<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
PITTWAY CORPORATION
(NAME OF SUBJECT COMPANY)
------------------------
PITTWAY CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK OF THE PAR VALUE OF $1.00 PER SHARE
CLASS A STOCK OF THE PAR VALUE OF $1.00 PER SHARE
(TITLE OF CLASS OF SECURITIES)
------------------------
725790 10 9
725790 20 8
(CUSIP NUMBERS OF CLASSES OF SECURITIES)
------------------------
KING HARRIS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
200 SOUTH WACKER DRIVE, SUITE 700
CHICAGO, ILLINOIS 60606-5802
(312) 831-1070
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING
STATEMENT)
------------------------
WITH A COPY TO:
BRIAN D. HOGAN, ESQ.
KIRKLAND & ELLIS
200 EAST RANDOLPH DRIVE
CHICAGO, ILLINOIS 60601
(312)861-2000
________________________________________________________________________________
<PAGE>
ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Pittway Corporation, a Delaware
corporation (the 'Company'). The address of the principal executive offices of
the Company is 200 South Wacker Drive, Suite 700, Chicago, Illinois 60606-5802.
The titles of the classes of equity securities to which this
Solicitation/Recommendation Statement on Schedule 14D-9 (this 'Schedule 14D-9'
or 'Statement') relates are the Common Stock of the par value of $1.00 per share
of the Company (the 'Common Stock') and the Class A Stock of the par value of
$1.00 per share of the Company (the 'Class A Stock,' and together with the
Common Stock, the 'Shares').
ITEM 2. TENDER OFFER OF THE BIDDER.
This Statement relates to the cash tender offer (the 'Offer') described in
the Tender Offer Statement on Schedule 14D-1, dated December 23, 1999 (as
amended or supplemented, the 'Schedule 14D-1'), filed by Honeywell International
Inc., a Delaware corporation ('Parent'), and HII-2 Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Parent (the 'Purchaser'), with the
Securities and Exchange Commission (the 'SEC'), to purchase all of the issued
and outstanding Shares at $45.50 per Share (such amount, or any greater amount
per Share paid pursuant to the Offer, hereinafter referred to as the 'Offer
Consideration'), net to the seller in cash, without interest, upon the terms and
subject to the conditions set forth in the Purchaser's Offer to Purchase dated
December 23, 1999 (the 'Offer to Purchase') and in the related Letter of
Transmittal (the Schedule 14D-1, the Offer to Purchase and the Letter of
Transmittal, together with any amendments or supplements thereto, constitute the
'Offer Documents').
The Offer is being made in accordance with an Agreement and Plan of Merger,
dated as of December 20, 1999 (the 'Merger Agreement'), by and among the
Company, Parent and the Purchaser. Pursuant to the Merger Agreement, following
completion of the Offer and satisfaction or waiver, if permissible, of certain
conditions, the Purchaser will be merged with and into the Company (the
'Merger') and the Company will become a wholly-owned subsidiary of Parent (the
'Surviving Corporation'). At the effective time of the Merger (the 'Effective
Time'), each Share issued and outstanding immediately prior to the Effective
Time (other than Shares held by Parent or the Purchaser or any other wholly
owned subsidiary of Parent, Shares owned by the Company as treasury stock, and
Shares held by any stockholders of the Company who have properly perfected their
appraisal rights under Delaware law) will be converted into the right to receive
the Offer Consideration without interest thereon. The Merger Agreement is
summarized in Item 3(b)(ii) of this Schedule 14D-9.
The Offer Documents indicate that the principal executive offices of Parent
and the Purchaser are located at 101 Columbia Road, Morris Township, New Jersey
07962.
ITEM 3. IDENTITY AND BACKGROUND.
(a) NAME AND ADDRESS OF THE COMPANY.
The name and address of the Company, which is the person filing this
Schedule 14D-9, are set forth in Item 1 above.
(b)(i) ARRANGEMENTS WITH THE COMPANY'S EXECUTIVE OFFICES, DIRECTORS OR
AFFILIATES.
Certain contracts, agreements, arrangements or undertakings between the
Company and its affiliates and certain of its executive officers, directors or
affiliates are described in the Company's Proxy Statement, dated April 5, 1999,
relating to its annual meeting of stockholders (the 'Proxy Statement') under the
headings 'Security Ownership of Certain Beneficial Owners and Management,'
'Compensation,' and 'Compensation Committee Report on Executive Compensation.' A
copy of the applicable portions of the Proxy Statement has been filed as Exhibit
99.29 to this Schedule 14D-9 and such portions of the Proxy Statement are
incorporated herein by reference. Additional information relating to such
contracts, agreements, arrangements or undertakings is set forth in the
Company's Information Statement pursuant to Section 14(f) of the Securities
Exchange Act of 1934, as amended (the
<PAGE>
'Exchange Act') and Rule 14f-1 thereunder (the 'Information Statement') attached
hereto as Schedule I.
In connection with the Merger Agreement, the Harris Family Stockholders,
who beneficially own an aggregate of approximately 52.9% of the outstanding
Common Stock and 18.4% of the outstanding Class A Stock, have entered into the
Stockholders Agreement (see 'Stockholders Agreement' in Item 3(b)(ii) below) and
have also agreed to contribute funds to the Company to fund a portion of certain
bonuses for designated Company employees (see 'Merger Agreement -- Certain
Employment Arrangements' in item 3(b)(ii) below).
Pursuant to the Merger Agreement, Parent has agreed to indemnify Company
stockholders of record at the close of business on July 31, 1998 against certain
tax liabilities. See 'Merger Agreement -- Certain Tax Indemnification' in
Item 3(b)(ii) below. Substantially all of the Harris Family Stockholders and
current directors and executive officers of the Company were Company
stockholders of record at such time.
William Blair & Company, L.L.C., of which E. David Coolidge III, a director
of the Company, is the chief executive officer, has served as financial advisor
to the Company in connection with the transactions contemplated by the Merger
Agreement and has received, and may hereafter receive, fees in connection
therewith. See Item 5 below.
Pursuant to the Merger Agreement, Parent has agreed to cause the Company or
any successor to indemnify, defend and hold harmless the present and former
directors, officers and employees of the Company and its subsidiaries with
respect to matters occurring at or prior to the Effective Time to the full
extent permitted under Delaware law and, subject to certain limitations, to
maintain the Company's existing officers' and directors' liability insurance or
substantially similar insurance. See 'Merger Agreement -- Indemnification and
Insurance' in Item 3(b)(ii) below.
Pursuant to the Merger Agreement, certain Parent options are to be granted,
and certain bonuses are to become or potentially become payable, to employees of
the Company (including Messrs. Guthart and Conforti and the employees of the
Company identified as 'significant employees' in the Information Statement under
the heading 'Executive Officers and the Significant Employees of the Company'
(the 'Significant Employees')). See 'Merger Agreement -- Certain Employee
Arrangements' in Item 3(b)(ii) below.
Pursuant to the Merger Agreement, the existing employment relationships
between the Company and King Harris, Paul R. Gauvreau and Edward J. Schwartz are
being revised, contingent upon the occurrence of the Share Purchase Date. See
'Merger Agreement -- Certain Employee Arrangements' in Item 3(b)(ii) below. In
addition, such existing employment agreements, the existing employment agreement
between the Company and Leo A. Guthart and the existing employment agreements
with the Significant Employees will be amended effective at the Share Purchase
Date in two respects: (i) to eliminate a provision permitting the employer to
make adjustments to the employee's duties, responsibility and authority, and
compensation, in the event there is a significant reduction in the level of the
business to which his duties thereunder relate or if all or a significant part
of such business is disposed of; and (ii) to include a reduction in yearly total
compensation opportunity offered for reasonable performance as an event
constituting a basis on which the employee is permitted to terminate his
employment and continue to be paid for the remainder of the then scheduled
employment term the salary that would have been paid but for such termination.
See 'Merger Agreement -- Certain Employee Arrangements' in Item 3(b)(ii) below.
Pursuant to the Merger Agreement, promptly following the commencement of
the Offer each holder of an outstanding Company option, performance shares award
or bonus shares award will be given the opportunity to surrender a portion
thereof, effective immediately following the Share Purchase Date, in return for
a cash payment. See 'Merger Agreement -- Outstanding Options and Other Awards'
in Item 3(b)(ii) below. Such portions would otherwise have been payable in
Class A Stock as they became exercisable or payable over time. The following
Company directors and executive officers and members of the Harris Family have
options or awards affected by such opportunity, as follows:
2
<PAGE>
<TABLE>
<CAPTION>
NAME CASH PAYMENT(1)
- ---- ---------------
<S> <C>
King Harris................................................. $15,802,676
William W. Harris........................................... 291,456
Eugene L. Barnett........................................... 291,456
Robert L. Barrows........................................... 52,481
Fred Conforti............................................... 10,522,048
E. David Coolidge III....................................... 291,456
Anthony Downs............................................... 145,728
Leo A. Guthart.............................................. 9,512,557
Jerome Kahn, Jr............................................. 74,411
John W. McCarter, Jr........................................ 95,700
Paul R. Gauvreau............................................ 2,579,841
Edward J. Schwartz.......................................... 2,385,365
Philip V. McCanna........................................... 733,331
James F. Vondrak............................................ 760,089
William J. Friend........................................... 43,701
</TABLE>
- ------------
(1) Assuming acceptance of the opportunity and no change in the Offer Price.
Pursuant to the Merger Agreement, each holder of an outstanding Company
stock appreciation right will be permitted to exercise such right at any time.
See 'Merger Agreement -- Outstanding Options and Other Awards' in Item 3(b)(ii)
below. Such rights would already have been fully exercisable in February, 2000;
the Company believes the benefit of this change is immaterial.
In connection with the Company's entering into the Merger Agreement, the
Compensation Committee of the Board of Directors of the Company has amended the
outstanding Company bonus shares awards and performance shares awards held by
the Significant Employees to accelerate into 1999 payments of portions thereof
not otherwise then payable, and has amended the outstanding Company options held
by the Significant Employees to permit exercise in 1999 of portions thereof not
otherwise then exercisable and to permit payment of the exercise price for such
portions with unsecured promissory notes rather than cash. Any such note would
be in the amount of the sum of the exercise price plus withholding taxes
applicable to all affected portions, would be due in six months and would bear
interest at a prime rate in effect from time to time. The maximum aggregate
affected portions would relate to 510,109 shares of Class A Stock and the
maximum aggregate amount of the promissory notes would be approximately
$11,700,000.
Article Sixth, Section 2, of the Company's Certificate of Incorporation, as
amended, provides that each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including any action
by or in the right of the Company) by reason of the fact that he or she (i) is
or was a director, officer, employee or agent of the Company or (ii) is or was
serving, at the request of the Company, as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Company to the fullest extent permitted
by law, against all expenses (including attorneys' fees), judgments, fines and
amounts paid or to be paid in settlement actually and reasonably incurred by him
or her in connection with such action, suit or proceeding.
The Company maintains a liability insurance policy which, subject to
various exclusions and deductibles and subject to annual review and certain
rights of the insurer to terminate, covers its directors and officers (and the
Company's indemnification obligations to them) to an aggregate maximum of
$25 million of coverage against claims made during the policy period relating to
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
3
<PAGE>
(ii) ARRANGEMENTS WITH HONEYWELL INTERNATIONAL INC., ITS EXECUTIVE
OFFICERS, DIRECTORS AND AFFILIATES.
MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement.
This summary is not a complete description of the terms and conditions of the
Merger Agreement and is qualified in its entirety by reference to the complete
text of the Merger Agreement, which is filed with the SEC as Exhibit 99.1 to
this Schedule 14D-9 and is incorporated herein by reference. Capitalized terms
not otherwise defined herein shall have the definitions assigned to them in the
Merger Agreement.
The Offer. The Merger Agreement provides that the Purchaser will commence
the Offer and that, upon the terms and subject to prior satisfaction or waiver
(other than the waiver of the Minimum Condition) of the conditions of the Offer,
the Purchaser will purchase all Shares validly tendered pursuant to the Offer.
The Merger Agreement provides that, without the prior written consent of the
Company, the Purchaser shall not (and Parent shall cause the Purchaser not to):
decrease the Offer Consideration or decrease the number of Shares sought
pursuant to the Offer;
extend the expiration date of the Offer beyond the initial Expiration Date
of the Offer, except:
that if, immediately prior to the Expiration Date of the Offer (as it
may be extended), the Shares of each class tendered and not withdrawn
pursuant to the Offer constitute less than 90% of the outstanding Shares
of each class, the Purchaser may extend the Offer for one or more
periods not to exceed seven business days in the aggregate,
notwithstanding that all conditions to the Offer are satisfied as of
such Expiration Date of the Offer; and
that if any condition to the Offer has not been satisfied or waived,
Purchaser may, in its sole discretion, extend the Expiration Date of the
Offer for one or more periods;
amend or waive the Minimum Condition; or
amend any term or other condition of the Offer;
provided, however, that, except as set forth above and subject to applicable
legal requirements, the Purchaser may waive any condition to the Offer other
than the Minimum Condition in its sole discretion and; provided, further, that
the Offer may be extended in connection with an increase in the consideration to
be paid pursuant to the Offer so as to comply with applicable rules and
regulations of the SEC.
The Merger. Pursuant to the Merger Agreement and the Delaware General
Corporations Law (the 'DGCL'), as soon as practicable, but not later than the
second business day, after the consummation of the Offer and satisfaction or
waiver, if permissible, of all conditions to the Merger, and the approval and
adoption of the Merger Agreement by the stockholders of the Company (if required
by applicable law), Purchaser shall be merged with and into the Company and the
Company will be the Surviving Corporation.
The respective obligations of Parent and the Purchaser, on the one hand,
and the Company, on the other hand, to effect the Merger are subject to the
satisfaction on or prior to the Closing Date (as defined in the Merger
Agreement) of each of the following conditions, any and all of which may be
waived in whole or in part, to the extent permitted by applicable law:
the Merger Agreement shall have been approved and adopted by the requisite
vote of the holders of Shares, if required by applicable law, in order to
consummate the Merger;
no statute, rule, order, decree or regulation shall have been enacted or
promulgated by any government authority which prohibits the consummation
of the Merger, and there shall be no order or injunction of a court of
competent jurisdiction in effect precluding consummation of the Merger;
provided, that Parent shall employ its commercially reasonable best
efforts to oppose, contest and resolve such order or injunction;
Parent, the Purchaser or their affiliates shall have purchased Shares
pursuant to the Offer; and
4
<PAGE>
any other material governmental approvals required to be obtained prior to
the consummation of the Merger shall have been obtained; provided, that
Parent shall employ its commercially reasonable best efforts to obtain any
such required approvals.
At the Effective Time of the Merger (i) each issued and outstanding Share
(other than Shares that are owned by the Company as treasury stock, any Shares
owned by Parent, the Purchaser or any other wholly owned subsidiary of Parent,
or any Shares which are held by stockholders exercising appraisal rights under
Delaware law) will be converted into the right to receive the Offer
Consideration (the 'Merger Consideration') and (ii) each issued and outstanding
share of the Purchaser will be converted into one share of common stock of the
Surviving Corporation.
The Company's Board of Directors. The Merger Agreement provides that prior
to the Share Purchase Date, the Company will have taken all action as may be
necessary so that effective immediately after the Share Purchase Date, the size
of the Board of Directors of the Company (the 'Board') will be reduced to eight,
all directors, other than two of the directors (as will be designated by the
Board) will resign and six persons designated by Parent will be elected to fill
the vacancies so created. Following the Share Purchase Date and prior to the
Effective Time, the Board will have at least two directors who are directors on
the date of the Merger Agreement and who are not employed by the Company (the
'Independent Directors'). The Company's obligation to appoint the Purchaser's
designees to the Board is subject to compliance with Section 14(f) of the
Exchange Act and Rule 14f-1 promulgated thereunder. In addition, after the Share
Purchase Date and prior to the Effective Time, the affirmative vote of a
majority of the Independent Directors shall be required to
amend or terminate the Merger Agreement by the Company,
exercise or waive any of the Company's rights, benefits or remedies
thereunder, or
take any other action by the Company Board under or in connection with the
Merger Agreement;
provided, that, if after the Share Purchase Date and prior to the Effective
Time, one of the Independent Directors does not continue to serve for any reason
whatsoever, the other Independent Director will be entitled to designate a
person to fill the vacancy who will be deemed to be one of the Independent
Directors. If after the Share Purchase Date and prior to the Effective Time
there is no Independent Director for any reason, the other directors, pursuant
to the Company's Certificate of Incorporation and the Company's Bylaws, will
designate two persons to fill the vacancies who will not be stockholders,
affiliates or associates of Parent or the Purchaser and they will be deemed to
be Independent Directors. Following the Share Purchase Date and prior to the
Effective Time, neither Parent nor Purchaser will take any action to cause any
Independent Director to be removed other than for cause.
