Item 1. Business
(a) General Development of Business
Pittway Corporation ("Pittway" or "Registrant"), was incorporated under Delaware law in 1925. Pittway and its subsidiaries are referred to herein collectively as the "Company".
The Company operates in two reportable industry segments: alarm and other security products, and publishing.
In December 1997, the Company announced that its Penton Publishing subsidiary ("Penton") had signed a letter of intent to acquire another business media company, contingent on the Company spinning off Penton to the Company's stockholders in a tax-free distribution. The acquisition and related spin-off are subject to the execution of a definitive combination agreement and receipt of a favorable ruling on the spin-off from the Internal Revenue Service, among other conditions. At such time as the principal conditions are satisfied, subsequent financial disclosures will reflect Penton as a discontinued operation, including restatement of prior periods. The Company expects the transaction will be completed in the second or third quarter of 1998. See information set forth under the heading "Supplemental Information" appearing on pages 40-41 of the Company's 1997 Annual Report to Stockholders which is incorporated herein by reference.
Acquisitions and dispositions of businesses by the Company, other than the discontinued operations discussed below, in each of the five years ended December 31, 1997 were not significant to the Company's sales or results of operations.
In September 1997, Cylink Corporation ("Cylink"), an affiliate of the Company (see "Real Estate and Other Ventures" in Item 1(c), below), acquired Algorithmic Research, an information security company, for cash and Cylink stock totaling $76.3 million. The Company increased the carrying value of its investment in Cylink by $6.4 million and recorded a $4.0 million after-tax gain, or $.19 per share (basic and diluted), as a result of the stock issued in the acquisition and reduced the carrying value of its investment in Cylink by $18.9 million and recorded an $11.8 million after-tax expense, or $.56 per share (basic and diluted), for its equity in Cylink's write-off of "in-process technology" acquired in the transaction. In February 1996, Cylink made an initial public offering of its common stock. The Company increased its carrying value of this investment to reflect the increase in the Company's equity in Cylink's net book value. An after-tax gain of $14.4 million, or $.69 per share ($.68 diluted) was recorded on the increase in Cylink's equity.
In February 1996, the Company sold 13% of its investment in United States Satellite Broadcasting Company, Inc. ("USSB") as part of an initial public offering of USSB common stock. The sale resulted in an after-tax gain of $8.1 million or $.39 per share (basic and diluted). See "Real Estate and Other Ventures" in Item 1(c), below.
During the first half of 1994, the Company sold its 16.67% ownership in First Alert, Inc., a manufacturer of residential fire protection products, as part of an initial public offering of that company's common stock. The sale resulted in an after-tax gain of $11.8 million or $.57 per share.
In April 1993, the Company distributed its investment in AptarGroup, Inc. (formerly known as the Seaquist Division packaging group) to stockholders in a tax-free spin-off. AptarGroup, Inc. is a manufacturer of aerosol valves, dispensing pumps and closures which are sold to packagers and marketers in the personal care, fragrance/cosmetics, pharmaceutical, household products and food industries.
(b) Financial Information about Industry Segments
Financial information relating to industry segments for each of the three years ended December 31, 1997 is set forth in Note 14 ("Segment Information") to the Consolidated Financial Statements contained in the 1997 Annual Report to Stockholders, pages 36-37, which Note is incorporated herein by reference.
(c) Narrative Description of Business
The principal operations, products and services rendered by the Company:
Alarm and Other Security Products Segment
This segment involves the design, manufacture and sale of an extensive line of burglar and commercial fire alarm equipment, closed circuit television, access control and other alarm components and systems as well as the distribution of alarm, fire, security and other electrical products manufactured by other companies. By offering a broad line of alarm products needed for security systems, the Company provides a full range of services to independent alarm dealers and installers which range in size from one person operations to the largest national alarm service companies. In every major domestic market area, quick delivery is provided through the Company's computerized regional warehouses and convenience center outlets (ADI), authorized distributors and dealers. ADI is the largest wholesale distributor of security, low voltage and voice and data cabling products in North America specializing in burglar alarm, fire alarm, CCTV, access control, intercom, central vacuum and sound & communications sales. Various products sold through ADI are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under the Company's Ademco brand name, others are resold under brand names owned by its suppliers. In the Canadian, Mexican and overseas markets, alarm and other security products are sold through the Company's distribution centers, authorized distributors and sales agents. The Company also offers AlarmNet to alarm companies in major U.S. markets. AlarmNet is a wireless cellular-like communication network designed to transmit alarm signals by radio instead of over telephone lines. The Company also offers First Alert Professional, a brand name marketing program to independent burglar alarm dealers.
