-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hx/fS9SVbbrXjejRNHpDaHQUQ29wR1bBaQKly9SxhiuWQ5Ct3j0OTdzRYCbXLhfx jH0IqrS9WjdWdLcddQKdFw== 0000912057-94-001088.txt : 19940331 0000912057-94-001088.hdr.sgml : 19940331 ACCESSION NUMBER: 0000912057-94-001088 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PITTWAY CORP /DE/ CENTRAL INDEX KEY: 0000093469 STANDARD INDUSTRIAL CLASSIFICATION: 3669 IRS NUMBER: 135616408 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-04821 FILM NUMBER: 94518408 BUSINESS ADDRESS: STREET 1: 200 S WACKER DR STE 700 CITY: CHICAGO STATE: IL ZIP: 60606-5802 BUSINESS PHONE: 3128311070 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-K 1 1993 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1993 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-4821 PITTWAY CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 13-5616408 (State of Incorporation) (I.R.S. Employer Identification No.) 200 South Wacker Drive, Suite 700, Chicago, Illinois 60606-5802 (Address of Principal Executive Offices) (ZIP Code) 312/831-1070 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $1.00 par value American Stock Exchange Class A Stock, $1.00 par value American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant (based on closing sales prices on March 3, 1994): $345,042,000 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (March 3, 1994): Common Stock - 2,626,024 shares outstanding; Class A Stock - 11,314,700 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1993 Annual Report to Stockholders are incorporated by reference into Parts I and II of this report. Portions of the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 19, 1994 are incorporated by reference into Part III of this report. 1 PITTWAY CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K For The Year Ended December 31, 1993 PART I Page Item 1 Business 3-7 Item 2 Properties 8 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market For Registrant's Common Equity and Related Stockholder Matters 10 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8 Financial Statements and Supplementary Data 10 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 10 PART III Item 10 Directors and Executive Officers of the Registrant 10 Item 11 Executive Compensation 10-11 Item 12 Security Ownership of Certain Beneficial Owners and Management 11 Item 13 Certain Relationships and Related Transactions 11 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 12 SIGNATURES 13 2 PART I Item 1. Business (a) General Development of Business Standard Shares, Inc. ("Standard") was incorporated under Delaware law in 1925. On December 28, 1989, Pittway Corporation ("Old Pittway"), a Pennsylvania corporation incorporated in 1950, merged into Standard through an exchange of stock and Standard changed its name to Pittway Corporation ("Pittway" or "Registrant"). Prior to the merger Standard owned 50.1% of Old Pittway. The merger was accounted for in a manner similar to a pooling of interests, using historical book values. Pittway and its subsidiaries are referred to herein collectively as the "Company." The Company operates in two reportable industry segments: alarm and other security products, and publish-ing. In April 1993, the Company distributed its investment in the AptarGroup, Inc. (formerly known as the Seaquist Division packaging group) to stockholders in a tax-free spinoff. AptarGroup, Inc. is a manufacturer of aerosol valves, dispensing pumps and closures which are sold to packagers and marketers in the personal care, fragrance/cosmetics, pharmaceutical, household products and food industries. In October 1992, the Company sold its Barr Company, a contract packager for marketers of aerosol and liquid fill (non- aerosol) personal and household products, to a Canadian packaging company. In July 1992, the Company sold its First Alert/BRK Electronics business to a new company formed by BRK management and an investment firm. Financial information relating to these transactions is set forth in Note 1 ("Discontinued Operations") to the Consolidated Financial Statements contained in the 1993 Annual Report to Stockholders, page 25, which is incorporated herein by reference. In 1991, the Company sold its expedited ground transportation service business to its local management. (b) Financial Information about Industry Segments Financial information relating to industry segments for each of the three years ended December 31, 1993 is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1993 Annual Report to Stockholders, pages 29-30, which is incorporated herein by reference. (c) Narrative Description of Business The principal operations, products and services rendered by the Company: Alarm and Other Security Products Segment This segment involves the design, manufacture and sale of an extensive line of burglar alarm and commercial fire detection and alarm components and systems and the distribution of alarm and other security products manufactured by other companies. By offering a broad line of alarm products needed for security systems, the Company provides a full range of services to independent alarm installers, which range in size from 3 one-man operations to the largest national alarm service companies. In every major domestic market area, quick delivery is provided through the Company's computerized regional warehouses and convenience center outlets, authorized distributors and dealers. Various products sold through the alarm system distribution group are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under the Company's Ademco brand name, others are resold under brand names owned by its suppliers. In the Canadian and overseas markets, alarm and other security products are sold through the Company's distribution centers, authorized dealers and sales agents. Commercial fire detectors, fire controls and control communicators are sold through the Company's regional warehouses, electrical and building supply wholesalers and alarm and fire safety distributors. Raw materials essential to the Company's businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available from more than one supplier and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the Company's products can be obtained only from a small number of suppliers and could adversely impact production of alarm equipment and commercial fire detectors by the Company. The Company believes that the loss of any other single source of supply would not have a material adverse effect on its overall business. Sales and marketing methods common to this industry segment include communications through the circulation of catalogs and merchandising bulletins, direct mail campaigns, and national and local advertising in trade publications. The Company's principal advantages in marketing are its reputation, broad product line, high quality products, extensive integrated distribution network, efficient customer service, competitive prices and brand names. Within the industry there is competition from large and small manufacturers in both the domestic and foreign markets. While competitors will continue to introduce new products similar to those sold by the Company, the Company believes that its research and development efforts and expansion of its distribution network will permit it to remain competitive. Publishing Segment This segment is a publisher of 32 national business and trade magazines with other businesses in the marketing-communications field. The Company's publications serve both specific industries and broad functional markets which include specialized manufacturing, service industries, technical and professional fields and general management. Most publications are distributed on a monthly basis with several others distributed on a biweekly, annual or biennial frequency. With the exception of two magazines paid for by subscribers, the publications are distributed free through controlled circulation. The principal source of revenue is from the sale of advertising space within the magazines. Other facets of the business include: the operation of a printing plant for the printing and production of most of the Company's publications and those of other publishers; a national mail-marketing organization; a majority-owned subsidiary specializ- ing in the design and development of courses and conferences for managerial, professional and technical personnel; research and telemarketing services; direct-response card mailer service and special publications. Within the publishing and marketing communications fields, competi- tion exists in the form of other publications and media communica- tion businesses. Reductions in advertising schedules by domestic industrial companies due to economic and other competitive pressures directly impacts the display advertising levels of the Company's publishing segment. The Company competes with one or more other magazines for advertising 4 revenue in each of its magazine titles. The Company's principal sales advantages include relevant editorial content and innovative marketing complemented by specialized multi-magazine supplements. The Company believes that its competitive position benefits from improvements in manufacturing productivity and from cost control programs. The Company places great emphasis on providing quality products and services to its customers. Real Estate and Other Ventures The Company is involved in the sale, marketing and development of land near Tampa, Florida for residential and commercial use. Fairway Village is an improved residential property being developed into single family homes situated adjacent to a major resort. Saddlebrook Village, a 2,000 acre parcel of land nearby, is approved for development as a master planned community. Saddlebrook Corporate Center, a nearby 450 acre parcel, is a master planned business park for mixed use development including light manufacturing, research and development, distribution and warehousing, retail and other businesses. Principal competition comes from other residential and commercial developments in Florida. The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties in Chicago, Dallas, Los Angeles and Boston. See Item 7 of this Form 10-K. The Company also has invested in three rental apartment complexes located in Chicago and Washington, D.C. as a 5% limited partner that provide certain tax advantages. The Company has a 45% interest in a leading manufacturer of commercial encryption equipment and of spread spectrum radios and a 5% equity interest in a satellite broadcast company which is expected to begin operations in the Spring of 1994. The Company also has a 16 2/3% investment in a manufacturer of residential fire protection products which has filed a registration statement with the S.E.C. for an initial public offering of its stock. See Item 7 of this Form 10-K. 5 Other Information Patents and Trademarks - While the Company owns or is licensed under a number of patents which are cumulatively important to its business, the loss of any single patent or group of patents would not have a material adverse effect on the Company's overall business. Products manufactured by the Company are sold primarily under its own trademarks and tradenames. Some products purchased and resold by the Company's alarm and security products business are sold under