Stockholders Meeting. Pursuant to the Merger Agreement, the Company will,
if required by applicable law in order to consummate the Merger, duly call, give
notice of, convene and hold a special meeting of its stockholders (the 'Special
Meeting') as promptly as practicable following the acceptance for payment and
purchase of Shares by the Purchaser pursuant to the Offer for the purpose of
considering and taking action upon the Merger and the adoption of the Merger
Agreement. The Merger Agreement provides that the Company will, if required by
applicable law in order to consummate the Merger, prepare and file with the SEC
a preliminary proxy or information statement (the 'Proxy Statement') relating to
the Merger and the Merger Agreement and use its best efforts
to obtain and furnish the information required to be included by the SEC
in the Proxy Statement and, after consultation with Parent, to respond
promptly to any comments made by the SEC with respect to the preliminary
Proxy Statement and cause a definitive Proxy Statement to be mailed to its
stockholders, provided that no amendment or supplement to the Proxy
Statement will be made by the Company without consultation with Parent and
its counsel and
to obtain the necessary approvals of the Merger and the Merger Agreement
by its stockholders. If the Purchaser acquires a number of Shares
constituting at least two-thirds of the outstanding votes that may be cast
by the holders of Shares, the Purchaser will have sufficient voting power
to approve the Merger, even if no other stockholder votes in favor of the
Merger.
5
<PAGE>
Parent has agreed that it will vote, or cause to be voted, all of the Shares
owned by it, the Purchaser or any of its other subsidiaries and affiliates
immediately following the Share Purchase Date in favor of the approval of the
Merger and the adoption of the Merger Agreement.
The Merger Agreement provides that in the event that Parent, the Purchaser
or any other subsidiary of Parent acquires at least 90% of the outstanding
Shares of each class, pursuant to the Offer or otherwise, Parent, the Purchaser
and the Company will, at the request of Parent, and subject to the terms of the
Merger Agreement, take all necessary and appropriate action to cause the Merger
to become effective as soon as practicable after such acquisition, without a
meeting of stockholders of the Company, in accordance with Delaware law.
Outstanding Options and Other Awards. Pursuant to the Merger Agreement,
Promptly following commencement of the Offer:
each holder of an outstanding option under the Company's 1990 Stock Awards
Plan, 1996 Director Stock Option Plan or 1998 Director Stock Option Plan
(each an 'Option') will be given the opportunity to surrender to the
Company, effective immediately following the Share Purchase Date, the
portion of the Option which is then vested or which would become vested on
or prior to December 31, 2000 (the 'Vested Option Portion') in return for
a cash payment by the Company equal to the product of
the Offer Price minus the exercise price per Share of the Vested
Option Portion of such Option and
the number of Shares covered by the Vested Option Portion of the
Option.
each holder of a performance shares award then outstanding under the
Company's 1990 Stock Awards Plan (each a 'Performance Shares Award') will
be given the opportunity to surrender to the Company, effective
immediately following the Share Purchase Date, the portion of the
Performance Shares Award which is then vested or which would vest by its
terms on or prior to December 31, 2000 (the 'Vested Performance Shares
Award Portion') in return for a cash payment by the Company, immediately
following the Share Purchase Date, equal to the product of
the Offer Consideration and
the number of shares covered by the Vested Performance Shares Award
Portion of such Performance Shares Award
each holder of a bonus shares award then outstanding under the Company's
1990 Stock Awards Plan (each a 'Bonus Shares Award') may surrender to the
Company, effective immediately following the Share Purchase Date, the
Bonus Shares Award in return for the cash payment by the Company,
immediately following the Share Purchase Date, of an amount equal to the
product of
the Offer Consideration and
the number of shares covered by such Bonus Shares Award; and
each holder of a stock appreciation right then outstanding under the
Company's 1990 Stock Awards Plan (each a 'SAR') may exercise the SAR at
any time.
All of the above payments will be made net of applicable withholding taxes.
Any portion of any Option, Performance Shares Award, Bonus Shares Award or
SAR that is outstanding at the Share Purchase Date and has not been surrendered
for cash payment as described above will continue in accordance with its terms,
except that pursuant to action taken prior to the date of the Merger Agreement
by the Board or the Compensation Committee of the Board, as applicable,
each such portion shall immediately vest and be exercisable or payable in
full in the event of termination of employment by the employer at or after
the Share Purchase Date without cause, death or disability and
from and after the Effective Time each such portion that is outstanding at
the Effective Time will represent the right to acquire, in lieu of each
share of Class A Stock that could be acquired
6
<PAGE>
immediately prior to the Effective Time upon exercise or payment, cash in
the amount of the Offer Price.
Interim Operations. Pursuant to the Merger Agreement, the Company has
agreed that, except as expressly contemplated or provided by the Merger
Agreement or agreed to by Parent (which agreement cannot be unreasonably
withheld), prior to the time the directors designated by the Purchaser
constitute a majority of the Board (the 'Board Appointment Date'), the business
of the Company and its subsidiaries will be conducted only in the ordinary and
usual course and, to the extent consistent therewith, each of the Company and
its subsidiaries will use its commercially reasonable best efforts and shall
cooperate with Parent to preserve its business organization intact and maintain
its existing relations with customers, suppliers, employees, creditors and
business partners, and
the Company will not, directly or indirectly,
except (x) upon exercise or payment of stock options or other
awards outstanding under the Company Stock Plans or (y) pursuant
to outstanding obligations to the former stockholders of Alarm
Suppliers, Inc., sell, pledge, dispose of or encumber any shares
of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitment or rights of any kind to
acquire, any shares of capital stock of any class of the Company
or any of its subsidiaries;
amend its Certificate of Incorporation or Bylaws or similar
organizational documents; or
split, combine or reclassify the outstanding Shares or any
outstanding capital stock of any of the subsidiaries of the
Company; and
neither the Company nor any of its subsidiaries shall
declare, set aside or pay any dividend or other distribution payable
in cash, stock or property with respect to its capital stock other
than dividends paid by subsidiaries of the Company to the Company or
any of its subsidiaries in the ordinary course of business consistent
with past practice; provided, that the Company may declare and pay
its regular quarterly cash dividends not to exceed $.0217 per share
of Common Stock and $.03 per share of Class A Stock;
transfer, lease, license, sell, mortgage, pledge, dispose of, or
encumber any assets other than in the ordinary and usual course of
business and consistent with past practice, or incur or modify any
indebtedness or other liability, other than in the ordinary and usual
course of business and consistent with past practice;
redeem, purchase or otherwise acquire directly or indirectly any of
its capital stock;
except as required by any collective bargaining agreement, grant any
increase in the compensation payable or to become payable by the
Company or any of its subsidiaries to any of its officers or
employees except that
the Company and its subsidiaries may grant base salary increases
consistent with past practice for employees normally occurring at
or after the 1999 year end for year 2000 in amounts not to exceed
five percent in the aggregate (except for salaries paid to
managers of businesses acquired by the Company after October 1,
1998, which will be determined in a manner consistent with the
Company's past practice with respect to salaries paid to managers
of acquired companies); provided that any increases in the base
salaries payable to the Company's top ten most highly compensated
executives must be consistent with past practice for such
executives (unless agreed to, on a case by case basis, by Parent)
and, in any event, the increases may not exceed ten percent of
base salary
for each executive and
in the aggregate for all executives;
adopt any new, or amend or otherwise increase, or accelerate the
payment or vesting of the amounts payable or to become payable under,
any existing, bonus, incentive compensation, deferred compensation,
severance, profit sharing, stock option, stock purchase, insurance,
7
<PAGE>
pension, retirement or other employee benefit plan, agreement or
arrangement; provided, that the Company may pay cash bonuses to any
or all of its managers covering 1999 performance so long as the
amount of each such bonus is consistent with past practice (unless
agreed to, on a case by case basis, by Parent) and the aggregate
amount of such bonuses (excluding the bonuses payable under
previously agreed to formulas so long as the amounts paid are per
such existing formulas) do not exceed by twenty percent (20%) the
aggregate amount of the bonuses paid to such managers for 1998
performance, except for bonuses paid to managers of businesses
acquired by the Company after October 1, 1998, in which case such
bonuses will be consistent with the Company's past practice with
respect to bonus policies for acquired businesses; and; provided,
further, that the Company may, before the completion of the Offer
modify the termination for 'Good Reason' provision in executive
employment contracts such that 'Good Reason' would include a
reduction in yearly total compensation opportunity offered to a given
executive for reasonable performance, and eliminate the 'Adjustments'
clause in each of such executive employment agreements;
enter into any new employment or severance agreement with or grant
any severance or termination pay to any officer, director or employee
of the Company or any of its subsidiaries; provided, that employment
agreements with additional executives may be entered into upon
agreement of Parent and the Company,
permit any insurance policy naming it as a beneficiary or a loss
payable payee to be cancelled or terminated without notice to Parent,
except in the ordinary course of business and consistent with past
practice;
enter into any contract or transaction relating to the purchase of
assets other than in the ordinary course of business consistent with
prior practices;
enter into any contract or transaction relating to the lending of any
material amount of money to, or the purchase of any stock of, or
other equity interest in, or material amount of assets of, any
corporation or other entity, or enter into any joint venture or
partnership (collectively, 'Investments'), other than those
Investments in progress on the date of the Merger Agreement;
make any capital expenditures which are significantly in excess of
the amounts set forth in the budgets previously shown to Parent in
writing;
change any of the accounting methods used by it unless required by
generally accepted accounting principles ('GAAP'), or, except in the
ordinary course consistent with past practice make any material tax
election except in the ordinary course of business consistent with
past practice, change any material tax election already made, adopt
any material tax accounting method except in the ordinary course of
business consistent with past practice, change any material tax
accounting method unless required by GAAP, or, except in the ordinary
course consistent with past practice, enter into any closing
agreement, settle any tax claim or assessment or consent to any tax
claim or assessment or any waiver of the statute of limitations for
any such claim or assessment; or
take any action with the intent of causing any of the conditions to
the Parent set forth in this Item under the heading 'Conditions to
the Offer' to not be satisfied.
No Solicitation. Pursuant to the Merger Agreement, the Company has agreed
that neither the Company nor any of its subsidiaries will (and the Company will
use its best efforts to cause its officers, directors, employees,
representatives and agents, including, but not limited to, investment bankers,
attorneys and accountants not to), directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than Parent, any of its affiliates or representatives) concerning any
proposal or offer to acquire all or a substantial part of the business and
properties of the Company or any of its subsidiaries or any capital stock of the
Company or any of its subsidiaries, whether by merger, tender offer, exchange
offer, sale of assets or similar transactions involving the Company or any
subsidiary,
8
<PAGE>
division or operating or principal business unit of the Company (an 'Acquisition
Proposal'), except that the Company and the Board are not prohibited from
taking and disclosing to the Company's stockholders a position with
respect to a tender or exchange offer by a third party pursuant to
Rules 14d-9 and 14e-2 promulgated under the Exchange Act, or
making such disclosure to the Company's stockholders as, in the good faith
judgment of the Board, after receiving advice from outside counsel, is
required under applicable law, provided that the Company may not, except
as described below, withdraw or modify its approval or recommendation of
the Offer or the Merger or enter into any agreement with respect to any
Acquisition Proposal.
prior to the Share Purchase Date, furnishing information concerning the
Company and its subsidiaries to any corporation, partnership, person or
other entity or group or participating in discussions and negotiations
with such entity or group if such person has on an unsolicited basis
submitted to the Company
an Acquisition Proposal believed by the Board in good faith to be
bona fide, or
an expression of interest believed by the Board in good faith to be
bona fide indicating such person's desire to pursue the possibility
of making an Acquisition Proposal on terms financially superior to
the Offer and the Merger (an 'Indication of Interest')
and, in either such case, the Board determines in good faith
after consulting with its financial advisors, that such person has
the financial capability to consummate such Acquisition Proposal
or, in the case of an Indication of Interest, a transaction on
terms financially superior to the Offer and Merger, and
after receipt of advice from outside legal counsel to the Company,
that such action by the Company is appropriate in furtherance of
the best interests of the Company's stockholders, and
such person has signed a confidentiality agreement substantially
identical to the confidentiality agreement between Parent and the
Company (it being understood that the Board and/or its financial
advisors may, in any event, discuss with any person submitting an
Acquisition Proposal or Indication of Interest such person's bona
fides and/or financial capability).
The Company will promptly provide to Parent any written material
information regarding the Company provided to such person which was not
previously provided or otherwise made available to Parent. The Company is
required to promptly following receipt of an Acquisition Proposal or Indication
of Interest (and in any event not later than 24 hours after receipt thereof)
notify Parent of the receipt of the Acquisition Proposal or Indication of
Interest, as the case may be, and any stated, whether in writing or otherwise,
material terms (other than the identity of the person submitting such
Acquisition Proposal or Indication of Interest) of such Indication of Interest
or Acquisition Proposal and notify Parent of any material changes in any
disclosed Indication of Interest or Acquisition Proposal. The foregoing
notwithstanding, the Company will not be required to disclose the terms of any
Indication of Interest unless and until the Company publicly discloses the
existence of such Indication of Interest. The Board may withdraw or modify its
approval or recommendation of the Offer and/or the Merger, provided (i) the
Board believes in good faith, after receipt of advice from outside legal counsel
to the Company, that the failure to do so could reasonably be expected to cause
the Board to violate its fiduciary duties to the Company's stockholders under
applicable law, and (ii) the Company notifies Parent of any such withdrawal or
modification prior to its release to the public.
At any time after 5:00 P.M., Central Time, on the second full business day
following the business day on which notice is given (it being understood that
Christmas Eve and New Years Eve shall not be deemed to be 'business days' for
such purpose) to Parent of the Company's intent to do so and if the Company has
otherwise complied with the terms of Section 5.4 of the Merger Agreement
(including, without limitation, the notice provisions thereof), the Company
Board may, provided that the notice identifies the person submitting the
Acquisition Proposal, cause the Company to enter into an agreement with respect
to such Acquisition Proposal. Parent has agreed that neither it nor any of its
9
<PAGE>
subsidiaries nor any of the officers, directors, employees, representatives or
agents, including, but not limited to investment bankers, attorneys and
accountants, of any of the foregoing shall, directly or indirectly, contact, on
behalf or at direction of Parent or any of is subsidiaries, any person disclosed
to Parent as having submitted an Acquisition Proposal or Indication of Interest
with respect to such Acquisition Proposal, the Offer, the Merger, or any
arrangement or understanding in connection therewith (other than contacts not
intended to dissuade, and that are not reasonably likely to have the effect of
dissuading, such person from pursuing such Acquisition Proposal), so long as
such person is subject to similar restrictions. In the event the Company is
going to enter into an agreement with respect to an Acquisition Proposal, the
Company will not do so unless it has terminated the Merger Agreement in
accordance with its terms and paid or caused to be paid to Parent the
Termination Fee (as defined below) not later than simultaneously with entering
into such agreement.
Indemnification and Insurance. Pursuant to the Merger Agreement, after the
Share Purchase Date, Parent shall cause the Company or any successor, including
the Surviving Corporation, to indemnify, defend and hold harmless the present
and former officers, directors and employees of the Company and its subsidiaries
and persons who become any of the forgoing prior to the Effective Time with
respect to matters occurring at or prior to the Effective Time to the full
extent permitted under Delaware law. The Merger Agreement also provides that
Parent will, or will cause the Company or any successor, including the Surviving
Corporation, to maintain the Company's existing officers' and directors'
liability insurance ('D&O Insurance') for a period of not less than six years
after the Share Purchase Date, provided, that Parent may substitute therefor
policies of substantially equivalent coverage and amounts containing terms no
less favorable to such former directors or officers. Parent has also agreed that
if the existing D&O Insurance expires, is terminated or canceled during such
period, Parent or the Surviving Corporation will use all reasonable efforts to
obtain substantially similar D&O Insurance, but in no event will it be required
to pay aggregate premiums for any such insurance in excess of 175% of the
aggregate premiums paid in 1999 on an annualized basis for such purpose (the
'1999 Premium'). If Parent or the Surviving Corporation is unable to obtain the
amount of D&O Insurance required for such aggregate premium, Parent or the
Surviving Corporation has agreed to obtain as much insurance as can be obtained
for an annual premium not in excess of 175% of the 1999 Premium.
Certain Employee Arrangements. Pursuant to the Merger Agreement, for a
period of not less than one year following the Share Purchase Date, Parent shall
cause the Company to provide to each person employed by the Company or its
subsidiaries immediately prior to the Share Purchase Date and who remains in the
employ of the Company or its subsidiaries with employee benefits that are
generally comparable in the aggregate to the employee benefits provided to such
employees immediately prior to the date of the Merger Agreement. Pursuant to the
Merger Agreement, Parent shall, or shall cause its subsidiaries to, cause each
plan, program or arrangement made available to such employees after the Share
Purchase Date to:
treat prior service with the Company, its affiliates or other
entities (to the same extent such service is recognized under
analogous plans, programs or arrangements of the Company or its
affiliates prior to the Share Purchase Date) as service rendered to
Parent or its subsidiaries for purposes of eligibility and vesting
(but not benefit accrual, except to the extent required by law);
give credit for any deductible or co-payment amounts in respect of
the plan year in which the Share Purchase Date occurs, to the extent
that, following the Share Purchase Date, such employees participate
in any plan for which deductible or co-payments are required; and
waive any preexisting condition which was waived or otherwise covered
under the terms of any Company plan immediately prior to the Share
Purchase Date or waiting period limitation which would otherwise be
applicable to such employees on or after the Share Purchase Date.