Commercial fire detectors and fire controls are sold through the Company's regional warehouses, electrical and building supply wholesalers and alarm and fire safety distributors. These products are primarily sold under the Company's Fire-Lite, Notifier, Fire Control Instruments and System Sensor brand names.
Raw materials essential to the Company's businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available from more than one supplier and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the Company's products can be obtained only from one or two suppliers, the shortage of which could adversely impact production of alarm equipment and commercial fire detectors by the Company. The Company believes that the loss of any other single source of supply would not have a material adverse effect on its overall business.
Through its NESCO subsidiary the Company offers a wide variety of services to independent distributors of its fire alarm systems products, including assistance with system design, bonding, technical help, training, marketing and administrative support.
Sales and marketing methods common to this industry segment include communications through the circulation of catalogs and merchandising bulletins, direct mail campaigns, and national and local advertising in trade publications. The Company's principal advantages in marketing are its reputation, broad product line, high quality products, extensive integrated distribution network, efficient customer service, competitive prices and brand names.
Within the industry there is competition from large and small manufacturers in both the domestic and foreign markets. While competitors will continue to introduce new products similar to those sold by the Company, the Company believes that its research and development efforts and the breadth and quality of its distribution network will permit it to remain competitive.
Publishing Segment
This segment is a publisher of 33 national business and trade publications. The Company's publications serve both specific industries and broad functional markets which include specialized manufacturing, service industries, technical and professional fields and general management. Most publications are distributed on a monthly basis with several others distributed on a biweekly, annual or biennial frequency. The publications are generally distributed free through controlled circulation. The principal source of revenue is from the sale of advertising space within the magazines. A variety of magazine-related products and services are also offered including: directories, trade shows and conferences; readership lists, specialty publications, custom publishing, research and telemarketing operations, CD-ROMs, on-line computer services, and direct-response card mailer service. Other facets of the business include: the operation of a printing plant for the printing and production of most of the Company's publications and those of other publishers; a national direct mail marketing organization serving the pharmaceutical and business services markets and providing a complete line of services, from creative and printing to mailing service capabilities.
Within the publishing and marketing communications fields, competition exists in the form of other publications and media communication businesses. Reductions in advertising schedules by domestic industrial companies due to economic and other competitive pressures directly impacts the display advertising levels of the Company's publishing segment. The Company competes with one or more other magazines for advertising revenue in each of its magazine titles. The Company's principal sales advantages include relevant
editorial content and innovative marketing complemented by specialized multi-magazine supplements. The Company believes that its competitive position also benefits from improvements in productivity and from cost control programs. The Company places great emphasis on providing quality products and services to its customers.
Real Estate and Other Ventures
The Company is involved in the marketing, sale and development of land near Tampa, Florida for residential and commercial use. Saddlebrook East Village, a 2,000 acre parcel of land, is approved for development as a master planned community. A major shopping mall developer signed a contract to acquire 250 acres of this land. If the land purchase is closed (the developer could take up to 24 months to complete the planning and permitting process), a sizeable regional mall will be built on the site. Another developer has signed a letter of intent to acquire the adjacent land, which it wants to use for residential development. The West Village, formerly called Saddlebrook Corporate Center, a nearby 450 acre parcel, originally planned as a business park for mixed use development, was partially converted to a residential community due to the demand for residential housing. Principal competition comes from other residential and commercial developments in Florida.
The Company owns 8,606,085 shares (29.6% of the shares outstanding) of Cylink Corporation (Cylink) a leading supplier of network information security products that enable the secure transmission of data over private local area networks and wide area networks and public packet switched networks, such as the Internet. Cylink further offers a line of spread spectrum radio products that are used for wireless voice and data communications. On March 13, 1998, Cylink announced a pending sale of this wireless business for $60.5 million. Cylink acquired Algorithmic Research, an information security company, in September 1997. The Company also owns 3,781,375 shares (4.2% of the shares outstanding) of United States Satellite Broadcasting Company Inc. (USSB), a company which provides subscription television programming via high-power direct broadcast satellite to households throughout the Continental U.S. Both of these companies made initial public offerings of their respective stocks in February of 1996. Additionally, the Company has approximately an 8.5% interest in a joint venture that develops wireless signaling equipment for communication between fixed points and a 10% interest in a company that enhances data transmission over cellular telephone networks.
