Penton") had signed a letter of intent to acquire another business media company, contingent on the Company spinning off Penton to the Company's stockholders in a tax-free distribution. The acquisition and related spin-off are subject to the execution of a definitive combination agreement and receipt of a favorable ruling on the spin-off from the Internal Revenue Service, among other conditions. At such time as the principal conditions are satisfied, subsequent financial disclosures will reflect Penton as a discontinued operation, including restatement of prior periods. Note 2 - Acquisitions and Dispositions During 1997, the Company acquired the assets and businesses of a foreign distributor of alarm and other security products, one domestic and one foreign manufacturer and distributor of fire control products, two domestic trade show companies and one foreign trade show company. The total purchase price for these businesses was $69,417 cash paid, principally financed through short-term bank borrowings, $6,976 of future payments, certain liabilities assumed as well as future contingent payments up to $13,882 tied to future earnings of the acquired companies through 2003. The excess of the aggregate purchase price over the fair market value of net assets acquired of $75,061 is being amortized over 40 years. Also in 1997, the Company sold one publication for $991 cash. During 1996, the Company acquired the assets and businesses of two foreign distributors of alarm systems and a domestic manufacturer of glass break sensors. The total purchase price for these businesses was $3,263 cash and $2,619 payable over three years. During 1995, the Company acquired the assets and businesses of a manufacturer of residential burglar/fire alarm controls, a distributor of alarm and other security products and a foreign manufacturer of commercial intrusion alarms and control panels. The total purchase price for these businesses was $12,931 cash and $3,089 in notes. The Company sold a publication for $1,000 cash, received in January 1996, and the assumption of related liabilities. The Company also sold its 51% interest in a business offering seminars to its minority stockholders for $355 cash and retained a $1,000 note receivable due from this former subsidiary. All the aforementioned acquisitions were accounted for as purchase transactions. The impact of these acquisitions on consolidated results of operations was not significant. These companies have been included in the consolidated financial statements from their respective dates of acquisition or to the dates of disposition. Note 3 - Inventories At December 31, 1997 and 1996 approximately 84% and 85%, respectively, of the total inventories are accounted for by the LIFO method. The recorded value of inventory approximates current cost. At year end, inventories consist of: 1997 1996 Raw materials $ 59,405 $ 41,568 Work-in-process 17,852 19,560 Finished goods - Manufactured by the Company 89,771 69,020 Manufactured by others 75,628 73,106 $242,656 $203,254 Note 4 - Debt The average annual interest rate on short-term notes payable was approximately 6.9% (6.2% domestic and 8.1% foreign) and 6.6% (5.7% domestic and 11.7% foreign) at December 31, 1997 and 1996, respectively. There are no compensating balance or commitment fee requirements associated with these short-term borrowings. The Company has guaranteed indebtedness of $1,250 relating to real estate ventures in which it participates. The Company's capitalized lease obligations are collateralized by certain equipment. Other long-term debt bears interest principally at 4% to 7%, with maturities through 2009. Aggregate long-term maturities due annually for the five years beginning in 1998 are $8,206, $10,736, $8,486, $7,541, $8,076 and $60,518 thereafter. Page 30 Note 5 - Investment in Affiliate The Company's investment in Cylink consists of 8,606,085 shares of common stock. See Note 13 regarding the fair value of the investment. In September 1997, Cylink acquired Algorithmic Research, an information security company, for cash and Cylink stock totaling $76,263. The Company increased the carrying value of its investment in Cylink by $6,396 and recorded a $3,997 after-tax gain, or $.19 per share (basic and diluted), as a result of the stock issued in the acquisition and reduced the carrying value of its investment in Cylink by $18,943 and recorded an $11,839 after- tax expense, or $.56 per share (basic and diluted), for its equity in Cylink's write-off of "in-process technology" acquired in the transaction. In 1996, the carrying value of the investment in Cylink was increased by $23,279 to reflect the increase in the Company's equity in Cylink's net book value as a result of an initial public offering in February 1996. The after-tax gain recorded on the increase in Cylink's equity was $14,413, or $.69 per share ($.68 diluted). The summarized results of operations of Cylink for the year ended December 31, 1997 are as follows: sales - $80,599; gross profit - $53,153; write-off of "in-process technology" - ($63,920); net loss - ($58,777). Summarized balance sheet information at December 31, 1997 is: current assets - $63,472; non-current assets - $19,121; current liabilities - $13,222; non-current liabilities - $269. Note 6 - Leveraged Leases The Company is an equity participant in leveraged leases of an aircraft and communication satellite transponders. As the Company has no general liability for the nonrecourse debt attributable to the acquisition of such assets, the debt has been offset against the related rentals receivable. The net investment in leveraged leases consists of: 1997 1996 Rentals receivable (net of principal and interest on nonrecourse debt) $11,900 $12,875 Estimated residual value 11,432 11,432 Unearned and deferred income (4,773) (4,792) Investment in leveraged leases 18,559 19,515 Deferred income taxes (18,597) (19,630) Net investment $ (38) $ (115) A summary of the components of income from leveraged leases follows: 1997 1996 1995 Income (loss) before income taxes $ (81) $ 433 $ 363 Income tax benefit (cost) - Current (1,005) (911) 106 Deferred 1,033 759 (233) Income (loss) from leveraged leases $ (53) $ 281 $ 236 Minimum annual rentals receivable (net of principal and interest on nonrecourse debt) under leveraged leases for the next five years beginning with 1998 are $2,065, $1,751, $3,488, $483, $98 and an aggregate of $4,015 thereafter. Page 31 Note 7 - Income Taxes Income before income taxes consists of: 1997 1996 1995 Domestic income $ 84,640 $109,772 $60,148 Foreign income 4,188 5,708 3,930 $ 88,828 $115,480 $64,078 The provision for income taxes consists of: 1997 1996 1995 Current - Federal $ 31,023 $27,867 $25,107 State and local 4,492 4,251 2,857 Foreign 2,690 2,462 2,670 38,205 34,580 30,634 Deferred - Federal (4,724) 7,680 (6,696) Foreign (167) 178 (232) (4,891) 7,858 (6,928) $ 33,314 $42,438 $23,706 The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate of 35% to income before income taxes is as follows: 1997 1996 1995 Income tax at statutory rate $31,090 $40,418 $22,427 Tax effect of - State income taxes, net of federal benefit 2,751 