The Merger Agreement also provides that Parent shall:
establish a severance program (which provides severance benefits of 1
week's pay for every year of service, up to a maximum of 52 weeks)
covering any domestic Company employees
10
<PAGE>
whose employment may be terminated within one year of the Share
Purchase Date other than for cause, death or disability;
provide, or arrange to have provided, outplacement assistance
appropriate for each employee level;
offer 'pay to stay' benefits for Company employees as appropriate;
establish a retention program for certain employees of the Company
which provides for option grants to designated employees under
Parent's stock option plan following the Share Purchase Date and a
Tier 1, Tier 2 and/or Tier 3 retention bonus payable by the Company
to designated employees. The aggregate Black-Scholes value of option
grants under the retention program will be $4,100,000, including
option grants to Messrs. Conforti and Guthart, each with a value of
$500,000, and to the Significant Employees with an aggregate value of
$1,700,000. The aggregate value of Tier 1 retention bonuses payable
to designated employees will be $15,900,000, which will be paid to
the Significant Employees. Fifty percent (50%) of each designated
employee's Tier 1 retention bonus will be payable as of the Share
Purchase Date. The Harris Family will contribute to the Company the
amount necessary to fund this portion of such employee's Tier 1
retention bonus. The remaining fifty percent (50%) of each designated
employee's Tier 1 retention bonus will be payable in 3 equal
installments on the first, second and third anniversaries of the
Share Purchase Date, in each case unless such employee's employment
has been terminated prior to such date voluntarily or by the Company
for cause. Parent will guarantee the Company's obligation to pay this
portion of such employee's Tier 1 retention bonus. The aggregate
value of Tier 2 retention bonuses payable to designated employees
will be $4,100,000, of which $3,500,000 will be payable to the
Significant Employees. Each designated employee's Tier 2 retention
bonus will vest on the third anniversary of the Share Purchase Date
(i) unless such employee's employment has terminated prior to such
date and (ii) if, and to the extent, 3 year performance targets are
achieved by such employee. The maximum aggregate value of Tier 3
retention bonuses payable to designated employees will be
$13,000,000, including Tier 3 retention bonuses payable to the
Significant Employees with an aggregate maximum value of $5,600,000.
Each designated employee's Tier 3 retention bonus will vest on the
third anniversary of the Share Purchase Date (i) if such employee's
employment has not terminated prior to such date for any reason other
than death, disability or cause and (ii) if, and to the extent, 3
year performance targets are achieved by such employee. Additional
information regarding the retention program is set forth in a letter
agreement, a copy of which is filed as Exhibit 99.3 to this
Schedule 14D-9; and
establish a corporate office retention, severance and pay-to-stay
program, which is expected to include P. McCanna and J. Vondrak,
providing severance benefits of 1 week's pay for every year of
service and undetermined pay-to-stay benefits on a case-by-case
basis.
The parties have also agreed to enter into an amendment to King Harris'
employment agreement with the Company dated as of January 1, 1996, which
amendment, to be effective as of the Share Purchase Date, provides that:
all references to 'Company' in the agreement shall refer to Parent on
and after the Share Purchase Date;
Mr. Harris will initially be President/CEO of the Alarm Components
and Systems Business of Parent's Home and Building Control Division.
Mr. Harris' title can be changed to CEO anytime after 90 days
following the Share Purchase Date;
Mr. Harris will report to the President of Parent's Home and Building
Control Division;
Mr. Harris will be allowed to continue serving on the for-profit and
not-for-profit boards he currently serves on; and
the employment agreement will have a 2 year term which may be
extended on a year to year basis by mutual consent. On January 1,
2002, Mr. Harris may elect to become a consultant of Parent. As a
consultant, he would receive $400,000 per year until age 65 and would
be
11
<PAGE>
required to work no more than 8 hours per week on the average. He
would also be reimbursed for business expenses and reasonable office
expenses; and
if Mr. Harris dies, his estate or designated beneficiary will receive
100% of the amounts he would have received under the terms of the
employment agreement.
The parties have also agreed that the employment agreements between the
Company and Paul R. Gauvreau and Edward J. Schwartz will be amended effective
the Share Purchase Date to provide that their employment will terminate one year
thereafter, at which time they will be treated for purposes of the Company's
Change of Control Plan as having been terminated without 'cause.'
Representations and Warranties. Pursuant to the Merger Agreement, the
Company has made customary representations and warranties to Parent and the
Purchaser with respect to, among other things, its organization, capitalization,
authorization and validity of agreements, consents and approvals, no violations
of law or Company instruments, financial statements, public filings, the absence
of any material adverse effect on the Company since September 30, 1999,
undisclosed liabilities, material contracts, litigation, employee benefit plans,
labor matters, tax matters, intellectual property, Year 2000 compliance,
insurance, compliance with laws, restrictions on business activities, vote
required to approve the Merger Agreement, interested party transactions,
environmental matters, real property, financial advisor opinion and brokers' and
finders' fees.
Certain Tax Indemnification.
Pursuant to the Merger Agreement, Parent has agreed to indemnify Company
stockholders of record at the close of business on July 31, 1998 ('Indemnified
Company Stockholders') from certain taxes ('Indemnified Taxes'). Indemnified
Taxes means, in general, taxes imposed on those stockholders as a result of the
Company's 1998 spinoff of Penton Media, Inc. (the 'Spinoff') failing to qualify
as tax-free under Section 355 of the Code, but only if such failure is because
the negotiation, execution and delivery of the Merger Agreement, any of the
transactions contemplated by the Merger Agreement or the Stockholders Agreement,
or any action or inaction on the part of Parent, Purchaser or the Company at or
after the Share Purchase Date, causes the 'device' or 'continuity of shareholder
interest' requirement of Section 355 not to be met (an 'Indemnifiable
Disqualification'). The amount of any indemnification would be reduced by
certain tax benefits that would result, or be treated as resulting, from the
Spinoff not being tax-free. A more detailed definition of the term 'Indemnified
Taxes' is contained in Section 5.13(b) of the Merger Agreement.
Parent will have no obligation to indemnify Indemnified Company
Stockholders if certain factual statements upon which Purchaser is relying are
not true and correct, the representations of certain officers and directors of
the Company are not true and correct or if certain directors or officers of the
Company fail to reasonably cooperate in Parent's defense against any Indemnified
Tax, in each case, however, only if such failure to be true and correct or
failure to cooperate is material to a determination that an Indemnifiable
Disqualification has occurred. Additionally, in the event an Indemnified Company
Stockholder fails to notify Parent as required by the Merger Agreement of the
Indemnified Company Stockholder's receipt of any written question or other
notice from the Internal Revenue Service to the effect that the Internal Revenue
Service is reviewing the Spinoff, or, if Parent exercises its rights pursuant to
the Merger Agreement to conduct the defense against the Indemnified Tax, an
Indemnified Company Stockholder against whom the Internal Revenue Service is
challenging the Spinoff or certain other Indemnified Company Stockholders,
officers or directors of the Company undertake actions described in the Merger
Agreement that would compromise Parent's ability to control the defense against
the Indemnified Tax, Parent's obligation to indemnify will be reduced to the
extent such failure or actions adversely affects Parent's ability to defend
against the Indemnified Tax.
For purposes of the Merger Agreement, the term 'Tax' is defined to mean all
taxes, chargers, fees, duties, levies, penalties or other assessments imposed by
any federal, state, local or foreign governmental authority, including, but not
limited to, income, gross receipts, excise, property, sales, gain, use, license,
custom duty, unemployment, capital stock, transfer, franchise, payroll,
withholding, social security, minimum, estimated, and other taxes, and any
interest, penalties or additions attributable thereto.
12
<PAGE>
Purchaser has received the opinion of Kirkland & Ellis, based on
assumptions set forth in such opinion, as well as representations of certain
officers, directors and stockholders of the Company, that the Spinoff will not
fail to qualify as a distribution on which no gain or loss was recognized by
Indemnified Company Stockholders under Section 355 of the Code due to violation
of the 'device' or 'continuity of shareholder interest' requirements of
Section 355 of the Code and the regulations thereunder as a result of (1) the
negotiation, execution and delivery of the Merger Agreement or (2) any of the
transactions contemplated by the Merger Agreement and the Stockholders
Agreement, assuming the transaction is consummated as contemplated.
Termination; Fees. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Share Purchase Date,
(a) by mutual written consent of Parent and the Company,
(b) by either the Company or Parent
(i) if
(x) the Offer shall have expired without any Shares being
purchased therein or
(y) the Purchaser shall not have accepted for payment all Shares
tendered pursuant to the Offer by February 20, 2000, or, in the event
that the failure of the conditions to the Offer as of February 20,
2000 is as a result of any waiting periods under applicable laws
having not expired, or any approvals under applicable laws having not
been received, by February 20, 2000, June 30, 2000, provided, that
such right to terminate will not be available to any party whose
failure to fulfill any obligation under the Merger Agreement was the
cause of, or resulted in, the failure of Parent or the Purchaser to
purchase the Shares on or before such date, or after Purchaser has
purchased Shares pursuant to the Offer; or
(ii) if any governmental entity shall have issued an order, decree
or ruling or taken any other action (which order, decree, ruling or
other action the parties will use their reasonable efforts to lift), in
each case permanently restraining, enjoining or otherwise prohibiting
the acceptance for payment of, or payment for, Shares pursuant to the
Offer or the Merger and such order, decree, ruling or other action shall
have become final and non-appealable,
(c) by the Company
(i) in connection with entering into a definitive agreement with
respect to an Acquisition Proposal; provided it has complied with
certain of the provisions of the Merger Agreement, including the notice
provisions described above under 'No Solicitation,' and that it makes
simultaneous payment of the Termination Fee; or
(ii) if Parent or the Purchaser shall have breached in any material
respect any of their respective representations, warranties, covenants
or other agreements contained in the Merger Agreement, which breach
cannot be or has not been cured, in all material respects, within 30
days after the giving of written notice to Parent or the Purchaser, as
applicable, or
(d) by Parent
(i) if prior to the Share Purchase Date, the Company has breached
any representation, warranty, covenant or other agreement contained in
the Merger Agreement which
(x) would give rise to the failure of a condition described in
paragraph (f) or (g) under Annex A to the Merger Agreement (which are
set forth in clauses (f) and (g) of Section 14) and
(y) cannot be or has not been cured, in all material respects,
within 30 days after the giving of written notice to the Company;
(ii) if either Parent or the Purchaser is entitled to terminate the
Offer as a result of the occurrence of any event set forth in
paragraph (e) under Annex A to the Merger Agreement (which is set forth
in clause (e) of Section 14); or
13
<PAGE>
(iii) if either Parent or the Purchaser is entitled to terminate
the Offer as a result of the occurrence of any event set forth in
paragraph (h) under Annex A to the Merger Agreement (which is set forth
in clause (h) of Section 14).
In accordance with the Merger Agreement, if
(x) the Company terminates the Merger Agreement pursuant to
clause (c)(i) above,
(y) either the Company or Parent terminates the Merger Agreement
pursuant to clause (b)(i) of the immediately preceding paragraph or Parent
terminates the Merger Agreement pursuant to clause (d)(i) above and, in the
case of this subclause (y),
(a) prior thereto there shall have been publicly announced another
Acquisition Proposal that is financially superior to the Offer and
Merger (either at the time it is made or at any time prior to the
termination of the Merger Agreement) or Indication of Interest and
(b) an Acquisition Proposal shall be consummated on or prior to
November 15, 2000, or
(z) Parent terminates the Merger Agreement pursuant to
clause (d)(iii) above and, in the case of this subclause (z), an
Acquisition Proposal on terms financially superior to the Offer and Merger
shall be consummated on or prior to November 15, 2000,
the Company has agreed to pay to Parent an amount equal to $80,000,000 (the
'Termination Fee'); provided that no Termination Fee will be payable if the
Purchaser or Parent was in material breach of its representations, warranties or
obligations under the Merger Agreement at the time of its termination.
In addition, if Parent shall terminate the Merger Agreement pursuant to
clause (d)(ii) above, the Company has agreed to pay to Parent an amount equal to
50% of the Termination Fee, which amount shall be payable upon the termination
of the Merger Agreement, and, if an Acquisition Proposal shall be consummated on
or prior to November 15, 2000, the Company has agreed to pay to Parent an amount
equal to the Termination Fee less any amount theretofore paid pursuant to this
sentence no later than the consummation of such Acquisition Proposal.
CONDITIONS TO THE OFFER
The Merger Agreement provides that, notwithstanding any other provisions of
the Offer, and in addition to (and not in limitation of) the Purchaser's rights
to extend and amend the Offer at any time in its sole discretion (subject to the
provisions of the Merger Agreement), the Purchaser shall not be required to
accept for payment or, subject to any applicable rules and regulations of the
SEC, including Rule 14e-l(c) under the Exchange Act (relating to the Purchaser's
obligation to pay for or return tendered Shares promptly after termination or
withdrawal of the Offer), pay for, and may delay the acceptance for payment of
or, subject to the restriction referred to above, the payment for, any tendered
Shares, and, subject to the terms of the Merger Agreement, may terminate or
amend the Offer as to any Shares not then paid for, if (i) any applicable
waiting period under the HSR Act has not expired or terminated, (ii) the Minimum
Condition has not been satisfied, or (iii) at any time on or after the date of
the Merger Agreement and before the Share Purchase Date, any of the following
events shall occur:
(a)(i) there shall be threatened or pending any suit, action or
proceeding by any Governmental Entity (as defined in the Merger Agreement)
against the Purchaser, Parent, the Company or any subsidiary of the Company
or (ii) there shall be instituted or pending any suit, action or proceeding
before any court which, in the case of either (i) or (ii), in the good
faith judgment of Parent and Purchaser after consulting with legal counsel,
is likely to result in any change or effect (or any development that,
insofar as can reasonably be foreseen, is likely to result in any change or
effect) that will constitute a Company Material Adverse Effect (as defined
in the Merger Agreement) or is materially adverse to the ability of Parent
to consummate the Merger Agreement, the Offer, the acquisition of Shares
pursuant to the Offer or the Merger, and which in each case of either (i)
or (ii), is (A) seeking to prohibit or impose any material limitations on
Parent's or the Purchaser's ownership or operation (or that of any of their
respective subsidiaries or affiliates) of all or a material portion of the
businesses or assets of the Company and its subsidiaries taken as a whole,
or to compel Parent or the Purchaser or their respective subsidiaries and
affiliates
14
<PAGE>
to dispose of or hold separate any material portion of the business or
assets of the Company or Parent and their respective subsidiaries, in each
case taken as a whole, (B) challenging the acquisition by Parent or the
Purchaser of any Shares under the Offer, seeking to restrain or prohibit
the making or consummation of the Offer or the Merger or the performance of
any of the other transactions contemplated by the Merger Agreement, or
seeking to obtain from the Company, Parent or the Purchaser any damages
that are material in relation to the Company and its subsidiaries taken as
a whole, (C) seeking to impose material limitations on the ability of the
Purchaser, or render the Purchaser unable, to accept for payment, pay for
or purchase some or all of the Shares pursuant to the Offer and the Merger,
(D) seeking to impose material limitations on the ability of Purchaser or
Parent effectively to exercise full rights of ownership of the Shares,
including, without limitation, the right to vote the Shares purchased by it
on all matters properly presented to the Company's stockholders, or
(E) which otherwise is reasonably likely to have a Company Material Adverse
Effect; provided, that Parent shall employ its commercially reasonable best
efforts to oppose, contest and resolve any such pending or threatened suit,
action or proceeding;
(b) there shall be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated, or deemed applicable,
pursuant to an authoritative interpretation by or on behalf of a Government
Entity, to the Offer or the Merger, or any other action shall be taken by
any Governmental Entity, other than the application to the Offer or the
Merger of applicable waiting periods under HSR Act, that is reasonably
likely to result, directly or indirectly, in any of the consequences
referred to in clauses (A) through (E) of paragraph (a) above; provided,
that Parent shall employ its commercially reasonable best efforts to
oppose, contest and resolve any such judgment, order, injunction or
enforcement by any such Government Entity;
(c) there shall have occurred (i) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States (whether or not mandatory), or (ii) any limitation (whether or not
mandatory) by any United States governmental authority on the extension of
credit generally by banks or other financial institutions, in each instance
to the extent, but only to the extent, that such events affect Parent's
ability to obtain financing for the Offer;
(d) there shall have occurred any events, changes or effects after the
date of the Merger Agreement which, either individually or in the
aggregate, has had or is reasonably likely to have a Company Material
Adverse Effect; provided that (i) any adverse change in the business
relationship of the Company or any of its subsidiaries with any of its
customers as a result of (x) the Company's entering into the Merger
Agreement or (y) the transactions contemplated by the Merger Agreement,
(ii) any effect of any such adverse change on the business, assets,
liabilities, properties, results of operations or financial condition of
the Company and its subsidiaries, (iii) any adverse effect of any decision
by any customer of the Company or any of its subsidiaries that accounted
for 5% or more of the consolidated net sales of the Company for the fiscal
year ending December 31, 1999 to change the mix or channel of purchasing of
products ordered or to be ordered from the Company or any of it
subsidiaries, (iv) any adverse effect on the business relationship between
the Company and its subsidiaries, on the one hand, and Protection One Alarm
Monitoring, Inc. and its affiliates, on the other hand, resulting from the
financial condition of Protection One Alarm Monitoring, Inc. and its
affiliates and (v) any adverse effect of changes in foreign currency
exchange shall be excluded when making any determination whether a Company
Material Adverse Effect has occurred;
(e)(i) the Company Board or any committee thereof shall have withdrawn
or modified in a manner adverse to Parent or the Purchaser its approval or
recommendation of the Offer, the Merger or the Merger Agreement, approved
or recommended any Acquisition Proposal or, upon the request of Parent,
failed to reaffirm its approval or recommendation of the Offer, the Merger
or the Merger Agreement, or (ii) the Company shall have entered into any
agreement with respect to any Acquisition Proposal in accordance with
Section 5.4(e) of the Merger Agreement;
(f) the representations and warranties of the Company set forth in the
Merger Agreement (which for these purposes shall exclude all qualifications
or exceptions relating to 'materiality' and/or Company Material Adverse
Effect) shall not be true and correct, in each case (i) as of the
15
<PAGE>
date referred to in any representation or warranty which addresses matters
as of a particular date, or (ii) as to all other representations and
warranties, as of the date of the Merger Agreement and as of the scheduled
expiration of the Offer, such that the aggregate effect of all such
representations and warranties which are not true and correct shall have
had or be reasonably likely to have a Company Material Adverse Effect;
(g) the Company shall have failed to perform any obligation or to
comply with any agreement or covenant with the Company to be performed or
complied with by it under the Merger Agreement other than any failure which
except for the provisions of Section 1.3(a) of the Merger Agreement would
not have, or be reasonably likely to have, either individually or in the
aggregate, a Company Material Adverse Effect;
(h) any person (other than any person beneficially owning (as defined
in Rule 13d-3 promulgated under the Exchange Act), or part of a group
beneficially owning, 20% or more of the outstanding Company capital stock
on the date of the Merger Agreement) acquires beneficial ownership of at
least 20% (or, with respect to any person beneficially owning, or part of a
group beneficially owning, 10% or more on the date of the Merger Agreement
or with respect to any group of which such a person may be or become a
member, 25%) of the outstanding Common Capital Stock;
(i) the Merger Agreement shall have been terminated in accordance with
its terms; or
(j) Kirkland & Ellis shall have withdrawn its tax opinion delivered
pursuant to Section 5.13 of the Merger Agreement and advised Parent in
writing that, on account of such counsel's discovery of additional facts (a
description of which shall be included in such writing) subsequent to the
date of such opinion establishing that any of the fact statements set forth
in the tax schedule attached thereto are not true and correct, it has
become such counsel's opinion that it is more likely than not that the
Spinoff will fail to qualify as a distribution to which Section 355 of the
Code applies as a result of (1) the negotiation, execution and delivery of
the Merger Agreement, (2) any of the transactions contemplated by the
Merger Agreement, or (3) any action or inaction on the part of the Company
at or before the Share Purchase Date.