The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties located primarily in Chicago. See Item 7 of this Form 10-K. The Company also has invested, as a 5% limited partner, in six rental apartment complexes located in Chicago, Indianapolis, San Jose and three near Washington, D.C. which provide certain tax advantages. The Company is an equity participant in leveraged leases of an aircraft and communications satellite transponders.
Other Information Patents and Trademarks -
While the Company owns or is licensed under a number of patents which are cumulatively important to each of its business units, the loss of any single patent or group of patents would not have a material adverse effect on the Company's overall business.
Products manufactured by the Company are sold primarily under its own trademarks and tradenames. Some products purchased and resold by the Company's alarm and security products distribution business are sold under the Company's tradenames while others are sold under tradenames owned by its suppliers.
Customers -
Neither of the Company's industry segments is dependent upon a single customer or a few customers. In 1997, the Alarm and Other Security Products Segment developed significant national account business from several major companies in the U.S. residential alarm market. The loss of any one of these customers would not have a material adverse effect on the Company's results of operations.
Research and Development -
The Company is engaged in programs to develop and improve products as well as develop new and improved manufacturing methods. Expenditures for Company sponsored research and development activities in the alarm and other security products segment were $24.3 million in 1997, $18.1 million in 1996 and $16.6 million in 1995. These costs, which are expensed in the Company's consolidated income statement, were associated with a number of products in varying stages of development, none of which represents a significant item of cost or is projected to be a significant addition to the Company's line of products.
Product Liability -
Due to the nature of the fire and security alarm business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. This exposure was reduced by the sale of First Alert/BRK Electronics in 1992. It is likely, due to the present litigious atmosphere in the United States, that additional claims and lawsuits will be filed in future years. The Company believes that it maintains sufficient insurance to cover this exposure.
Environmental Matters -
The Company anticipates that compliance with various laws and regulations relating to protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position.
Employees -
At December 31, 1997, there were approximately 7,800 persons employed by the Company, including 5,700 employed in the United States. Approximately 1,400 of the employees working in the United States were represented by labor unions. The Company considers its relations with its employees and the unions representing its employees to be good.
Risks and Uncertainties -
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual results in 1998 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.
Risks associated with acquisition strategy - The Company's strategy includes the acquisition of businesses that complement or augment the Company's existing products and services. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approvals, including antitrust approvals. Any acquisitions completed by the Company may be made at substantial premiums over the fair value of the net assets of the acquired companies. There can be no assurance that the Company will be able to complete future acquisitions or that the Company will be able to successfully integrate any acquired businesses. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms which are not favorable to the Company and, in the case of equity financing, may result in dilution to the Company's stockholders.
Competition - The Company encounters and expects to continue to encounter significant competition in the sale of its products and services. The Company's competitors include a number of large multinational corporations, some of which may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. Competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. There can be no assurance that the Company's current products, products under development, or ability to develop new technologies will be sufficient to enable it to compete effectively.
Risks associated with international operations - International sales account for 14% of the Company's 1997 consolidated revenues and the Company intends to continue to expand its presence in international markets. International revenues are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by the Company in foreign markets where payment for the Company's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse impact on the Company's business and results of operations.
Rapid and significant technological change and new products - The markets for the Company's products are characterized by rapid and significant technological change, evolving industry standards and frequent new product introductions and enhancements. Many of the Company's products and products under development are technologically innovative, and require significant planning, design, development and testing, at the technological, product and manufacturing process levels. These activities can require significant commitments of capital, personnel and other resources by the Company.
In addition, products that are competitive in the Company's markets are frequently characterized by rapid and significant technological change due to industry standards that may change and by the introduction of new products and technologies that render existing products and technologies uncompetitive or obsolete. There can be no assurance that any of the products currently being developed by the Company, or those to be developed in the future, will be technologically feasible or accepted by the marketplace, that any such development will be completed in any particular time frame, or that the Company's products or proprietary technologies will not become uncompetitive or obsolete.