the Company's tradenames while others are sold under tradenames owned by its suppliers. Customers - Neither of the Company's industry segments is dependent upon a single customer or a few customers. The loss of any one or more of these customers would not have a material adverse effect on the Company's results of operations. Research and Development - The Company is engaged in programs to develop and improve products as well as develop new and improved manufacturing methods. Expenditures for Company sponsored research and development activities in the alarm and other security products segment was $10.8 million in 1993, $10.0 million in 1992 and $10.2 million in 1991. These costs were associated with a number of products in varying stages of development, none of which represents a significant item of cost or is projected to be a significant addition to the Company's line of products. Acquisitions and Dispositions - Acquisitions of businesses by the Company in each of the three years ended December 31, 1993 were not significant to the Company's sales or results of operations. Dispositions by the Company, other than the discontinued operations previously discussed in the "General Development of Business" section, in each of the three years ended December 31, 1993 were not significant to the Company's sales or results of operations. Product Liability - Due to the nature of the alarm security business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. This exposure has been lessened by the sale of First Alert/BRK Electronics. It is likely, due to the present litigious atmosphere in the United States, that additional claims and lawsuits will be filed in future years. The Company believes that it maintains sufficient insurance to cover this exposure. While it believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the financial impact of claims and lawsuits which may be filed in the future. 6 Environmental Matters - The Company anticipates that compliance with various laws and regulations relating to protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position. Employees - At December 31, 1993, there were approximately 4,800 persons employed by the Company, including 4,000 employed in the United States. Approximately 1,000 of these employees were represented by labor unions. The Company considers its relations with its employees to be good. (d) Financial Information About Foreign and Domestic Operations and Export Sales Financial information concerning foreign and domestic operations and export sales is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1993 Annual Report to Stockholders, pages 29-30, which is incorporated herein by reference. 7 Item 2. Properties The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- Syosset, New York (1) N/A 341,000 Syosset, New York (3) 1997 14,000 Northford, Connecticut (1) N/A 179,000 New Haven, Connecticut (2) N/A 42,000 St. Charles, Illinois (1) 2002 158,000 West Chicago, Illinois (1) 1997 10,000 San Antonio, Texas (1) 1995 14,000 Melbourne, Australia (2) 1995 5,000 Sydney, Australia (2) 1998 25,000 Montreal, Canada (2) 1995 8,000 Toronto, Canada (2) 1997 7,000 London, England (1) 1994 18,000 Milan, Italy (1) N/A 14,000 Milan, Italy (2) 1998 8,000 Trieste, Italy (1) N/A 40,000 Juarez, Mexico (4) 1999 39,000 Madrid, Spain (2) 1998 8,000 Publishing Segment- Cleveland, Ohio (3) 2000 179,000 Cleveland, Ohio (2) 1996 30,000 Berea, Ohio (5) N/A 100,000 New York, New York (3) 1997 10,000 Dunedin, Florida (3) 1995 8,000 Safety Harbor, Florida (1) 1995 19,000 General Corporate- Chicago, Illinois (3) 2001 12,000 Other properties in the alarm and other security products segment include 77 full-line convenience centers which function as retail- like sales distribution outlets to serve the North American market. The convenience centers are under leases expiring through 2002 and range in size from 1,200 to 30,000 square feet. Other properties in the publishing segment include 13 sales and/or editorial offices under leases expiring through 2003 and located in major cities throughout the United States. The Company believes the above facilities are adequate for its present needs. (1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing (5) Printing N/A Not applicable - facilities are owned by the Company 8 Item 3. Legal Proceedings On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and currently under development by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860), alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit. At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs have appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. Both appeals are presently being briefed and expected to be heard in spring 1994. Saddlebrook has moved for summary judgment on December 22, 1993 on the ground that plaintiffs' claims were fully litigated and decided in administrative action. The trial court ordered that, in the event plaintiffs' appeals are resolved by July 1994, Saddlebrook's motion for summary judgment will be heard in August 1994 and, in the event that such motion is denied, retrial will begin in October 1994. 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 to split equally the costs of the defense of the litigation, the costs of any ultimate judgment and the costs of mandated remedial work. The agreement provides for the Company to make subordinated loans to Saddlebrook to enable Saddlebrook to pay its half of the costs of the latter two items. No loans have been made to date. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. Item 4. Submission of Matters to a Vote of Security Holders None. 9 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The information set forth under the heading "Market Prices, Security Holders and Dividend Information" appearing on page 33 of the Company's 1993 Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data The information set forth under the heading "Supplemental Information - Five Year Summary of Selected Financial Data" appearing on page 33 of the Company's 1993 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the heading "Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition" appearing on pages 34-35 of the Company's 1993 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto, together with the report thereon of Price Waterhouse dated February 23, 1994, appearing on pages 19-32 of the Company's 1993 Annual Report to Stockholders are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Information required to be furnished in this part of the Form 10-K has been omitted because the Registrant will file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than April 30, 1994. Item 10. Directors and Executive Officers of the Registrant The information set forth under the headings "Nominees for Election by the Holders of Class A Stock", "Nominees for Election by the Holders of Common Stock", "Executive Officers" and "Section 16(a) Reports" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 19, 1994 is incorporated herein by reference. Item 11. Executive Compensation The information set forth under the headings "Compensation Committee Interlocks and Insider Participation", "Compensation", "Compensation Committee Report on Executive Compensation" and "Performance Graph" 10 in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 19, 1994 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 19, 1994 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the headings "Certain Transactions" and "Compensation Committee Interlocks and Insider Participation" (which is cross-referenced under the heading "Certain Transactions") in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 19, 1994 is incorporated herein by reference. 11 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial statements and financial statement schedules filed as a part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on pages 14-15 of this Form 10-K and are incorporated herein by reference. Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 24-25 of this Form 10-K, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit to this report pursuant to Item 14 (c) of Form 10-K is so identified on the Index to Exhibits. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PITTWAY CORPORATION (Registrant) BY /s/ Paul R. Gauvreau Paul R. Gauvrea Financial Vice President and Treasurer Date: March 25, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 25, 1994. /s/ Neison Harris /s/ Anthony Downs Neison Harris, Director and Anthony Downs, Director Chairman of the Board /s/ King Harris /s/ Leo A. Guthart King Harris, Director, President and Leo A. Guthart, Director Chief Executive Officer /s/ Paul R. Gauvreau /s/ Irving B. Harris Paul R. Gauvreau, Principal Irving B. Harris, Director Financial and Accounting Officer /s/ Eugene L. Barnett /s/ William H. Harris Eugene L. Barnett, Director William H. Harris, Director /s/ Sidney Barrows /s/ James H. Lorie Sidney Barrows, Director James H. Lorie, Director /s/ Fred Conforti /s/ Sal F. Marino Fred Conforti, Director Sal F. Marino, Director 13 PITTWAY CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following documents are filed as a part of this report: Page reference in Annual Report to Stockholders Financial Statements required by Item 8 of this Form: Consolidated Balance Sheet at December 31, 1993 and 1992 20-21 For each of the three years ended December 31, 1993 - Consolidated Statement of Income 19 Consolidated Statement of Cash Flows 22 Consolidated Statement of Stockholders' Equity 23 Summary of Accounting Policies and Notes to Consolidated Financial Statements 24-31 Report of Independent Accountants 32 Page reference in Form 10-K Financial Statement Schedules required by Article 12 of Regulation S-X: Report of Independent Accountants on Financial Statement Schedules 16 Consolidated Financial Statement Schedules - I. Marketable Securities - Other Investments 17 II. Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties - Continuing Operations 18 II. Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties - Discontinued Operations 19 VII. Guarantees of Securities of Other Issuers 20 VIII. Valuation and Qualifying Accounts 21 IX. Short-Term Borrowings 22 X. Supplementary Income Statement Information 23 14 PITTWAY CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Continued - The consolidated financial statements of Pittway Corporation, listed in the above index together with the Report of Independent Accountants, which are included in the Company's 1993 Annual Report to Stockholders, are incorporated herein by reference. All other schedules have been omitted because the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. With the exception of the aforementioned information and information incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7 and 8) of this Form 10-K, the Company's 1993 Annual Report to Stockholders is not deemed to be filed as part of this report. The individual financial statements of the Company have been omitted because Pittway Corporation is primarily an operating company and the restricted net assets of subsidiaries together with the equity in undistributed earnings of equity investees is less than 25 percent of consolidated net assets. Summarized financial information for the limited real estate partnerships and other ventures is omitted because, when considered in the aggregate, they do not constitute a significant subsidiary. 15 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Pittway Corporation Our audits of the Consolidated Financial Statements referred to in our report dated February 23, 1994 appearing on page 32 of the 1993 Annual Report to Stockholders (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in the index on page 14 of this Form 10-K. In our opinion, these Financial Statement Schedul- es present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. As discussed in Note 4 to the Consolidated Financial Statements contained in the 1993 Annual Report to Stockholders, pages 25-26, the Company changed its method of accounting for income taxes in 1993. /s/ Price Waterhouse PRICE WATERHOUSE Chicago, Illinois February 23, 1994 16 PITTWAY CORPORATION SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS FOR THE YEAR ENDED DECEMBER 31, 1993 (Dollars in Thousands)