The foregoing conditions are for the sole benefit of Parent and the
Purchaser, may be asserted by Parent or the Purchaser and may be waived by
Parent or the Purchaser in whole or in part at any time and from time to time in
the sole discretion of Parent or the Purchaser, subject in each case to the
terms of the Merger Agreement. The failure by Parent or the Purchaser at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
STOCKHOLDERS AGREEMENT
The following is a summary of certain provisions of the Stockholders
Agreement. This summary is not a complete description of the terms and
conditions of the Stockholders Agreement and is qualified in its entirety by
reference to the full text of the Stockholders Agreement filed with the SEC as
Exhibit 99.2 to this Schedule 14D-9 and incorporated herein by reference.
Capitalized terms not otherwise defined below shall have the meanings set forth
in the Merger Agreement or the Stockholders Agreement, as the context may
require.
As a condition and inducement to Parent's entering into the Merger
Agreement, the Harris Family Stockholders, concurrently with the execution and
delivery of the Merger Agreement, entered into the Stockholders Agreement, dated
December 20, 1999, with Parent and Purchaser (the 'Stockholders Agreement').
Pursuant to the Stockholders Agreement, the Harris Family Stockholders have
agreed to tender, in accordance with the terms of the Offer, all of the shares
beneficially owned by them and subject to the Stockholders Agreement, promptly
following the commencement of the Offer. All Shares beneficially owned by them,
excluding approximately 428,000 Shares which were reserved for charitable
contributions, are subject to the terms of the Stockholders Agreement and are
sometimes referred to as the 'Harris Family Shares.' The Harris Family
Stockholders also agreed not to withdraw from the Offer any Harris Family Shares
tendered pursuant to the Offer unless and until the Merger Agreement is
terminated.
16
<PAGE>
Pursuant to the Stockholders Agreement, the Stockholders have also granted
to Parent an option to purchase the Subject Shares, at an option price of $45.50
per Share or any higher price paid or to be paid pursuant to the Offer, during
the Option Period (as defined hereinafter). The Option shall become exercisable,
unless earlier terminated, from and after the time and date of an Option
Triggering Event.
The 'Option Triggering Event' is the first to occur of the following:
the termination by the Company of the Merger Agreement pursuant to
clause (c)(ii) of the first paragraph under the heading 'Termination Fees'
under the heading 'Merger Agreement' above, other than a termination,
prior to 5:00 p.m., New York time, on February 20, 2000, in connection
with an Acquisition Proposal that is financially superior to the Offer and
Merger, either at the time it is made or at any time prior to the
termination of the Merger Agreement, or Indication of Interest (a
'Superior Proposal') from any party, or an affiliate of such party, which
made an Acquisition Proposal or gave an Indication of Interest prior to
12:00 p.m., New York time, on February 3, 2000 (such time and date, the
'Initial Offer Expiration Date'),
the termination by Parent of the Merger Agreement pursuant to
clause (d)(iii) of the first paragraph under the heading 'Termination
Fees' under the heading 'Merger Agreement' above, other than a
termination, prior to 5:00 p.m., New York time, on February 20, 2000, in
connection with a Superior Proposal from any party, or an affiliate of
such party, which made an Acquisition Proposal or gave an Indication of
Interest prior to the Initial Offer Expiration Date,
the termination by the Company or Parent of the Merger Agreement pursuant
to clause (b)(i) of the first paragraph under the heading 'Termination
Fees' under the heading 'Merger Agreement' above, if prior to such
termination there shall have been publicly announced a Superior Proposal,
and
the termination by Parent of the Merger Agreement pursuant to
clause (d)(ii) of the first paragraph under the heading 'Termination Fees'
under the heading 'Merger Agreement above, as a result of the Company's
willful material breach of a covenant in the Merger Agreement if prior to
such breach the Company shall have received a Superior Proposal.
The Option shall terminate (whether or not it shall have become
exercisable) on the time and date of the first to occur of the following:
the purchase of Shares in the Offer,
any termination of the Merger Agreement on or prior to the Initial Offer
Expiration Date,
the termination of the Merger Agreement after the Initial Offer Expiration
Date other than in connection with an Option Triggering Event,
100 days after the beginning of the Option Period,
the Initial Offer Expiration Date if, as of such date, there shall have
been no publicly announced Acquisition Proposal or Indication of Interest
and all conditions, other than the Minimum Condition, shall have been
satisfied.
The period beginning at the time and date the Option shall become
exercisable and ending on the time and date the Option shall terminate is
referred to herein as the 'Option Period.'
During the Option Period, each Harris Family Stockholder has agreed not to:
except pursuant to the terms of the Stockholders Agreement and for the
tender of Shares in the Offer, offer for sale and for sales, transfers and
gifts to other Harris Family Stockholders which do not affect the status
of the Subject Shares under the Stockholders Agreement, sell, transfer,
tender, pledge, encumber, assign or otherwise dispose of, or enter into
any contract, option or other arrangement to do so;
except pursuant to the terms of the Stockholders Agreement, grant any
proxies or powers of attorney, other than in connection with the Company's
year 2000 annual meeting or to facilitate performance under the
Stockholders Agreement;, deposit any of their Shares into a voting trust
or enter into a voting agreement with respect to any of their Shares; or
17
<PAGE>
take any action that would make any representation or warranty contained
in the Stockholders Agreement untrue or incorrect or have the effect of
impairing the ability of the Stockholder to perform the Stockholder's
obligations under the applicable Stockholders Agreement or preventing or
delaying the consummation of any of the transactions contemplated by the
applicable Stockholders Agreement and the Merger Agreement.
If the Option is exercised and, for any reason, neither Purchaser nor any
third-party shall have acquired 100% of the Shares by a date which is nine
months after such exercise at a price per Share equal to or greater than the
price paid to exercise the Option, then at the election of all of the Harris
Family Stockholders (upon five-days' notice given within ten months after such
exercise) the Option exercise shall be rescinded. Upon any such rescission, the
Harris Family Stockholders is required to return to Parent the aggregate option
consideration previously received by them (plus investment income, if any,
realized thereon) and Parent is required to return to the Harris Family
Stockholders the Harris Family Shares free and clear of any encumbrances (plus
any dividends (and investment income, if any, realized thereon)). Throughout the
period during which the Option is subject to rescission, Parent and Purchaser is
not permitted to take any action which would (i) adversely affect the voting
rights in respect of the Harris Family Shares, but Parent shall be entitled to
exercise full voting rights related to the Harris Family Shares or (ii) cause
the Company to make or pay any special dividends or distributions. The foregoing
notwithstanding, the provisions of this paragraph shall not apply if Purchaser
or one of its affiliates makes, following the exercise of the Option and during
such nine month period, an offer to all holders of Shares to purchase any or all
of their Shares at a price per Share equal to or greater than the price paid to
exercise the Option, which offer shall be subject to no conditions other than
the absence of an injunction.
Each of the Harris Family Stockholders has agreed to unconditionally
release, as of the Effective Time, any and all claims (other than for
dividends), and causes of action that such stockholder may have against the
Company or any of its subsidiaries or any present or former director, officer,
employee or agent of the Company or any of its subsidiaries (collectively, the
'Released Parties') resulting from any act, omission or occurrence prior to the
Effective Time.
Each Harris Family Stockholder has agreed that, in the capacity as a
stockholder, it will not respond to any inquiries or the making of any proposal
by any person or entity (other than Parent or any affiliate of Parent)
concerning any business combination, merger, tender offer, exchange offer, sale
of assets, sale of shares of capital stock or debt securities or similar
transactions involving the Company or any subsidiary, division or operating or
principal business unit of the Company. If any Harris Family Stockholder,
receives any such inquiry or proposal, then the Stockholder has agreed to
promptly inform Parent of the existence thereof. Prior to the beginning of the
Option Period, the Harris Family Stockholders, in their capacity as
stockholders, may respond to any such inquiry or proposal; after the beginning
of the Option Period, the Harris Family Stockholders are not permitted to
respond to any such inquiry or proposal. Each Harris Family Stockholder has
agreed to immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties previously conducted with respect
to any of the foregoing. Nothing contained in the Stockholders Agreement shall
prohibit any Harris Family Stockholder from acting in its capacity as an officer
and/or director.
Pursuant to the Stockholders Agreement, Parent has agreed to indemnify the
Harris Family Stockholders against any reasonable legal expenses (but not
against liability) incurred by all such Harris Family Stockholders, in their
capacity as such, as a result of any litigation (or threat of litigation)
directly or indirectly related to the Stockholders Agreement up to $100,000 in
the aggregate and one-half of any such expenses in excess of $100,000.
To the extent that the terms of the Stockholders Agreement would cause the
shares of Common Stock to lose their special voting rights, the terms of the
Stockholders Agreement shall be deemed modified ab initio, in whole or in part,
to the extent, but only to the extent, necessary so that the shares of Common
Stock do not lose their special voting rights.
18
<PAGE>
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS.
The Board (with E. David Coolidge, III, a director of the Company who is
also the Chief Executive Officer of William Blair & Company, L.L.C., which
issued the Fairness Opinion (as defined below), abstaining) has unanimously
(i) determined that the Merger Agreement and the transactions contemplated
thereby, including each of the Offer and the Merger, are fair to, and in the
best interests of, the Company and its stockholders, (ii) approved and adopted
the Merger Agreement and the transactions contemplated thereby, and
(iii) resolved to recommend that the stockholders of the Company accept the
Offer and tender their Shares pursuant to the Offer and approve and adopt the
Merger Agreement and the Merger.
A letter to the Company's stockholders communicating the Company's
recommendation and a press release announcing the execution of the Merger
Agreement are filed with this Schedule 14D-9 as Exhibits 99.6 and 99.5,
respectively, and are incorporated herein by reference in their entirety.
(b) BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION.
Background of the Offer.
For many years, the Company and Honeywell Inc. ('Honeywell') have had a
customer-supplier business relationship. During the course of this relationship,
executives of Honeywell and the Company have met from time to time to discuss
issues relating to their customer-supplier business relationship. As a result,
the Company and Honeywell, as well as their executives, were familiar with each
other, as well as with the respective businesses of the two companies.
On May 27, 1999, at the request of Michael Bonsignore, who was then
Chairman and CEO of Honeywell, a meeting was held between Mr. Bonsignore and
King Harris, President and CEO of the Company, to discuss matters of mutual
interest. At this meeting, Mr. Bonsignore proposed that the Company and
Honeywell explore the possibility of a business combination.
A subsequent meeting was held on July 15, 1999 among Mr. Bonsignore, Kevin
Gilligan, President of Honeywell's Home and Building Control Division, another
executive from Honeywell's Home and Building Control Division, Mr. Harris, Leo
Guthart, the Vice Chairman of the Company and Chairman of the Pittway Security
Group, and Edward Schwartz, a Vice President of the Company, to explore further
the possibility of a business combination between the Company and Honeywell.
Prior to this meeting, Honeywell and the Company executed a customary
confidentiality agreement.
At the July 15th meeting, the parties discussed the potential benefits that
might be achieved from such a business combination. Later in the month, Mr.
Harris provided Honeywell with additional information to assist Honeywell in its
evaluation of the Company.
On September 9, 1999, Mr. Gilligan and two other representatives of
Honeywell met with Messrs. Harris, Guthart and Schwartz to continue discussions
as to the potential synergies that might be generated by a combined entity.
During these discussions, Mr. Gilligan indicated that based on Honeywell's
preliminary review and absent the identification of additional synergistic
opportunities, Honeywell could not justify a price as high as $40 per share.
These discussions were continued at a meeting held on October 27, 1999
among Mr. Gilligan, Peter D'Aloia, Vice President of Strategic Planning of
AlliedSignal Inc. ('AlliedSignal'), another executive from Honeywell's Home and
Building Control Division and Messrs. Harris, Schwartz and Guthart. At this
meeting, the parties discussed, among other things, their respective operating
philosophies, the rationale for, and synergies that might be generated by, a
business combination and the potential price and basis for a transaction. During
the course of this meeting, Mr. Gilligan indicated that, based upon Honeywell's
review to date and subject to further due diligence, Honeywell was interested in
pursuing a business combination at a price of $45 per share in cash.
On November 4, 1999, Mr. Harris advised Mr. Gilligan that the Company would
be retaining an investment banker and that the subject of Honeywell's interest
in continuing to pursue discussions with the Company would be presented to the
Company's Board of Directors at its next regular meeting,
19
<PAGE>
which was scheduled for November 18, 1999. Discussions also took place at this
time between representatives of the Company and Honeywell with respect to the
extent and scope of due diligence that would be required by Honeywell if it were
to continue its efforts to determine whether a potential business combination
was desirable.
On November 17, 1999, an amended confidentiality agreement was signed by
AlliedSignal, Honeywell and the Company.
At its regular meeting on November 18, 1999, the Board of Directors of the
Company considered Honeywell's interest in a business combination transaction
and whether the executives of the Company, with the assistance of the Company's
advisors, should continue their discussions with Honeywell. Representatives of
William Blair & Company, L.L.C., the Company's financial advisor (see Item 5
below), including E. David Coolidge III (who is a director of the Company and
the Chief Executive Officer of William Blair & Company, L.L.C.), and
representatives of Kirkland & Ellis, the Company's legal advisor, were present
at this meeting. After considering the matter, the Board of Directors authorized
management, with the assistance of the Company's advisors, to continue to
explore with Honeywell the possibility of a business combination transaction.
Following the Board meeting, Mr. Harris contacted Mr. Gilligan to inform
him that the Board had authorized management to allow Honeywell to conduct due
diligence provided that an acceptable framework for a transaction could be
achieved. Mr. Harris indicated that he would elaborate on the Board's position
at a meeting to be held on November 19, 1999. In advance of the meeting, Mr.
Harris provided Mr. Gilligan with a discussion outline setting forth a possible
framework for a transaction and outlining various matters, including
employee-related matters. The outline did not address any employment terms for
the executive officers of the Company because the Board considered it
appropriate that issues relating to the Company and its stockholders be
addressed first.
A meeting was held on Friday, November 19, 1999 in Chicago between
representatives of Honeywell and its legal and financial advisors and
representatives of the Company and its legal and financial advisors. At that
meeting, Mr. Harris explained that, while the Board believed that further
exploration of a business combination of the two companies was desirable, due
diligence could only proceed if the parties were able to reach a common
understanding as to the potential framework for a transaction. Mr. Harris also
questioned whether Honeywell would be willing to increase the transaction price.
Mr. Gilligan indicated that, while a final proposal would be submitted only
after the completion of due diligence, Honeywell believed that the price stated
in its earlier expression of interest had fairly valued the Company.
In the course of the November 19th meeting, the various representatives
discussed the potential structure for a transaction, the method of announcing
and minimum time period for the Offer, the terms and conditions upon which the
Company would be able to respond to third party proposals, the extent to which
the Harris Family might be willing to commit in connection with a potential
transaction, the potential terms of the agreement to be prepared to effectuate a
business combination transaction and severance, retention and incentive matters
for employees generally.