Possible adverse effect from changes in governmental regulations - The Company competes in several markets which involve compliance by its customers with Federal, state, local and foreign regulations. The Company develops, configures and markets its products to meet customer needs created by such regulations. These regulations may be amended in response to new scientific evidence or political or economic considerations. Any significant change in regulations could adversely affect demand for the Company's products in regulated markets.
Risks associated with dependence on capital spending policies - The level of capital spending by users of the Company's products can have a significant effect on the Company's revenues. Such spending is based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of equipment, public policy, and the effects of different economic cycles. Any decrease in such spending could have a material adverse effect on the Company's business and results of operations.
Dependence on patents and proprietary rights - The Company seeks to obtain patents and protect trade secrets for significant new technologies, products and processes because of the length of time and expense associated with bringing new products through the development process and to the marketplace. The Company's success depends in part on its ability to develop patentable products and obtain and enforce patent protection for its products both in the U.S. and in other countries. The Company owns numerous U.S. and foreign patents, and intends to file additional applications for patents as appropriate to cover its products. No assurance can be given that patents will issue from any pending or future patent applications owned by or licensed to the Company or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any issued patents owned by or licensed to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. The Company could incur substantial costs in defending itself in suits brought against it or in suits in which the Company may assert its patent rights against others. If the outcome of any such litigation is unfavorable to the Company, the Company's business and results of operations could be materially adversely affected.
The Company relies on trade secrets and proprietary know-how which it seeks to protect, in part, by confidentiality agreements with its collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors.
Risks associated with potential spin-off - In December 1997, the Company announced its Penton Publishing subsidiary had signed a letter of intent to acquire another business media company, contingent on the Company spinning off Penton to the Company's stockholders in a tax-free distribution. The acquisition and related spin-off are subject to the execution of a definitive combination agreement and receipt of a favorable ruling on the spin-off from the Internal Revenue Service, among other conditions. There can be no assurance that the acquisition will be completed, that the Company will receive a favorable ruling from the Internal Revenue Service or that any of the other conditions will be met. (Also see "Risks associated with acquisition strategy," above.)
Pending litigation - The Company is a party in a lawsuit which arose out of the development of a resort and a portion of the adjoining residential properties owned and developed by the Company as well as a patent infringement lawsuit (see Item 3). The Company is also, in the normal course of business, subject to a number of lawsuits and claims, both actual and potential in nature. If the outcome of any such litigation is unfavorable to the Company, the Company's business and operations could be materially adversely affected.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations and export sales is set forth in Note 14 ("Segment Information") to the Consolidated Financial Statements contained in the 1997 Annual Report to Stockholders, pages 36-37, which Note is incorporated herein by reference.
Item 2.
Item 2. Properties
The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- Syosset, New York (1) N/A 310,000 Syosset, New York (2) 2014 10,000 Syosset, New York (3) 2002 14,000 Syosset, New York (1) 1999 6,000 Syosset, New York (1) 2000 33,000 Syosset, New York (2) 1998 34,000 Torrance, California (1) 1998 48,000 Miami, Florida (2) 2002 16,000 El Paso, Texas (2) 2001 19,000 El Paso, Texas (2) 2002 97,000 Louisville, Kentucky (3) 2002 7,000 Louisville, Kentucky (3) 1998 4,000 Jeffersontown, Kentucky (2) 2002 7,000 Raleigh, North Carolina (1) 1998 8,000 Northford, Connecticut (1) N/A 252,000 Lisle, Illinois (3) 2002 5,000 St. Charles, Illinois (1) 2003 158,000 St. Charles, Illinois (1) 2004 100,000 West Chicago, Illinois (1) 1998 21,000 Norcross, Georgia (3) 1998 6,000
Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- (continued) Waltham, Massachusetts (1) 2002 50,000 Melbourne, Australia (2) 1998 5,000 Sydney, Australia (2) 1998 25,000 Alleur, Belgium (2) 2000 6,000 Toronto, Canada (2) 1998 7,000 Concord, Ontario, Canada (2) 2000 11,000 Lichfield Staffs, England (4) 2014 20,000 Burgess Hill, England (4) N/A 60,000 Tyne & Wear, England (1) 1999 7,000 East Kilbride, Scotland (1) N/A 15,000 Hilden, Germany (2) 2000 8,000 Purmerend, The Netherlands (2) N/A 25,000 Xi'an, China		 (1) N/A 20,000 Tsuen Wan, NT, Hong Kong (2) 1999 8,000 Milan, Italy (1) N/A 14,000 Milan, Italy (2) 2001 10,000 Trieste, Italy (1) N/A 40,000 Arezzo, Italy (1) 2001 5,000 Juarez, Mexico (4) 2008 71,000 Juarez, Mexico (4) 2004 83,000 Juarez, Mexico (4) 2007 148,000 Madrid, Spain (2) 2000 11,000 Barcelona, Spain (2) 2005 6,000 Distribution Centers Superhub Locations: Atlanta, Georgia (2) 2007 125,000 Reno, Nevada (2) 2008 323,000 Louisville, Kentucky (2) 2007 190,000 Pine Brook, New Jersey (2) 1998 37,000 Hub Locations: Boston, Massachusetts (2) 1999 14,000 Milford, Connecticut (2) 2008 18,000 Los Angeles, California (2) 1999 30,000 Chicago, Illinois (2) 2005 40,000 Clearwater, Florida (2) 2004 27,000 Memphis, Tennessee (2) 2006 15,000 Richmond, Virginia (2) 2004 14,000 Phoenix, Arizona (2) 2004 15,000 Dallas, Texas (2) 2008 76,000 Denver, Colorado (2) 1999 11,000 Detroit, Michigan (2) 2000 15,000 New Orleans, Louisiana (2) 2007 10,000 Seattle, Washington (2) 2006 25,000 Toronto, Canada (2) 2007 26,000 Montreal, Canada (2) 2000 11,000
Publishing Segment- Cleveland, Ohio (3) 2000 179,000 Cleveland, Ohio (2) 2001 28,000 Berea, Ohio (5) N/A 100,000 Chicago, Illinois (3) 2003 9,000 New York, New York (3) 2000 10,000
Principal Lease Approximate Location Use Expiration Square Feet Publishing Segment (continued) Dunedin, Florida (3) 2000 13,000 Tampa, Florida (2) 1999 19,000 Tampa, Florida (5) 2000 15,000 Hasbrouck Heights, New Jersey (3) 2001 22,000
General Corporate- Chicago, Illinois (3) 2001 12,000
Other properties in the alarm and other security products segment include 92 full-line convenience centers, in addition to those hub locations listed above, which function as retail-like sales distribution outlets to serve the North American market. These 92 centers are under leases expiring through 2008 and range in size from 1,200 to 10,000 square feet. Other properties in the publishing segment include 14 sales and/or editorial offices under leases expiring through 2003 located in major cities throughout the United States and one in the United Kingdom. The Company believes the above facilities are adequate for its present needs.
(1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing (5) Printing N/A Not applicable - facilities are owned by the Company
Item 3.
Item 3. Legal Proceedings
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and developed by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83-1860) alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's
governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit.
At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the grounds that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs appealed the trial court's decision granting summary judgment. In August 1996, the appellate court affirmed all but three issues in the trial court's summary judgment order in favor of Saddlebrook. A hearing took place on May 15, 1997 to determine the scope of the three issues remaining for retrial. The trial court must rule on the scope before the retrial can take place, which is expected to begin in 1998.
Until October 14, 1989, Saddlebrook disputed responsibility for ultimate liability and costs (including costs of corrective action). On that date, the Company and Saddlebrook entered into an agreement with regard to such matters. The agreement, as amended and restated on July 16, 1993, provides for the Company and Saddlebrook to split equally the costs of the defense of the litigation and the costs of certain related litigation and proceedings, the costs of the ultimate judgment, if any, and the costs of any mandated remedial work. Subject to certain conditions, the agreement permits Saddlebrook to obtain subordinated loans from the Company to enable Saddlebrook to pay its one-half of the costs of the latter two items. No loans have been made to date.
The Company in the normal course of business is subject to a number of lawsuits and claims, both actual and potential in nature. While management believes that the ultimate outcome of the aforementioned lawsuit and resolution of other existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the magnitude of financial impact of claims and lawsuits which may be filed in the future.