Market Carrying Name of Issue Shares Principal Cost Value Value Municipal Bonds (A) $16,114 $16,188 $16,260 $16,188 Preferred Stocks (A) 484,010 15,118 15,281 15,118 Other 101 101 101 Total Short-Term Marketable Securities $31,407 $31,642 $31,407
Market Carrying Description Shares Principal Cost Value Value 5.33% equity interest in United States Satellite Broadcasting $13,333 $20,000(B) $13,333 16 2/3% equity investment in First Alert, Inc. 500,000 5,000(D) 15,000(B) 5,000 5% and 13% equity interests in limited real estate partnerships 8,375 9,000(B) 8,375 Land held for development or lease 16,071 (C) 16,071 Other investments, principally Cylink, a 45% owned affiliate 8,374 (C) 8,374 Total Real Estate and Other Ventures $51,153 $51,153 Leveraged Leases $21,954 (C) $21,954
(A) The securities of no single issuer constitutes 2% or more of total assets. (B) Excludes related deferred income taxes. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated market value amounts and the estimates presented may not necessarily be indicative of the amounts that the Registrant could realize in a current market exchange. (C) Market value is not readily determinable but management believes it to be in excess of its carrying value. (D) Cost is based upon the cash price per share paid for all other shares issued by such entity at the time of the sale of First Alert/BRK Electronics by the Company. 17 PITTWAY CORPORATION SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES CONTINUING OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in Thousands)
Balance at Deductions Balance at end of period beginning Amounts Name of Debtor of period Additions collected Other (C) Current Not current 1993 P. Ibarrondo (A) $435 $56 ($85) $406 1992 P. Ibarrondo (A) $518 ($83) $435 1991 P. Mazzacano (B) $160 ($160) P. Ibarrondo (A) $518 $518
(A) Loan bearing interest at a variable rate (approximately 13% per annum at December 31, 1993) and collateralized by marketable securities. (B) Relocation loan for new housing which was repaid when prior residence was sold. (C) Represents adjustments for the translation of local currency into U.S. dollars. 18 PITTWAY CORPORATION SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES DISCONTINUED OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in Thousands)
Balance at Deductions Balance at end of period beginning Amounts Name of Debtor of period Additions collected Other (C) Current Not current 1993 P. Cheru (A) $129 ($129)(F) C. Siebel (A) 130 (130)(F) J. Blanie (B) 178 (178)(F) F. Boutan (D) 118 (118)(F) 1992 P. Cheru (A) $150 ($11) ($10)(E) $12 $117 C. Siebel (A) 154 (14) (10)(E) 14 116 J. Blanie (B) 197 (6) (13)(E) 7 171 L. Lowrimore (C) 288 (288) F. Boutan (D) 125 (7)(E) 118 1991 P. Cheru (A) $164 ($11) ($3)(E) $12 $138 C. Siebel (A) 170 (13) (3)(E) 15 139 J. Blanie (B) 205 (5) (3)(E) 7 190 L. Lowrimore (C) 168 $120 288 F. Boutan (D) 128 (3)(E) 125
(A) Housing loans which were due in 1999 and 2001 for Mr. Cheru and Mr. Siebel, respectively, were payable in quarterly installments and bore interest at 6% and 2.23% per annum for Mr. Cheru and Mr. Siebel, respectively. The residences were pledged as collateral. (B) Relocation loan for new housing which was due in 2009 and bore interest at 6% per annum. (C) Relocation loan for new housing which was repaid when prior residence was sold. The loan was interest-free. (D) Relocation loan for new housing due in 1995, bearing interest at 9% per annum and secured by a residence. (E) Represents adjustments for the translation of local currency into U.S. dollars. (F) Represents assumption of the receivable by AptarGroup, Inc. which was spunoff in April 1993. 19 PITTWAY CORPORATION SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS FOR THE YEAR ENDED DECEMBER 31, 1993 (Dollars in Thousands)
Nature of any default by issuer of securities Name of issuer of Title of issue guaranteed in principal, securities guaranteed of each class Total amount interest, sinking fund or by person for which of securities guaranteed and Nature of redemption provisions, or statement is filed guaranteed outstanding guarantee payment of dividends Illinois Housing Real Estate First $1,200 Principal and None Development Authority Mortgage Notes Interest (A) (175 N. Harbor Drive Maturing 2008 Limited Partnership) (A) In participation with Metropolitan Life Insurance Company 20 PITTWAY CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in Thousands)
Balance at Charges to Deductions Balance beginning costs and from at end of period expenses reserve (A) of period 1993 Allowance for doubtful accounts $5,867 $2,938 $3,284 $5,521 Inventory obsolescence reserve 4,583 2,641 2,002 5,222 Valuation allowance-deferred income taxes 4,842(B) 778 5,620 1992 Allowance for doubtful accounts $6,948 $2,806 $3,887 $5,867 Inventory obsolescence reserve 5,557 1,657 2,631 4,583 1991 Allowance for doubtful accounts $5,521 $4,530 $3,103 $6,948 Inventory obsolescence reserve 4,818 2,540 1,801 5,557
(A) Write-off of accounts considered uncollectible, net of recoveries, or write-off of obsolete inventory. Also includes valuation accounts of acquired or divested companies and foreign currency translation adjustments, net. (B) Balance established January 1, 1993 with the adoption of Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes". 21 PITTWAY CORPORATION SCHEDULE IX - SHORT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in Thousands)
Maximum Average Weighted Weighted amount amount average Balance average outstanding outstanding interest Category of aggregate at end of interest during the during the rate during short-term borrowings period rate period period (A) the period (B) 1993 Short-term notes payable (to banks): Domestic $28,380 3.60% $30,500 $19,255 3.49% Foreign 2,479 11.76 2,479 1,874 12.28 1992 Short-term notes payable (to banks): Domestic $17,600 $4,417 4.18% Foreign $2,001 16.23% 7,334 3,868 13.27 1991 Short-term notes payable (to banks): Domestic $10,450 $4,300 6.49% Foreign $11,399 12.05% 11,399 6,737 11.89
(A) Average amount outstanding during the period is computed on a month-end basis. (B) Average interest for the year is based on the weighted average of the stated month-end rates. 22 PITTWAY CORPORATION SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in Thousands)
Charged to costs and expenses 1993 1992 1991 Advertising costs (A) $13,707 $13,807 $14,453
(A)Advertising costs are charged to expense as incurred. 23 INDEX TO EXHIBITS Sequential Number and Description of Exhibit Page Number*** 3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended February 29, 1988). 3.2 Certificate of Amendment to Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990). 3.3 Bylaws of Registrant (incorporated by reference to Exhibit 4.3 of the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990). 4. The Registrant hereby agrees to provide the Commission, upon request, copies of such instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries as are specified in Item 601(b)(4)(iii) of Regulation S-K. 10.1 Amended and Restated Merger Agreement and Plan of Reorganization (incorporated by reference to Exhibit 2 of the Registrant's Form S-4 Registration Statement No. 33 - 31519 filed with the Commission on October 11, 1989). 10.2 Combination Agreement by and among Pittway Corporation, AptarGroup, Inc. Karin Pilz, Peter Pfeiffer, Klaus Pfeiffer and Elke Miedler, without exhibits (incorporated by reference to Exhibit 2.1 to Form S-1 Registration Statement No. 33 - 58132 of AptarGroup, Inc. filed February 10, 1993). 10.3 Pittway Corporation 1990 Stock Awards Plan (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990). 10.4 Second Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1993.** 26-27 10.5 Agreement of Employment dated July 2, 1973 with Leo A. Guthart, as amended (incorporated by reference to Exhibit 10(f) of the Registrant's Form S-4 Registration Statement No. 33-31519 filed with the Commission on October 11, 1989).** 24 INDEX TO EXHIBITS - cont'd. Sequential Number and Description of Exhibit Page Number*** 13. 1993 Annual Report to Stockholders.* 28-44 21. Subsidiaries of the Registrant. 45-46 23. Consent of Independent Accountants. 47 * Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Form 10-K. ** This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of Form 10-K. *** This information appears only in the manually signed original of this Form 10-K. 25 EX-10 2 EXHIBIT 10 EXHIBIT 10.4 PITTWAY CORPORATION DECEMBER 31, 1993 FORM 10-K SECOND EXTENSION AND AMENDMENT Reference is made to the Agreement of Employment dated July 1, 1990, as extended and amended by the Extension and Amendment dated as of June 30, 1992 (the "Agreement"), by and between Penton Publishing, Inc. (the "Corporation") and Sal F. Marino ("Marino"). The Agreement provides that the "term of employment" thereunder expires on December 31, 1993 unless extended by the Corporation and Marino. The Corporation and Marino desire to extend such "term of employment", and in connection therewith to make certain amendments to the Agreement. Accordingly, the Corporation and Marino hereby agree as follows: 1.Paragraph 1 of the Agreement is amended in its entirety to read as follows: "1. This Agreement shall become effective at 12:01 a.m., EDT, on the date hereof Marino's employment by the Corporation shall continue until December 31, 1994 (or such later date as the Corporation and Marino may agree upon in writing during the term of employment (as defined below)), unless earlier terminated by Marino's death or pursuant to Paragraph 6. The period from the date hereof to and including the first to occur of December 31, 1994 (or such later date), the date of Marino's death, or the date of termination pursuant to Paragraph 6, is herein referred to as the "term of employment"." 2. The first sentence of Paragraph 3 of the Agreement is amended in its entirety to read as follows: "The Corporation agrees to pay Marino a salary during the term of employment, which shall be payable in equal monthly installments at a rate not less than TWO HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($275,000.00) per year during that portion of the term of employment occurring prior to December 31, 1992, at a rate not less than THREE HUNDRED FIVE THOUSAND DOLLARS ($305,000.00) per year during that portion of the term of employment occurring after December 31, 1992 and prior to December 31, 1993 and at a rate not less than THREE HUNDRED FIFTEEN THOUSAND DOLLARS ($315,000.00) per year during any portion of the term of employment occurring after December 31, 1993." 26 EXHIBIT 10.4 PITTWAY CORPORATION DECEMBER 31, 1993 FORM 10-K IN WITNESS WHEREOF, the undersigned have executed this Second Extension and Amendment, as of December 31, 1993. PENTON PUBLISHING, INC. By: /s/ King Harris As Its: Vice President /s/ Sal F. Marino Sal F. Marino 27 EX-13 3 EXHIBIT 13 EXHIBIT 13 PITTWAY CORPORATION DECEMBER 31, 1993 FORM 10-K Pittway Corporation and Subsidiaries Consolidated Statement of Income For The Years Ended December 31, 1993, 1992 and 1991 (Dollars in Thousands, Except Per Share)
