-----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, NX3ChZdKGMjumMtyvENBUcM3s1oD0aCKRExrApXXr/dAh4Gc4JrN2U7o2INuXhv/ 60sJUKp2Mw898RrIMnT6GQ== 0000093469-99-000017.txt : 19991103 0000093469-99-000017.hdr.sgml : 19991103 ACCESSION NUMBER: 0000093469-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITTWAY CORP /DE/ CENTRAL INDEX KEY: 0000093469 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 135616408 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04821 FILM NUMBER: 99739756 BUSINESS ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 BUSINESS PHONE: 3128311070 MAIL ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD SHARES INC DATE OF NAME CHANGE: 19900321 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD POWER & LIGHT CORP DATE OF NAME CHANGE: 19660905 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (Zip Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (October 21, 1999). Common Stock 7,877,664 Class A Stock 34,877,405 PITTWAY CORPORATION AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999 INDEX PART I. FINANCIAL INFORMATION Page ITEM 1. Financial Statements Consolidated Statement of Income - Three and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheet - September 30, 1999 and December 31, 1998 4 - 5 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 - 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 15 - 18 ITEM 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 2 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited; Dollars in Thousands, Except Per Share Data) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 CONTINUING OPERATIONS - NET SALES........................... $441,326 $344,488 $1,235,964 $974,165 OPERATING EXPENSES: Cost of sales...................... 272,835 217,990 767,713 618,754 Selling, general and administrative.................... 116,822 86,881 336,349 254,204 Litigation accrual (reversal)...... (43,000) 43,000 Depreciation and amortization...... 12,641 9,316 35,190 26,192 402,298 314,187 1,096,252 942,150 OPERATING INCOME.................... 39,028 30,301 139,712 32,015 OTHER INCOME (EXPENSE): Gain on sale of USSB securities.... 49,317 Change in equity of affiliate...... (504) (867) (2,336) 7,035 Income from marketable securities and other interest................ 978 607 3,468 2,076 Interest expense................... (4,073) (3,259) (11,863) (9,832) Income from investments............ 255 214 670 5,415 Miscellaneous, net................. (1,078) (549) (732) (1,022) (4,422) (3,854) 38,524 3,672 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................ 34,606 26,447 178,236 35,687 PROVISION FOR INCOME TAXES.......... 12,930 9,413 67,512 12,724 INCOME FROM CONTINUING OPERATIONS... 21,676 17,034 110,724 22,963 INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income taxes of ($266) and $3,635................ (373) 5,031 NET INCOME........................... $ 21,676 $ 16,661 $ 110,724 $ 27,994 INCOME (LOSS) PER SHARE OF COMMON AND CLASS A STOCK (NOTE 3): Basic: Continuing operations..... $ .51 $ .40 $ 2.59 $ .54 Discontinued operations... (.01) .12 Net income................ $ .51 $ .39 $ 2.59 $ .66 Diluted: Continuing operations..... $ .49 $ .39 $ 2.53 $ .54 Discontinued operations... (.01) .11 Net income................ $ .49 $ .38 $ 2.53 $ .65 CASH DIVIDENDS DECLARED PER SHARE: Common............................. $ .0217 $ .0217 $ .0651 $ .0884 Class A............................ $ .0300 $ .0300 $ .0900 $ .1133 AVERAGE SHARES OUTSTANDING (000's)... 42,754 42,503 42,725 42,263 AVERAGE SHARES AND DILUTIVE EQUIVALENTS OUTSTANDING (000's)..... 43,927 43,445 43,771 43,132 See accompanying notes. 3 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (Unaudited; Dollars in Thousands) September 30, December 31, 1999 1998 ASSETS CURRENT ASSETS: Cash and equivalents................... $ 30,658 $ 16,998 Marketable securities.................. 43,248 44,200 Accounts and notes receivable, less allowance for doubtful accounts of $16,285 and $12,173.................. 309,656 263,127 Inventories............................ 322,295 252,947 Future income tax benefits............. 33,882 32,870 Prepayments, deposits and other........ 9,038 10,666 748,777 620,808 PROPERTY, PLANT AND EQUIPMENT, at cost: Buildings.............................. 41,353 39,645 Machinery and equipment................ 258,646 225,835 299,999 265,480 Less: Accumulated depreciation......... (159,711) (132,679) 140,288 132,801 Land................................... 2,429 2,481 142,717 135,282 INVESTMENTS: Marketable securities (USSB)........... 51,994 Investment in affiliate (Cylink)....... 19,280 21,616 Real estate and other ventures......... 51,133 49,131 Leveraged leases....................... 15,167 16,821 85,580 139,562 OTHER ASSETS: Goodwill, less accumulated amortization of $14,373 and $9,642... 174,825 134,686 Other intangibles, less accumulated amortization of $6,199 and $6,266.... 2,444 2,906 Notes receivable....................... 14,795 15,862 Miscellaneous.......................... 26,930 25,949 218,994 179,403 $1,196,068 $1,075,055 See accompanying notes. 4 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (Unaudited; Dollars in Thousands) September 30, December 31, 1999 1998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable........................... $ 121,341 $ 92,395 Long-term debt due within one year...... 16,051 16,719 Accounts payable........................ 192,571 167,773 Accrued liabilities..................... 78,445 66,304 Income taxes payable.................... 19,474 6,136 427,882 349,327 LONG-TERM DEBT, less current maturities... 103,226 104,609 DEFERRED LIABILITIES: Income taxes............................ 77,856 71,114 Litigation.............................. 43,000 Other................................... 8,903 11,841 86,759 125,955 STOCKHOLDERS' EQUITY: Preferred stock, none issued............ Common capital stock, $1 par value- Common stock.......................... 7,878 7,878 Class A stock......................... 34,877 34,763 Capital in excess of par value.......... 20,721 18,671 Retained earnings....................... 524,436 417,363 Accumulated other comprehensive income (loss) - Marketable securities valuation adjustment.............. 7 22,416 Foreign currency translation adjustment........................ (9,718) (5,927) 578,201 495,164 $1,196,068 $1,075,055 See accompanying notes. 5 PITTWAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited; Dollars in Thousands) 1999 1998 CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Income from continuing operations................ $110,724 $ 22,963 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: Depreciation and amortization.................. 35,190 26,192 Gain on sale of USSB securities, net of taxes.. (30,187) Equity in affiliate, net of taxes.............. 1,460 (4,397) Deferred income taxes.......................... 4,411 1,223 Retirement and deferred compensation plans..... (1,759) (4,995) Income/loss from investments adjusted for cash distributions received............... 1,635 1,609 Provision for losses on accounts receivable.... 6,033 3,044 Litigation (reversal) accrual, net of taxes.... (26,875) 26,875 Change in assets and liabilities, excluding effects from acquisitions and foreign currency adjustments: Increase in accounts receivable.............. (34,438) (36,075) Increase in inventories...................... (60,600) (13,150) Decrease in prepayments and deposits......... 2,003 385 Increase in accounts payable and accrued liabilities......................... 26,611 16,232 Increase (decrease)in income taxes payable... 14,238 (3,229) Other changes, net............................. (311) (1,976) Net cash provided by continuing operating activities........................... 48,135 34,701 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................. (37,679) (26,864) Proceeds from sales of USSB securities, net of taxes................................... 45,976 Net increase (decrease) in current marketable securities.......................... 945 (5,445) Dispositions of property and equipment........... 1,176 360 Additions to investments......................... (2,201) (2) Increase in notes receivable..................... (4,022) (14,620) Net assets of businesses acquired, net of cash... (61,471) (12,654) Net cash used by investing activities............ (57,276) (59,225) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in notes payable.................... 29,711 7,030 Proceeds of long-term debt....................... 1,427 5,863 Repayments of long-term debt..................... (4,996) (3,360) Stock options exercised.......................... 203 5,906 Dividends paid................................... (3,657) (5,072) Net cash provided by financing activities........ 22,688 10,367 EFFECT OF EXCHANGE RATE CHANGES ON CASH............ 113 330 NET CASH PROVIDED BY DISCONTINUED OPERATIONS....... 3,499 NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.... 13,660 (10,328) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........ 16,998 29,257 CASH AND EQUIVALENTS AT END OF PERIOD.............. $ 30,658 $ 18,929 See accompanying notes. 6 PITTWAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited; Dollars in Thousands) NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company" or "Registrant"). Certain businesses were discontinued in 1998, as discussed in Note 2. Except where otherwise indicated, the following notes relate to continuing operations. Certain prior year amounts have been reclassified to conform to the current year classification. All share and per share data reflect a 2-for-1 stock split paid September 11, 1998. The accompanying consolidated financial statements are unaudited but reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements contained herein. However, the financial statements and related notes do not include all disclosures normally provided in the Company's Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE 2 DISCONTINUED OPERATIONS On August 7, 1998 the Company distributed its investment in Penton Media, Inc. ("Penton"), a wholly-owned subsidiary of the Company, to stockholders in a tax-free spin-off. Net sales of the discontinued operations prior to their disposition were $14,466 and $126,137 for the quarter and nine months ended September 30, 1998, respectively. NOTE 3. COMPREHENSIVE INCOME Total comprehensive income (loss) for the three and nine month periods ended September 30 was: Three Months Nine Months 1999 1998 1999 1998 Net income $21,676 $16,661 $110,724 $27,994 Other comprehensive income (loss) 4,004 (7,410) (26,200) 534 Total comprehensive income $25,680 $ 9,251 $ 84,524 $28,528 Other comprehensive income (loss) for the nine month period ended September 30, 1999, reflects the sale of USSB securities. 