3,307 1,857 Other items, net (527) (1,287) (578) Actual income tax provision $33,314 $42,438 $23,706 Effective income tax rate 37.5% 36.7% 37.0% The components of the deferred tax liabilities (assets) at December 31, 1997 and 1996 are comprised of the following: 1997 1996 Deferred tax liabilities - Leveraged leases $ 18,597 $ 19,630 Real estate ventures - Affordable housing 16,799 13,678 Other 4,308 4,265 Investment in affiliate 5,760 9,520 Investment in USSB 5,418 8,389 Purchased tax benefit leases 3,091 3,612 Depreciation 2,820 2,867 State income taxes, net of federal benefit 3,800 3,571 Other 5,033 4,072 Total deferred tax liabilities 65,626 69,604 Deferred tax assets - Inventory valuation (9,179) (7,707) Tax loss carryforwards (4,967) (4,738) Deferred compensation (7,541) (5,635) Bad debts (2,953) (2,677) Workers compensation (1,511) (1,146) Other (4,994) (6,059) Total deferred tax assets (31,145) (27,962) Valuation allowance 4,967 4,738 Net deferred tax liability $ 39,448 $ 46,380 The valuation allowance relates to tax loss carryforwards of which $975 as of December 31, 1997 will be credited to goodwill when and if utilized. The Company's federal income tax returns have been examined through 1992 without material adjustment of reported income. Page 32 Note 8 - Stock Options and Awards The Company's 1990 stock awards plan (as amended in 1994) provides for the issuance of up to 1,500,000 shares of Class A stock to employees pursuant to options, performance and bonus share awards, stock appreciation rights ("SARs") and other awards. Certain awards are payable in the form of Class A stock or cash. Performance share awards, SARs and options vest ratably over terms of five years or less. Options and SARs are exercisable up to ten years from date of grant. Shares are issued or cash is paid pursuant to performance and bonus share awards upon specified maturity dates. Activity in options, performance and bonus share awards under the 1990 plan is summarized as follows: 1997 1996 1995 Outstanding at beginning of year 845,726 594,116 359,581 Awards and options granted 269,964 275,425 239,247 Shares issued for awards and for options exercised (64,921) (14,349) (1,494) Awards and options redeemed for cash (5,633) (8,466) (1,072) Awards and options cancelled (1,000) (1,000) (2,146) Outstanding at end of year 1,044,136 845,726 594,116 Exercisable at end of year 343,547 196,782 30,750 Shares available for grant 187,939 451,270 717,229 Weighted average exercise price information follows: 1997 1996 1995 Outstanding at beginning of year $29.66 $22.84 $18.75 Awards and options granted 54.72 43.00 28.88 Shares issued for awards and for options exercised 28.66 7.86 20.08 Awards and options redeemed for cash 20.08 20.08 17.09 Awards and options cancelled 43.25 43.25 17.09 Outstanding at end of year 36.24 29.66 22.84 Exercisable at end of year 20.13 16.58 7.95 Outstanding awards at December 31, 1997 include 165,264 performance and bonus share awards, of which 40,025 are issuable in 1998, and the following non-qualified options: Range of Outstanding Exercisable Exercise Average Average Average Prices Shares Price Life (yrs) Shares Price $43-$55 420,700 $49.44 8.7 $23-$30 289,922 $26.64 6.7 135,272 $23.00 $ 9-$17 168,250 $16.35 5.3 168,250 $16.35 The Company's 1996 stock option plan for non-employee directors provides for the issuance of up to 30,000 shares of Class A stock which are awarded at the market value on the date of the award. In 1996, options for 24,000 shares were granted at an exercise price of $47.50 per share. Options for 12,000 shares are exercisable at December 31, 1997 and options for 5,000 shares become exercisable in each of the next two years. Options for 2,000 shares were cancelled in 1997. Options expire at the earlier of ten years from the date of grant or five years after the optionee ceases to be a member of the Board. Page 33 The fair value of options at date of grant was $23.29 in 1997, $18.87 in 1996 and $12.72 in 1995 for the 1990 plan and $21.47 in 1996 for the director's plan. These values were determined by the Black-Scholes model with the following weighted average assumptions for 1997, 1996 and 1995, respectively: interest rate of 5.6%, 6.4% and 7.1%; volatility of 27%, 27% and 25%; annual dividends of $.33 per share and an expected life of 8 years for all three years. Total expense under these plans was $5,127, $5,680, and $5,748 in 1997, 1996 and 1995, respectively. If the Company had adopted SFAS No. 123 with respect to options, net income would have been $53,112, or $2.53 per share ($2.50 diluted) in 1997, $71,685, or $3.43 per share ($3.39 diluted) in 1996 and $39,940, or $1.91 per share ($1.90 diluted) in 1995. The pro forma effect on net income in 1996 and 1995 is not representative of the effect in future years because it does not take into consideration options granted prior to 1995. Note 9 - Retirement Plans The Company has various noncontributory retirement plans covering substantially all current and certain former domestic employees. Retirement benefits for employees in foreign countries are generally provided by national statutory programs. Benefits for domestic employees are based on years of service and annual compensation as defined by each plan. The Company's policy is to fund pension costs accrued. The components of net pension income for the plans consist of: 1997 1996 1995 Service cost - benefits earned during the year $ 5,115 $ 4,562 $ 4,005 Interest cost on projected benefit obligation 4,584 4,265 4,042 Actual return on plan assets (17,864) (13,804) (27,286) Net amortization and deferred gains and losses 7,713 4,477 18,439 Net pension income $ (452) $ (500) $ (800) The reconciliation of the funded status of the plans at year end follows: 1997 1996 Actuarial present value of benefit obligations - Vested benefit obligation $(58,432) $(53,089) Nonvested benefit obligation (3,773) (3,300) Accumulated benefit obligation (62,205) (56,389) Excess of projected benefit obligation over accumulated benefit obligation (10,894) (9,616) Projected benefit obligation (73,099) (66,005) Plan assets at fair value 123,187 109,287 Plan assets in excess of projected benefit obligation 50,088 43,282 Unrecognized net gain (41,683) (34,460) Unrecognized prior service cost 2,835 3,431 Unamortized transition net asset (4,395) (5,860) Prepaid pension cost included in the consolidated balance sheet $ 6,845 $ 6,393 Plan assets consist primarily of U.S. government obligations, investment grade corporate bonds and common and preferred stocks. The projected benefit obligation was determined using an assumed discount rate of 7% and an assumed rate of increase in compensation of 5% for both years. The expected long-term rate of return on plan assets was 7% for both years. Note 10 - Lease Commitments The Company leases certain manufacturing facilities, warehouses, office space and equipment under noncancelable operating leases expiring at various dates through the year 2014. Most of the leases contain renewal options and certain equipment leases include options to purchase during or at the end of the lease term. Minimum annual rental commitments