1993 1992 1991 Continuing Operations: Net Sales........................... $650,105 $568,301 $516,343 Operating Expenses: Cost of sales..................... 398,756 346,034 316,991 Selling, general and administrative.................. 200,088 185,369 173,948 Depreciation and amortization..... 17,249 14,829 13,783 616,093 546,232 504,722 Operating Income.................... 34,012 22,069 11,621 Other Income (Expense): Income from marketable securities and other interest.. 2,855 2,585 1,382 Interest expense................. (2,789) (3,344) (4,196) Income (loss) from investments... 2,573 1,831 (1,516) Miscellaneous, net............... (511) (1,288) 234 2,128 (216) (4,096) Income From Continuing Operations Before Income Taxes............... 36,140 21,853 7,525 Income Taxes (Note 4): Current.......................... 8,436 4,055 5,498 Deferred......................... 6,464 5,338 (2,344) 14,900 9,393 3,154 Income From Continuing Operations... 21,240 12,460 4,371 Income From Discontinued Operations (Note 1): Earnings from discontinued operations, net of income taxes of $3,560, $11,578 and $13,496, respectively..................... 6,940 18,380 21,145 Net gain on disposal of discontinued operations, net of income taxes of $9,779........................... 16,558 Cumulative effect of change in accounting for income taxes...... 3,106 10,046 34,938 21,145 Income Before Cumulative Effect of Changes in Accounting Principles.... 31,286 47,398 25,516 Cumulative Effect of Changes in Accounting For Income Taxes and Postretirement Benefits............. 1,535 Net Income............................ $ 32,821 $ 47,398 $ 25,516 Per Share of Common and Class A Stock (Note 5): Income from continuing operations... $ 1.52 $ .90 $ .32 Income from discontinued operations. .72 2.52 1.53 Cumulative effect of changes in accounting principles............. .11 Net income.......................... $ 2.35 $ 3.42 $ 1.85 Average number of shares outstanding (in thousands) (Note 5). 13,941 13,851 13,823
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. Page 19 Pittway Corporation and Subsidiaries Consolidated Balance Sheet December 31, 1993 and 1992 (Dollars in Thousands, Except Per Share)
ASSETS 1993 1992 Current Assets: Cash and equivalents......................... $ 1,908 $ 3,638 Marketable securities, at the lower of cost or market.......................... 31,407 32,831 Accounts and notes receivable, less allowance for doubtful accounts of $5,521 in 1993 and $5,867 in 1992.......... 115,947 99,638 Inventories (Note 3)......................... 100,065 86,561 Future income tax benefits (Note 4).......... 15,232 13,513 Prepayments, deposits and other.............. 7,974 13,836 272,533 250,017 Property, Plant and Equipment, at cost: Buildings.................................... 25,530 26,098 Machinery and equipment...................... 132,168 110,652 157,698 136,750 Less: Accumulated depreciation.............. 81,375 71,845 76,323 64,905 Land......................................... 2,403 2,983 78,726 67,888 Investments: Real estate and other ventures............... 51,153 39,713 Leveraged leases (Note 9).................... 21,954 18,720 73,107 58,433 Other Assets: Goodwill, less accumulated amortization of $6,159 in 1993 and $5,064 in 1992....... 40,357 41,331 Other intangibles, less accumulated amortization of $8,288 in 1993 and $7,297 in 1992............................. 6,658 5,483 Notes receivable............................. 5,362 7,958 Investment in discontinued operations (Note 1)........................ 137,648 Miscellaneous................................ 5,234 5,248 57,611 197,668 $481,977 $574,006
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. Page 20
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992 Current Liabilities: Notes payable (Note 8)......................... $ 30,859 $ 2,001 Long-term debt due within one year (Note 8).... 5,649 5,826 Dividends payable.............................. 1,757 74 Accounts payable............................... 44,489 46,472 Accrued expenses............................... 33,744 30,809 Income taxes payable........................... 4,911 2,187 Retirement and deferred compensation plans..... 605 1,511 Unearned income................................ 5,320 4,662 127,334 93,542 Long-Term Debt, less current maturities (Note 8): Notes payable, 8.6%, due in annual installments through 1996.................... 3,750 8,750 Other notes and mortgages payable, 6.0% - 8.25% due in monthly and annual installments through 2000................................. 2,333 851 6,083 9,601 Deferred Liabilities: Income taxes (Note 4).......................... 51,883 48,722 Other.......................................... 4,613 2,640 56,496 51,362 Stockholders' Equity: Preferred stock, authorized 2,000,000 shares; none issued.................................. Common capital stock, $1 par value (Note 5) - Common stock, authorized 30,000,000 shares; 2,626,024 shares issued and outstanding..... 2,626 2,626 Class A stock, authorized 24,000,000 shares; 11,314,700 shares issued and outstanding.... 11,315 11,315 Capital in excess of par value................. 28,348 28,348 Retained earnings.............................. 253,628 381,138 Cumulative foreign currency translation adjustment................................... (3,853) (3,926) 292,064 419,501 $481,977 $574,006
Page 21 Pittway Corporation and Subsidiaries Consolidated Statement of Cash Flows For The Years Ended December 31, 1993, 1992 and 1991 (Dollars in Thousands)
1993 1992 1991 Cash Flows From Continuing Operating Activities: Income from continuing operations......... $ 21,240 $ 12,460 $ 4,371 Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: Depreciation and amortization........... 17,249 14,829 13,783 Deferred income taxes................... 6,464 5,338 (2,344) Retirement and deferred compensation plans.................................. 1,231 (325) 4,269 Income/loss from investments adjusted for cash distributions received................. 330 (1,678) 1,572 Provision for losses on accounts receivable............................. 2,938 2,806 4,530 Change in assets and liabilities, excluding effects from acquisitions, dispositions and foreign currency adjustments: Increase in accounts and notes receivable..................... (23,340) (16,835) (9,384) Increase in inventories............... (13,946) (3,639) (5,093) (Decrease) increase in accounts payable and accrued expenses......... (930) 4,762 10,770 Increase (decrease) in income taxes payable.............................. 7,284 (6,758) 2,052 Other changes, net.................... 2,340 (4,508) 2,045 Net cash provided by continuing operations............................... 20,860 6,452 26,571 Cash Flows From Investing Activities: Capital expenditures...................... (29,478) (17,187) (13,872) Disposition of property and equipment..... 585 1,256 822 Additions to real estate investments and other ventures........................... (12,317) (19,370) (7,361) Dispositions of businesses................ 100 3,231 Collections of notes receivable........... 5,434 1,630 2,097 Net decrease (increase) in marketable securities............................... 1,424 (32,831) Net assets of businesses acquired, net of cash.............................. (3,430) (4,208) (2,677) Net cash used by investing activities..... (37,782) (70,610) (17,760) Cash Flows From Financing Activities: Net increase (decrease) in notes payable.. 29,200 (7,477) (3,679) Proceeds of long-term debt................ 1,996 1,313 Repayments of long-term debt.............. (5,405) (12,201) (1,138) Dividends paid............................ (5,722) (17,372) (10,412) Net cash provided (used) in financing activities............................... 20,069 (37,050) (13,916) Effect of exchange rate changes on cash.... (166) (447) (58) Cash Flows From Discontinued Operations: Net proceeds from divestitures, net of income taxes of $9,779................... 81,580 Cash (used) provided by operating, investing and financing activities....... (4,711) (2,007) 22,163 Net cash (used) provided by discontinued operations............................... (4,711) 79,573 22,163 Net (decrease) increase in cash and equivalents............................... (1,730) (22,082) 17,000 Cash and equivalents at beginning of period 3,638 25,720 8,720 Cash and equivalents at end of period...... $ 1,908 $ 3,638 $ 25,720 Supplemental cash flow disclosure: Interest paid............................. $ 2,804 $ 3,752 $ 3,730 Income taxes paid......................... 8,939 31,591 14,391
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. Page 22 Pittway Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity For The Years Ended December 31, 1993, 1992 and 1991 (Dollars in Thousands, Except Per Share)
Cumulative Foreign Capital In Currency Common Stock Class A Stock Excess of Retained Translation Shares Par Value Shares Par Value Par Value Earnings Adjustment Balance - December 31, 1990... 2,626,024 $2,626 11,179,156 $11,179 $24,547 $336,046 $13,879 Net income................... 25,516 Cash dividends declared: Common stock - $.60 per share............. (1,575) Class A stock - $1.10 per share............ (12,321) Shares issued pursuant to performance awards.......... 20,783 21 321 Translation adjustment....... (661) Balance - December 31, 1991... 2,626,024 2,626 11,199,939 11,200 24,868 347,666 13,218 Net income................... 47,398 Cash dividends declared: Common stock - $.60 per share............. (1,576) Class A stock - $1.10 per share............ (12,350) Shares issued pursuant to performance awards.......... 114,761 115 3,480 Translation adjustment....... (17,144) Balance - December 31, 1992... 2,626,024 2,626 11,314,700 11,315 28,348 381,138 (3,926) Net income................... 32,821 Cash dividends declared: Common stock - $.45 per share............. (1,183) Class A stock - $.55 per share............. (6,222) Distribution of AptarGroup, Inc. common stock to stockholders...... (152,926) (90) Translation adjustment....... 163 Balance - December 31, 1993... 2,626,024 $2,626 11,314,700 $11,315 $28,348 $253,628 $(3,853)