On August 16, 1995, Interactive Technologies, Inc. ("ITI" - plaintiff) commenced a lawsuit in U.S. District Court against the Company alleging patent infringement. The plaintiff claimed the Company infringed on their patent by making, using and selling certain security system products in the United States, and that the infringement was willful. Plaintiff initially sought unspecified damages, and an injunction. The Company denied infringement, maintaining the plaintiff's patent was invalid, as well as unenforceable because the plaintiff committed inequitable conduct before the Patent Office when applying for the patent. During discovery, the plaintiff informed the Company it was seeking damages measured by its lost profits or not less than
a reasonable royalty on sales of the Company. Fact discovery in the action closed on January 17, 1997. The Court conducted a Markman hearing in October 1997 to construe the patent claims asserted by plaintiff and issued its Order interpreting the claims on October 24, 1997. The Company moved for summary judgment of non-infringement. On December 2, 1997 the Court issued its Order granting partial summary judgment that the Company's products did not literally infringe the patent claims, and denying summary judgment of no infringement. Jury trial started on January 7, 1998. During the trial, the plaintiff indicated it was seeking lost profits and royalty damages of up to $66.8 million. The plaintiff also asserted trebling of damages, if awarded, based upon alleged willful infringement.
Recent Events - ITI Litigation Update
On March 9, 1998 the jury handed down a verdict against the Company awarding damages of approximately $36 million. The jury did not award trebling of damages because they found that the Company did not willfully infringe. Although the verdict has been handed down, judgment on the jury's verdict is not expected to be entered by the court until April 8, 1998. The Company intends to file post-trial motions and appeal if the motions are unsuccessful. The Company believes it has meritorious defenses in such post-trial motions and appeal. The ultimate outcome of this matter is uncertain but will result in significant damages should the Company lose the appeal.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity and Related Stock- holder Matters
The information set forth under the heading "Market Prices, Security Holders and Dividend Information" appearing on page 41 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
The information set forth under the heading "Supplemental Information -Five Year Summary of Selected Financial Data" appearing on page 40 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under the heading "Management's Discussion and Analysis" appearing on pages 42-43 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto, together with the report thereon of Price Waterhouse LLP dated February 18, 1998, appearing on pages 23-38 of the Company's 1997 Annual Report to Stockholders are incorporated herein by reference. The Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto incorporated by reference in the Form 10-K should be read in conjunction with information contained in "Recent Events - ITI Litigation Update" included in Item 3 herein and the Form 8-K filed with the Securities and Exchange Commission on March 10, 1998.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Information required to be furnished in this part of the Form 10-K has been omitted because the Registrant will file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than April 30, 1998.
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the headings "Nominees for Election by the Holders of Class A Stock", "Nominees for Election by the Holders of Common Stock", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information set forth under the headings "Compensation Committee Interlocks and Insider Participation", "Compensation", "Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information set forth under the headings "Certain Transactions" (and the information set forth under the heading "Compensation Committee Interlocks and Insider Participation" which is cross-referenced under the heading "Certain Transactions") in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 7, 1998 is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements and financial statement schedule filed as a part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule on page 18 of this Form 10-K and are incorporated herein by reference.
Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 21-23 of this Form 10-K, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit to this report pursuant to Item 14 (c) of Form 10-K is so identified on the Index to Exhibits.
(b) On December 1, 1997, the Registrant filed a report on Form 8-K announcing that its Penton Publishing subsidiary had signed letters of intent to acquire three separate business media companies. One of the acquisitions is contingent on the Registrant spinning off Penton to the Registrant's shareholders in a tax-free distribution which, in turn, is subject to the receipt of a favorable ruling from the Internal Revenue Service.
On March 10, 1998, the Registrant filed a report on Form 8-K announcing that a jury in the U.S. District Court in St. Paul, Minnesota handed down a verdict the previous day in ITI's patent suit against the Registrant relating to ITI's U.S. Patent 4,855,713. The patent relates to a method of entering wireless transmitter identity codes into security system control panels. The jury verdict awarded damages of approximately $36 million. The Registrant intends to appeal the verdict.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PITTWAY CORPORATION (Registrant)
BY /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President, Treasurer And Chief Financial Officer
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 23, 1998.