under all noncancelable leases for the next five years beginning with 1998 are $25,263, $23,427, $20,204, $12,411, $9,973 and an aggregate of $25,486 thereafter. Rental commitments are stated net of minimum sublease rentals aggregating $3,320. Total rent expense (including taxes, insurance and maintenance when included in the rent) amounted to $22,515, $18,350 and $16,930 in 1997, 1996 and 1995, respectively. Page 34 Note 11- Contingencies and Commitments In 1989 a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. A hearing took place in 1997 to determine the scope of the issues remaining for retrial. The trial court must rule on the scope before the retrial can take place, which is expected to begin in 1998. In 1995 a lawsuit was brought against the Company, seeking lost profits and royalty damages of up to $66.8 million on account of Company sales of products which the plaintiff alleges infringed on its patent. The plaintiff is also asserting trebling of damages, if awarded, based upon alleged willful infringement. The Company moved for summary judgment of non-infringement and, in December 1997, the Court issued an order granting the Company partial summary judgment, stating that its products did not literally infringe upon the plaintiff's patent claims. Trial of this case is currently in progress. The Company strongly believes it has meritorious defenses and is vigorously defending itself. The Company in the normal course of business is subject to a number of lawsuits and claims, both actual and potential in nature. While management believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. The Company has committed to invest up to a total of $23.3 million in certain affordable housing real estate ventures through 2005. Note 12 - Capital Stock and Earnings Per Share In January 1996 the Board of Directors declared a 3-for-2 stock split in the form of a 50% stock dividend on the Company's Common and Class A stock, payable March 1, 1996 to stockholders of record February 14, 1996. All share and per share data, as appropriate, reflect this split. The effect of the split is presented retroactively within stockholders' equity at December 31, 1995 by transferring the par value for the additional shares issued from the capital in excess of par value account to the common stock accounts. Except for voting and dividend rights, the two classes of common capital stock are identical. Class A stockholders are entitled to one-tenth vote per share and have the right to elect 25% of all directors, but not less than two. Common stockholders are entitled to one vote per share and have the right to elect the remaining number of directors. Upon a change of control of the Company (as defined in the Company's certificate of incorporation), the Class A stock will automatically be changed into Common stock. Cash dividends declared on Class A stock are required to be 1-2/3 cents per share more than dividends declared on Common stock (up to a maximum of 6-2/3 cents per share per year). Basic net income per common share amounts were calculated by dividing earnings by the combined weighted average number of Class A and Common shares outstanding. Diluted net income per share amounts were based on the same reported earnings but assume the issuance of Class A stock upon exercise of outstanding stock options and distributable as performance awards. Page 35 Note 13 - Fair Value of Financial Instruments The carrying amount of cash and equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximates fair value because of the short maturity of these instruments. The following table presents the carrying amounts and estimated fair values of the Company's other financial instruments at year end: 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets - Current marketable securities $ 16,583 $ 16,583 $ 26,026 $ 26,026 Investment in USSB 30,015 30,015 37,814 37,814 Investment in Cylink 20,441 83,909 31,183 111,879 Affordable housing investments 22,542 22,542 20,342 20,342 Notes receivable 8,092 8,074 10,887 10,722 Financial liabilities - Long-term debt (103,563) (102,052) (91,849) (88,288) The estimated fair values of marketable securities, the investment in USSB and the investment in affiliate are based on quoted market prices. The estimated fair values of the Company's investments in affordable housing projects were based upon available financial and other information. The estimated fair values of the notes receivable and long-term debt were calculated based upon the present value of estimated cash flows using appropriate discount rates. At December 31, 1997 and 1996, current marketable securities consisted of adjustable rate preferred stocks, which had gross unrealized holding gains (losses) of $25 and ($1,911), respectively. Realized gains and losses on sales of marketable securities are based upon the specific identification method. Such gains totaled $331 and $63 in 1997 and 1996, respectively, and losses totaled $79 and $576 in 1997 and 1996, respectively. In February 1996 the Company sold 13% of its investment in USSB as part of an initial public offering of USSB common stock. The sale resulted in an after-tax gain of $8,149, or $.39 per share (basic and diluted). The Company recorded a charitable donation of appreciated shares of USSB stock in the fourth quarter of 1996 resulting in a tax benefit of $849, or $.04 per share (basic and diluted). Unrealized holding gains in this investment were $14,226 and $22,025 at December 31, 1997 and 1996, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts and the estimates presented above may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. Note 14 - Segment Information The Company operates principally in two industry segments. The Alarm and Other Security Products segment designs, manufactures and sells an extensive line of burglar and commercial fire alarm equipment and distributes alarm and other security products manufactured by other companies. The Publishing segment produces national business magazines and related products, trade shows and conferences, and direct mail marketing programs. Sales within and between segments and geographic areas are made at approximate arm's-length prices. Operating income consists of sales less operating expenses. Sales and expenses which are not related to or identifiable with specific segments are included in General Corporate and Other. Identifiable assets are those assets that are specifically identified with the industry segments and geographic areas in which operations are conducted. Eliminations include sales between segments and geographic areas and related intercompany accounts. Export sales were not material and no single customer accounted for ten percent of sales. Page 36