See Summary of Accounting Policies and Notes to Consolidated Financial Statements. Page 23 Summary of Accounting Policies (Dollars in Thousands) Basis of Presentation The consolidated financial statements include the accounts of Pittway Corporation and its majority-owned subsidiaries (the "Company"). The Company follows the equity method of accounting for its investments in greater than 20%-owned but less than majority-owned affiliates. All significant intercompany accounts and transactions have been eliminated. Except where otherwise indicated, the following notes relate to continuing operations consisting principally of alarm systems businesses and trade publishing. Cash Equivalents Cash equivalents are generally comprised of highly liquid instruments with original maturities of three months or less, such as treasury bills, certificates of deposit, commercial paper and time deposits. Marketable Securities Marketable securities consist of equity and debt securities carried at the lower of aggregate cost or market value. Net realized gains (losses) in 1993 and 1992 and unrealized gains and losses at December 31, 1993 were not significant. Inventories Inventories are stated at cost, which is lower than market. Costs included in inventories are raw materials, direct labor and manufacturing overhead. Cost of substantially all domestic inventories is determined by using the last-in, first-out (LIFO) method, while the remaining inventories are valued primarily using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. Depreciation expense amounted to $14,664, $12,526 and $11,504 in 1993, 1992 and 1991, respectively. Investments Real estate and other ventures - These investments consist principally of equity interests in limited real estate partnerships, land held for development, an affiliate that manufactures encryption and data communication devices, a residential security products company and a satellite broadcast company. The Company's adjusted basis in certain of the limited real estate partnerships is carried at zero, the affiliate is carried at equity and investments in other partnerships and ventures are carried on a cost basis. Cash distributions received from these partnerships and ventures, other than the affiliate, were recorded as income from investments and were not significant. Leveraged leases - The Company's investment in leveraged leases consists of the rentals receivable net of the principal and interest on the related nonrecourse debt, estimated residual value of the leased property and unearned income. The unearned income is recognized as leveraged lease revenue in income from investments over the lease term. Intangible Assets Management believes that goodwill, trademarks and tradenames acquired in purchase transactions have continuing value. It is the Company's policy to amortize such costs over periods of up to 40 years except for the costs of such assets acquired prior to 1970. Intangible assets of approximately $3,356 related to pre- 1970 acquisitions are not being amortized because the Company believes there has been no diminution of value. Other intangibles acquired in purchase transactions or developed, consisting of non-compete agreements, customer mailing lists, patents and software development costs, are capitalized and amortized over their useful lives. Research and Development Expenses Research and development costs are expensed as incurred. These costs amounted to $10,814, $10,040 and $10,298 in 1993, 1992 and 1991, respectively. Income Taxes Provisions for income taxes recognize the tax effects of all transactions entering into the determination of net income for financial statement purposes, irrespective of when such transactions are reported for income tax purposes. In general, depreciation is computed on a straight-line method for financial reporting purposes and on accelerated methods for income tax purposes. Deferred income taxes and future income tax benefits have been recognized for all temporary differences. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes (see Note 4). Page 24 Product Liability and Workers Compensation Claims Provisions are made for estimated losses from products liability and workers compensation claims which are not covered by insurance. Translation of Foreign Currencies The functional currency of the Company's foreign operations is the local currency. Accordingly, assets and liabilities of foreign operations are translated to U.S. dollars at the rates of exchange on the balance sheet date; income and expense are translated at the average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate section of stockholders' equity. Transaction gains and losses are reflected in miscellaneous income and amounted to expenses of $523, $1,020 and $256 in 1993, 1992 and 1991, respectively. Notes To Consolidated Financial Statements (Dollars in Thousands, Except Per Share) Note 1 - Discontinued Operations The Company distributed its investment, carried at $153,016, in the Seaquist packaging group (now known as AptarGroup, Inc.) to stockholders in a tax-free spinoff on April 22, 1993. In July 1992, the Company sold its First Alert/BRK Electronics business to a new company formed by BRK management and an investment firm. The sale price was $87,154 plus a 16 2/3% ownership interest in the new company valued at $5 million. In October 1992, the Company sold its Barr packaging division operations, excluding real estate, for $4,205 cash and a $3,200 two-year note. The net after-tax gain on the 1992 divestitures amounted to $16,558, or $1.20 per share. At December 31, 1992, the investment in the net assets of the discontinued operations consisted of: Current assets................. $132,811 Current liabilities............ (102,329) Net current assets............. 30,482 Net fixed assets............... 138,250 Other noncurrent assets........ 31,589 Noncurrent liabilities......... (62,673) $137,648
Net sales of the discontinued operations prior to their respective dispositions were $117,473, $451,092 and $465,288 in 1993, 1992 and 1991, respectively. Note 2 - Acquisitions and Dispositions During 1993, the Company acquired the assets and business of a domestic access control manufacturer and two publications for $3,430 cash. During 1992, the Company acquired the assets and business of a domestic manufacturer of lighting control equipment and two publications for $4,208 cash. The Company sold a magazine for $100 cash and a $400 note. During 1991, the Company acquired the assets and business of a foreign manufacturer of fire alarm controls for $2,677 cash. Also, in 1991, the Company sold its expedited ground transportation service business to its management. The aggregate proceeds were approximately $5,431, including $2,200 of subordinated notes due in 1995 and 1996. No significant gain or loss resulted from this transaction. All the aforementioned acquisitions were accounted for as purchase transactions. The impact of these acquisitions on consolidated results of operations was not significant. These companies have been included in the consolidated financial statements from their respective dates of acquisition or to the date of disposition. Note 3 - Inventories At December 31, 1993 and 1992 approximately 86% and 85%, respectively, of the total inventories are accounted for by the LIFO method. At year end, inventories consist of:
1993 1992 Raw materials........................ $ 23,313 $ 20,684 Work-in-process...................... 9,311 10,463 Finished goods - Manufactured by the Company........ 33,912 30,684 Manufactured by others............. 34,087 26,185 Total........................... 100,623 88,016 Less LIFO reserve.................... (558) (1,455) $100,065 $ 86,561
The LIFO reserve represents the excess of FIFO cost, which approximates current cost, over the LIFO value of inventory. Note 4 - Income Taxes Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". The cumulative effect of the change as of January 1, 1993 was a benefit of $1,965 ($.14 per share) for continuing operations and $3,106 ($.22 per share) for discontinued operations. As a result of the 1993 increase in the U.S. federal income tax rate from 34% to 35%, the current year effect was to in- Page 25 crease the Federal income tax provision by $1,202 consisting of $400 ($.03 per share) related to 1993 income and $802 ($.06 per share) to increase prior accumulated deferred taxes. Income from continuing operations before income taxes consists of:
1993 1992 1991 Domestic income..................... $39,985 $23,969 $ 8,883 Foreign loss........................ (3,845) (2,116) (1,358) $36,140 $21,853 $ 7,525
The provision for income taxes consists of:
1993 1992 1991 Current Federal........................ $ 5,819 $ 2,383 $ 3,455 State and local................ 2,000 1,335 1,272 Foreign........................ 617 337 771 8,436 4,055 5,498 Deferred Federal........................ 7,131 5,284 (1,797) Foreign........................ (667) 54 (547) 6,464 5,338 (2,344) $14,900 $ 9,393 $ 3,154
The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 to income from continuing operations before income taxes is as follows:
1993 1992 1991 Income tax at statutory rate....... $12,649 $ 7,430 $ 2,559 Tax effect of - State income taxes, net of federal benefit................. 1,300 879 839 U.S. income tax rate increase on cumulative timing differences... 802 Earnings of non-consolidated affiliates...................... (299) (142) (1,597) Foreign operations............... 1,296 1,112 567 Amortization of intangibles...... 426 324 360 Reserves no longer required...... (800) Other items, net................. (474) (210) 426 Actual income tax provision........ $14,900 $ 9,393 $ 3,154 Effective income tax rate.......... 41.2% 43.0% 41.9%
During 1992 and 1991, respectively, deferred income taxes (benefits) provided for temporary differences in the recognition of revenue and expense for tax and financial statement purposes consisted principally of the following: purchased tax benefit leases - $(2,556) and $(3,422); real estate ventures - $3,775 and $659; leveraged leases - $1,900 and $1,405; retirement and deferred compensation plans - $1,130 and $(669); inventory valuation - $495 and $(13); and bad debts - $233 and $(375). The components of the deferred tax liabilities (assets) at December 31, 1993 are comprised of the following: Leveraged leases......................... $ 16,689 Real estate ventures - Affordable housing.................... 5,309 Other................................. 15,210 Purchased tax benefit leases............. 5,952 Depreciation............................. 2,293 State income taxes, net of federal benefit........................ 5,354 Other ................................... 1,076 Total deferred tax liabilities........... 51,883 Inventory valuation...................... (5,503) Tax loss carryforwards................... (5,620) State income taxes, net of federal benefit........................ (2,420) Bad debts................................ (2,044) Workers compensation..................... (1,191) Other ................................... (4,074) Total deferred tax assets................ (20,852) Valuation allowance...................... 5,620 Net deferred tax liability............... $36,651