Following the meeting, discussions continued between the parties and their
respective representatives as to the potential terms for a transaction and
additional limited due diligence was begun.
On December 1, 1999, the merger of AlliedSignal and Honeywell was
completed. On Friday, December 3, 1999, the Board of Directors of Parent met and
authorized management to proceed with a business combination transaction with
the Company, if satisfactory terms could be negotiated.
On December 7, 1999, the Board of Directors of the Company met by telephone
and authorized expanded due diligence.
Financial, legal and accounting due diligence began on December 8, 1999 and
continued for the next week and a half. On Friday, December 10, 1999, Parent's
legal advisors distributed to the Company and its legal advisors a draft of the
Merger Agreement. A draft of the Stockholders Agreement was also presented to
counsel for the Harris Family.
During the week of December 13, 1999, the parties and their legal counsel
and the Harris Family and its legal counsel negotiated the terms of the Merger
Agreement and the Stockholders Agreement,
20
<PAGE>
respectively. On the evening of December 16, 1999, Mr. Gilligan delivered
Parent's proposal to combine the two companies pursuant to the various
agreements which were being negotiated at a cash price of $45 per share. Mr.
Gilligan indicated that this was the highest price that Parent was willing to
offer. Mr. Harris indicated that, while he would present Honeywell's proposal to
the Company's Board of Directors, which had tentatively scheduled a meeting for
Saturday, December 18, 1999, he urged Mr. Gilligan to consider increasing the
offer price. Mr. Gilligan reiterated Parent's belief that $45 was a fully priced
offer.
On December 17, 1999, members of the Harris Family met, reviewed the
possible transaction and the terms of the Stockholders Agreement and concluded
that they would support the transaction as contemplated in the Stockholders
Agreement if the transaction were approved by the Company's Board of Directors.
On December 18, 1999, the Board of Directors of the Company met, together
with its legal and financial advisors, to review the terms of the proposed
transaction. At the meeting, Mr. Harris reviewed the history of the
negotiations, William Blair & Company, L.LC. reviewed the financial terms of the
transaction, and Kirkland & Ellis reviewed the legal duties of directors, as
well as the terms of the proposed transaction. During the course of the meeting,
the Board directed Mr. Harris to indicate to Parent that the Board would not
approve the transaction unless the price were increased. Mr. Harris left the
meeting and telephoned Mr. Gilligan. Mr. Gilligan, on behalf of Parent,
responded that Parent might be willing to increase its price slightly, but only
in return for certain concessions. After further telephone discussions, between
which the Board conferred, Messrs. Harris and Gilligan settled upon an increase
in the price to $45.50 per share in return for an increase of the termination
fee by $5,000,000. The Board of Directors then considered the revised terms and
authorized the Company to enter into the Merger Agreement. The factors
considered by the Board of Directors are set forth under 'Factors Considered by
the Board' below.
The Merger Agreement and the Stockholders Agreement were executed and
delivered by the respective parties late in the day on Sunday, December 19,
1999. On Monday, December 20, 1999, the parties announced their agreement to
engage in a business combination transaction.
Factors Considered by the Board.
In approving the Offer, the Merger Agreement and the transactions
contemplated thereby, and recommending that all stockholders tender their Shares
pursuant to the Offer, the Board considered a number of factors, including:
(1) the financial and other terms of the Offer, the Merger Agreement
and the Stockholders Agreement, including the benefits of the proposed
transaction being structured as a two-step tender offer and merger which
would provide the Company's stockholders with an opportunity to receive $
45.50 per Share on an accelerated basis;
(2) the taxable nature of the transactions contemplated by the Merger
Agreement;
(3) the presentation of William Blair & Company, L.L.C. ('Blair'), the
Company's financial advisor, and Blair's opinion, delivered to the Board on
December 18, 1999, that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the $45.50 per Share cash
consideration to be received by the holders of the Shares pursuant to the
Offer and the Merger is fair to such holders from a financial point of view
(the 'Fairness Opinion'). THE FULL TEXT OF BLAIR'S FAIRNESS OPINION IS
ATTACHED HERETO AS ANNEX A. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ
SUCH OPINION IN ITS ENTIRETY;
(4) the requirement in the Company's Certificate of Incorporation that
the holders of the Common Stock and Class A Stock receive the same
consideration per share in a merger;
(5) the fact that the $45.50 per Share Offer price represents a
premium of approximately 57% and 52%, respectively, over the closing prices
of the Common Stock and Class A Stock on the New York Stock Exchange (the
'NYSE') on December 17, 1999, and approximately 57% and 47%, respectively,
over the average of all closing prices of the Common Stock and Class A
Stock on the NYSE for the last full month of trading prior to December 17,
1999;
21
<PAGE>
(6) the history of the trading of the Common Stock and Class A Stock
on the NYSE over the last 12 months and the premiums represented by the
$45.50 per Share Offer price to the prices reflected in such history;
(7) the volatility of the closing prices of the Common Stock and
Class A Stock;
(8) the alternatives available to the Company; and the possibility
that if the Company remained as an independent public corporation, because
of a decline in the market price of the Shares or the stock market in
general, the price that might be received by the holders of the Shares in
the open market or in a future transaction might be less than the $45.50
per Share price to be received by holders of Shares in connection with the
Offer and the Merger;
(9) the Company's existing competitive and market positions, including
the nature of the industry in which the Company operates;
(10) the potential adverse effect on the Company of a probe of the
market for alternative possible transactions prior to the signing of the
Merger Agreement;
(11) Blair's advice that the terms of the Merger Agreement and the
Stockholders Agreement are reasonably calculated to provide an effective
probe of the market for alternative possible transactions subsequent to the
signing of the Merger Agreement;
(12) the provisions of the Merger Agreement that permit the Company to
terminate the Merger Agreement upon payment of a termination fee under
certain circumstances;
(13) the fact that the stockholders will have appraisal rights in
connection with the Merger;
(14) the fact that the Parent's and the Purchaser's obligations under
the Merger Agreement and the Offer are not subject to any financing
condition;
(15) the Parent's financial condition and ability to cause the
Purchaser to meet its obligations under the Merger Agreement;
(16) legal matters relating to the Offer and the Merger Agreement,
including, without limitation, the regulatory clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and other regulatory agencies
with respect to the Offer and the favorable prospects for receiving such
clearance; and
(17) the decision reached on December 17, 1999 by the Harris Family
Stockholders to enter into the Stockholders Agreement.
The foregoing discussion of the factors considered and given weight by the Board
is not intended to be exhaustive. In view of the variety of factors considered
in connection with its evaluation of the Merger Agreement and the Offer, the
Board did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the Board may have given
different weights to different factors.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The Company retained Blair in connection with the Offer and the Merger.
Pursuant to an engagement letter dated November 18, 1999, the Company paid
Blair, upon execution of such letter, a cash retainer fee of $250,000. Upon
delivery of the Fairness Opinion, the Company paid Blair an additional cash fee
of $1,500,000. Upon consummation by the Company of a sale transaction (which
would include the occurrence of the Share Purchase Date), the Company has agreed
to pay Blair an additional cash fee of (i) 0.35% of Transaction Consideration(as
defined below), plus (ii) an additional 1.15% of the amount, if any, that the
Transaction Consideration increases due to the price per share for the Company's
capital stock paid or payable being greater than $45.00 per share, less
(iii) any of the foregoing fees previously paid by the Company. In addition to
the engagement letter, Blair and the Company have entered into a separate
indemnity letter, dated November 18, 1999, pursuant to which the Company has
agreed to indemnify Blair against certain liabilities and expenses arising out
of the engagement and the transactions in connection therewith, including
certain liabilities under the federal securities laws.
22
<PAGE>
For purposes of the engagement letter, Transaction Consideration means
generally the amount paid to the Company, its stockholders and holders of
Company options and other awards, plus the total amount of indebtedness of the
Company for borrowed money which is assumed or remains outstanding, reduced by
the cash and marketable securities which remain.
Except as set forth above, neither the Company nor any person acting on its
behalf has or currently intends to employ, retain or compensate any person to
make solicitations or recommendations to the stockholders of the Company on its
behalf with respect to the Offer and the Merger.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Except as set forth in the paragraph below, and except for gifts and
other transfers among Harris Family Stockholders, whose beneficial ownership is
aggregated in calculating the number of Shares beneficially owned by such
persons pursuant to Rule 13d-3 promulgated under the Exchange Act, no
transactions in the Shares have been effected during the past 60 days by the
Company or, to the best of the Company's knowledge, by any executive officer,
director, affiliate or subsidiary of the Company.
On December 9, 1999, Jerome Kahn, Jr., a director of the Company, exercised
options for (i) 7,800 shares of Class A Stock at an exercise price of $18.26 per
share under the 1996 Director Stock Option Plan of the Company and (ii) 202
shares of Class A Stock at an exercise price of $22.75 per share under the 1998
Director Stock Option Plan of the Company.
(b) The Stockholders Agreement requires that the Harris Family Stockholders
tender the Shares subject thereto on the terms provided therein. See
'Stockholders Agreement' in Item 3(b)(ii) above. To the best of the Company's
knowledge, to the extent permitted by applicable securities laws, rules or
regulations, all of the Company's executive officers, directors and affiliates
other than the Harris Family Stockholders who own Shares beneficially or of
record, presently intend to tender such Shares to Purchaser pursuant to the
Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) The Company is not engaged in any negotiation in response to the Offer
which relates to or would result in (i) an extraordinary transaction such as a
merger or reorganization, involving the Company or any subsidiary of the
Company; (ii) a purchase, transfer or sale of a material amount of assets by the
Company or any subsidiary of the Company; (iii) a tender offer for or other
acquisition of securities by or of the Company; or (iv) any material change in
the present capitalization or dividend policy of the Company.
(b) Except as set forth herein, there are no transactions, resolutions of
the Board, agreements in principle or signed contracts in response to the Offer
that relate to or would result in one or more of the events referred to in
Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Short Form Merger. Under the DGCL, if the Purchaser acquires, pursuant to
the Offer or otherwise, at least 90% of the outstanding Shares of each class,
the Purchaser will be able to effect the Merger after consummation of the Offer
without a vote of the Company's stockholders. However, if the Purchaser does not
acquire at least 90% of the outstanding Shares of each class pursuant to the
Offer or otherwise and a vote of the Company's stockholders is required under
the DGCL, a significantly longer period of time will be required to effect the
Merger.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
99.1(2) -- Agreement and Plan of Merger, dated as of December 20, 1999,
by and among Pittway Corporation, Honeywell International Inc.
and HII-2 Acquisition Corp.
</TABLE>
(table continued on next page)
23
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
99.2(2) -- Stockholders Agreement, dated as of December 20, 1999, by
and among Honeywell International Inc., HII-2 Acquisition
Corp. and certain Stockholders parties thereto.
99.3 -- Letter Agreement, dated December 20, 1999, between
Honeywell International Inc. and King Harris,
individually, for Pittway Corporation, and on behalf of
the Harris Family.
99.4 -- Engagement Letter, dated November 18, 1999, between
Pittway Corporation and William Blair & Company, L.L.C.
and the related Indemnification Letter of same date.
99.5(2) -- Press Release dated December 20, 1999.
99.6 -- Letter to Stockholders of Pittway Corporation, dated
December 23, 1999.*
99.7(1) -- Fairness Opinion of William Blair and Company, dated
December 18, 1999.*
99.8(3) -- Restated Certificate of Incorporation of the Company.
99.9(3) -- Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated June 23, 1987.
99.10(3) -- Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated December 28, 1989.
99.11(3) -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated May 9, 1996.
99.12(3) -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated May 7, 1998.
99.13(4) -- Bylaws of the Company, as amended to date.
99.14(5) -- Pittway Corporation 1990 Stock Awards Plan, as amended.
99.15(6) -- Pittway Corporation 1998 Director Stock Option Plan.
99.16(7) -- Pittway Corporation 1996 Director Stock Option Plan.
99.17(8) -- Employment Agreement with King Harris dated as of
January 1, 1996.
99.18(9) -- Amended and Restated Employment Agreement with Leo A.
Guthart dated as of January 1, 1999.
99.19 -- Amendment to the Amended and Restated Employment
Agreement with Leo A. Guthart, dated December 20, 1999.
99.20(4) -- Employment Agreement with Paul R. Gauvreau dated as of
January 1, 1998.
99.21(10) -- Amendment to Employment Agreement between Pittway
Corporation and Paul R. Gauvreau dated as of March 18,
1999.
99.22(4) -- Employment Agreement with Edward J. Schwartz dated as of
January 1, 1998.
99.23(10) -- Amendment to Employment Agreement between Pittway
Corporation and Edward J. Schwartz dated as of March 18,
1999.
99.24(9) -- Pittway Corporation Change of Control Plan dated as of
September 15, 1999.
99.25 -- Amendment to Pittway Corporation Change of Control Plan
executed by the Company and King Harris on December 20,
1999.
99.26 -- Amendment to Pittway Corporation Change of Control
Plan executed by the Company and Paul R. Gauvreau on
December 20, 1999.
99.27 -- Amendment to Pittway Corporation Change of Control
Plan executed by the Company and Edward J. Schwartz on
December 20, 1999.
99.28(11) -- Company's Information Statement pursuant to
Section 14(f) of the Exchange Act and Rule 14f-1
thereunder.*
99.29 -- Certain portions of pages 3-5 and 9-16 of the Company's
Proxy Statement, dated April 5, 1999, relating to the
Company's Annual Meeting of Shareholders held on May 6,
1999.
</TABLE>
- ------------
* Included in the materials mailed to the Company's stockholders.
(1) Attached hereto as Annex A.
(2) Incorporated by reference to the Company's current report on Form 8-K filed
with the SEC on December 20, 1999.
(3) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1998 and filed with the SEC on August 4,
1998.
(footnotes continued on next page)
24
<PAGE>
(footnotes continued from previous page)
(4) Incorporated by reference from the Company's annual report on Form 10-K for
the year ended December 31, 1998 and filed with the SEC on March 19, 1999.
(5) Incorporated by reference from the Company's registration statement of
Form S-8 (No. 333-71613) filed with the SEC on February 1, 1999.
(6) Incorporated by reference from the Company's registration statement of
Form S-8 (No. 333-71617) filed with the SEC on February 1, 1999.
(7) Incorporated by reference from the Company's registration statement of
Form S-8 (No. 333-12615) filed with the SEC on September 25, 1996.
(8) Incorporated by reference from the Company's annual report on Form 10-K for
the year ended December 31, 1995 filed with the SEC on March 27, 1996.
(9) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1999 and filed with the SEC on November
2, 1999.
(10) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1999 and filed with the SEC on May 5, 1999.
(11) Attached hereto as Schedule I.
25
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
PITTWAY CORPORATION
By: /s/ KING HARRIS
...................................
Name: King Harris
Title: President and Chief Executive
Officer
Dated: December 23, 1999
26
<PAGE>
SCHEDULE I
PITTWAY CORPORATION
200 SOUTH WACKER DRIVE, SUITE 700
CHICAGO, ILLINOIS 60606-5802
------------------------
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND
RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about December 23, 1999,
as part of the Solicitation/Recommendation Statement on Schedule 14D-9
('Schedule 14D-9') of Pittway Corporation, a Delaware corporation (the
'Company'), to holders of Common Stock of the par value of $1.00 per share of
the Company (the 'Common Stock') and Class A Stock of the par value of $1.00 per
share of the Company (the 'Class A Stock,' and together with the Common Stock,
the 'Shares'). Capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in the Schedule 14D-9. Pursuant to an
Agreement and Plan of Merger, dated December 20, 1999 (the 'Merger Agreement'),
among the Company, Honeywell International Inc., a Delaware corporation
('Parent'), and HII-2 Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent (the 'Purchaser'), in the event of the occurrence of
the Share Purchase Date (as defined in Schedule 14D-9), the size of the
Company's board of directors (the 'Board') is to be reduced to eight members,
all but two of the current members of the Board are to resign, and six persons
designated by Parent are to be elected to fill the vacancies. These matters are
described in more detail under the heading 'Merger Agreement -- The Company's
Board of Directors' in Item 3(b)(ii) in Schedule 14D-9. You are receiving this
Information Statement in connection with such possible designation of directors.
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and Rule 14f-1
thereunder. You are urged to read this information statement carefully. You are
not, however, required to take any action in connection with this Information
Statement.
Pursuant to the Merger Agreement, the Purchaser has commenced a cash tender
offer to acquire all of the Shares (the 'Offer'). The Offer is scheduled to
expire at 12:00 Midnight, New York City Time, on Thursday, February 3, 2000,
unless the Offer is extended. Following the successful completion of the Offer,
upon approval by a stockholder vote, if required, and subject to certain other
conditions, the Purchaser will be merged with and into the Company (the
'Merger'). See 'The Offer' and 'The Merger' under the heading 'Merger Agreement'
in Item 3(b)(ii) in Schedule 14D-9.
The information contained in this Information Statement concerning Parent
and Purchaser has been furnished to the Company by Parent and Purchaser, and the
Company assumes no responsibility for the accuracy or completeness of such
information.
GENERAL INFORMATION REGARDING THE COMPANY
GENERAL
The Common Stock and the Class A Stock are the only classes of voting
securities of the Company outstanding. As of December 20, 1999, there were
7,877,664 shares of Common Stock and 34,902,691 shares of Class A Stock
outstanding.