Depreciation Operating Identifiable Capital and Industry Segments Net Sales Income Assets Expenditures Amortization 1997 Alarm and Other Security Products $1,143,722 $ 89,285 $649,471 $ 43,201 $ 27,912 Publishing 204,931 25,329 136,374 5,450 6,519 General Corporate and Other 50 (6,784) 185,605 117 229 Consolidated $1,348,703 $107,830 $971,450 $ 48,768 $ 34,660 1996 Alarm and Other Security Products $ 922,869 $ 70,366 $538,967 $ 45,187 $ 22,051 Publishing 188,122 18,695 87,357 4,822 5,878 General Corporate and Other 584 (6,661) 212,769 180 237 Consolidated $1,111,575 $ 82,400 $839,093 $ 50,189 $ 28,166 1995 Alarm and Other Security Products $ 754,003 $ 54,021 $420,738 $ 36,835 $ 15,008 Publishing 191,263 11,941 88,721 5,154 5,788 General Corporate and Other 403 (6,718) 163,515 67 218 Consolidated $ 945,669 $ 59,244 $672,974 $ 42,056 $ 21,014
Operating Identifiable Geographic Areas Net Sales Income Assets 1997 Domestic Operations $1,204,687 $ 99,751 $793,311 European Operations 114,478 5,766 158,540 Other Foreign Operations 73,560 2,783 34,993 Eliminations (44,022) (470) (15,394) Consolidated $1,348,703 $107,830 $971,450 1996 Domestic Operations $ 985,696 $ 73,511 $716,356 European Operations 104,352 5,491 116,493 Other Foreign Operations 56,153 3,123 29,216 Eliminations (34,626) 275 (22,972) Consolidated $1,111,575 $ 82,400 $839,093 1995 Domestic Operations $ 860,687 $ 53,032 $590,063 European Operations 70,302 4,041 77,302 Other Foreign Operations 40,943 2,199 20,999 Eliminations (26,263) (28) (15,390) Consolidated $ 945,669 $ 59,244 $672,974
Page 37 Note 15 - Quarterly Results (Unaudited) Quarterly results of operations for the years ended December 31, 1997 and 1996 are shown below:
1997 Quarters Total First Second Third Fourth For Year Net Sales $301,158 $339,213 $357,264 $351,068 $1,348,703 Gross Profit 108,651 124,617 127,243 135,425 495,936 Net Income 12,296 16,598 8,335 (a) 18,285 55,514 Net Income per Share: Basic .59 .79 .39 (a) .87 2.65 Diluted .58 .78 .39 (a) .86 2.61
1996 Quarters Total First Second Third Fourth For Year Net Sales $257,477 $272,361 $285,726 $296,011 $1,111,575 Gross Profit 93,030 99,391 102,322 109,763 404,506 Net Income 33,288 (b) 12,530 12,756 14,468 (c) 73,042 Net Income per Share: Basic 1.59 (b) .60 .61 .69 (c) 3.49 Diluted 1.58 (b) .59 .60 .68 (c) 3.46 (a) Net income for the 1997 third quarter includes a $3,997 after-tax gain on Cylink capital transactions and an $11,839 after-tax expense for the Company's equity in Cylink's write-off of "acquired in-process technology." These items decreased net income by $7,842, or $.37 per share (basic and diluted). (b) Net income for the 1996 first quarter includes an $8,149 after-tax gain on the sale of shares of USSB stock and a $14,507 after-tax gain from Cylink's initial public offering. These items increased net income by $22,656, or $1.08 per share (basic and diluted). The after-tax gain from Cylink's initial public offering was reduced by $94 in the 1996 second quarter. (c) Net income for the 1996 fourth quarter includes a tax benefit of $849, or $.04 per share (basic and diluted) for a charitable contribution of appreciated securities.
Page 38 Reports of Independent Accountants and Management Report of Independent Accountants [PW Logo] To the Board of Directors and Stockholders of Pittway Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Pittway Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Pittway Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois February 18, 1998 Management's Responsibility for Financial Statements The financial statements of Pittway Corporation and its consolidated subsidiaries, and all other information presented in this Annual Report, are the responsibility of the management of the Company. These statements have been prepared in accordance with generally accepted accounting principles and reflect in all material respects the substance of events and transactions that should be included. Management is responsible for the accuracy and objectivity of the financial statements, including estimates and judgments reflected therein, and fulfills this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. Management believes that the internal accounting controls in use are satisfactory to provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations, and that the financial records are reliable for the purpose of preparing financial statements. Independent accountants were selected by the Board of Directors, upon the recommendation of the Audit Committee, to audit the financial statements in accordance with generally accepted auditing standards. Their audits, as well as those of the Company's internal audit department, include a review of internal accounting control policies and procedures and selective tests of transactions. The Audit Committee of the Board of Directors, which consists of three directors who are not officers or employees of the Company, meets regularly with management, the internal auditors and the independent accountants to review matters relating to financial reporting, internal accounting controls, and auditing. The independent accountants have unrestricted access to the Audit Committee. /s/ King Harris /s/ Paul R. Gauvreau King Harris Paul R. Gauvreau President and Chief Executive Officer Financial Vice President and Treasurer Page 39 Supplemental Information Five Year Summary of Selected Financial Data (Dollars in thousands, except per share data)
1997 1996 1995 1994 1993 Operating Results Net Sales of Continuing Operations $1,348,703 $1,111,575 $945,669 $778,026 $650,105 Operating Income from Continuing Operations 107,830 82,400 59,244 49,922 34,012 Income from Continuing Operations 55,514 (a) 73,042(b) 40,372 44,836(d) 21,240 Income from Discontinued Operations 10,046 Cumulative Effect of Changes in Accounting Principles 1,535 Net Income 55,514(a) 73,042(b) 40,372 44,836(d) 32,821 Per Share (c): Basic - Income from Continuing Operations 2.65(a) 3.49(b) 1.93 2.15(d) 1.02 Income from Discontinued Operations .48 Cumulative Effect of Changes in Accounting Principles .07 Net Income 2.65(a) 3.49(b) 1.93 2.15(d) 1.57 Diluted - Income from Continuing Operations 2.61(a) 3.46(b) 1.92 2.14(d) 1.02 Income from Discontinued Operations .48 Cumulative Effect of Changes in Accounting Principles .07 Net Income 2.61(a) 3.46(b) 1.92 2.14(d) 1.57 Cash Dividends Declared Per Share (c): Common .267 .267 .267 .267 .30 Class A .333 .333 .333 .333 .367 Capital Expenditures 48,768 50,189 42,056 28,246 29,478 Depreciation and Amortization 34,660 28,166 21,014 20,160 17,249 At Year End Total Assets 971,450 839,093 672,974 563,287 481,977 Long-Term Debt 95,357 87,916 85,966 5,088 6,083 Stockholders' Equity 487,134 446,872 363,026 328,130 292,064 Per Outstanding Share (c) 23.21 21.36 17.36 15.69 13.97 Market Price Per Share (c): Common 68.94 52.13 44.25 26.00 22.67 Class A 69.63 53.50 45.17 26.83 21.50 (a) Includes the after-tax gain on Cylink capital transactions of $3,997 and the after-tax expense for the Company's equity in Cylink's write-off of "acquired in-process technology" of $11,839. These items decreased net income by $7,842, or $.37 per share (basic and diluted). (b) Includes the after-tax gain on the sale of investment in USSB and gain from Cylink stock offering of $8,149, or $.39 per share (basic and diluted) and $14,413, or $.69 per share ($.68 diluted), respectively. (c) Per share data reflect the 3-for-2 stock split declared in January 1996. (d) Includes net gain on sale of First Alert stock of $11,776, or $.57 per share (basic and diluted).