7 NOTE 4. ACQUISITIONS During the first nine months of 1999, the Company acquired the assets and business of a foreign distributor of alarm and other security products and three domestic operations: a manufacturer of fire controls; a distributor of alarm and other security products; and a distributor of structured cable products. The total purchase price for these businesses was $61,470 cash plus $1,711 of debt assumed. During the same period in 1998, the Company acquired the assets and businesses of one domestic distributor of security equipment and five foreign alarm businesses for stock and cash totaling $16,754. The five foreign operations consist of two manufacturers of fire alarm controls, one distributor of fire alarm systems and two distributors of security products. All of these acquisitions were accounted for as purchase transactions in the consolidated financial statements from their respective dates of acquisition. The impact on consolidated results of operations was not significant. NOTE 5. INVENTORIES The recorded value of inventories at September 30, 1999 and December 31, 1998 approximate current cost and consist of the following: Sept 30, Dec 31, 1999 1998 Raw materials $ 71,413 $ 57,763 Work in process 17,831 22,089 Finished goods - Manufactured by the Company 128,460 98,199 Manufactured by others 104,591 74,896 $322,295 $252,947 NOTE 6. MARKETABLE SECURITIES Information about the Company's marketable securities at September 30, 1999 and December 31, 1998 is as follows: Sept 30, Dec 31, 1999 1998 Current - Adjustable Rate Preferred Stocks - Aggregate cost $ 43,237 $ 44,198 Net unrealized holding (loss) gain 11 2 Aggregate fair value $ 43,248 $ 44,200 Non-Current - USSB Common Stock - Aggregate cost $ - $ 15,789 Unrealized holding gain - 36,205 Aggregate fair value $ - $ 51,994 8 Realized gains and losses are based upon the specific identification method. Such gains and losses on the adjustable rate preferred stock, for the quarter and nine months ended September 30, 1999 and 1998 were not significant. In the nine months ended September 30, 1999, the Company recorded gains, net of taxes, of $30,187 ($.69 per diluted share) on the sale of all its shares of USSB stock. NOTE 7. INVESTMENT IN AFFILIATE The investment in affiliate consists of the Company's interest in Cylink Corporation (Cylink), which is carried at equity. At September 30, 1999, the Company's 8.6 million shares of Cylink had a quoted market value of $63,394. In 1998, the Company increased the carrying value of its investment in Cylink by $6,646 and recorded an after-tax gain of $4,154, or $.10 per diluted share, to reflect its equity in the gain on Cylink's divestiture of its wireless division. The summarized results of operations of Cylink for the quarter and nine months ended September 30, 1999 and 1998 (as restated by Cylink in December 1998) are as follows: Three Months Nine Months 1999 1998 1999 1998 Revenue $15,092 $12,130 $ 42,186 $ 32,555 Gross profit 10,935 6,206 29,148 20,010 Loss from continuing operations $(3,238) $(5,683) $(10,357) $(10,725) Income from discontinued operations, including gain on disposal 2,246 2,246 22,517 Net income (loss) $ (992) $(5,683) $ (8,111) $ 11,792 NOTE 8. EARNINGS PER SHARE Basic net income per share amounts were calculated by dividing earnings by the combined weighted average number of Class A and Common shares outstanding. Diluted net income per share amounts were based on the same reported earnings but assume the issuance of Class A stock upon exercise of outstanding stock options and distributable as performance and bonus share awards. 9 NOTE 9. SEGMENT INFORMATION Segment information for the quarter and nine months ended September 30, excluding the patent litigation were: Three Months Nine Months 1999 1998 1999 1998 Sales - Alarm Manufacturing $255,903 $189,183 $ 729,554 $538,049 Alarm Distribution 267,927 216,865 750,799 605,631 General Corporate and Other 13 17 310 204 Less inter-segment sales (82,517) (61,577) (244,699) (169,719) $441,326 $344,488 $1,235,964 $974,165 Operating Income - Alarm Manufacturing $ 31,341 $ 22,034 $ 80,083 $ 54,234 Alarm Distribution 9,480 8,321 27,758 23,232 General Corporate and Other (1,416) (39) (5,892) (3,929) Less inventory profit on inter-segment sales (377) (15) (5,237) 1,478 $ 39,028 $ 30,301 $ 96,712 $ 75,015 NOTE 10. LEGAL PROCEEDINGS In 1989 a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8,000 were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In 1990 the trial court entered an order vacating the judgment and awarding a new trial. In December 1994, Saddlebrook's motion for summary judgment based on collateral estoppel was granted on the ground that Plaintiffs' claims were fully retried and rejected in a related administrative proceeding. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998, the trial court entered an order limiting the scope of the retrial in light of the appellate court's ruling. At an April 1, 1999 pretrial conference the retrial was scheduled to commence in the first quarter of 2000. In 1995 a lawsuit was brought against the Company by Interactive Technologies, Inc. ("ITI"), seeking lost profits and royalty damages of up to $66,800 on account of Company sales of products which the plaintiff alleged infringed on its patent. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful 10 infringement. The Company moved for summary judgment of non- infringement and, in December 1997, the Court issued its order granting the Company partial summary judgment, stating its products did not literally infringe upon plaintiff's patent claims. In March 1998, the jury handed down a verdict against the Company awarding damages of $35,954. The jury found that the Company did not willfully infringe. The Company recorded a provision of $43,000 in the first quarter of 1998 which considers the judgment and interest. The Company appealed the verdict. In May 1999, the Federal Circuit Court of Appeals unanimously reversed the March 1998 verdict. ITI's petition to the Court of Appeals for a re-hearing of its decision was summarily denied. The $43,000 provision has been reversed in the second quarter of 1999 as a result of the favorable decision of the Circuit Court of Appeals. In October 1999, ITI filed a Petition for Certiorari with the U.S. Supreme Court seeking review of the Circuit Court of Appeals decision. The Company will file its opposition in November 1999 and expects resolution by year-end. In August 1998, ITI filed a second lawsuit against the Company which alleges that certain of the Company's products not specified in the prior litigation infringe on the same patent. This lawsuit is effectively stayed pending the resolution of the above lawsuit. 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 the aforementioned lawsuits and resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS Sales for the third quarter and first nine months of 1999 were $441.3 million and $1.24 billion, respectively, a 28 and 27 percent increase over the same periods in 1998. Operating income increased 29 percent for the quarter and 29 percent, excluding the accrual/reversal of a litigation provision, for the year to date. Income from continuing operations amounted to $21.7 million and $110.7 million for the quarter and nine month periods in 1999 compared to $17.0 million and $23.0 million in the respective periods of 1998. The increase in earnings for the nine month period was affected by the inclusion of two special items and the Cylink results for both years. The special items are an after- tax gain on the sale of USSB stock in 1999 of $30.2 million ($.69 per diluted share) and the accrual in 1998, and reversal in 1999, of a $26.9 million ($.61 per diluted share) after-tax provision for patent 11 litigation. The change in the Company's equity in Cylink included an after-tax gain on the 1998 sale of Cylink's wireless communications business of $4.2 million ($.10 per diluted share). Pro forma operating results through September 30, after excluding discontinued operations, the patent litigation accrual/reversal, changes in Pittway's equity investment in Cylink, the gain on sale of USSB stock and related tax effects are as follows: Three Months Nine Months 1999 1998 1999 1998 (dollars in thousands, except per share) Net sales $441,326 $344,488 $1,235,964 $974,165 Operating expenses: Cost of sale 272,835 217,990 767,713 618,754 Selling, general and administrative 116,822 86,881 336,349 254,204 Depreciation and amortization 12,641 9,316 35,190 26,192 402,298 314,187 1,139,252 899,150 Operating income 39,028 30,301 96,712 75,015 Interest expense (4,073) (3,259) (11,863) (9,832) Other income (expense), net 155 272 3,406 6,469 Income before income taxes 35,110 27,314 88,255 71,652 Provision for income taxes 13,119 9,738 33,133 26,211 Net income $ 21,991 $ 17,576 $ 55,122 $ 45,441 Net income per diluted share of Common and Class A stock $ .50 $ .40 $ 1.26 $ 1.05 Domestic sales for the third quarter and first nine months of 1999 increased 24 percent over the same periods in 1998. International sales increased 50 percent in the third quarter and 43 percent for the first nine months of 1999 over the same periods last year. International sales now represent 17 percent of total year to date sales up from 15 percent for the third quarter and nine months of 1998. Operating profits improved as a direct result of sales growth at higher gross margins, although the improvement was somewhat offset by higher selling, general and administrative expenses, principally in the manufacturing segment, in addition to increases in certain distribution expenses. Alarm Manufacturing sales increased 35 percent during the quarter, and 36 percent year to date leading to a 42 and 48 percent increase in operating income, respectively. The segment's operating margin improved to 12.2 percent of sales for the quarter and 11.0 percent year to date from 11.6 percent and 10.1 percent in 1998 respectively. The increased sales volume reflects the benefit of the continued acceptance of numerous new product offerings and from expanded worldwide distribution capabilities. Businesses acquired in 1998 and 1999 accounted for 16 percent for the third quarter and 14 percent year to date of segment sales in 1999. Sales to the Distribution segment accounted for 32 and 12 34 percent of Manufacturing revenue in the third quarter and first nine months of 1999 respectively and 33 percent for the quarter and 32 percent year to date in 1998. Such sales increased 34 percent and 44 percent for the quarter and nine months, respectively, from a year ago. A portion of the increase resulted from building inventory for the Distribution segment to meet increased customer demand, particularly for national accounts. Alarm Distribution sales increased 24 percent during the quarter and nine months leading to a 14 percent and 19 percent increase in operating income, respectively. The