The valuation allowance relates to tax loss carryforwards of which $2,362 will be credited to goodwill when and if utilized. Note 5 - Capital Stock and Earnings per Share Except for voting and dividend rights, the two classes of common capital stock are identical. Class A stockholders are entitled to one-tenth vote per share and have the right to elect 25% of all directors, but not less than two. Common stockholders are entitled to one vote per share and have the right to elect the remaining number of directors. Upon a change of control of the Company (as defined in the Company's certificate of incorporation), the Class A stock will automatically be changed into Common stock. Page 26 Cash dividends declared on Class A stock are required to be 2.5 cents per share more than dividends declared on Common stock (up to a maximum of 10 cents per share per year). The 2.5 cents premium was increased to 12.5 cents for each dividend declared in the ten quarters beginning with the third quarter of 1990 and ending with the fourth quarter of 1992. As provided in a 1989 corporate charter amendment creating the Class A stock, the increase in Class A dividends was required due to the relative market prices of Common and Class A stock during the three months ended June 28, 1990. Beginning with dividends declared in the second quarter of 1993, the quarterly dividends on Common stock and Class A stock were reduced by $.05 as a result of the spinoff of AptarGroup, Inc. on April 22, 1993. Net income per share of common capital stock is based on the combined weighted average number of Class A and Common shares outstanding which does not include shares issuable upon exercise of outstanding non-qualified stock options or shares distributable as performance share awards because the dilutive effect is not significant. Note 6 - Stock Options and Awards The Company's 1990 stock awards plan provides for the issuance of up to 500,000 shares of Class A stock to employees pursuant to options, performance share rights and other awards. Certain awards are payable in the form of Class A stock or cash. Performance share rights and non-qualified options vest ratably over terms of three years and five years and are exercisable up to ten years from date of grant. During 1993 the Compensation Committee amended the options then outstanding to reflect the valuation of the AptarGroup, Inc. spunoff in April 1993 by increasing the options granted by 10,500 shares. During 1992, the Company vested and issued shares or paid in cash all performance share rights then outstanding. Activity in options and performance share rights for Class A stock is summarized as follows (prices shown are per share):
1993 1992 Outstanding at beginning of year................. 10,000 122,840 Rights granted ($30.13 and $26.50)............... 17,595 58,986 Options granted ($25.63)......................... 121,948 Issued in stock ($17.50 to $33.27)............... (114,761) Paid in cash ($17.50 to $34.38).................. (56,887) Canceled ($26.38)................................ (178) Outstanding at end of year ($9.48 to $30.13 and $9.48 to $13.57).......................... 149,543 10,000 Exercisable at end of year....................... 0 0 Available for grant.............................. 225,915 365,232
In addition, the Company has granted other awards which provide additional deferred compensation based on the fair market value or the increase in fair market value of the Company's Class A stock. The cost of these compensation agreements is provided currently as it relates to prior service and ratably over the employees' future employment as it applies to future service. Awards of performance share rights are expensed as compensation at the date of grant. Expense under all of these arrangements amounted to $1,180, $2,098, and $2,351 in 1993, 1992 and 1991, respectively. Note 7 - Retirement Plans The Company has various noncontributory retirement plans covering substantially all current and certain former domestic employees. Retirement benefits for employees in foreign countries are generally provided by national statutory programs. Benefits for domestic employees are based on years of service and annual compensation as defined by each plan. The Company's policy is to fund pension costs accrued. In early 1991 the Company withdrew from participation in a union sponsored retirement plan. Under the terms of the termination agreement, the Company recorded a total withdrawal liability of $1,655. Prior to withdrawal, the Company's contribution to such a plan was determined and funded based on a collective bargaining arrangement. In 1992 the Company recognized a curtailment gain of $1,845 resulting from a net decrease in projected benefit obligations (less unrecognized prior service costs) of employees of the divisions sold. This gain is included in the net gain on disposal of discontinued operations. The components of net pension cost (income) for the plans consists of:
1993 1992 1991 Service cost - benefits earned during the year................... $ 3,154 $ 3,181 $ 3,086 Interest cost on projected benefit obligation........................ 3,410 3,181 3,028 Actual return on plan assets........ (12,563) (11,745) (12,598) Net amortization and deferred gains and losses........................ 5,165 5,567 7,396 Net pension cost (income)........... $ (834) $ 184 $ 912
Page 27 The reconciliation of the funded status of the plans at year end follows:
1993 1992 Actuarial present value of benefit obligations: Vested benefit obligation......... $(39,426) $(37,303) Nonvested benefit obligation...... (952) (1,312) Accumulated benefit obligation.. (40,378) (38,615) Excess of projected benefit obligation over accumulated benefit obligation................ (11,724) (10,487) Projected benefit obligation........ (52,102) (49,102) Plan assets at fair value........... 86,734 77,677 Plan assets in excess of projected benefit obligation...... 34,632 28,575 Unrecognized net gain............... (21,969) (15,584) Unrecognized prior service cost..... 1,921 2,225 Unamortized transition net asset.... (10,254) (11,720) Prepaid pension cost included in the consolidated balance sheet. $ 4,330 $ 3,496
Plan assets consist primarily of U.S. government obligations, investment grade corporate bonds and common and preferred stocks. The projected benefit obligation was determined using an assumed discount rate of 7% and an assumed rate of increase in compensation of 5% for both years. The expected long-term rate of return on plan assets was 7% for both years. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", which requires the accrual of the expected cost of retiree medical and life insurance benefits over the period the employee provides services to the Company. Prior to the change, costs were charged to expense as incurred. The cumulative effect reported in the 1993 consolidated statement of income is an after-tax charge of $430, or $(.03) per share. The annual expense for these postretirement benefits was not significant in 1993, 1992 or 1991. Note 8 - Debt The average annual interest rate on short-term notes payable was approximately 4.3% (3.6% domestic and 11.8% foreign) and 16.2% (all foreign) at December 31, 1993 and 1992, respectively. There are no compensating balance or commitment fee requirements associated with these short-term borrowings. The Company has guaranteed indebtedness of $1,200 relating to real estate ventures in which it participates. Under the terms of the 8.6% notes payable, retained earnings available for dividends amounted to $73,501 at December 31, 1993. Aggregate long-term maturities due annually for the five years beginning in 1994 are $5,649, $4,050, $288, $297, $1,225 and $223 thereafter. Note 9 - Leveraged Leases The Company is an equity participant in leveraged leases of aircraft and communication satellite transponders. As the Company has no general liability for the nonrecourse debt attributable to the acquisition of such assets, the debt has been offset against the related rentals receivable. The net investment in leveraged leases consists of:
1993 1992 Rentals receivable (net of principal and interest on nonrecourse debt). $15,069 $13,917 Estimated residual value............ 13,641 11,308 Unearned and deferred income........ (6,756) (6,505) Investment in leveraged leases...... 21,954 18,720 Deferred income taxes............... (16,689) (12,562) Net investment...................... $ 5,265 $ 6,158
A summary of the components of income from leveraged leases follows:
1993 1992 1991 Income before income taxes.......... $ 1,706 $ 1,414 $ 137 Current income tax benefit.......... 3,711 1,700 1,367 Deferred income taxes............... (4,183) (1,900) (1,405) Income from leveraged leases........ $ 1,234 $ 1,214 $ 99
Minimum annual rent receivable (net of principal and interest on nonrecourse debt) under leveraged leases for the next five years beginning with 1994 are $223, $1,305, $274, $567, $1,490 and an aggregate of $11,210 thereafter. Page 28 Note 10 - Lease Commitments The Company leases certain manufacturing facilities, warehouses, office space and equipment under noncancelable operating leases expiring at various dates through the year 2005. Most of the leases contain renewal options and certain equipment leases include options to purchase during or at the end of the lease term. Minimum annual rental commitments under all noncancelable leases for the next five years beginning with 1994 are $11,242, $10,189, $8,849, $8,095, $7,332 and an aggregate of $14,014 thereafter. Rental commitments are stated net of minimum sublease rentals aggregating $4,502. Total rent expense (including taxes, insurance and maintenance when included in the rent) amounted to $15,484, $14,365 and $12,237 in 1993, 1992 and 1991, respectively. Note 11 - Contingencies and Commitments In 1989, a judgment was entered against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and currently under development by the Company. The lawsuit alleged damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. In December 1990 the trial court entered an order vacating the judgment and awarding a new trial, which was affirmed on appeal in March 1992. On remand to the trial court, Saddlebrook's motion for summary judgment, on the ground that plaintiff's claims were fully tried and rejected in a related administrative proceeding, is pending. If that motion is not granted, retrial is currently set for October 1994. The Company and Saddlebrook have entered into an agreement to split equally the costs of the defense of the litigation, the costs of the ultimate judgment, if any, and the costs of mandated remedial work. The agreement provides for the Company to make subordinated loans to Saddlebrook to enable Saddlebrook to pay its half of the costs of the latter two items. No loans have been made to date. The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements. The Company has committed to invest up to a total of $17 million for certain ventures through 1996, including $6.7 million due in 1994 to complete its investment commitment in a satellite broadcasting company. The Company in the normal course of business is subject to a number of lawsuits and claims both actual and potential in nature. While management believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future. Note 12 - Fair Value of Financial Instruments The carrying amount of cash and equivalents, accounts receivable, short-term marketable securities, accounts payable, accrued expenses and notes payable approximates fair value because of the short maturity of these instruments. At December 31, 1993 and 1992, the estimated fair values of the Company's notes receivable exceed their carrying values of $9,321 and $12,174 by approximately $1,700 and $1,200, respectively, and the estimated fair values of the Company's long-term debt exceed their carrying values of $11,732 and $15,427 by approximately $300 and $600, respectively. These fair values were calculated based upon the present value of estimated cash flows using appropriate discount rates. The estimated fair values of the Company's long-term investments which are considered financial instruments (investments in affordable housing projects, zero basis real estate ventures, a satellite broadcasting company and a residential security products company) exceed their carrying values of $26,708 (excluding related deferred income taxes) at December 31, 1993 by $17,300 based upon available information. The estimated fair values of such long-term investments at December 31, 1992 approximate their carrying values (excluding related deferred income taxes) of $19,517. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts and the estimates presented above may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. Note 13 - Segment Information The Company operates principally in two industry segments. The Alarm and Other Security Products segment involves the design, manufacture and sale of an extensive line of burglar alarm and commercial fire detection and alarm components and systems and the distribution of alarm and other security products manufactured by other companies. The Publishing segment is engaged in the publication of national business magazines with other businesses in the marketing-communications field. Sales within and between segments and geographic areas are made at approximate arm's-length prices. Operating income consists of sales less operating expenses. Certain overhead support expenses previously classified as general corporate operating expenses have now been allocated to industry segments and totaled in 1993, 1992 and 1991, respectively: $1,945, $1,855 and $1,147 for Alarm and Other Security Products and $804, $771 and $732 for Publishing. Sales and expenses which were not related to or identifiable with specific segments are included in General Corporate and Other. Identifiable assets are those assets that are specifically identified with the industry segments and geographic areas in which operations are conducted. Eliminations include sales between segments and geographic areas and related intercompany accounts. Export sales were not material and no single customer accounted for ten percent of sales. Page 29
Depreciation Operating Identifiable Capital and Industry Segments Net Sales Income Assets* Expenditures Amortization 1993 Alarm and Other Security Products... $482,787 $ 33,416 $268,151 $ 23,117 $ 11,464 Publishing.......................... 164,627 7,206 78,733 6,265 5,185 General Corporate and Other......... 2,691 (6,610) 135,093 96 600 Consolidated........................ $650,105 $ 34,012 $481,977 $ 29,478 $ 17,249 1992 Alarm and Other Security Products... $401,250 $ 23,644 $225,394 $ 12,366 $ 9,714 Publishing.......................... 163,063 6,844 76,665 4,777 4,468 General Corporate and Other......... 3,988 (8,419) 134,299 44 647 Consolidated........................ $568,301 $ 22,069 $436,358 $ 17,187 $ 14,829 1991 Alarm and Other Security Products... $339,261 $ 15,890 $212,787 $ 10,581 $ 8,916 Publishing.......................... 161,766 3,294 74,921 2,674 3,992 General Corporate and Other......... 15,316 (7,563) 83,667 617 875 Consolidated........................ $516,343 $ 11,621 $371,375 $ 13,872 $ 13,783 Geographic Areas 1993 Domestic Operations................. $606,199 $ 35,919 $446,244 European Operations................. 38,024 (1,094) 34,598 Other Foreign Operations............ 27,243 9 10,618 Eliminations........................ (21,361) (822) (9,483) Consolidated........................ $650,105 $ 34,012 $481,977 1992 Domestic Operations................. $524,922 $ 23,137 $400,543 European Operations................. 37,495 (646) 31,933 Other Foreign Operations............ 24,189 (513) 10,199 Eliminations........................ (18,305) 91 (6,317) Consolidated........................ $568,301 $ 22,069 $436,358 1991 Domestic Operations................. $479,707 $ 11,862 $355,169 European Operations................. 28,211 561 21,653 Other Foreign Operations............ 24,255 300 14,489 Eliminations........................ (15,830) (1,102) (19,936) Consolidated........................ $516,343 $ 11,621 $371,375
* Excludes investment in discontinued operations of $137,648 and $198,433 in 1992 and 1991, respectively. Page 30 Note 14 - Quarterly Results (Unaudited) Quarterly results of operations for the years ended December 31, 1993 and 1992 are shown below:
Quarter Total First Second Third Fourth For Year Net Sales -1993...... $151,777 $158,414 $165,296 $174,618 $650,105 -1992...... 133,256 139,837 143,418 151,790 568,301 Gross Profit -1993...... 55,356 56,583 58,309 63,852 234,100 -1992...... 47,972 49,499 53,229 56,738 207,438 Income from Continuing Operations -1993...... 5,169 4,477 5,159 6,435 21,240 -1992...... 1,251 3,364 3,574 4,271 12,460 Income from Discontinued Operations -1993...... 9,459(a) 1,267 (680)(d) 10,046 -1992...... 6,692 4,955 21,079(c) 2,212 (c) 34,938 Net Income -1993...... 16,163(a)(b) 5,744 5,159 5,755 32,821 -1992...... 7,943 8,319 24,653(c) 6,483 (c) 47,398 Per Share Income from Continuing Operations -1993...... .37 .32 .37 .46 1.52 -1992...... .09 .24 .26 .31 .90 Income from Discontinued Operations -1993...... .68(a) .09 (.05)(d) .72 -1992...... .48 .36 1.52(c) .16 (c) 2.52 Net Income -1993...... 1.16(a)(b) .41 .37 .41 2.35 -1992...... .57 .60 1.78(c) .47 (c) 3.42
(a) Includes a $3,106 benefit ($.22 per share) for a change in accounting for income taxes. (b) Includes a net $1,535 benefit ($.11 per share) for a change in accounting for income taxes and postretirement benefits. (c) Includes a net after-tax gain of approximately $17,700 ($1.28 per share) in the third quarter and after-tax charges of $1,100 ($.08 per share) in the fourth quarter related to discontinued operations. (d) Represents additional estimated settlement costs of outstanding claims. Page 31 Report of Independent Accountants To the Board of Directors and Stockholders of Pittway Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Pittway Corporation and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Pittway Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 4 and 7 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/ Price Waterhouse Chicago, Illinois February 23, 1994 Management's Responsibility for Financial Statements The financial statements of Pittway Corporation and its consolidated subsidiaries, and all other information presented in this Annual Report, are the responsibility of the management of the Company. These statements have been prepared in accordance with generally accepted accounting principles consistently applied and reflect in all material respects the substance of events and transactions that should be included. Management is responsible for the accuracy and objectivity of the financial statements, including estimates and judgments reflected therein, and fulfills this responsibility primarily by establishing and maintaining accounting systems and practices adequately supported by internal accounting controls. Management believes that the internal accounting controls in use are satisfactory to provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations, and that the financial records are reliable for the purpose of preparing financial statements. Independent accountants were selected by the Board of Directors, upon the recommendation of the Audit Committee, to audit the financial statements in accordance with generally accepted auditing standards. Their audits, as well as those of the Company's internal audit department, include a review of internal accounting control policies and procedures and selective tests of transactions. The Audit Committee of the Board of Directors, which consists of two directors who are not officers or employees of the Company, meets regularly with management, the internal auditors and the independent accountants to review matters relating to financial reporting, internal accounting controls, and auditing. The independent accountants have unrestricted access to the Audit Committee. Page 32 Supplemental Information Five Year Summary of Selected Financial Data (Dollars in Thousands, Except Per Share Data)
1993 1992 1991 1990 1989 Operating Results Net Sales of Continuing Operations... $650,105 $568,301 $516,343 $505,243 $441,716 Operating Income from Continuing Operations......................... 34,012 22,069 11,621 16,192 12,306 Income from Continuing Operations.... 21,240 12,460 4,371 10,596 12,835 Income from Discontinued Operations.. 10,046 34,938(c) 21,145 13,467 19,884 Cumulative Effect of Changes in Accounting Principles.............. 1,535 Net Income........................... 32,821 47,398(c) 25,516 24,063 32,719 Per Share: Income from Continuing Operations.. 1.52 .90 .32 .77 .93 Income from Discontinued Operations .72 2.52(c) 1.53 .97 1.45 Cumulative Effect of Changes in Accounting Principles............ .11 Net Income......................... 2.35 3.42(c) 1.85 1.74 2.38 Cash Dividends Declared Per Share (a): Common............................. .45 .60 .60 .60 7.26 Class A............................ .55 1.10 1.10 .90 .625 Capital Expenditures................. 29,478 17,187 13,872 14,813 18,726 Depreciation and Amortization........ 17,249 14,829 13,783 13,567 10,511 At Year End Assets of Continuing Operations...... 481,977 436,358 371,375 346,121 338,932 Investment in Discontinued Operations 137,648 198,433 199,832 181,478 Total Assets......................... 481,977 574,006 569,808 545,955 520,410 Long-Term Debt....................... 6,083 9,601 21,584 27,149 25,588 Stockholders' Equity(d).............. 292,064 419,501 399,578 388,277 365,997 Per Share(d)....................... 20.95 30.09 28.90 28.13 26.54 Market Price Per Share (b)(d): Common............................. 34.00 38.00 33.13 23.00 Class A............................ 32.25 34.50 29.38 17.38 36.50
(a) The cash dividends on Common stock for 1989 include $7.11 paid in connection with the December 1989 merger of the Company with its 50.1% owned subsidiary ("Old Pittway"). In addition, the Company paid a dividend of 1.63 shares of Class A stock for each Common share at that time. Cash dividends declared per Class A share include dividends declared by Old Pittway, restated based upon the conversion ratio of three Class A shares for each Old Pittway share before the merger. (b) Historical prices for Common stock prior to 1990 are not meaningful. Prices for Class A stock are restated based upon the conversion ratio of three Class A shares for each Old Pittway share. (c) Includes net gain on disposal of discontinued operations. (d) Stockholders' equity and market prices at December 31, 1993 reflect the spinoff of AptarGroup, Inc. in April 1993. Market Prices, Security Holders and Dividend Information The Company's Common (ticker symbol PRY) and Class A (ticker symbol PRYA) stock are traded on the American Stock Exchange. As of December 31, 1993, stockholders of record totaled approximately 600 for Common and 1,300 for Class A. The following table sets forth, on a quarterly basis, the high and low prices for the Common and Class A stock on the American Stock Exchange, along with the cash dividends declared.