Page 40 Pro Forma Presentation for Pending Divestiture The following pro forma information presents historical amounts as restated to reflect Penton as a discontinued operation (See Note 1 to consolidated financial statements). The pro forma results are presented for informational purposes only and do not purport to be indicative of the results of operations which would actually have been obtained if the transactions had occurred in such periods, or which may exist or be obtained in the future. 1997 1996 1995 Net sales from continuing operations $1,143,772 $923,453 $754,406 Income from continuing operations before special items $ 48,176 $ 38,873 $ 31,542 Special items (7,842)(a) 22,562(b) Income from continuing operations 40,334 61,435 31,542 Earnings from discontinued operations 15,180 11,607 8,830 Provision for expenses related to divestiture (618) Income from discontinued operations 14,562 11,607 8,830 Net income $ 54,896 $ 73,042 $ 40,372 Income Per Share of Common and Class A Stock: Basic - Income from continuing operations $ 1.92 $ 2.94 $ 1.51 Income from discontinued operations .70 .55 .42 Net Income $ 2.62 $ 3.49 $ 1.93 Diluted - Income from continuing operations $ 1.90 $ 2.91 $ 1.50 Income from discontinued operations .68 .55 .42 Net Income $ 2.58 $ 3.46 $ 1.92 Market Prices, Security Holders and Dividend Information The Company's Common stock (ticker symbol PRY) and Class A stock (ticker symbol PRYA) are traded on the New York Stock Exchange (American Stock Exchange prior to October 4, 1996). As of December 31, 1997, stockholders of record totaled approximately 450 for Common and 850 for Class A. The following table sets forth, on a quarterly basis, the high and low prices for the Common and Class A stock on the New York Stock Exchange or American Stock Exchange, along with the cash dividends declared, adjusted to reflect the three-for-two stock split declared in January 1996. Common Class A Dividends Declared High Low High Low Common Class A 1997 Quarter: First $55.25 $49.88 $55.00 $48.50 $.0667 $.0833 Second 55.88 49.50 57.12 48.62 .0667 .0833 Third 64.50 50.25 65.00 50.00 .0667 .0833 Fourth 69.00 59.88 70.00 60.00 .0667 .0833 1996 Quarter: First $50.00 $40.63 $49.75 $38.63 $.0667 $.0833 Second 49.75 43.50 50.50 41.63 .0667 .0833 Third 47.88 39.00 49.25 38.25 .0667 .0833 Fourth 53.50 42.25 55.75 44.38 .0667 .0833 Page 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Sales increased in 1997 to $1.35 billion, a 21% increase over 1996 sales which were 18% higher than 1995. Domestic sales grew 22% in 1997 and 15% in 1996 while international sales increased 17% in 1997 and 44% in 1996. International business, substantially all of which derives from alarm operations, represents 14% of total consolidated sales in both 1997 and 1996. Most of the foreign sales growth in 1997 is derived from expansion of European operations. Approximately one-third of the foreign sales growth in 1996 resulted from two European acquisitions late in 1995 and early in 1996. Gross profit increased 23% in 1997 and 18% in 1996 principally due to the expanded sales levels. Selling, general and administrative expenses increased 20% in 1997 and 14% in 1996 principally as a result of increased costs associated with the higher sales volume and, in 1997, temporarily increased distribution costs at ADI as a result of a strike at a major U.S.-based package carrier and reengineering of ADI's distribution hub system. Alarm product sales accounted for 85% of consolidated revenues in 1997 (83% in 1996) and increased 24% in 1997 and 22% in 1996. Virtually every business unit recorded increased sales. The largest increases in both amounts and percentages occurred in domestic burglar alarm manufacturing, aided by major new accounts, and in security equipment distribution. The domestic distribution business made significant gains in 1997 and 1996 by expanding its outlet network internally, adding major new accounts, expanding its product offerings, acquiring a business in November 1995 and by capitalizing on the early 1995 bankruptcy of a major competitor. The volume at all of the manufacturing units benefited in 1997 and 1996 from the continued acceptance of numerous new product offerings, from expanded worldwide distribution capabilities and, to a lesser extent, from acquisitions. Operating income for the segment increased 27% in 1997 and 30% in 1996 primarily because of the expanded sales volume. Research and development expense increased 35% to $24.3 million in 1997 and increased 9% to $18.1 million in 1996 as the Company expended record amounts on research and new product development. Publishing sales increased 9% in 1997 and operating income increased 35%. These favorable results were achieved through a combination of increased magazine advertising revenues, a newly acquired trade show held in the second quarter of 1997, and containment of operating costs. Publishing sales declined 2% in 1996 due to the inclusion in the prior year results of a seminar business, which was sold in June 1995. Excluding this business, 1996 sales increased 5% to $188 million reflecting increases in both ad pages and page rates on an improved mix of magazines. The Company expects the spin-off of its publishing business to be completed in the second or third quarter of 1998. Depreciation and amortization expense increased both in 1997 and 1996, principally as a result of capital additions associated with the expansion of the alarm business. Other income (expense) in 1997 includes two special items recorded in connection with an acquisition made by the Company's Cylink affiliate: a $6.4 million pretax gain as a result of the stock issued in the acquisition and an $18.9 million pretax expense for the Company's equity in Cylink's write-off of "acquired in-process technology." 