Pursuant to the Company's Certificate of Incorporation, prior to the Change
of Control Date (as defined therein) generally the holders of Class A Stock
voting as a class are entitled to elect such number of directors, but not less
than two, as equal 25% of the total number of directors constituting the full
Board and the holders of Common Stock voting as a class are entitled to elect
the remaining directors, and with respect to all other matters voted upon by the
stockholders of the Company, the holders of Common Stock are entitled to one
vote per share of Common Stock and the holders of Class A Stock are entitled to
one-tenth of one vote per share of Class A Stock.
<PAGE>
Subject to certain exceptions, which may be applicable notwithstanding the
occurrence of the Share Purchase Date, the 'Change of Control Date' is defined
as the first date on which the shares of Harris Group Stock (as defined below)
are entitled to cast fewer than 4,488,330 votes (counting the Class A Stock as
entitled to cast one-tenth of one vote per share for this purpose). 'Harris
Group Stock' means, at any point in time, shares of Common Stock and Class A
Stock which, at such time, any member of the 'Harris Group' (as defined below),
either alone or in combination with any other member or members of the Harris
Group, directly or indirectly beneficially owns (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as such Rule was in effect and interpreted
at 5:00 P.M. Central Standard Time on December 28, 1989), without taking into
account any shares of Common Stock acquired by any member of the Harris Group
subsequent to May 31, 1989 in excess of shares of Common Stock disposed of by
members of the Harris Group subsequent to such date. The 'Harris Group' means
Messrs. Irving B. Harris, Neison Harris, King Harris, William W. Harris and
Sidney Barrows (deceased), and their respective spouses, descendants and spouses
of descendants, trustees of trusts established for the benefit of such persons,
and executors of estates of such persons. Irving B. Harris and Neison Harris are
brothers. William W. Harris is the son of Irving B. Harris and King Harris is
the son of Neison Harris.
Provided that a Change of Control Date had not theretofore occurred, if the
election of the eight directors referred to above were submitted to the
Company's stockholders, the holders of Class A Stock voting as a class would be
entitled to elect two directors and the holders of the Common Stock voting as a
class would be entitled to elect six directors.
If a Change of Control date had theretofore occurred, the authorized shares
of Class A Stock, both issued and unissued, would automatically have been
changed into, and redesignated as, shares of Common Stock, at which time each
share of Common Stock would entitle its record holder to one vote and the
holders of Common stock (including such redesignated shares) would be entitled
to elect all eight directors.
THE COMPANY'S BOARD OF DIRECTORS
Parent has informed the Company that Parent will choose Parent's six
designees from the list of persons set forth in Schedule I attached to the Offer
to Purchase. If necessary, Parent may choose additional or other Parent's
designees, subject to the requirements of Rule 14f-1 promulgated under the
Exchange Act.
Parent has advised the Company that to the best knowledge of Parent, none
of Parent's potential designees currently is a director of, or holds any
position with, the Company, and except as disclosed in the Offer to Purchase,
none of Parent's designees beneficially owns any securities (or rights to
acquire any securities) of the Company or has been involved in any transactions
with the Company or any of its directors, executive officers or affiliates that
are required to be disclosed pursuant to the rules of the SEC. None of Parent's
designees has any family relationship with any director or executive officer of
the Company.
Parent has advised the Company that each of the persons listed in
Schedule I attached to the Offer to Purchase has consented to act as a director,
and that none of such persons has during the last five years been convicted in a
criminal proceeding (excluding traffic violations and similar misdemeanors) or
was a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceeding was, or is, subject to
a judgment, decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws or finding any violation
of such laws or is involved in any other legal proceeding which is required to
be disclosed under Item 401(f) of Regulation S-K promulgated by the SEC. It is
expected that Parent's designees may assume office at any time following the
Share Purchase Date, which date cannot be earlier than February 3, 2000.
2
<PAGE>
COMPANY DIRECTORS AND EXECUTIVE OFFICERS
THE CURRENT MEMBERS OF THE COMPANY BOARD
The names of the Company's current directors, their ages as of
December 23, 1999 and certain other information about them are set forth below.
Each of the directors other than Irving Harris, Neison Harris, King Harris, Fred
Conforti and Leo A. Guthart is eligible to be one of the two current directors
who continues to serve on the Board after the Share Purchase Date.
DIRECTORS ELECTED BY THE HOLDERS OF CLASS A STOCK
<TABLE>
<CAPTION>
DIRECTOR
NOMINEE SINCE AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
------- -------- --- --------------------------------------
<S> <C> <C> <C>
Eugene L. Barnett(A)............... 1980 71 Retired; Consultant (March 1991 to April 1993) to
The Brand Companies, Inc. (specialty contractor);
Vice President of the Company (1979 to 1993);
Director, AptarGroup, Inc. (specialty packaging
components manufacturer) and National Service
Corporation (specialty contractor)
E. David Coolidge III(A)(N)........ 1994 56 Chief Executive Officer (since January 1996),
Managing Partner (1995), Manager, Corporate
Finance Department (1977 to 1995) of William
Blair & Company L.L.C. (investment banker)
Anthony Downs(A)(C)................ 1971 69 Senior Fellow of Brookings Institution
(non-profit social policy research center);
Consultant; Director, Bedford Properties, Inc.
(real estate investment trust), Essex Property
Trust, Inc. (real estate investment trust),
General Growth Properties, Inc. (real estate
investment trust), Massachusetts Mutual Life
Insurance Corporation (insurance company) and
Penton Media, Inc. (business media company)
</TABLE>
DIRECTORS ELECTED BY THE HOLDERS OF COMMON STOCK
<TABLE>
<CAPTION>
DIRECTOR
NOMINEE SINCE AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
------- -------- --- --------------------------------------
<S> <C> <C> <C>
Robert L. Barrows'D'............... 1999 51 Shareholder in the law firm of Leonard, Street
and Deinard, Minneapolis, Minnesota; Director,
AptarGroup, Inc. (specialty packaging compo-
nents manufacturer)
Fred Conforti...................... 1990 58 President of Pittway Systems Technology Group
(division of the Company); Vice President of
the Company (since 1990)
Leo A. Guthart(E).................. 1980 62 Chairman and Chief Executive Officer of
Pittway Security Group (division of the
Company); Vice Chairman of the Board of the
Company (since 1990); Director, AptarGroup,
Inc. (specialty packaging components
manufacturer) and Chairman of the Board and
Director, Cylink Corporation (commercial data
encryption company); Trustee, Acorn Investment
Trust (mutual funds)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NOMINEE SINCE AGE PRINCIPAL OCCUPATION AND DIRECTORSHIPS
------- ----- --- --------------------------------------
<S> <C> <C> <C>
Irving B. Harris(E)'D'............. 1953 89 Chairman of the Executive Committee of the
Company (since 1990); Chairman of the Board
of Acorn Investment Trust (mutual funds)
King Harris(E)(N)'D'............... 1975 56 President and Chief Executive Officer of the
Company (since 1990); Chairman of the Board
and Director, AptarGroup, Inc. (specialty
packaging components manufacturer); Chairman
of the Board and Director, Penton Media, Inc.
(business media company)
Neison Harris(E)'D'................ 1963 84 Chairman of the Board of the Company (since
1974)
William W. Harris(C)(E)(N)'D' 1975 59 Private Investor; Treasurer of KidsPac
(political action committee); Director,
Cylink Corporation (commercial data
encryption company)
Jerome Kahn, Jr.(C) 1994 65 President (since October 1996), Vice
President (prior to 1994 to October 1996) of
William Harris Investors, Inc. (investment
advisor); Trustee, Acorn Investment Trust
(mutual funds)
John W. McCarter, Jr.(C)........... 1998 61 President and Chief Executive Officer (since
October 1996) of The Field Museum (natural
history museum); Senior Vice President (prior
to 1994 to October 1996) of Booz-Allen &
Hamilton, Inc. (consulting); Director, W.W.
Grainger, Inc. (industrial supply
distributor), A.M. Castle & Company
(industrial specialty metal distributor),
H.T. Insight Funds, Inc. (mutual funds) and
The LaSalle Partners Funds, Inc. (mutual
funds)
</TABLE>
- ------------
(A) Member of Audit Committee
(C) Member of Compensation Committee
(E) Member of Executive Committee
(N) Member of Nominating Committee
'D' Irving B. Harris and Neison Harris are brothers. William W. Harris is the
son of Irving B. Harris and King Harris is the son of Neison Harris.
Robert Barrows is the nephew of Irving B. Harris and Neison Harris and the
first cousin of William W. Harris and King Harris.
INFORMATION CONCERNING THE BOARD; DIRECTOR COMPENSATION
The Board of Directors of the Company met nine times during 1998. The
Company's Board of Directors has an Audit Committee, a Compensation Committee,
an Executive Committee and a Nominating Committee.
The Audit Committee reviews and, as it deems appropriate, approves internal
accounting and financial controls for the Company and accounting principles and
auditing practices and procedures to be employed in preparation and review of
financial statements of the Company. The Audit Committee also makes
recommendations to the full Board concerning the engagement of independent
public accountants to audit the annual financial statements of the Company and
its subsidiaries and arranges with such accountants the scope of the audit to be
undertaken by such accountants. The current members of the Audit Committee are
Eugene L. Barnett (Chairman), E. David Coolidge III and Anthony Downs. During
1998, the Committee met twice.
4
<PAGE>
The Compensation Committee reviews and determines the compensation of
certain executive officers, reviews and makes recommendations to the full Board
with respect to salaries, bonuses and deferred compensation of certain other
officers and executives, compensation of directors and management succession,
and makes such determinations and performs such other duties as are expressly
delegated to it pursuant to the terms of any employee benefit plan of the
Company. The Compensation Committee administers the Company's 1990 Stock Awards
Plan. The current members of the Compensation Committee are Anthony Downs
(Chairman), William W. Harris, Jerome Kahn, Jr. and John W. McCarter, Jr. During
1998, the Compensation Committee met five times.
The Executive Committee generally meets prior to each regular meeting of
the Board of Directors to distill topics and issues to be presented at such
meetings. When the full Board is not in session, the Executive Committee may
exercise all the powers and authority of the Board of Directors except as
limited by law. The current members of the Executive Committee are Irving B.
Harris (Chairman), Leo A. Guthart, King Harris, Neison Harris and William W.
Harris. During 1998, the Executive Committee met six times.
The Nominating Committee, as it deems appropriate, makes recommendations to
the full Board with respect to the size and composition of the Board and its
committees and with respect to nominees for election as directors. The current
members of the Nominating Committee are William W. Harris (Chairman), E. David
Coolidge III and King Harris. During 1998, the Nominating Committee met once.
The Nominating Committee will consider suggestions regarding candidates for
election to the Board submitted by stockholders in writing to the Secretary of
the Company. With regard to the 2000 annual meeting of stockholders, any such
suggestion must be received by the Secretary no later than the date by which
stockholder proposals for such annual meeting must be received as described
below under the heading 'Stockholder Proposals for the 2000 Annual Meeting.'
Fred Conforti attended only 56% of the meetings of the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, Anthony Downs, William W. Harris, Jerome Kahn, Jr. and (after
May 7, 1998) John W. McCarter, Jr., were the members of the Compensation
Committee. Pulbrook Associates ('Pulbrook'), a limited partnership of which
Irving B. Harris owns 58.7% as a limited partner and a corporation owned by a
trust of which William W. Harris is a trustee owns 1.3% as the general partner,
was indebted to the Company during 1998 pursuant to an amortizing 8% mortgage
note in the original principal amount of $193,000 delivered in November 1993 in
connection with Pulbrook's purchase of a National Pride car care center from the
Company. The largest outstanding note balance during 1998 (on January 1, 1998)
was $162,282. The balance as of March 25, 1999 was $148,035.
BOARD COMPENSATION
During 1998, compensation to non-officer directors was paid at the rate of
$2,500 per quarter plus $3,000 for each Board meeting attended in person, $1,000
for each Board meeting attended by telephone and $1,000 for each committee
meeting attended, except that $250 was paid for attending a committee meeting
held on the same day as a Board meeting. The Chairman of the Audit Committee was
paid an additional $2,000 per year. Effective January 1, 1999, the compensation
per quarter was increased to $3,500 and the Chairman of the Compensation
Committee will be paid an additional $2,000 per year. Officer directors are not
separately compensated for serving as directors.
Under the Company's 1998 Director Stock Option Plan, the Board may from
time to time grant to directors who are not employees of the Company or any of
its subsidiaries ('Eligible Directors') non-qualified options to purchase shares
of Class A Stock at the market values on the dates of grant. The maximum number
of shares which may be issued under the Plan is 135,000 (subject to adjustment).
Each option may have a term of up to 10 years, but, if earlier than scheduled
expiration, will expire five years after the optionee's service as a member of
the Board terminates for any reason. Each option becomes exercisable as
determined by the Board, but except in the event of death or disability cannot
be exercised during the six months subsequent to grant.
Pursuant to the Plan, during 1998 non-qualified options were granted as
follows: Mr. McCarter -- 5,400 shares; Mr. Barnett -- 540 shares;
Mr. Coolidge -- 540 shares; Mr. Downs -- 270 shares; Mr. W.
5
<PAGE>
Harris -- 540 shares; Mr. Kahn -- 540 shares. Mr. McCarter's option was
exercisable upon grant with respect to 50% and becomes exercisable with respect
to the balance on the first anniversary of grant provided he is then an Eligible
Director. Each of the other options was exercisable upon grant with respect to
25% and becomes exercisable with respect to an additional 25% on each
anniversary of grant provided the holder is then an Eligible Director.
Mr. McCarter's option was granted to him following his initial election to the
Board at the 1998 annual meeting. The options granted to the other directors
were granted to them to avoid dilution under their options pursuant to the
Company's 1996 Director Stock Option Plan that were outstanding at the time of
the Spinoff.
Directors who hold outstanding options under the Company's 1996 Director
Stock Option Plan and/or 1998 Director Stock Option Plan will be offered an
opportunity to surrender to the Company, effective following the Share Purchase
Date, the portion of each such option which is then exercisable or which would
become exercisable on or prior to December 31, 2000 in exchange for a cash
payment. See Item 3(b)(i) in Schedule 14D-9 and 'Merger Agreement -- Outstanding
Options and Other Awards' in Item 3(b)(ii) in Schedule 14D-9.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE COMPANY
All officers of the Company are elected each year by the Board of Directors
at its annual organization meeting in May. In addition to Fred Conforti, Leo A.
Guthart, Irving B. Harris, King Harris and Neison Harris, information with
respect to whom is set forth above, the executive officers of the Company
include the following:
Paul R. Gauvreau, 60, Financial Vice President, Treasurer and Chief
Financial Officer of the Company, since prior to 1994.
Edward J. Schwartz, 58, Vice President of the Company since prior to 1994.
Philip V. McCanna, 52, Controller of the Company since 1995, Director of
Financial Reporting of the Company prior to 1995.
James F. Vondrak, 55, Secretary of the Company since 1995, Group
Controller of Pittway Systems Technology Group (division of the Company)
since 1994.
Set forth below are the 'significant employees' of the Company (as such
term is used in Instructions to Paragraph (b) of Item 401 under Regulation S-K
promulgated under the Securities Act):
Roger B. Fradin, 46, President of Alarm Device Manufacturing Company, a
division of the Company, since prior to 1994.
Mark S. Levy, 51, President of Fire-Lite Alarms, Inc., a subsidiary of the
Company, since prior to 1994.
Steven I. Roth, 53, President of Ademco Distribution, Inc., a subsidiary
of the Company, since prior to 1994.
Andreas Kramvis, 47, President of Ademco International, Inc., a subsidiary
of the Company, since prior to 1994.
SUMMARY COMPENSATION TABLE
In the descriptions which follow, no adjustment has been made to the
descriptions of the terms of outstanding restricted stock awards, options or
SARs to reflect the fact that pursuant to the Merger Agreement the holders of
certain currently outstanding restricted stock awards, options and SARs will be
offered an opportunity to surrender portions of such awards to the Company in
return for a cash payment following the Share Purchase Date and to exercise or
receive payment of certain portions thereof earlier than described. See 'Merger
Agreement -- Outstanding Options and Other Awards' in Item 3(b)(ii) in
Schedule 14D-9 and Item 3(b)(i) in Schedule 14D-9.
The following table sets forth compensation information for the President
and Chief Executive Officer of the Company (who served as such throughout 1998)
and for each of the Company's four most highly compensated other executive
officers serving at the end of 1998. No other person who served as an executive
officer of the Company at any time during 1998 had 1998 compensation in excess
of the 1998 compensation of any of the executive officers named in the table.