segment's operating margin dipped to 3.5 and 3.7 percent of sales for the quarter and nine months ended September 30, 1999 from 3.8 and 4.3 percent of sales for the respective periods of last year. Much of the increased volume originated from continuing growth in national account business for products manufactured by the Alarm Manufacturing segment. Businesses acquired in 1998 and 1999 accounted for 7 percent of segment sales for the quarter and 5 percent year to date in 1999. The volume gains led to higher operating income although increased freight rates, acquisition integration costs and relocation costs offset improvements in the gross margin resulting in a decline in the operating margin. Depreciation and amortization expense increased 36 percent in the third quarter and 34 percent for the first nine months. Depreciation expense increased due to capital additions from both existing operations and acquisitions in 1998 and 1999. Amortization expense increased due to acquisitions. Other income (expense) during the first nine months of 1999 included a $49.3 million pretax gain on the sale of USSB stock. The nine-month period in 1998 included Pittway's $6.7 million share of Cylink's gain on the divestiture of its wireless division, special cash distributions from real estate ventures and a gain on the sale of an investment, which totaled $4.5 million. Interest expense is higher in the third quarter and nine months of 1999 compared to the prior year due to higher borrowing levels. Effective tax rates were 37.4 percent and 35.6 percent for the third quarter and 37.9 percent and 35.7 percent for the first nine months of 1999 and 1998, respectively. The 1999 rate increased reflecting a higher effective foreign income tax rate. DISCONTINUED OPERATIONS Income (loss) from the discontinued operations of Penton Media, Inc., which was spun-off in August 1998, was ($.4 million) and $5.0 million, ($.01) and $.11 per diluted share, for the third quarter and nine months in 1998. 13 FINANCIAL CONDITION The Company's financial condition remained strong during the first nine months of 1999. Net working capital at September 30, 1999 was $320.1 million, up from $271.5 million at December 31, 1998. Management anticipates that operations, borrowings and marketable securities will continue to be the primary sources of funds needed to meet ongoing programs for capital expenditures, to finance acquisitions and investments and to pay dividends. In the first nine months of 1999, the $100.6 million generated from income from continuing operations excluding depreciation, amortization, the reversal of the litigation accrual, the change in equity of Cylink, other non-cash items and the gain on sale of USSB stock was partially used to fund the net increase in working capital items. The remaining $48.1 million of net cash generated from operating activities, together with $46.0 million of proceeds from the sales of USSB stock, $29.7 million of short term borrowings, $1.2 million proceeds from the disposition of property and equipment and $.9 million of proceeds from the sales of marketable securities, was used primarily to finance $61.5 million in acquisitions, $37.7 million of capital expenditures, $3.6 million net repayments of long term debt, a $4.0 million increase in notes receivable, $2.2 million additions to investments and $3.7 million of dividends. The Company continually investigates investment opportunities for growth in related areas and is presently committed to invest up to $45.9 million in certain affordable housing ventures through 2005. The Company has real estate investments in various limited partnerships with interests in commercial rental properties, which may be sold or turned over to lenders. Such events have no effect on net income although they do have a negative impact on the Company's cash position because tax payments become due when the properties are sold or returned to the lenders. The Company has approximately $3.0 million accrued at September 30, 1999 to fully cover the remaining tax payments that would be due if all the properties were sold or returned to the lenders. The Company presently intends to hold its existing investment in Cylink and has classified it as a long-term investment. YEAR 2000 ISSUE All work necessary to upgrade the Company's systems for Year 2000 (Y2K) compliance is expected to be completed in a timely fashion and should not involve a significant amount of the Company's resources. The Company's Y2K project is proceeding on schedule. Although the Company expects its critical systems to be compliant, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible loss of technical resources to perform 14 the work, failure to identify all susceptible systems, noncompliance by third parties whose systems and operations impact the Company, and other similar uncertainties. Due to the general uncertainty inherent in the Y2K problem, resulting in part from the uncertainty of Y2K readiness of customers, third-party suppliers and other vendors, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. **** This quarterly report, other than historical financial information, contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth in Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 1998. These include risks and uncertainties relating to pending litigation, government regulation, competition and technological change, intellectual property rights, capital spending, international operations, and the Company's acquisition strategies. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Property Damage Claim On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860) alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. 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 15 the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the grounds that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. On April 1, 1998 the trial court entered an order limiting the scope of a retrial in light of the appellate court's ruling. At an April 1, 1999 pretrial conference the retrial was scheduled to commence in the first quarter of 2000. Until October 14, 1989, Saddlebrook disputed responsibility for ultimate liability and costs (including costs of corrective action). On that date, the Company and Saddlebrook entered into an agreement with regard to such matters. The agreement, as amended and restated on July 16, 1993, provides for the Company and Saddlebrook to split equally the costs of the defense of the litigation and the costs of certain related litigation and proceedings, the costs of the ultimate judgment, if any, and the costs of any mandated remedial work. 16 Patent Infringement Claim On August 16, 1995, Interactive Technologies, Inc. ("ITI" - plaintiff) commenced a lawsuit in U.S. District Court against the Company alleging patent infringement. The plaintiff claimed the Company infringed on their patent by making, using and selling certain security system products in the United States, and that the infringement was willful. Plaintiff initially sought unspecified damages, and an injunction. The Company denied infringement, maintaining the plaintiff's patent was invalid, as well as unenforceable because the plaintiff committed inequitable conduct before the Patent Office when applying for the patent. During discovery, the plaintiff informed the Company it was seeking damages measured by its lost profits or not less than a reasonable royalty on sales of the Company. Fact discovery in the action closed on January 17, 1997. The Court conducted a Markman hearing in October 1997 to construe the patent claims asserted by plaintiff and issued its Order interpreting the claims on October 24, 1997. The Company moved for summary judgment of non-infringement. On December 2, 1997 the Court issued its Order granting partial summary judgment that the Company's products did not literally infringe the patent claims, and denying summary judgment of no infringement. Jury trial started on January 7, 1998. During the trial, the plaintiff indicated it was seeking lost profits and royalty damages of up to $66.8 million. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement. On March 9, 1998 the jury handed down a verdict against the Company awarding damages of $36.0 million. The jury found that the Company did not willfully infringe. The Court entered judgment on the jury's verdict on April 9, 1998. Consequently, the Company recorded a provision of $43.0 million in the first quarter of 1998, which considered the judgment and interest. The Company filed post-trial motions on April 20, 1998 for judgment as a matter of law in favor of the Company which were denied. The Company appealed the verdict. Appeal briefs were filed and oral arguments on the appeal were heard on March 4, 1999. In May 1999, the Federal Circuit Court of Appeals unanimously reversed the March 1998 verdict. ITI's petition to the Court of Appeals for a re-hearing of its decision was summarily denied. The $43.0 million provision has been reversed in the second quarter of 1999 as a result of the favorable decision of the Circuit Court of Appeals. In October 1999, ITI filed a Petition of Certiorari with the U.S. Supreme Court seeking review of the Circuit Court of Appeals decision. The Company will file its opposition in November 1999 and expects resolution by year-end. In August 1998, ITI filed a second lawsuit against the Company which alleges that certain of the Company's products not specified in the prior litigation infringe on the same patent. This lawsuit is effectively stayed pending the resolution of the above lawsuit. 17 Other The Company in the normal course of business is subject to a number of claims and lawsuits, both actual and potential in nature. While management believes that the ultimate outcome of the aforementioned lawsuits and resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Number Description 10.1 Amended and Restated Employment Agreement with Leo A. Guthart dated as of January 1, 1999.* 10.2 Pittway Corporation Change Of Control Plan dated as of September 15, 1999.* 10.3 Pittway Corporation Change of Control Plan Acceptance executed by King Harris on October 13, 1999 10.4 Pittway Corporation Change of Control Plan Acceptance executed by Paul R. Gauvreau on October 22, 1999 10.5 Pittway Corporation Change of Control Plan Acceptance executed by Edward J. Schwartz on October 24, 1999 27 Financial Data Schedule (submitted only in electronic format). * This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 6(a) of Form 10-Q. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PITTWAY CORPORATION (Registrant) By /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President, Treasurer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: November 2, 1999 19 EX-10.1 2 GUTHART AGREEMENT Exhibit 10.1 Pittway Corporation September 30, 1999 Form 10-Q AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") made as of January 1, 1999, between Pittway Corporation, a Delaware corporation (the "Company"), and Leo A. Guthart ("Executive"). Executive currently serves as the chief executive officer of the Pittway Security Group (f/k/a the Ademco Security Group) of the Company pursuant to an Employment Agreement dated as of January 1, 1996 (the "Existing Employment Agreement"). The Company and Executive desire to replace the Existing Employment Agreement (insofar as it relates to periods from and after the date hereof) with this Agreement. In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT. The Company shall employ Executive, and Executive accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on the date hereof and ending as provided in paragraph 5 hereof (the "Employment Period"). 2. POSITION AND DUTIES. (a) During the Employment Period, Executive shall serve as the chief executive officer of the Pittway Security Group of the Company or any successor to such Group, in each case as constituted from time to time (the "Group"), and shall have the normal duties, responsibilities and authority of an executive serving in such position, subject to the power of the Board of Directors of the Company (the "Board") or the President of the Company to expand or limit such duties, responsibilities and authority, either generally or in specific instances. Executive shall have the title Chairman and Chief Executive Officer of the Group, subject to the power of the Board or the President of the Company to change such title from time to time. During the Employment Period, Executive shall also serve as a director of the Company for so long as the Board nominates him to that position and he is elected to it, as a Vice- Chairman of the Company for so long as the Board elects or appoints him to that position and as a director of any affiliate of the Company (or other entity in which the Company has an investment) designated by the Board for so long as the Board causes him to be elected to such position. (b) Executive shall report to the President of the Company. (c) During the Employment Period, Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity, and, provided such activities do not exceed those in which Executive has engaged in the past, participation in charitable and civic endeavors and management of Executive's personal investments and business interests) to the business and affairs of the Group and the business and affairs of any other group of the Company, any division of the Company, or any subsidiary or affiliate of the Company (or any group or division thereof), engaged in the security, alarm or monitoring products business or any other business the same as or similar to or related to that then engaged in by the Group. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (d) Executive shall perform his duties and responsibilities principally in the New York metropolitan area, and shall not be required to travel outside that area any more extensively than he has done in the past in the ordinary course of the business of the Group. 3. SALARY AND BENEFITS. (a) The Company agrees to pay Executive a salary during the Employment Period, in monthly installments. (b) Executive's initial salary shall be $550,000 per annum. (c) Executive's salary may be increased by the Board from time to time. (d) The Board may, in its sole discretion, award a bonus to Executive for any calendar year during the Employment Period. (e) The Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (f) In addition to the salary and any bonus(es) payable to Executive pursuant to this paragraph, Executive shall be entitled during the Employment Period to participate, on the same basis as other executives of the Company (but subject to variations among executives resulting from differences in the levels of benefits made available to employees at particular business units under the Company's 401(k) plan or any other plan of the Company), in the Company's Standard Executive Benefits Package. The Company's "Standard Executive Benefits Package" means those benefits (including insurance, vacation, company car or car allowance and/or other benefits) for which substantially all of the executives of the Company are from time to time generally eligible, as determined from time to time by the Board. (g) In addition to participation in the Company's Standard Executive Benefits Package pursuant to this paragraph, Executive shall be entitled during the Employment Period to: (i) additional term life insurance coverage in an amount equal to Executive's salary; but only if and so long as such additional coverage is available at standard rates from the insurer providing term life insurance coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company (If Executive is not participating in term life insurance coverage under the Standard Executive Benefits Package and if such additional coverage would be available at standard rates from such insurer if Executive were so participating, Executive shall instead be entitled to an amount each calendar year, payable monthly, equal to the amount the Company would have been required to pay for such additional coverage for such year.); (ii) supplementary long-term disability coverage in an amount which will increase maximum covered annual compensation to $330,000 and maximum monthly payments to $18,333; but only if and so long as such supplementary coverage is available at standard rates from the insurer providing long-term disability coverage under the Standard Executive Benefits Package or a comparable insurer acceptable to the Company; and (iii) participation in the Pittway Corporation Supplemental Executive Retirement Plan (the "SERP"), a copy of which, as currently in effect, is attached hereto as Exhibit A. 4. ADJUSTMENTS. Notwithstanding paragraphs 2 and 3 hereof, at any time during the Employment Period Executive may elect, by means of advance written notice to the Company at least ninety (90) days prior to the effective date of such election, to reduce the business time and attention he is required to devote pursuant to paragraph 2(c) hereof to the number of hours per week specified in such election (which shall not be less than eight (8) hours per week). Any such election, once made, shall be irrevocable. In the event of any such election: (i) if the number of hours per week specified in such election is less than twenty (20), at the effective date of such election Executive's salary shall automatically be reduced to $350,000 per annum; and if the number of hours per week specified in such election is twenty (20) or more, at the effective date of such election Executive's salary shall automatically be reduced to an amount, between $350,000 and $550,000 per annum, to be negotiated between Executive and the President of the Company promptly following the Company's receipt of such election; (ii) unless Executive's actual hours of work during the calendar year in which the effective date of such election occurs or any subsequent calendar year equal or exceed 1,000, Executive shall not expect any bonus for such calendar year; (iii) Executive shall not thereafter participate in any benefits included in the Company's Standard Executive Benefits Package for which a minimum number of regularly scheduled hours of work or actual hours of work during a year are required unless Executive, in fact, meets such requirement; (iv) if, under clause (iii) above, Executive ceases to participate in term life insurance coverage, Executive shall also cease to be entitled to any additional term life insurance coverage pursuant to paragraph 3(g)(i) hereof (but not to any amount in lieu thereof to which he is otherwise entitled pursuant to such paragraph); (v) if, under clause (iii) above, Executive ceases to participate in long-term disability coverage, Executive shall also cease to be entitled to any supplementary long-term disability coverage pursuant to paragraph 3(g)(ii) hereof; (vi) if, under clause (iii) above, Executive ceases to participate in the Company's health insurance program, then for so long during the remainder of the Employment Period as the Company maintains a health insurance program the Company shall maintain for Executive (and his dependents) private health insurance providing substantially the same benefits as those provided to executives of the Company under the Company's health insurance program in effect from time to time, provided that (A) such private health insurance is available, (B) the premium for such private health insurance does not exceed 150% of the gross rate (before any cost- sharing under the terms of the program) allocated to employees of the Group under the Company's health insurance program and (C) Executive pays the percentage of the premium for such private health insurance equivalent to any cost-sharing requirement imposed under the terms of the Company's health insurance program; (vii) at the effective date of such election, the level of any continuing benefits included in the Standard Executive Benefits Package or provided for in paragraph 3(g) hereof the amount of which is based on salary or compensation shall be adjusted to reflect Executive's reduced salary; and (viii) if the Board so determines, Executive shall cease to serve as the chief executive officer of the Group. Without limiting the generality of clause (iii) above, if Executive were to elect to reduce to eight hours the business time and attention he is required to devote pursuant to paragraph 2(c) hereof, under the current terms of the Company's benefits it is anticipated that Executive would not be eligible to continue to participate in any health, disability or insurance benefit or to receive any award under the Pittway Corporation 1990 Stock Awards Plan and would not be entitled to any increase in benefit under the Pittway Corporation Retirement Plan, but would be eligible to participate in the Company's 401(k) plan and the SERP and, subject to the terms of clause (vi) above, to private health insurance coverage. 