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 Company's investment in Cylink resulting from its initial public offering. Excluding these special items in both years, other income (expense) was less favorable in 1997 principally due to increased interest expense from higher borrowing levels and increased foreign currency transaction losses from the strong U.S. dollar and UK pound against other key international currencies, partially offset by the Company's equity in increased operating earnings at Cylink. Effective tax rates were 37.5% in 1997, 36.7% in 1996, and 37.0% in 1995. An analysis of the Company's effective tax rate appears in Note 7 to the Consolidated Financial Statements. Page 42 FINANCIAL CONDITION The Company's financial condition remained strong through 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 1997, income before depreciation, amortization and the special items recorded in connection with the acquisition made by the Company's Cylink affiliate provided $98.0 million of net cash which was used primarily to finance a $39.0 million increase in inventory balances and a $26.7 million increase in accounts receivable. The remaining net cash generated from operations ($58.4 million), along with $11.6 million of net proceeds from the sale of marketable securities, $2.9 million of payments received on notes receivable, $1.0 million of proceeds on the sale of a publication, $1.1 million of proceeds from the exercise of stock options, and $3.8 million of net proceeds on long-term debt were used to finance $48.8 million of capital additions, $6.7 million of dividends paid to stockholders, and $3.6 million of affordable housing investments. Acquisitions of six companies were completed during the year at a combined purchase price of $69.4 million which was financed principally through the $58.6 million increase in short-term borrowings. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest up to $23.3 million in certain affordable housing real estate ventures through 2005. The Company has real estate investments in various limited partnerships with interests in commercial rental properties which may be sold or turned over to lenders. Such events have no effect on net income although they do have a negative impact on the Company's cash position because tax payments become due when the properties are sold or returned to the lenders. The Company has approximately $4.3 million accrued at December 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. ACCOUNTING CHANGES In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." The statement requires the addition of comprehensive income and its components in the primary financial statements. Comprehensive income includes cumulative foreign currency translation adjustments and unrealized investment gains and losses, which are not included in income under current accounting principles. The statement is effective for fiscal years beginning after December 15, 1997, and requires comparative amounts in financial statements for earlier periods presented. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement requires the Company to report financial and descriptive information about its reportable segments, determined using the management approach (i.e., internal management reporting). The statement is effective for fiscal years beginning after December 15, 1997. The Company has not yet determined the impact that SFAS No. 131 will have on its financial statements. INFLATION The impact of inflation on the Company's results of operations has not been significant in recent years. YEAR 2000 ISSUE All work necessary to upgrade the Company's systems for Year 2000 compliance is expected to be completed in a timely fashion and should not involve a significant amount of the Company's resources. **** This annual report, other than historical financial information, contains forward-looking statements that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1997. These include risks and uncertainties relating to the potential spin-off of the Company's publishing business, pending litigation, government regulation, competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. Page 43 Group Locations and Divisions Pittway Security Group 165 Eileen Way Syosset, Long Island NY 11791 Tel. 516/921-6704 Leo A. Guthart, Chairman and CEO Ademco Distribution, Inc. (ADI) Steven I. Roth, President Executive Vice Presidents: Michael Cannata Joseph Cappelletti Vice Presidents: Dennis Babcock Sheri Bram Tom Braun John Burton Anthony Caputo Pat Comunale George Ehrlinger Mark Ingram Chris Lanier Stan Martin Martin Mueller James W. Rothstein Arthur Shaw Warren Stillwell Jordan Thomasson Ademco Distribution International Etobicoke, Ontario, Canada Ken Hall, Vice President and Managing Director Alarm Device Manufacturing Company (ADEMCO) Roger B. Fradin, President Executive Vice Presidents: Ben Cornett Martin Higgins Alvin Silver Senior Vice Presidents: Edward Freeman Herbert Lustig Vice Presidents: Steven Amodeo Mark Chekos Kathy Engel Gordon Hope Charles A. LaCarrubba John Lorenty Frank Marino Kevin O'Connor Martin Raphael Ron Rothman Joe Sausa Ademco Sensor Company (ASC) Louisville, Kentucky Ben Cornett, President Tom Polson, Vice President Apex Raleigh, North Carolina Jim Filer, President Commercial Systems Division John Sasso, President Tam Hulusi, Vice President First Alert Professional Ivan Scharer, President Vice Presidents: Ken Weinstein Jeffrey Vollmar Subsidiaries: Fire Burglary Instruments (FBII) Theodore Simon, Senior Vice President Javelin Systems Torrance, California Graham Wallis, President Ray Payne, Executive Vice President Ron Levy, Vice President Radscan, Inc. (AlarmNet) Steven Winick, President Xetron West Chicago, Illinois Dennis Charlebois, President International Subsidiaries: Ademco International Andreas Kramvis, President Vice Presidents: Paul Brennan Allen Frederick Alan Wachtel Ademco Australia Pty. Ltd. Barry Whitton, Managing Director Ademco MicroTech Limited United Kingdom Jim Green, Managing Director Jim Gemmill, Director Robert Ebrey, Director Ademco-Sontrix Espana, S.A. Pedro de Ibarrando, Managing Director Ademco-Italia S.p.A. Giordano Picchi, Managing Director Stefano Fratini, Director Ademco Hong Kong Limited N.H. Lam, General Manager Security House The Netherlands Jos Mathot, Managing Director Ademco-Canada J.P. Chalmin, President Affiliate: Cylink Corporation Sunnyvale, California Leo