Common Class A Dividends Declared High Low High Low Common Class A 1993 Quarter: First........$44 $37 7/8 $39 1/8 $33 7/8 $ .15 $.175 Second....... 43 1/4 18 1/2 38 1/2 17 7/8 .10 (a) .125 (a) Third........ 28 1/2 24 26 5/8 21 7/8 .10 (a) .125 (a) Fourth....... 34 25 32 3/8 24 3/8 .10 (a) .125 (a) 1992 Quarter: First........$37 1/2 $31 1/2 $32 1/8 $25 5/8 $ .15 $.275 (b) Second....... 37 5/8 32 1/2 32 3/4 28 .15 .275 (b) Third........ 36 7/8 33 1/4 31 1/4 28 .15 .275 (b) Fourth....... 40 32 5/8 34 3/4 29 .15 .275 (b)
(a) The dividends on Common and Class A stock have been reduced to a quarterly rate of $.10 and $.125, respectively, as a result of the spinoff of AptarGroup, Inc. on April 22, 1993. (b) The Class A dividends declared in 1992 include an extra $.10 per share previously required in connection with the 1989 Standard Shares-Pittway Merger. Page 33 Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition RESULTS OF CONTINUING OPERATIONS Sales increased 14% in 1993 and 10% in 1992 principally due to higher sales levels in the Company's alarm system segment. Domestic sales increased 15% in 1993 and 9% in 1992. International sales, representing 10% of total consolidated sales in 1993 and 11% in 1992, relate to the alarm segment and increased 6% in 1993 and 18% in 1992. The larger increase in 1992 is primarily due to the expansion of European operations. Alarm product sales increased 20% in 1993 and 18% in 1992. Although the overall alarm systems industry is growing slowly, the Company's manufacturing and distribution businesses are increasing their market share as a result of growing dealer and distribution support for new products introduced in the last few years. Operating income increased 41% in 1993 and 49% in 1992 because of expanded sales volume in the areas noted above and because of the benefits of new product development and manufacturing efficiencies. Research and development expense amounted to $10.8 million and $10 million in 1993 and 1992, respectively, reflecting continuing development and expansion of the Company's burglar and fire alarm products and systems. Publishing sales for 1993 remained relatively unchanged from the 1992 and 1991 levels due to the continuing media recession. Operating income increased 5% in 1993 primarily due to the ancillary operations of the business and increased 108% in 1992 primarily due to cost controls and restructuring activities. Depreciation and amortization expense increased both in 1993 and 1992 as a result of capital additions, principally in the alarm segment. Other income (expense) was more favorable in 1993 than in 1992 because of reduced translation losses, increased income from an affiliate and from leveraged leases, and reduced interest expense. While total borrowings increased in 1993, lower interest rates on short-term notes payable and the reduction in long-term debt resulted in a decrease in interest expense. Other income (expense) was more favorable in 1992 than in 1991 because of higher income from leveraged leases, lower net interest expense and the write-off of an investment in a radio-based credit card approval service in 1991. Effective tax rates were 41.2% in 1993, 43.0% in 1992 and 41.9% in 1991. An analysis of the Company's effective tax rate appears in Note 4 to the Consolidated Financial Statements. As a result of the 1993 increase in the U.S. Federal income tax rate from 34% to 35%, the current year effect was to increase the Federal income tax provision by $1.2 million ($.4 million related to 1993 income and $.8 million to increase prior accumulated deferred taxes). ACCOUNTING CHANGES Effective January 1, 1993 the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", and No. 109, "Accounting for Income Taxes". The cumulative effect on prior years of the changes in accounting principles as of January 1, 1993 was a $1.9 million benefit for income taxes and a $.4 million after-tax charge for postretirement benefits. DISCONTINUED OPERATIONS Sales and earnings from packaging operations decreased in 1993 due to the spinoff of AptarGroup, Inc. in April 1993. Income from discontinued operations was favorably impacted by a $3.1 million benefit from the adoption of SFAS No. 109 in the first quarter of 1993. Sales and earnings from packaging operations increased in 1992 as a result of improvement in the cosmetic and perfumery markets Page 34 in Europe and growth in personal care markets in the United States. These favorable results were partially offset by sales and earnings reductions in the contract packaging business which was sold in October 1992. Sales and earnings of residential smoke detector and related retail products were significantly lower in 1992 compared to 1991 due to the disposition of these operations in July 1992, prior to the peak sales season. A net after-tax gain of $16.6 million was recorded on the 1992 divestitures. FINANCIAL CONDITION The Company's financial condition remained strong through 1993. Management anticipates that operations and borrowings will continue to be the primary source of funds needed to meet ongoing programs for capital expenditures, to finance acquisitions and investments, to pay dividends and to reduce debt. The Company has an investment of $5 million in common stock of First Alert, Inc. (formerly Pittway's First Alert/BRK Electronics business). First Alert filed a registration statement with the S.E.C. in early February 1994 for an initial public offering of its common stock. If completed, the offering may also include some or all of Pittway's stockholding at a price significantly in excess of its carrying value, providing an additional source of cash for the Company. In 1993 the primary sources of the $21 million net cash provided by operating activities were operating profits, before depreciation, amortization and deferred taxes, and an increase in accrued income taxes. Such cash generated was partially used to finance the $37 million increase in accounts receivable and inventories. The available cash generated from operations, along with a $29 million increase in short-term borrowings, were used to pay for capital expenditures, to increase investments in a satellite broadcasting venture and in leveraged leases and to reduce outstanding debt. Capital expenditures of $29.5 million were made in 1993 primarily in the alarm system segment to increase capacity to support the increasing product sales levels and new product introductions. Dividend payments were lower in 1993 than in 1992 because: the dividend normally paid in January was paid in December 1992; the dividends on Class A stock in 1992 included an extra $.10 per share per quarter related to the 1989 merger of Pittway and Standard Shares, Inc.; and quarterly dividends were reduced by $.05 per share in 1993 due to the spinoff of AptarGroup, Inc. The Company is continually investigating opportunities for growth in related areas. It is presently committed to invest approximately $17 million in certain ventures through 1996, including $6.7 million due in 1994 to complete its investment commitment in a satellite broadcasting company. The Company has real estate investments in various limited partnerships with interests in commercial rental properties which may be sold or turned over to lendors due to the present weak commercial real estate market. The Company's deferred income tax liability accounts fully cover the tax payments that would be due if properties were sold or returned to the lenders and such events would have no effect on income. However, the required tax payments would negatively impact the Company's cash position. The likelihood, extent and timing of such payments is not readily determinable, but the maximum total amount at December 31, 1993 is approximately $15.2 million. The impact of inflation on the Company's results of operations has lessened in recent years, although inflation does increase the Company's cost of doing business. The Company attempts to offset the impact of inflation through productivity and technological improvements, cost containment programs and by increasing its selling prices over time as allowed by market conditions. In addition, substantially all domestic inventories are valued on the last-in, first-out (LIFO) method, which generally results in reporting the cost of goods sold at approximately current costs. Page 35 EX-21 4 EXHIBIT 21 EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1993 FORM 10-K Approximate Percentage of Voting Securities State or Owned by Country of Immediate Name of Company Incorporation Parent Pittway Corporation Ademco International Marketing Ltd. Delaware 100 Ademco Distribution, Inc. Delaware 100 ADI-Lenox Club, Inc. Delaware 100 Automation Leasing Corp. New York 100 Ademconet, Inc. Delaware 100 Radscan, Inc. Delaware 100 FBX Corporation Delaware 100 Fire Burglary Instruments, Inc. New York 100 Datawave, Inc. Delaware 100 Viewtronics, Inc. Delaware 100 Amgard Products, Inc. Delaware 100 Amgard Monitoring, Inc. Delaware 80 Fire-Lite Alarms, Inc. Connecticut 100 Notifier Engineered Systems Company Delaware 100 MicroLite Corporation California 90 Penton Publishing, Inc. Delaware 100 Penton Learning Systems, Inc. Delaware 51 Quality Alert Institute, Inc. Delaware 100 Links Guide, Inc. Delaware 80 Curtin & Pease/Peneco, Inc. Florida 100 Pittway Real Estate, Inc. Florida 100 Chilpub, Inc. Delaware 100 Xetron Corporation Texas 100 Final Frontier Pittway I, Inc. Illinois 100 Final Frontier Pittway II, Inc. Illinois 100 Pittway Corporation of Canada Canada 100 Pittway Fire Safety, Inc. Delaware 100 Ademco de Juarez, S.A. de C.V. Mexico 100 45 EXHIBIT 21 PITTWAY CORPORATION DECEMBER 31, 1993 FORM 10- K Approximate Percentage of Voting Securities State or Owned by Country of Immediate Name of Company Incorporation Parent Pittway Corporation (continued) Ademco Italia S.p.A. Italy 100 Ademco (Hong Kong) Limited Hong Kong 100 Pittway Foreign Sales Corp. U.S. Virgin Islands 100 Pittway International, Ltd. Delaware 100 Ademco Sicherheitseinrichtungen GmbH Germany 100 Notifier Espana, S.A. Spain 100 Notifier (Benelux) S.A. Belgium 100 Notifier Deutschland, GmbH Germany 100 Pittway UK Limited England 100 Notifier Limited England 100 System Sensor Limited England 100 Ademco-Sontrix Limited England 100 Ademco-Sontrix (Australia) Pty. Ltd. Australia 100 Ademco-Sontrix Espana, S.A. Spain 100 Pittway Electronics Italy S.r.l. Italy 100 Notifier Italia S.r.l. Italy 100 Pittway Tecnologica S.p.A. Italy 100 Notes: All of the above subsidiaries are included in the Registrant's consolidated financial statements. Parent-subsidiary or affiliate relationships are shown by marginal indentation. 46 EX-23 5 EXHIBIT 23 EXHIBIT 23 PITTWAY CORPORATION DECEMBER 31, 1993 FORM 10-K CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-33312 and 33-35168) of Pittway Corporation of our report dated February 23, 1994 appearing on page 32 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 16 of this Form 10-K. /s/Price Waterhouse PRICE WATERHOUSE Chicago, Illinois March 25, 1994 47 -----END PRIVACY-ENHANCED MESSAGE-----