5. EMPLOYMENT PERIOD. (a) Except as hereinafter provided, the Employment Period shall continue until, and shall end upon, September 26, 2004. (b) Notwithstanding (a) above, the Employment Period shall end early upon the first to occur of any of the following events: (i) Executive's death; (ii) Executive's retirement upon or after reaching age 65 ("Retirement"); (iii) the Company's termination of Executive's employment on account of Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than six (6) consecutive months ("Termination for Disability"); (iv) the Company's termination of Executive's employment for Cause ("Termination for Cause"); (v) the Company's termination of Executive's employment other than a Termination for Disability or a Termination for Cause ("Termination without Cause"); or (vi) Executive's termination of Executive's employment for Good Reason, by means of advance written notice to the Company at least thirty (30) days prior to the effective date of such termination identifying such termination as a Termination by Executive for Good Reason ("Termination by Executive for Good Reason"). (c) For purposes of this Agreement, "Cause" shall mean: (i) the commission by Executive of a felony or a crime involving moral turpitude; (ii) the commission by Executive of a fraud; (iii) the commission by Executive of any act involving dishonesty or disloyalty with respect to the Company or any of its subsidiaries or affiliates; (iv) conduct by Executive tending to bring the Company or any of its subsidiaries or affiliates into substantial public disgrace or disrepute; (v) gross negligence or willful misconduct by Executive with respect to the Company or any of its subsidiaries or affiliates; (vi) repudiation of this Agreement by Executive or Executive's abandonment of his employment with the Company (it being expressly understood that a Termination by Executive for Good Reason shall not constitute such a repudiation or abandonment); (vii) breach by Executive of any of the agreements in paragraph 10 hereof; or (viii) any other breach by Executive of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to Executive from the Company. (d) For purposes of this Agreement, "Good Reason" shall mean: (i) a reduction by the Company in Executive's salary, other than pursuant to paragraph 4 hereof, to an amount less than "Executive's Reference Salary" (i.e., $550,000 or, upon reduction pursuant to paragraph 4 hereof, the reduced amount pursuant to such paragraph); or (ii) any breach by the Company of this Agreement which is material and which is not cured within thirty (30) days after written notice thereof to the Company from Executive. 6. POST-EMPLOYMENT PERIOD PAYMENTS. (a) If the Employment Period ends on September 26, 2004, or if the Employment Period ends early pursuant to paragraph 5 hereof for any reason, Executive shall cease to have any rights to salary, bonus (if any) or benefits other than: (i) any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, as of the end of the Employment Period, (ii) (but only to the extent provided in the SERP or any other benefit plan in which Executive has participated as an employee of the Company) any plan benefits which by their terms extend beyond termination of Executive's employment and (iii) any other amount(s) payable pursuant to the succeeding provisions of this paragraph 6 or the provisions of paragraph 7. (b) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Executive's death, the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the period of fifteen years from and after the end of the Employment Period equal to one-half of the monthly installments which would have been paid to Executive pursuant to paragraph 7 hereof had the Employment Period instead ended early pursuant to paragraph 5 hereof on account of Retirement or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America, N.A. in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. (c) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Disability, the Company shall pay to Executive (or his personal representative) amounts during the period of fifteen years from and after the end of the Employment Period equal to the monthly installments which would have been paid to Executive pursuant to paragraph 7 hereof had the Employment Period instead ended early pursuant to paragraph 5 hereof on account of Retirement (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America, N.A. in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. (d) If the Employment Period ends early pursuant to paragraph 5 hereof on account of Termination for Cause, the Company shall pay Executive an amount equal to that Executive would have received as salary (based on Executive's salary then in effect) had the Employment Period remained in effect until the later of the effective date of the Company's termination of Executive's employment or the date thirty days after the Company's notice to Executive of such termination. (e) If the Employment Period ends early pursuant to paragraph 5 hereof on account of a Termination without Cause or a Termination by Executive for Good Reason, the Company shall pay to Executive amounts equal to the amounts Executive would have received as salary (based on Executive's salary then in effect or, if greater, Executive's Reference Salary) had the Employment Period remained in effect until September 26, 2004 and for consulting services had the Consulting Period (as defined in paragraph 7 hereof) thereafter continued until September 26, 2019, at the times such amounts would have been paid (in the event Executive is entitled during the payment period to any payments under any disability benefit plan or the like in which Executive has participated as an employee of the Company, less such payments); provided, however, that in the event of Executive's death during the payment period, the Company shall not be obligated to pay any subsequent such amounts, but the Company shall pay to Executive's estate (or such person or persons as Executive may designate in a written instrument signed by him and delivered to the Company prior to his death) either (i) amounts during the remainder of the payment period equal to one-half of the amounts which would have been paid to Executive but for his death or (ii) if so elected by the payee(s) by written notice to the Company within the period of sixty (60) days after the date of Executive's death, a lump sum amount equivalent to the discounted present value of such reduced amounts, discounted at the publicly announced reference rate for commercial lending of Bank of America, N.A. in effect at the date of notice to the Company of such election, with said amount to be paid on a date no later than thirty (30) days following the date of notice to the Company of such election. It is expressly understood that the Company's payment obligations under this (e) shall cease in the event Executive breaches any of his agreements in paragraph 8, 10 or 11 hereof. 7. AVAILABILITY FOR CONSULTING. If the Employment Period ends pursuant to paragraph 5 hereof on September 26, 2004, or if the Employment Period ends early pursuant to paragraph 5 hereof on account of Retirement, during the period of fifteen years from and after the end of the Employment Period, or, if shorter, during the period from the end of the Employment Period until the date of termination of the Consulting Period pursuant to the final paragraph of this paragraph 7 (the "Consulting Period"), Executive shall make himself available to the Company as a consultant at such times as the Company requests upon reasonable advance notice to Executive. In return, (i) Executive shall be paid, in monthly installments, at a rate per annum equal initially to $100,000 but which shall increase on September 26, 2005 and on each subsequent September 26th by the percentage of the amount in effect on the immediately preceding day equal to the Social Security Administration automatic cost-of-living adjustment (COLA) that became effective on the immediately preceding January 1st, and (ii) the Company shall reimburse Executive for all reasonable expenses incurred by him in the course of performing consulting services at the Company's request which are consistent with the Company's policies in effect from time to time with respect to travel and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. Any request for the performance of consulting services shall be ineffective unless it is received by Executive at least two weeks in advance of the date such services are to be performed, and shall also be ineffective to the extent the performance of such services would be impractical for Executive in view of Executive's health or travel or vacation plans or any employment, consulting or family- related commitments which Executive may have at the time. At the time of Executive's receipt of a Company request, Executive shall advise the Company of any relevant such impracticality and the basis therefor. To the extent deemed practical by the Company, Executive shall provide his consulting advice by telephone. In any event, Executive shall not be required to travel in connection with the performance of his consulting services, except to the Group's offices. It is expressly understood that Executive shall not be required to spend more than 20 hours in the performance of his consulting services during any particular month. The Company may terminate the Consulting Period early for Cause, in which event the Company's obligations under the foregoing provisions of this paragraph 7 shall cease. 8. INVENTIONS AND OTHER INTELLECTUAL PROPERTY. Executive agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, trademarks, slogans, product or other designs, advertising or marketing programs, and all similar or related information which relate to the Company's or any of its subsidiaries' or affiliates' actual or anticipated business, research and development or existing or future products or services and which are (or were prior to the date of this Agreement) conceived, developed or made by Executive, whether alone or jointly with others, while employed by the Company or any such subsidiary or affiliate or any predecessor thereof ("Work Product") belong to the Company or such subsidiary or affiliate. Executive will promptly disclose such Work Product to the President of the Company and perform all actions reasonably requested by the President of the Company (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). 9. LIMITATION. Paragraph 8 of this Agreement regarding the ownership of inventions and other intellectual property does not apply to the extent application thereof is prohibited by any law the benefits of which cannot be waived by Executive. Executive hereby waives the benefits of any such law to the maximum extent permitted by law. 10. CONFIDENTIAL INFORMATION. Executive acknowledges that the information, observations and data obtained by him while employed by the Company pursuant to this Agreement or during the Consulting Period, as well as those obtained by him while employed by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement, concerning the business or affairs of the Company or any of its subsidiaries or affiliates or any predecessor thereof (unless and except to the extent the foregoing become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, "Confidential Information") are the property of the Company or such subsidiary or affiliate. Therefore, Executive agrees that he shall not disclose any Confidential Information without the prior written consent of the President of the Company unless and except to the extent that such disclosure is (i) made in the ordinary course of Executive's performance of his duties under this Agreement or (ii) required by any subpoena or other legal process (in which event Executive will give the Company prompt notice of such subpoena or other legal process in order to permit the Company to seek appropriate protective orders), and that he shall not use any Confidential Information for his own account without the prior written consent of the President of the Company. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) relating to the Confidential Information, the Work Product or the business of the Company or any of its subsidiaries or affiliates which he may then possess or have under his control. 11. NON-COMPETE, NON-SOLICITATION. (a) Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement and any consulting services for the Company pursuant to this Agreement he will become familiar, and during the course of his employment by the Company or any of its subsidiaries or affiliates or any predecessor thereof prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of and other confidential information concerning the Company and its subsidiaries and affiliates and predecessors thereof and that his services have been and will be of special, unique and extraordinary value to the Company. (b) Executive agrees that during the Employment Period and the Consulting Period and, if Executive has performed any consulting services during the final year of the Consulting Period, for one year after the performance of such services, he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or in any other corporation or enterprise or otherwise, engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, the security, alarm or monitoring products business or any other business then actively being conducted by the Group, in any geographic area in which the Group is then conducting such business (whether through manufacturing or production, calling on customers or prospective customers, or otherwise). Notwithstanding the foregoing, subsequent to the Employment Period Executive may engage or be engaged in, or assist any other person, firm, corporation or enterprise in engaging or being engaged in, any business activity which is not competitive with a business activity being conducted by the Group at the time subsequent to the Employment Period Executive first engages or assists in such business activity (a "Non-competitive Business Activity"). (c) Executive further agrees that during the Employment Period and the Consulting Period and, if Executive has performed any consulting services during the final year of the Consulting Period, for one year after the performance of such services, he shall not in any manner, directly or indirectly, (i) induce or attempt to induce any employee of the Company or of any of its subsidiaries or affiliates to quit or abandon his employ, or any customer of the Company or of any of its subsidiaries or affiliates to quit or abandon its relationship, for any purpose whatsoever, or (ii) in connection with any business to which the first sentence of (b) above applies, except where such activity constitutes a Non- competitive Business Activity, call on, service, solicit or otherwise do business with any then current or prospective customer of the Company or of any of its subsidiaries or affiliates. (d) Nothing in this paragraph 11 shall prohibit Executive from being: (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (e) If, at the time of enforcement of this paragraph, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 12. ENFORCEMENT. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would be damaged irreparably in the event any of the provisions of paragraph 8, 10 or 11 hereof were not performed in accordance with their specific terms or were otherwise breached and that money damages would be an inadequate remedy for any such non-performance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 13. EXECUTIVE REPRESENTATIONS. Executive represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. 14. SURVIVAL. Paragraphs 8, 10 and 11 hereof shall survive and continue in full force in accordance with their terms notwithstand- ing the end of the Employment Period or the end of the Consulting Period, in each case regardless of the cause. 15. NOTICES. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: Mr. Leo A. Guthart 96 Willets Road Old Westbury, NY 11568 Notices to the Company: Mr. King Harris President Pittway Corporation 200 South Wacker Drive, Suite 700 Chicago, IL 60606-5802 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or mailed. 16. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 17. CHANGE OF CONTROL. In the event that there is a Change of Control of the Company: (i) the Company shall establish a grantor trust (within the meaning of Sections 671, et. seq., of the Internal Revenue Code of 1986, as amended) designed, taking into account the investment of the corpus thereof, to fund the Company's payment obligations to Executive thereafter as and when due, and shall fund the corpus of such grantor trust in accordance with such design (which grantor trust the Company shall establish and fund prior to the Change of Control of the Company in the event it has sufficient advance notice thereof to do so; and otherwise which the Company shall establish and fund promptly following its becoming aware of the Change of Control of the Company); and (ii) if, after the Change of Control of the Company, the Company wrongfully withholds from Executive any amount payable to Executive pursuant to this Agreement or the SERP and Executive obtains a final judgment against the Company for such amount, the Company shall reimburse Executive for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in obtaining such judgment and shall pay Executive interest on the amount of each such cost or expense from the date of payment thereof by Executive to the date of reimbursement by the Company at a floating rate per annum equal to the publicly announced reference rate for commercial lending of Bank of America, N.A. in effect from time to time. For purposes of the foregoing, a "Change of Control of the Company" will be deemed to have occurred if but only if, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, a person or group other than one or more members of the Harris Group (as currently defined in the Company's Restated Certificate of Incorporation, as amended) becomes the beneficial owner of stock of the Company possessing a majority of the voting power under ordinary circumstances with respect to the election of directors. 18. COMPLETE AGREEMENT. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way, including without limitation the Existing Employment Agreement. 19. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which shall be deemed to be an original and both of which taken together shall constitute one and the same agreement. 20. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, executors, personal representatives, successors and assigns, except that neither party may assign any of his or its rights or delegate any of his or its obligations hereunder without the prior written consent of the other party. Executive hereby consents to the assignment by the Company of all of its rights and obligations hereunder to: (i) any subsidiary or affiliate of the Company in the event all or any substantial part of the business to which Executive's duties under this Agreement relate are transferred thereto and (ii) any successor to the Company by merger or consolidation or purchase of all or substantially all of the Company's assets; in each case provided such transferee or successor assumes the liabilities of the Company hereunder. 21. CHOICE OF LAW. This Agreement shall be governed by the internal law, and not the laws of conflicts, of the State of New York. 22. AMENDMENT AND WAIVER. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PITTWAY CORPORATION By KING HARRIS Its President LEO A. GUTHART EX-10.2 3 CHANGE OF CONTROL Exhibit 10.2 Pittway Corporation September 30, 1999 Form 10-Q PITTWAY CORPORATION CHANGE OF CONTROL PLAN SECTION 1 INTRODUCTION 1.1 THE PLAN AND ITS EFFECTIVE DATE. This Pittway Corporation Change of Control Plan (the "Plan") has been established by Pittway Corporation (the "Company"), effective September 15, 1999. 1.2 PURPOSE. The Company and certain of its subsidiaries are currently parties to employment agreements with key employees thereof which permit the employers to terminate the key employees' employment without cause and which permit the key employees to terminate their employment by giving the notice specified therein, and the Company and its subsidiaries may hereafter become parties to other such employment agreements (each such existing or future employment agreement, an "Employment Agreement"). Under the Employment Agreements, an employer's termination of a key employee's employment may result in economic benefits to the employee, and the employee's termination of employment may result in the surrender of economic benefits. However, in the event of an impending change of control of the Company or the employee's perception that there may be an impending change of control of the Company, the prospect of such payment or surrender may not be sufficient to overcome the employee's uncertainty as to his or her future and any related inclination of the employee to seek other employment, to the detriment of the Company. The purpose of the Plan is to provide certain key employees of the Company and its subsidiaries with benefits related to a change of control of the Company intended to preserve for the Company and its stockholders the value of the services of such employees in such events. SECTION 2 ELIGIBILITY 2.1. ELIGIBILITY. Each key employee of the Company or a subsidiary who (i) is a party to an Employment Agreement, (ii) is designated by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") to participate in the Plan, and (iii) accepts in writing the terms of the Plan (along with his or her employer, if his or her employer is a subsidiary rather than the Company) (each a "participant") shall participate in the Plan, subject to the limitations of the Plan. SECTION 3 BENEFIT 3.1 TRIGGERING OF BENEFIT. If a Change of Control of the Company (as defined in Section 4.3) should occur, and if during the period thereafter ending on the second anniversary thereof either (i) a participant's employment is terminated by his or her employer without Cause (as defined in the participant's Employment Agreement, and based on a finding described in Section 4.1) or (ii) a participant terminates his or her employment for Good Reason (as defined in the participant's Employment Agreement) (each a "Triggering Termination"), then the participant shall be entitled to the benefit provided in Section 3.2. Such benefit shall be in addition to any salary which has accrued but is unpaid, and any expenses which have been incurred but are unpaid, at the time of such termination and (but only to the extent provided in any benefit plan in which the participant has participated as an employee of his or her employer) any plan benefits which by their terms extend beyond such termination; but shall be in lieu of any other amounts that the employer would otherwise have paid to (or contributed to a grantor trust for the benefit of) the participant pursuant to his or her Employment Agreement as a result of or following such termination. 