/s/ Neison Harris /s/ E. David Coolidge III Neison Harris, Director and E. David Coolidge III, Director Chairman of the Board
/s/King Harris /s/ Anthony Downs King Harris, Director, President Anthony Downs, Director and Chief Executive Officer
/s/ Paul R. Gauvreau /s/ Leo A. Guthart Paul R. Gauvreau, Principal Leo A. Guthart, Director Financial and Accounting Officer
/s/ Eugene L. Barnett /s/ Irving B. Harris Eugene L. Barnett, Director Irving B. Harris, Director
/s/ Sidney Barrows /s/ William W. Harris Sidney Barrows, Director William W. Harris, Director
/s/ Fred Conforti /s/ Jerome Kahn, Jr. Fred Conforti, Director Jerome Kahn, Jr., Director
PITTWAY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as a part of this report:
Page reference in Annual Report to Stockholders
Financial Statements required by Item 8 of this Form:
Consolidated Balance Sheet at December 31, 1997 and 1996........................................ 24-25 For each of the three years ended December 31, 1997 - Consolidated Statement of Income..................... 23 Consolidated Statement of Cash Flows................. 26 Consolidated Statement of Stockholders' Equity....... 27 Summary of Accounting Policies and Notes to Consolidated Financial Statements.................... 28-38 Report of Independent Accountants...................... 39
Page reference in Form 10-K
Financial Statement Schedule required by Article 12 of Regulation S-X:
Report of Independent Accountants on Financial Statement Schedule................................... 19 Consolidated Financial Statement Schedule II Valuation and Qualifying Accounts.................... 20
The consolidated financial statements of Pittway Corporation, listed in the above index together with the Report of Independent Accountants, which are included in the Company's 1997 Annual Report to Stockholders, are incorporated herein by reference.
All other schedules have been omitted because the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. Summarized financial information for the limited real estate partnerships and other ventures is omitted because, when considered in the aggregate, they do not constitute a significant subsidiary.
With the exception of the aforementioned information and information incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7 and 8) of this Form 10-K, the Company's 1997 Annual Report to Stockholders is not deemed to be filed as part of this report.
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors of Pittway Corporation
Our audits of the consolidated financial statements referred to in our report dated February 18, 1998 appearing on page 39 of the 1997 Annual Report to Stockholders of Pittway Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in the index on page 18 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP Price Waterhouse LLP
Chicago, Illinois February 18, 1998
INDEX TO EXHIBITS
Sequential Number and Description of Exhibit Page Number***
3.1 Restated Certificate of Incorporation of Registrant, as amended (incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of Registrant dated December 28, 1989 (incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
3.3 Certificate of Amendment to Restated Certificate of Incorporation dated May 9, 1996 (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
3.4 Bylaws of Registrant, as amended (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).
4. Composite Conformed Copy of separate Note Purchase Agreements Dated as of December 15, 1995, each, between the Registrant and one of Metropolitan Life Insurance Company, Metropolitan Property and Casualty Insurance Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wausau, and West Coast Life Insurance Company without exhibits(incorporated by reference to Exhibit 4.0 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
10.1 Pittway Corporation 1990 Stock Awards Plan, as amended (incorporated by reference to Exhibit 4.4 to the Registrant's Form S-8 Registration Statement No. 33 - 54753 filed with the Commission on July 27, 1994).
INDEX TO EXHIBITS - cont'd.
Sequential Number and Description of Exhibit Page Number***
10.2 Pittway Corporation 1996 Director Stock Option Plan (incorporated by reference to Exhibit 4 of Registrant's Form S-8 Registration Statement No. 333 - 12615 filed with the Commission on September 25, 1996). 10.3 Employment Agreement with King Harris dated as of January 1, 1996. (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).**
10.4 Employment Agreement with Leo A. Guthart dated as of January 1, 1996. (incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).**
10.5 Employment Agreement with Thomas L. Kemp dated as of July 25, 1996. (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).**
10.6 Employment Agreement with Daniel J. Ramella dated as of January 1, 1997. (incorporated by reference to Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q or the quarter ended March 31, 1997).**
13. 1997 Annual Report to Stockholders.*
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended December 31, 1997 (submitted only in electronic format).
27.2 Restated Financial Data Schedule for the years ended December 31, 1995 and 1996, and the first three quarters of 1996 (submitted only in electronic format).
INDEX TO EXHIBITS - cont'd.
Sequential Number and Description of Exhibit Page Number***
27.3 Restated Financial Data Schedule for the first three quarters of 1997 (submitted only in electronic format).
* Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Form 10-K.
** This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of Form 10-K.
*** This information appears only in the manually signed original of this Form 10-K.