A. Guthart, Chairman Fernand Sarrat, President Page 44 Pittway Systems Technology Group 4225 Naperville Road, Suite 155 Lisle, IL 60532 Tel. 630/577-3700 Fred Conforti, President and CEO George Schoenfelder, Vice President Notifier/Fire-Lite Alarms, Inc. Northford, Connecticut Mark S. Levy, President Senior Vice Presidents: Donald D. Anderson W. Allen Fritts Vice Presidents: Fabian J. Skretta David M. DeMeo Paul L. Harris John Chetelat Notifier Engineered Systems Company (NESCO) Atlanta, Georgia Kenneth A. Plummer, Vice President Notifier Integrated Systems (NIS) Atlanta, Georgia Nicholas G. Martello, General Manager Notifier Network Technologies Company (NETCO) Louisville, Kentucky George J. Zamiar, General Manager Notifier International Notifier Canada Toronto, Canada Ivan Spiegel, Managing Director Notifier Far East Kowloon, Hong Kong Steve Higgins, Managing Director Notifier Middle East Amman, Jordan Knud Kikkenborg, Managing Director Notifier Latin America Sao Paulo, Brazil George Clark, Managing Director Notifier Australia Victoria, Australia Chris Lovett, Director Geoff Hellewell, Director Notifier Europe Notifier Limited Burgess Hill, U.K. Richard B. Marshall, Managing Director Notifier Italia S.r.L. Milan, Italy Franco Dischi, General Manager Notifier Benelux S.A. Alleur, Belgium Philippe Boumal, General Manager Notifier Espana S.A. Barcelona, Spain Miguel Moreno, General Manager Notifier Deutschland GmbH Dusseldorf, Germany Holger Hesse, General Manager Notifier AB Huddinge, Sweden Lennart Person, General Manager Morley Electronic Fire Systems Tyne & Wear, U.K. Ray Hope, Managing Director System Sensor Division St. Charles, Illinois Ronald Zegarski, Chairman John W. Hakanson, President and CEO Gary L. Lederer, Senior Vice President Vice Presidents: Nicholas Bellavia James B. Brown Aroon Chaddha Donald Malaker Robert R. Nelson Audible/Visible & Waterflow Division John Strauss, Vice President & General Manager System Sensor Canada Mississauga, Canada Peter Collier, Managing Director System Sensor Europe System Sensor Ltd. Horsham, U.K. David C. Harvey, Managing Director Pittway Tecnologica S.p.A. Trieste, Italy Vincenzo Nesta, President Xi'an System Sensor Electronics, Ltd. Xi'an, China Li Ning, General Manager MICROLITE CORPORATION West Chicago, Illinois Richard LeBlanc, President Darrell Chelcun, Vice President FIRE CONTROL INSTRUMENTS (FCI) Waltham, Massachusetts Frank H. Carideo, President Arthur S. Appel, Executive Vice President and CEO Vice Presidents: Gregory Fowler Carl Hagarty Page 45 Penton Publishing, Inc. 1100 Superior Avenue Cleveland, OH 44114 Tel. 216/696-7000 Thomas L. Kemp, Chairman and CEO Daniel J. Ramella, President and COO Group Presidents: James D. Atherton Jerome C. Neff James W. Zaremba Preston L. Vice, Senior Vice President Vice Presidents: Russell S. Carson Andrew C. DeSarle Joseph M. DiFranco John G. French Charles T. Griesemer Susan J. Grimm Robert S. Martin Katherine P. Torgerson A/E/C Systems International Exton, Pennsylvania Michael Hough, Managing Director George Borkovich, International Marketing Director Industrial Shows of America (ISOA) Hunt Valley, Maryland Susan J. Donahue, President Industrial Shows of America/International Hunt Valley, Maryland Charles E. Cross, President Penton Media, Ltd. Independent Exhibitions, Ltd. (INDEX) Surrey, U.K. Andrew Dedman, Managing Director Subsidiaries: Curtin & Pease/Peneco, Inc. Dunedin, Florida Robert Wilson, President and CEO Fred Hipp, Executive Vice President Pittway Real Estate Wesley Chapel, Florida Tel. 813/973-3685 Paul R. Gauvreau, President Harold E. Rice, Jr., Vice President Administration and Finance CORPORATE INFORMATION General Offices 200 South Wacker Drive, Suite 700 Chicago, Illinois 60606-5802 Tel. 312/831-1070 Stock Transfer Agent and Registrar Harris Trust and Savings Bank P.O. Box A-3504 Chicago, Illinois 60690-3504 Tel. 312/461-5360 Counsel Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Independent Accountants Price Waterhouse LLP 200 East Randolph Drive Chicago, Illinois 60601 Pittway Common and Class A stocks are listed on the New York Stock Exchange. A copy of the Company's December 31, 1997 Annual Report to the Securities and Exchange Commission on Form 10-K (excluding exhibits) will be furnished without charge to shareholders upon written request to the Secretary of the Company. Page 46 Board of Directors Eugene L. Barnett (a) Chairman of the Audit Committee; Consultant, former Chairman of The Brand Companies Sidney Barrows (c) Vice Chairman of the Board; Of counsel, Leonard, Street and Deinard, Minneapolis, Minnesota (attorneys at law) Fred Conforti Vice President; President and CEO of the Pittway Systems Technology Group E. David Coolidge III (a)(d)(e) Managing Director of William Blair & Company (investment banker) Anthony Downs (a)(b) Chairman of the Compensation Committee; Senior Fellow, Brookings Institution (non-profit social policy research center) Leo A. Guthart (c)(d) Vice Chairman of the Board; Chairman of the Pittway Security Group; Chairman of the Board of Cylink Corporation Irving B. Harris (c)(d) Chairman of the Executive and Investment Committees; Chairman of the Board of The Acorn Investment Trust (mutual funds) King Harris (c)(e) President and CEO Neison Harris (c) Chairman of the Board William W. Harris (b)(c)(e) Chairman of the Nominating Committee; Private Investor; Treasurer of KidsPac (political action committee) Jerome Kahn, Jr. (b) Vice President of William Harris Investors, Inc. (investment advisors) (a) Member of the Audit Committee (b) Member of the Compensation Committee (c) Member of the Executive Committee (d) Member of the Investment Committee (e) Member of the Nominating Committee Officers Neison Harris, (82) Chairman of the Board Irving B. Harris, (87) Chairman of the Executive Committee King Harris, (54) President and CEO Sidney Barrows, (79) Vice Chairman of the Board Leo A. Guthart, (60) Vice Chairman of the Board Fred Conforti, (56) Vice President Thomas L. Kemp, (46) Vice President Daniel J. Ramella, (45) Vice President Edward J. Schwartz, (56) Vice President Paul R. Gauvreau, (58) Financial