6
<PAGE>
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING
------------------- AWARDS OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) ($)(1)(2)(3) (#)(1)(2)(4) COMPENSATION
--------------------------- ---- ------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
King Harris, ................. 1998 $650,000 $720,000 54,600 $5,256(5)
President and Chief 1997 550,000 470,000 71,614 5,206
Executive Officer 1996 550,000 500,000 $250,000 52,650 4,946
Fred Conforti, ............... 1998 500,000 280,000 37,200 5,256(5)
President of Pittway Systems 1997 460,000 500,000 35,910 5,206
Technology Group (division 1996 425,000 150,000 51,048 4,590
of the Company)
Leo A. Guthart, .............. 1998 500,000 590,000 100,000 36,400 3,363(6)
Chairman and Chief Executive 1997 460,000 100,000 56,173 4,612
Officer of Pittway Security 1996 425,000 450,000 35,100 4,612
Group (division of the
Company)
Paul R. Gauvreau, ............ 1998 290,000 210,000 26,439 5,256(5)
Financial Vice President, 1997 275,000 180,000 10,800 5,206
Treasurer and Chief 1996 260,000 70,000 30,000 13,324 4,944
Financial Officer
Edward J. Schwartz, .......... 1998 195,000 100,000 12,587 5,243(7)
Vice President 1997 185,000 90,000 10,206 5,169
1996 172,000 60,000 10,000 10,370 4,880
</TABLE>
- ------------
(1) All of the restricted stock awards, options and SARs relate to Class A
Stock.
(2) All of the restricted stock awards and the following SARs were awarded in
lieu of bonuses or portions of bonuses that would otherwise have been paid
in cash: K. Harris, 18,964 shares for 1997; F. Conforti, 15,138 shares for
1996; L. Guthart, 21,073 shares for 1997; P. Gauvreau, 2,524 for 1996; and
E. Schwartz, 3,587 shares for 1998, 2,106 shares for 1997 and 2,270 shares
for 1996.
(3) The restricted stock awards shown for 1998 were awarded in 1999 and thus
were not outstanding at the end of 1998. The other restricted stock awards
shown remained outstanding in full at the end of 1998. The aggregate value
of the 40,351 shares subject to such other awards and to three other
restricted stock awards held by named executive officers that remained
outstanding at the end of 1998 was then $1,334,105. Each award shown was a
Performance Shares Award scheduled to vest in equal pro rata installments
over the five years subsequent to its grant. Under the terms of each award,
no shares are distributable until vesting of such award in full or earlier
termination of employment, and at the time shares are distributed an amount
is payable equal to the normal quarterly dividends which would have been
paid on such shares had such shares been issued on the date such award was
granted.
(4) Includes a SAR awarded for 1998 in 1999 (and thus not shown in the following
sections titled 'Option/SAR Grants During Year' and 'Option/SAR Exercises
and Year-End Values') to E. Schwartz for 3,587 shares. The SAR was a Bonus
Shares Award vested in full upon grant. Under the terms of such SAR,
following a date approximately three years after the date of grant (or
following the date of any earlier termination of employment), such shares
are issued and an amount is payable equal to the normal quarterly dividends
which would have been paid on such shares had such shares been issued on the
date such SAR was granted. The Compensation Committee may, in its sole
discretion, determine to pay the fair market value of such shares in cash
rather issue such shares.
(5) Consists of $4,800 annual matching Company contributions during the year to
the Company's salary reduction plan and $456 for term life insura nce
provided by the Company during the year.
(6) Consists of $3,249 annual matching Company contributions during the year to
the Company's salary reduction plan and $114 for term life insurance
provided by the Company during the year.
(7) Consists of $4,800 annual matching Company contributions during the year to
the Company's salary reduction plan and $443 for term life insurance
provided by the Company during the year.
7
<PAGE>
The following table sets forth information with respect to options and
stock appreciation rights ('SARs') granted during 1998 to executive officers
named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OF OPTION TERM(4)
OPTIONS/SARS EMPLOYEES IN BASE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- ---------- ----------- ------------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
King Harris(1)............ 54,600 6.0 $ 23.74 8/18/05 527,685 1,229,731
King Harris(2)............ 18,964 2.1 0 1/20/01 520,881 598,893
Fred Conforti(1).......... 37,200 4.1 23.74 8/18/05 359,522 837,839
Leo A. Guthart(1)......... 36,400 4.0 23.74 8/18/05 351,790 819,821
Leo A. Guthart(2)......... 21,073 2.3 0 1/20/01 578,809 665,496
Paul R. Gauvreau(1)....... 12,000 1.3 23.74 8/18/05 115,975 270,271
Paul R. Gauvreau(3)....... 14,439 1.6 27.2454 6/15/05 160,152 373,222
Edward J. Schwartz(1)..... 9,000 1.0 23.74 8/18/05 86,981 202,703
Edward J. Schwartz(2)..... 2,106 .2 0 1/20/01 57,845 66,509
</TABLE>
- ------------
(1) Consists of non-qualified options to purchase Class A Stock granted under
the Company's 1990 Stock Awards Plan at exercise prices equal to the market
prices on the dates of grant. Each option becomes exercisable on the third
anniversary of the date of grant, subject to acceleration in the event of
earlier termination of employment (full acceleration if earlier termination
is on account of death, permanent disability or retirement upon or after
reaching age sixty-five; partial acceleration in increments of 33 1/3% each
year commencing one year after the date of grant if termination is for any
other reason other than for 'cause').
(2) Consists of SAR's with respect to Class A Stock awarded under the Company's
1990 Stock Awards Plan (in lieu of a portion of a bonus that would otherwise
have been paid in cash) at a reference price of zero dollars and fully
vested at grant. Under the terms of each SAR, following a date approximately
three years after the date of grant (or following the date of any earlier
termination of employment), the shares of Class A Stock are issued and an
amount is payable equal to the normal quarterly dividends which would have
been paid on such shares had such shares been issued on the date the SAR was
granted. The Compensation Committee may, in its sole discretion, determine
to pay the fair market value of such shares in cash rather than issue such
shares.
(3) Consists of a non-qualified option to purchase Class A Stock granted under
the Company's 1990 Stock Awards Plan at an exercise price equal to the
market price on the date of grant. The option was fully exercisable on the
date of grant. The option was granted in exchange for Mr. Gauvreau's
surrender of a portion of a SAR previously granted to him under the Plan.
See 'Compensation Committee Report on Executive Compensation -- Stock Option
and Stock Appreciation Right (SAR) Program.'
(4) The assumed annual rates of appreciation in the price of Class A Stock are
in accordance with rules of the Securities and Exchange Commission and are
not predictions of future market prices of the Class A Stock nor of the
actual values the named executive officers will realize. In order for such
annual rates of appreciation to be realized over the 3-year term of the
SARs, the market price of Class A Stock would have to increase to
$27.47/share (5%) or $31.58/share (10%) at the end of that term. In order
for such annual rates of appreciation to be realized over the 7-year term of
the options, the market price of Class A Stock would have to increase to
$33.40/share (5%) or $46.26/share (10%) during that term. In such events,
and assuming corresponding annual rates of increase for the market price of
Common Stock, the market value of all currently outstanding shares of Common
Stock and Class A Stock would have increased by approximately $160,000,000
(5%) or $335,000,000 (10%) during that 3-year term and by approximately
$413,000,000 (5%) or $962,000,000 (10%) during that 7-year term.
8
<PAGE>
OPTION/SAR EXERCISES AND YEAR-END VALUES
The following table sets forth information with respect to exercises of
options and SARs during 1998 by the executive officers named in the Summary
Compensation Table and the values of unexercised options and SARs held by them
as of December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN 1998 AND YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS/SARS AT YEAR- MONEY OPTIONS/SARS AT
SHARES END(#) YEAR-END($)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
King Harris........... 97,716 $2,385,071 278,533 208,024 $7,024,166 $3,665,714
Fred Conforti......... 25,631 622,559 161,335 140,358 3,941,234 1,965,404
Leo A. Guthart........ 0 0 156,960 127,673 3,833,467 2,079,802
Paul R. Gauvreau...... 16,407 340,885 57,989 39,364 1,132,858 623,592
Edward J. Schwartz.... 3,078 73,763 34,975 32,168 854,154 555,144
</TABLE>
EMPLOYMENT AGREEMENTS
An employment agreement between the Company and K. Harris provides for a
minimum annual salary of $550,000, supplementary insurance coverage (or its cash
equivalent) and participation in the Company's supplemental executive retirement
plan. The agreement is for a term expiring December 31, 2001. The agreement
renews automatically at the end of each year for an additional year (or until
age 65, if earlier) unless either party thereto elects otherwise, but may be
terminated by Mr. Harris on specified advance notice (with forfeiture of
supplemental retirement benefits). The agreement includes non-competition,
non-solicitation and confidentiality obligations on the part of Mr. Harris which
survive its termination.
In 1998, the Company entered into similar agreements with Mr. Gauvreau and
Mr. Schwartz. See 'Compensation Committee Report on Executive
Compensation -- Employment Agreement with P. Gauvreau and E. Schwartz' in
'Compensation Committee Report on Executive Compensation' below.
Subsequent to the Company's 1999 annual meeting of stockholders, the
Company, with the approval of the Compensation Committee of the Board (the
'Committee'), amended and restated its employment agreement with L. Guthart. As
amended and restated, the agreement provides for a minimum annual salary of
$550,000, supplementary insurance coverage (or its cash equivalent) and
participation in the Company's supplemental executive retirement plan. The
agreement is for a term expiring September 26, 2004 but may be terminated by Mr.
Guthart on specified advance notice (with forfeiture of supplemental retirement
benefits). The agreement permits Mr. Guthart to elect to reduce to not less than
eight hours per week the business time and attention he is required to devote
during his employment (with a reduction in annual salary to not less than
$350,000, and a reduction in other benefits), and provides generally for a
fifteen-year post-employment consulting arrangement for an annual fee of
$100,000 (subject to adjustment based on cost of living). The agreement provides
that in the event of a 'Change of Control of the Company' (as defined
therein) -- which would include the occurrence of the Share Purchase Date -- the
Company is obligated to set aside in a grantor trust the amount Mr. Guthart
would thereafter be entitled to receive under the agreement. In connection with
the Merger Agreement, Mr. Guthart has waived application of this provision to
the transactions contemplated by the Merger Agreement, subject to immediate
reinstatement in the event the agreement is breached subsequent to the Share
Purchase Date.
Pursuant to the Merger Agreement, the foregoing agreements are to be
modified effective the Share Purchase Date. See 'Merger Agreement -- Certain
Employee Arrangements' in Item 3(b)(ii) in Schedule 14D-9 and Item 3(b)(i) in
Schedule 14D-9.
PLANS AND ARRANGEMENTS
In the descriptions of plans and arrangements which follow, and in the
descriptions elsewhere in this Proxy Statement of outstanding restricted stock
awards, options and SARs, references are made to
9
<PAGE>
shares of Class A Stock. If the Change of Control Date (as defined in the
Company's Restated Certificate of Incorporation, as amended) should occur, the
Class A Stock will change into Common Stock on a share-for-share basis. In the
event of any such change, references to Class A Stock in such descriptions
should be understood to refer to Common Stock.
SALARY REDUCTION PLAN
Under the Company's salary reduction plan, eligible covered employees of
the Company, its divisions and subsidiaries may elect to have a portion of their
'earnings' (total cash compensation less certain items) contributed to the plan
by their employers, and their employers match such contributions with specified
percentages thereof. The percentages vary and are determined from time to time
by their respective employers. For 1998, such percentages ranged from 1.5% to
3.0% of eligible covered employees' 'earnings.' Contributions and matches are
invested in one or more investment funds selected by the employees from among
those available under the plan. Such funds include a fund which invests solely
in Class A Stock. Salary reduction contributions vest immediately. Subject to
acceleration in the event of termination of employment upon retirement after age
65 or on account of death or disability, employer matching contributions vest on
a cumulative basis of 20% per year of credited service under the plan. Vested
contributions (after any earnings or losses from the investment thereof) are
distributed in a lump sum or installments following termination of employment,
but account balances may under certain circumstances and subject to certain
conditions be withdrawn or borrowed earlier.
RETIREMENT PLANS
The Company and its subsidiaries have tax-qualified retirement plans
covering all domestic salaried employees, and certain domestic hourly employees,
after three months of service. The plans are fully paid for by the Company, and
employees become fully vested after five years of service. The annual benefit
payable to an employee under the plans upon retirement, computed as a straight
life annuity amount, equals the sum of the separate amounts the employee accrues
for each of his years of service under the plans plus certain increases put into
effect prior to 1998. Such separate amounts are determined as follows: for each
year through 1988, 1.2% of such year's compensation up to the Social Security
wage base for such year and 1.8% (2.0% for years after 1986) of such year's
compensation above such wage base; for each year after 1988 through the year in
which the employee reaches thirty-five years of service, 1.2% of such year's
'covered compensation' and 1.85% of such year's compensation above such 'covered
compensation'; and for each year thereafter, 1.2% of such year's compensation.
The employee's compensation under the plans for any year includes all salary
(before any election under the Company's salary reduction plan or cafeteria
plan), commissions and overtime pay and, beginning in 1989, bonuses (in the case
of each executive officer named in the Summary Compensation Table, the
equivalent of the sum of the amounts set forth for such executive officer for
such year in the Annual Compensation column of such Table and the amount taxable
to such executive officer during such year related to options and SARs awarded
pursuant to the Company's 1990 Stock Awards Plan); subject to such year's limit
applicable to tax-qualified retirement plans ($160,000 for 1999 and, currently,
for each year thereafter). The employee's 'covered compensation' under the plans
for any year is generally the average, computed such year, of the Social
Security wage bases for each of the thirty-five years preceding the employee's
Social Security retirement age, assuming that such year's Social Security wage
base will not change in the future. Normal retirement age under the plans is age
65, and reduced benefits are available as early as age 55. Benefits are not
subject to reduction for Social Security benefits or other offset amounts.
Estimated annual benefits payable under the plans upon retirement at normal
retirement age for the following persons (assuming 1999 and future compensation
at the $160,000 limit currently applicable and that covered compensation remains
constant; but without regard to the formula limitation on annual benefits
imposed on tax-qualified retirement plans, currently $130,000) are: K. Harris,
$119,730; F. Conforti, $109,808; L. Guthart, $130,101; P. Gauvreau, $99,410; and
E. Schwartz, $56,887.
10
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Four executive officers of the Company and three other employees of the
Company or a subsidiary participate in the Company's supplemental executive
retirement plan, which is not tax-qualified. The annual benefit payable to a
participant under the plan at age 65, computed as a straight life annuity
amount, equals the sum of the separate amounts the participant accrues for each
of his years of service after January 1, 1995 plus, in one case, an increase
based on a pro forma adjustment to tax-qualified retirement benefits. The
separate amount for each such year is 1.85% of that portion of the participant's
salary and annual discretionary cash bonus, if any, for such year (before any
election under the Company's salary reduction plan, and including any portion of
such bonus taken in the form of Performance Shares Awards and/or Bonus Shares
Awards) in excess of $150,000 (or any higher limit applicable that year to
tax-qualified retirement plans) but less than $300,000. Benefits are not subject
to reduction for Social Security benefits or other offset amounts. Accrued
benefits are subject to forfeiture in certain events. Estimated annual benefits
payable under the plan upon retirement at age 65 for the following persons
(assuming 1999 and future annual salary and discretionary cash bonus of not less
than $300,000 for each of them and that the $160,000 limit applicable in 1999
remains constant) are: K. Harris, $34,902; L. Guthart, $20,442; P. Gauvreau,
$28,644; and E. Schwartz, $48,353.
CHANGE OF CONTROL PLAN
Subsequent to the Company's 1999 annual meeting of stockholders, the
Company, with the approval of the Committee, adopted a Change of Control Plan
and designated four employees to participate in such Plan, including K. Harris,
P. Gauvreau and E. Schwartz. Under the Plan, in the event of a 'Change of
Control of the Company' (as defined therein) -- which would include the
occurrence of the Share Purchase Date -- if the employment of a participant is
terminated during the two subsequent years by his employer without 'Cause' or by
him for 'Good Reason' (each as defined in his employment agreement with the
Company), he is entitled to continue to receive salary over the three years
subsequent to termination, to be paid an immediate bonus equal to at least his
target bonus for the year of termination, and to continue to participate in
substantially all of the benefits provided for in his employment agreement for
at least one year, subject to certain limitations related to the 'excess
parachute payment' provisions of the Internal Revenue Code. The Plan further
provides that upon a Change of Control of the Company, the Company is obligated
to set aside in a grantor trust the amount each participant would thereafter be
entitled to receive if his employment were so terminated. In connection with the
Merger Agreement, each participant has waived application of this provision to
the transactions contemplated by the Merger Agreement, subject to immediate
reinstatement in the event his employment agreement is breached subsequent to
the Share Purchase Date.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership (as such term is used in Section 13(d) of the Securities Exchange Act
of 1934 (the 'Exchange Act')) as of December 20, 1999 of Common Stock and
Class A Stock by (a) the persons known by the Company to be the beneficial
owners of more than 5% of the outstanding shares of Common Stock or Class A
Stock, (b) each director of the Company, (c) each of the executive officers of
the Company listed in the Summary Compensation Table, (d) all directors, and
executive officers of the Company as a group, and (e) the current members of the
Harris Group. The information set forth in the table as to directors and
executive officers is based upon information furnished to the Company by them in
connection with the preparation of this Information Statement. Except where
otherwise indicated, the mailing address of each of the stockholders named in
the table is: c/o Pittway Corporation, 200 South Wacker Drive, Suite 700,
Chicago, Illinois 60606-5802.