3.2. AMOUNT OF BENEFIT. Subject to Section 3.3, a participant entitled to a benefit shall be entitled: (A) For a period of three years following the date of his or her Triggering Termination (or, if shorter, the period following the date of his or her Triggering Termination ending on the date on which, without any extension thereof, the Employment Period under his or her Employment Agreement is scheduled to end as of the date of such termination), to receive the participant's salary at the time of such termination (or, if higher, Executive's Reference Salary as defined in his or her Employment Agreement), payable at the times such salary would have been paid had the participant's employment continued for such period; (B) To receive a lump sum payment within thirty days after the date of his or her Triggering Termination equal to the participant's Target Bonus (as defined in Section 4.7) for the year in which such termination occurs (or, if higher, the participant's Target Bonus for the preceding year or the year in which the Change of Control of the Company occurs); (C) If his or her Triggering Termination occurs after July 1 of the then-current year (unless the then-current year is the year in which, without any extension thereof, the Employment Period under his or her Employment Agreement is scheduled to end as of the date of such termination), to receive an additional lump sum payment within thirty days after the date of such termination equal to the product of (x) the participant's Target Bonus for the year in which such termination occurs (or, if higher, the participant's Target Bonus for the preceding year or the year in which the Change of Control of the Company occurs) multiplied by (y) a fraction, the numerator of which shall be the number of months that have elapsed, as of the date of such termination, during the then-current year (rounded up to the next largest full month), and the denominator of which shall be 12; and (D) For a period of one year following the date of his or her Triggering Termination (or, if shorter, the period following the date of his or her Triggering Termination ending on the date on which, without any extension thereof, the Employment Period under his or her Employment Agreement is scheduled to end as of the date of such termination), to be a full participant in, and to the benefits provided under, the Company's Standard Executive Benefits Package (as defined in the participant's Employment Agreement) in effect at the time of such termination (except that the participant shall not be entitled to any stock option, performance share, performance unit, stock purchase, stock appreciation or other equity-based compensatory benefit award) and the additional benefits set forth in Section 3 of his or her Employment Agreement in effect at the time of such termination (or, in the case of each such benefit, if higher, for the preceding year or the year in which the Change of Control of the Company occurs). If, however, the participant is not eligible to participate in particular benefits set forth in the preceding sentence, the Company shall reimburse the participant, on a monthly basis (net after taxes on the receipt of such reimbursement), for any premiums or other fees paid by the participant to obtain benefits (for the participant and his or her dependents) equivalent to such benefits. Notwithstanding the foregoing or any other provision of the Plan, (i) for the purpose of determining the period of continuation coverage to which the participant or any of his or her dependents is entitled pursuant to the requirements of COBRA (as defined in Section 4.4), the participant's "qualifying event," subject to the requirements of applicable plans, will be the termination of the one-year (or shorter) period set forth above in this (D) and the participant will be considered to have remained actively employed on a full-time basis through that date and (ii) the Company shall reimburse the participant (net after taxes on the receipt of such reimbursement) for any premiums paid by the participant for health insurance provided to the participant (for the participant and his or her dependents) by the Company pursuant to the requirements of COBRA as in effect on the effective date of the Plan. (E) Notwithstanding any provision of the Plan to the contrary, if any amount or benefit to be paid or provided to a participant under the Plan or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any bonus and any stock option, performance share, performance unit, stock purchase, stock appreciation or other equity-based right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing, would be an "Excess Parachute Payment" within the meaning of Section 280G of the Code (as defined in Section 4.5), or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided to the participant under the Plan shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction shall be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided to the participant, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income taxes). The determination of whether any reduction in such payment or benefits to be provided to the participant under the Plan is required pursuant to the preceding sentence shall be made at the expense of the Company, if requested by the participant or the Company, by the Company's independent accountants. The fact that the participant's right to payments or benefits may be reduced by reason of the limitations contained in this (E) shall not of itself limit or otherwise affect any other rights of the participant other than pursuant to the Plan. In the event that any payment or benefit intended to be provided under the Plan is required to be reduced pursuant to this (E), the participant shall be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this (E). The Company shall provide the participant with all information reasonably requested by the participant to permit the participant to make such designation. In the event that the participant fails to make such designation within 10 business days after his or her receipt of such information (or, if later, within 10 business days after his or her Triggering Termination), the Company may effect such reduction in any manner it deems appropriate. Without limiting the rights of the participant at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Midwest Edition of THE WALL STREET JOURNAL. Such interest will be payable on demand as it accrues. Any change in such prime rate will be effective on and as of the date of such change. 3.3 LIMITATIONS IN SPECIFIC CASES. At the time the Committee designates a key employee of the Company or a subsidiary to participate in the Plan, the Committee may reduce some or all of the payments and other benefits to which such employee will be entitled as a participant pursuant to Section 3.2. 3.4 PREVAILING PARTY'S LITIGATION EXPENSES. In the event of litigation between the Company and a participant related to the Plan, except as set forth in Section 3.5 the non-prevailing party shall reimburse the prevailing party for any costs and expenses (including without limitation attorneys' fees) reasonably incurred by the prevailing party in connection therewith. 3.5 CERTAIN PAYMENTS BY THE COMPANY. Without limiting the generality of Section 3.4: (i) if in the good faith judgment of a participant the Company has failed to comply with any of its obligations under the Plan or (ii) in the event that the Company or any other person takes or threatens to take any action to declare the Plan void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, a participant the benefits provided or intended to be provided to the participant hereunder, the Company irrevocably authorizes the participant from time to time to retain counsel of the participant's choice as hereinafter provided, at the expense of the Company, to advise and represent the participant in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any then existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the participant's entering into an attorney-client relationship with such counsel, and in that connection the Company and the participant agree that a confidential relationship will exist between the participant and such counsel. Without respect to whether the participant prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the participant in connection with any of the foregoing. 3.6 SOURCE OF PAYMENTS IN THE EVENT OF A CHANGE OF CONTROL OF THE COMPANY. In the event that there is a Change of Control of the Company, the Company shall establish one or more grantor trusts (within the meaning of Sections 671, et. seq., of the Code) designed, taking into account the investment of the corpus thereof, to fund the Company's payment obligations to the participants thereafter as and when due and shall fund the corpus of such grantor trust in accordance with such design (which grantor trust the Company shall establish and fund prior to the Change of Control of the Company in the event it has sufficient advance notice thereof to do so; and otherwise which the Company shall establish and fund promptly following its becoming aware of the Change of Control of the Company). SECTION 4 CERTAIN DEFINITIONS 4.1 "CAUSE". Following a Change of Control of the Company, a participant shall in no event be deemed to have been terminated for "Cause" for purposes of the Plan unless prior to his or her termination there shall have been delivered to the participant a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the non-employee directors of the Company then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the participant and an opportunity for the participant, together with the participant's counsel (if the participant chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of such directors, the participant had committed an act constituting "Cause" as defined in his or her Employment Agreement and specifying the particulars thereof in detail. While, for purposes of the Plan, such a determination will be a condition precedent to the existence of "Cause" following a Change of Control of the Company, such a determination will not be determinative or create a presumption that "Cause" in fact exists under the participant's Employment Agreement nor limit the right of the participant to contest the validity or propriety of such a determination. 