Vice President and Treasurer James F. Vondrak, (53) Corporate Secretary Philip McCanna, (50) Controller www:pittway.com [Inside back cover] Pittway Corporation 200 South Wacker Drive Suite 700 Chicago, IL 60606-5802 [Back cover] EX-21 3 EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1997 FORM 10-K Approximate Percentage of State or Voting Securities Country of Owned by Name of Company Incorporation Immediate Parent Pittway Corporation Ademco Distribution, Inc. Delaware 100 ADI-Lenox Club, Inc. Delaware 100 Ademconet, Inc. Delaware 100 Radscan, Inc. Delaware 100 Fire Burglary Instruments, Inc. New York 100 Ademco Security Group, Inc. California 100 Ademco Communications Partners, Inc. Delaware 100 Fire-Lite Alarms, Inc. Connecticut 100 Notifier Engineered Systems Company Delaware 100 MicroLite Corporation California 100 Penton Publishing, Inc. Delaware 100 Curtin & Pease/Peneco, Inc. Florida 100 Penton Media, Ltd. England 100 Independent Exhibitions Ltd. England 100 Chilpub, Inc. Delaware 100 Final Frontier Pittway I, Inc. Illinois 100 Final Frontier Pittway II, Inc. Illinois 100 Pittway Corporation of Canada Canada 100 Pittway Fire Safety, Inc. Delaware 100 Ademco de Juarez, S.A. de C.V. Mexico 100 ADI of Puerto Rico, Inc. Puerto Rico 100 Ademco Italia S.p.A. Italy 100 Ademco (Hong Kong) Limited Hong Kong 100 Pittway Foreign Sales Corp. U.S. Virgin Islands 100 Fire Control Instruments, Inc. Delaware 100 EXHIBIT 21 - cont'd PITTWAY CORPORATION DECEMBER 31, 1997 FORM 10-K Approximate Percentage of State or Voting Securities Country of Owned by Name of Company Incorporation Immediate Parent Pittway Corporation (continued) Pittway International, Ltd. Delaware 100 ADI de Mexico S.A. de C.V. Mexico 100 Notifier de Mexico S.A. de C.V. Mexico 100 System Sensor de Mexico S.A. de C.V. Mexico 100 Notifier Espana S.A. Spain 100 Notifier (Benelux) S.A. Belgium 100 Notifier Deutschland GmbH Germany 100 Notifier, Ltd. (Singapore) Delaware 100 System Sensor, Ltd. Delaware 100 Xi'an System Sensor Electronics, Ltd. China 55 Pittway UK Limited England 100 Notifier Limited England 100 Morley Electronic Fire Systems Limited England 100 System Sensor Europe Limited England 100 Ademco Microtech Limited England 100 Pittway Australia Pty., Ltd. Australia 100 Ademco-Sontrix Espana, S.A. Spain 100 Notifier Italia S.r.l. Italy 100 Pittway Tecnologica S.p.A. Italy 100 Ademco Security and Communications Group, B.V. Netherlands 100 Notifier Australia Pty., Ltd. Australia 60 Notes: All of the above subsidiaries are included in the Registrant's consolidated financial statements. Parent-subsidiary or affiliate relationships are shown by marginal indentation. EX-23 4 EXHIBIT 23 PITTWAY CORPORATION DECEMBER 31, 1997 FORM 10-K CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-35168, 33-54753 and 333-12615) of Pittway Corporation of our report dated February 18, 1998 appearing on page 39 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 17 of this Form 10-K. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois March 20, 1998 EX-27.1 5
5 1,000 YEAR DEC-31-1997 DEC-31-1997 41,334 16,583 240,681 12,097 242,656 560,483 302,123 148,962 971,450 316,444 95,357 0 0 20,991 466,143 971,450 1,348,703 1,348,703 818,107 818,107 34,660 4,960 11,693 88,828 33,314 55,514 0 0 0 55,514 2.65 2.61 Excluding net after-tax charges of $7.842 million, or $.37 per share (basic and diluted), resulting from an acquisition by the Company's affiliate, Cylink Corporation, net income was $63.356 million, or $3.02 per share ($2.98 diluted).
EX-27.2 6
5 1,000 YEAR 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 31,407 47,002 19,817 21,598 32,409 25,586 23,706 24,113 20,471 26,026 183,925 192,304 200,936 216,712 217,852 8,493 9,039 9,598 10,543 9,670 152,636 162,836 172,815 188,855 203,254 413,986 448,043 441,994 470,983 499,516 218,765 227,677 239,493 247,627 270,468 109,021 114,842 121,215 127,261 132,867 672,974 855,375 858,807 851,818 839,093 168,108 187,747 177,486 198,742 224,201 85,966 86,037 84,603 87,089 87,916 0 0 0 0 0 0 0 0 0 0 20,912 20,912 20,924 20,924 20,926 342,114 447,196 460,224 445,616 425,946 672,974 855,375 858,807 851,818 839,093 945,669 257,477 529,838 815,464 1,111,575 945,669 257,477 529,538 815,564 1,111,575 581,694 157,637 323,538 499,549 678,903 581,694 157,637 323,538 499,549 678,903 21,014 6,810 13,879 21,272 28,166 4,901 1,168 2,443 4,043 5,170 5,778 1,990 4,045 6,237 8,624 64,078 53,045 73,137 93,898 115,480 23,706 19,757 27,319 35,324 42,438 40,372 33,288 45,818 58,574 73,042 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 40,372 33,288 45,818 58,574 73,042 1.93 1.59 2.19 2.80 3.49 1.92 1.58 2.17 2.77 3.46 In accordance with Financial Accounting Standards No. 128, "Earnings per Share", the Company is presenting net income per share on both a basic and diluted basis. This financial data schedule has been restated to present EPS on a diluted basis.
EX-27.3 7
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 9,282 15,170 20,693 24,033 19,287 15,612 223,272 238,150 253,156 10,654 11,042 11,420 230,052 231,355 230,826 506,349 526,040 541,414 284,772 298,693 295,821 140,835 148,128 142,860 885,484 909,452 916,387 263,271 276,498 278,959 84,499 91,142 90,225 0 0 0 0 0 0 20,981 20,984 20,987 436,776 445,518 452,219 885,484 909,452 916,387 301,158 640,371 997,635 301,158 640,371 997,635 184,091 390,162 611,031 184,091 390,162 611,031 8,416 16,941 26,093 1,191 2,296 3,159 2,614 5,835 8,957 19,776 46,396 59,109 7,480 17,502 21,880 12,296 28,894 37,229 0 0 0 0 0 0 0 0 0 12,296 28,894 37,229 .59 1.38 1.77 .58 1.36 1.75 In accordance with Financial Accounting Standards No. 128, "Earnings per Share", the Company is presenting net income per share on both a basic and diluted basis. This financial data schedule has been restated to present EPS on a diluted basis. Excluding net after-tax charges of $7.842 million, or $.37 per share (basic and diluted), resulting from an acquisition by the Company's affiliate, Cylink Corporation, net income was $45.071 million, or $2.15 per share ($2.12 diluted).
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