4.2. "CHANGE OF CONTROL DATE". For purposes of the Plan, "Change of Control Date" shall have the meaning given such term in the Company's Restated Certificate of Incorporation, as amended as of the effective date of the Plan; it being understood that a Change of Control Date may occur without the occurrence of a Change of Control of the Company and vice versa. 4.3 "CHANGE OF CONTROL OF THE COMPANY". For purposes of the Plan, a "Change of Control of the Company" shall mean the occurrence of any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 40% or more of the then-outstanding shares of Common Stock of the par value of $1.00 per share of the Company (or, upon or after a Change of Control Date, of 40% or more of either (I) the then-outstanding shares of common stock of the Company (the "Company Common Stock") or (II) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors ("Voting Stock")); provided, however, that for purposes of this subparagraph (i), none the following acquisitions shall constitute a Change of Control of the Company: (A) an acquisition directly from the Company, (B) an acquisition by the Company, a subsidiary of the Company or the Harris Group (as defined below), (C) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, or (D) an acquisition by any Person pursuant to a transaction which complies with clauses (A), (B) and (C) of subparagraph (iii) of this Section 4.3; or (ii) Individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason (other than death or disability) to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a merger as a result of which the Company ceases to exist or becomes a subsidiary of another entity, a consolidation or a sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Company Common Stock and Voting Stock immediately prior to such Business Combination (or, if no Change of Control Date had occurred prior to such Business Combination, who on a pro forma basis would have been the beneficial owners, respectively, of the Company Common Stock and Voting Stock immediately prior to such Business Combination had a Change of Control Date occurred prior to such Business Combination) beneficially own, directly or indirectly, more than a majority of, respectively, the then- outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction is the parent of the Company or owns all or substantially all of the Company's assets, in each case either directly or through one or more subsidiaries) in substantially the same proportions relative to each other as their ownership (or pro forma ownership), immediately prior to such Business Combination, of the Company Common Stock and Voting Stock, as the case may be, (B) no Person (excluding any entity resulting from such Business Combination, the Harris Group or any employee benefit plan (or related trust) sponsored or maintained by the Company or the entity resulting from such Business Combination) beneficially owns, directly or indirectly, 40% or more of, respectively, the then-outstanding shares of common stock of the entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors or other governing body of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. For purposes of this Section 4.3, the "Harris Group" shall mean Messrs. Irving Harris, Neison Harris, King Harris, William W. Harris and Sidney Barrows and their respective spouses (including widows and widowers until first remarried), descendants and spouses (including widows and widowers until first remarried) of descendants, trustees of trusts established for the benefit of such persons (acting in their capacity as trustees of such trusts), and executors of estates of such persons (acting in their capacity as executors of such estates), and each Person of which any one or more of the foregoing owns (i) more than fifty percent (50%) of the voting stock or other voting interests and (ii) stock or other interests representing more than fifty percent (50%) of the total value of the stock or other interests of such Person. 4.4 "COBRA". For purposes of the Plan, "COBRA" shall mean Part 6 of subtitle B of Title I of ERISA. 4.5 "CODE". For purposes of the Plan, "Code" shall mean the Internal Revenue Code of 1986, as amended. 4.6 "ERISA". For purposes of the Plan, "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 4.7 "TARGET BONUS". For purposes of the Plan, "Target Bonus" for a participant for a particular year shall mean (i) the amount, if any, identified as such in writing by the Committee or (ii) if no amount has been so identified, an amount equal to the participant's salary for such year (or, in the case of the year in which his or her Triggering Termination occurs, if higher, Executive's Reference Salary as defined in his or her Employment Agreement for such year); provided, however, that in the event the participant's Triggering Termination occurs during the year in which, without any extension thereof, the Employment Period under his or her Employment Agreement is scheduled to end as of the date of such termination, the participant's Target Bonus for any prior year shall be deemed to be the participant's Target Bonus for such prior year multiplied by a fraction, the numerator of which shall be the number of months in the year in which such termination occurs prior to such scheduled end of the Employment Period (rounded up to the next largest full month), and the denominator of which shall be 12. SECTION 5 GENERAL PROVISIONS 5.1 EMPLOYMENT RIGHTS. Neither the establishment of, nor participation in, the Plan shall be construed to give any participant the right to be retained in the service of the Company or any of its subsidiaries or to any benefits not specifically provided by the Plan. 5.2 TAXES AND WITHHOLDING. Each participant shall be responsible for any taxes imposed on him or her ("taxes") by reason of the establishment of, or his or her participation in, the Plan. The Company or a subsidiary of the Company, or any grantor trust established pursuant to Section 3.6 designed to fund the Company's payment obligations to the participant, may deduct any taxes from payroll or other payments due the participant. In the event that such deductions are not sufficient to pay the taxes, the participant shall promptly remit the deficit to the Company upon its request. 5.3 INTERESTS NOT TRANSFERABLE. Except as to withholding of any tax under the laws of the United States or any state, the interests of participants under the Plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily transferred, assigned, alienated or encumbered; provided that the benefits of a participant under the Plan shall inure to the benefit of his or her heirs, executors or personal representatives. 5.4 CONTROLLING LAW. The Plan shall be construed in accordance with the provisions of ERISA and other Federal laws, to the extent such provisions are applicable to the Plan. To the extent not inconsistent therewith, the Plan shall be construed in accordance with the laws of the State of Illinois. 5.5 SUCCESSOR TO THE COMPANY. The term "Company" as used in the Plan shall include any successor to the Company by reason of merger, consolidation, the purchase of all or substantially all of the Company's assets or otherwise. 5.6 MISCELLANEOUS. The Plan shall be binding upon and inure to the benefit of the Company, the participants and their respective heirs, executors, legal representatives, successors and assigns. Any notice given in connection with the Plan shall be in writing and shall be delivered in person or by registered mail, return receipt requested. Any notice given by registered mail shall be deemed to have been given upon the date of delivery indicated on the registered mail return receipt, if correctly addressed. SECTION 6 AMENDMENT 6.1. AMENDMENT. While the Company expects to continue the Plan, it must necessarily reserve and hereby does reserve the right, either in general or as to one or more particular participants, to amend the Plan from time to time; provided that no amendment of the Plan with respect to a participant that reduces or eliminates any benefits of such participant shall be effective unless such participant consents to such amendment. IN WITNESS WHEREOF, the Plan has been executed on behalf of the Company by its duly authorized officers as of the day and year first above written. PITTWAY CORPORATION By: KING HARRIS Its: President ATTEST By: JAMES F. VONDRAK Its: Secretary EX-10.3 4 ACCEPTANCE HARRIS Exhibit 10.3 Pittway Corporation September 30, 1999 Form 10-Q PITTWAY CORPORATION CHANGE OF CONTROL PLAN ACCEPTANCE The undersigned, who is a party to an Employment Agreement with Pittway Corporation ("Pittway") dated as of January 1, 1996 and who has been designated by the Compensation Committee of the Board of Directors of Pittway to participate in the Pittway Corporation Change of Control Plan that became effective September 15, 1999 (the "Plan"), hereby accepts the terms of the Plan. Dated: October 13, 1999. King Harris EX-10.4 5 ACCEPTANCE GAUVREAU Exhibit 10.4 Pittway Corporation September 30, 1999 Form 10-Q PITTWAY CORPORATION CHANGE OF CONTROL PLAN ACCEPTANCE The undersigned, who is a party to an Employment Agreement with Pittway Corporation ("Pittway") dated as of January 1, 1998, as amended as of March 18, 1999, and who has been designated by the Compensation Committee of the Board of Directors of Pittway to participate in the Pittway Corporation Change of Control Plan that became effective September 15, 1999 (the "Plan"), hereby accepts the terms of the Plan. Dated: October 22, 1999. Paul R. Gauvreau EX-10.5 6 ACCEPTANCE SCHWARTZ Exhibit 10.5 Pittway Corporation September 30, 1999 Form 10-Q PITTWAY CORPORATION CHANGE OF CONTROL PLAN ACCEPTANCE The undersigned, who is a party to an Employment Agreement with Pittway Corporation ("Pittway") dated as of January 1, 1998, as amended as of March 18, 1999, and who has been designated by the Compensation Committee of the Board of Directors of Pittway to participate in the Pittway Corporation Change of Control Plan that became effective September 15, 1999 (the "Plan"), hereby accepts the terms of the Plan. Dated: October 24, 1999. Edward J. Schwartz EX-27 7 FDS SEPTEMBER 1999
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 30,658 43,248 325,941 16,285 322,295 748,777 302,427 159,711 1,196,068 427,882 103,226 0 0 42,755 535,446 1,196,068 1,235,964 1,235,964 767,713 767,713 30,216 6,033 11,863 178,236 67,512 110,724 0 0 0 110,724 2.59 2.53 Excluding the reversal of a litigation provision, changes in Pittway's equity investment in Cylink, the gain on sale of USSB stock and related tax benefits, net income would have been $55.1 million ($1.26 per diluted share).
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