11
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
NUMBER OF PERCENT OF NUMBER OF PERCENT OF VOTES ON
SHARES OF OUTSTANDING SHARES OF OUTSTANDING MATTERS OTHER
COMMON SHARES OF CLASS A SHARES OF THAN ELECTION
NAME STOCK(1) COMMON STOCK STOCK(1) CLASS A STOCK OF DIRECTORS
---- -------- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
William Harris Investors, 2,543,260 32.3% 3,614,870 10.4% 25.6%
Inc(2)(3)
2 North LaSalle Street
Suite 400
Chicago, Illinois 60602
Mario J. Gabelli et al.(4) ..... 1,553,414 19.7 3,347,262 9.6 16.6
One Corporate Center
Rye, New York 10580
Janus Capital Corporation(5) ... None -- 3,638,057 10.4 3.2
100 Fillmore Street, Suite 300
Denver, Colorado 80206
Katherine Harris(3)(6).......... 632,786 8.0 1,066,606 3.1 6.5
Irving B. Harris(3)(7).......... 2,543,260 32.3 3,614,870 10.4 25.6
King Harris(3)(8)............... 919,512 11.7 2,025,826 5.8 9.9
Neison Harris(3)(9)............. 751,898 9.5 1,083,394 3.1 7.6
William W. Harris(3)(10)(12).... 2,543,260 32.3 3,625,540 10.4 25.6
Eugene L. Barnett(11)(12)....... 1,200 * 12,626 * *
Robert L. Barrows(3)(13)........ 80,528 1.0 133,958 .4 .8
Fred Conforti(13)............... 7,800 .1 364,580 1.0 .4
E. David Coolidge III(12)....... 10,000 .1 25,670 .1 .1
Anthony Downs(15)............... 3,300 * 19,713 .1 *
Leo A. Guthart(16).............. None -- 372,345 1.1 .3
Jerome Kahn, Jr.(3)(17)......... 2,543,800 32.3 3,626,418 10.4 25.6
John W. McCarter, Jr.(18)....... 1,000 * 8,400 * *
Paul R. Gauvreau(19)............ None -- 188,768 .5 .2
Edward J. Schwartz(20).......... None -- 55,955 .2 *
All Directors, Nominees and 4,179,817 53.1 7,900,950 22.6 43.7
Executive Officers of the
Company as a group
(16 persons)(21)..............
The Current Harris Group(3)..... 4,155,977 52.8 6,765,048 19.4 42.5
</TABLE>
* Less than one-tenth of one percent
(1) Except as otherwise indicated below, beneficial ownership means the sole
power to vote and dispose of shares.
(2) The information as to William Harris Investors, Inc. ('WHI') is derived in
part from statements, as amended February 16, 1999, filed with the
Securities and Exchange Commission (the 'Commission') pursuant to
Section 13(g) of the Exchange Act. Such statements, together with advice
furnished to the Company separately by WHI, disclose that (i) WHI, an
investment adviser registered under the Investment Advisers Act of 1940,
holds all such shares on behalf, and in terminable discretionary accounts,
of Irving B. Harris, William W. Harris, Robert Barrows and certain other
members of the Harris Group and Jerome Kahn, Jr., (ii) WHI shares voting
power with such persons, and has sole dispositive power, with respect to
all such shares, (iii) Irving B. Harris and his children (including William
W. Harris) are the sole voting stockholders of WHI and (iv) Irving B.
Harris and Jerome Kahn, Jr. are, respectively, the Chairman and the
President of WHI.
(3) The information as to the Current Harris Group (as defined below),
Katherine Harris, Irving B. Harris, King Harris, Neison Harris, Robert
Barrows and William W. Harris is derived in part from statements, as
amended January 15, 1990, filed with the Commission pursuant to Section
13(d) of the Exchange Act and statements, as amended March 16, 1999, filed
with the Commission pursuant to such Section. Such statements, as amended,
were filed on behalf of such persons as well as those other persons and
entities who are currently members of the Harris Group beneficially owning,
(footnotes on next page)
12
<PAGE>
(footnotes from previous page)
directly or indirectly, shares of Common Stock or Class A Stock
(collectively referred to as the 'Current Harris Group'). Such statements
disclose that, because of the relationships among members of the Current
Harris Group, such persons may be deemed to be a group within the meaning
of Section 13(d) of the Exchange Act and the rules and regulations
thereunder. Jerome Kahn, Jr. may also be deemed to be a member of any such
group. Irving B. Harris, King Harris, Neison Harris, William W. Harris and
Jerome Kahn, Jr. and Robert Barrows) may be deemed in control of the
Company by reason of beneficial ownership of stock of the Company by
themselves and other members of the Current Harris Group and by reason of
their positions with the Company and its subsidiaries. The aggregate number
of outstanding shares which may be deemed to be beneficially owned by the
Current Harris Group includes all the shares shown in this table for WHI,
Katherine Harris, Irving B. Harris, King Harris, Neison Harris, Robert
Barrows and William W. Harris. Total excludes duplication of shares within
the Current Harris Group. Addition of the shares owned directly by Jerome
Kahn, Jr. would not affect the percentages of outstanding shares or
outstanding votes shown for the Current Harris Group.
(4) The information as to Mario J. Gabelli and entities controlled directly or
indirectly by Mr. Gabelli is derived from statements, as amended
November 3, 1997 and December 9, 1999, filed with the Commission pursuant
to Section 13(d) of the Exchange Act. Such statements disclose that
(i) Mr. Gabelli is the chief investment officer for most of the entities
signing such statements and is deemed to have beneficial ownership of the
shares beneficially owned by all such entities, (ii) Mr. Gabelli and such
entities do not admit that they constitute a group within the meaning of
Section 13(d) of the Exchange Act and the rules and regulations thereunder
and (iii) Mr. Gabelli and such entities have the sole power to vote and
dispose of all the shares of which they are beneficial owners (unless the
aggregate voting interest of all such entities exceeds 25% of the Company's
total voting interest or other special circumstances exist, in which case
the proxy voting committees of certain of such entities would have the sole
power to vote certain of 426,700 shares of Common Stock and 602,500 shares
of Class A Stock) except 6,450 shares of Common Stock and 55,466 shares of
Class A Stock as to which they have no voting power.
(5) The information as to Janus Capital Corporation ('Janus') is derived from a
statement, as amended February 5, 1999, filed with the Commission pursuant
to Section 13(g) of the Exchange Act. Such statement discloses that
(i) Thomas H. Bailey is President and Chairman of the Board of Janus, owns
approximately 12.2% of Janus and may be deemed to exercise control over
Janus, (ii) Janus is deemed to have beneficial ownership of all 3,638,057
shares, (iii) Janus and Mr. Bailey share voting and dispositive power with
respect to such shares, (iv) all such shares are held by managed portfolios
to which Janus is an investment advisor or sub-advisor and (v) Mr. Bailey
disclaims beneficial ownership of such shares.
(6) Consists of shares held as co-trustee of trusts created by members of the
Current Harris Group. Ms. Harris shares with other members of the Current
Harris Group the power to vote and dispose of such shares.
(7) Consists of the shares held by WHI (of which Irving B. Harris may be deemed
to share control), certain of which are held by WHI for the account of
Mr. Harris or would otherwise be deemed beneficially owned by him without
regard to WHI. As set forth in note (2), the voting power of the shares
held by WHI is shared by WHI with the respective persons for whose account
they are held and WHI has sole dispositive power with respect to such
shares.
(8) King Harris shares the power to vote and dispose of 694,622 of such shares
of Common Stock and 1,213,904 of such shares of Class A Stock. Includes
331,183 shares of Class A Stock which Mr. Harris has the right to acquire
within 60 days through the exercise of options awarded under the Company's
1990 Stock Awards Plan.
(9) Neison Harris shares the power to vote and dispose of 335,918 of such
shares of Common Stock and 631,364 of such shares of Class A Stock.
(footnotes continued on next page)
13
<PAGE>
(footnotes continued from previous page)
(10) Consists of the shares held by WHI (of which William W. Harris may be
deemed to share control), certain of which are held by WHI for the account
of Mr. Harris or would otherwise be deemed beneficially owned by him
without regard to WHI. As set forth in note (2), the voting power of the
shares held by WHI is shared by WHI with the respective persons for whose
account they are held and WHI has sole dispositive power with respect to
such shares.
(11) Mr. Barnett shares power to vote and dispose of all such shares.
(12) Includes 10,400 shares and 270 shares of Class A Stock which he has the
right to acquire within 60 days through the exercise of options awarded
under the Company's 1996 Director Stock Option Plan and 1998 Director Stock
Option Plan, respectively.
(13) Includes 2,700 shares of Class A Stock which he has the right to acquire
within 60 days through the exercise of options awarded under the Company's
1998 Director Stock Option Plan.
(14) Does not include 18,000 shares of Class A Stock owned by Mr. Conforti's
wife, as to which shares he disclaims beneficial ownership. Includes
158,590 shares of Class A Stock as to which Mr. Conforti shares voting and
dispositive power. Includes 197,245 shares of Class A Stock which he has
the right to acquire within 60 days through the exercise of options awarded
under the Company's 1990 Stock Awards Plan.
(15) Includes 5,200 shares and 135 shares of Class A Stock which he has the
right to acquire within 60 days through the exercise of options awarded
under the Company's 1996 Director Stock Option Plan and 1998 Director Stock
Option Plan, respectively.
(16) Mr. Guthart shares power to vote and dispose of 56,816 of such shares.
Includes 192,060 shares of Class A Stock which Mr. Guthart has the right to
acquire within 60 days through the exercise of options awarded under the
Company's 1990 Stock Awards Plan.
(17) Consists of the shares held by WHI, with respect to which Mr. Kahn acts as
portfolio manager, including 540 shares of Common Stock, 8,880 shares of
Class A Stock owned by Mr. Kahn and 2,600 shares and 68 shares of Class A
Stock which he has the right to acquire within 60 days through the exercise
of options awarded under the Company's 1996 Director Stock Option Plan and
1998 Director Stock Option Plan. As set forth in note (2), the voting power
of the shares held by WHI is shared by WHI with the respective persons for
whose account they are held and WHI has sole dispositive power with respect
to such shares.
(18) Mr. McCarter shares power to vote and dispose of such shares of Common
Stock. Includes 5,400 shares of Class A Stock consist of shares which he
has the right to acquire within 60 days through the exercise of an option
awarded under the Company's 1998 Director Stock Option Plan.
(19) Includes 62,029 shares of Class A Stock which Mr. Gauvreau has the right to
acquire within 60 days through the exercise of options awarded under the
Company's 1990 Stock Awards Plan.
(20) Does not include 4,672 shares of Class A Stock owned by Mr. Schwartz's
wife, as to which shares he disclaims beneficial ownership. Includes 43,075
shares of Class A Stock which Mr. Schwartz has the right to acquire within
60 days through the exercise of options awarded under the Company's 1990
Stock Awards Plan.
(21) Includes 2,987,733 shares of Common Stock and 4,463,100 shares of Class A
Stock as to which voting power is shared other than with directors and
executive officers of the Company and 931,748 shares of Common Stock and
1,781,482 shares of Class A Stock as to which dispositive power is so
shared. Includes 890,562 shares of Class A Stock which executive officers
of the Company have the right to acquire within 60 days through the
exercise of options awarded under the Company's 1990 Stock Awards Plan and
48,113 shares of Class A Stock which non-employee directors of the Company
have the right to acquire within 60 days through the exercise of options
awarded under the Company's 1996 and 1998 Director Stock Option Plans.
Total excludes duplication of shares within such group.
14
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the 'Committee')
makes salary, bonus and longterm incentive plan decisions with respect to the
Company's senior executive officers, in the case of senior executive officers
who have employment agreements subject to provisions regarding base salary which
appear in those agreements. The Company delegates compensation decisions
relating to other executive officers to the Chief Executive Officer and senior
executive officers who report directly to him. In making its compensation
decisions, the Committee's primary goal is to make such compensation competitive
with compensation offered by other firms in similar industries with similar
levels of size and performance. While the Committee is mindful of
Section 162(m) of the Internal Revenue Code of 1986, as amended, and the loss of
deductibility for federal income tax purposes of certain remuneration of a
covered executive officer in excess of $1,000,000 during any year, the Committee
does not base decisions primarily on preserving such deductibility. The
Committee set the salaries of the Company's Chairman of the Board and Chairman
of the Executive Committee (neither of whom receives any other compensation from
the Company) for 1998 based on the Committee's perception of the value of their
services to the Company. The Committee's policies applicable to compensation of
the Company's other senior executive officers, other than its chief executive
officer, for 1998 were as follows:
SALARY
The Committee obtained from an outside compensation specialist a detailed
report regarding salaries being paid to top-level executives in a wide variety
of companies roughly the same size as the Company. The outside specialist also
compiled data from certain similar-sized companies in the electronic and
electrical equipment field. 1,947 companies were analyzed via statistical
regression to prepare the general industry data. 55 companies were included in
the data for the electronic and electrical equipment field. Only six of the
companies included in the report had their performance reflected in the Value
Line Electronics Industry Index used in the Performance Graph which follows this
Report. The Committee does not know whether any of the companies included in the
report had its performance reflected in the Wilshire 5000 Index used in such
Performance Graph. Because nearly all of the Company's major direct competitors
are either divisions of larger diversified companies or privately held, those
competitors generally are not included in either the outside compensation
specialist's report or such indices. The Committee believes that the
electronic/communications equipment companies included in the outside
compensation specialist's report are, as a group, as comparable to the companies
included in the Value Line Electronics Industry Index as any other group of
companies for which compensation information was available to the Committee. The
report specifically identified salaries at the 50th, 75th and 90th percentiles
of the ranges of salaries surveyed. It also showed pay differentials between
presidents and chief executive officers (CEOs) of free-standing companies and
presidents and CEOs of division-based companies. The Committee tended to focus
on salaries paid in free-standing companies for two reasons. First, Company
businesses are given a high degree of autonomy and effectively run as
free-standing companies. Second, Company executives are likely targets of
management recruiters from free-standing competitors of the Company. The
Committee also reviewed published compensation information from five
publicly-held companies in the alarm equipment business. While three of these
companies are smaller than the Company's Groups, they still are indicative of
what competitive firms are paying in the alarm industry. As for salary policy in
general, the Committee aimed at setting salaries somewhere between the 50th and
75th percentile of the salary ranges reported by the outside compensation
specialist.
BONUS
The cash bonuses of Mr. Conforti and Mr. Guthart were determined by
formulas set by the Compensation Committee during the first 90 days of 1998. The
cash bonuses of Mr. Gauvreau and Mr. Schwartz were set by the Committee on a
discretionary basis after an evaluation of their individual performances, their
accomplishment of pre-established goals and objectives, and the relative
financial performance of the Company. In the process of determining these
discretionary bonuses, the Committee also reviewed the general industry
information relating to total cash compensation (base salary plus cash bonus) in
comparably-sized companies supplied by the outside compensation specialist.
15
<PAGE>
For 1998, bonuses for these executive officers ranged from 66% to 118% of
their base salaries and total cash compensation ranged between the 74th and 90th
percentile of the ranges for free-standing companies reported by the outside
compensation specialist. On a discretionary basis, a Performance Shares Award
was awarded to Mr. Guthart in addition to the cash bonus earned by him during
the year. A Bonus Shares Award was awarded to Mr. Schwartz in lieu of a portion
of his bonus which would otherwise have been paid in cash.
STOCK OPTION AND STOCK APPRECIATION RIGHT (SAR) PROGRAM
In 1993, the Committee established a Stock Option and Stock Appreciation
Right (SAR) Program to more closely tie the financial interests of managers with
those of stockholders. In 1998, 579,900 stock options were granted to 139 top
and middle managers, including all five executive officers named in the Summary
Compensation Table. The exercise price of the options was the market price of
the Company's Class A Stock on the date of the grant.
The Program was designed by the Company's outside compensation specialist,
who patterned it after programs used by many other companies of the Company's
size. In 1998, the Committee, after consultation with its outside compensation
specialist, determined that, subject to continuing improvement in the Company's
profits, over the seven-year period beginning with 1998 the annual target for
awards of stock options and SARs under the Program should be between 1.5% and
1.75% of the Company's outstanding shares.
The specific stock option grants given in 1998 were allocated among
executives on the basis of their positions and levels of responsibility. The
numbers and values of options and SARs already held by the executives were not a
factor in the allocation.
The Bonus Shares and Performance Shares Awards which were awarded in 1998
as part of the Company's bonus program were not part of the Stock Option and SAR
Program.
During 1998, the Company offered each holder of a then outstanding SAR
(other than a Bonus Shares Award) the opportunity to surrender some or all of
such SAR and receive in exchange a fully-exercisable, seven-year non-qualified
option to purchase a formula number of shares of Class A Stock at an exercise
price equal to the market price on the date of the new grant. The options
granted as a result of acceptances were also not part of the Program.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee reviewed the same information and analysis described above
insofar as it related to compensation being paid to Presidents and CEOs of
similar-sized companies. The compensation specialist's report specifically
identified in dollar terms the 50th, 75th and 90th percentile of base salary,
total cash compensation (base salary plus cash bonus) and total compensation
(including stock options and other consideration) being paid to comparable
Presidents and CEOs. Mr. Harris's base salary was at the 61st percentile of
compensation reported for similar-sized companies in general industry. His cash
bonus was derived from a formula set by the Compensation Committee during the
first 90 days of 1998. His total cash compensation was at the 78th percentile of
compensation reported for general industry companies.
EMPLOYMENT AGREEMENTS WITH P. GAUVREAU AND E. SCHWARTZ
In 1998, the Committee approved employment agreements with P. Gauvreau and
E. Schwartz, and in 1999 the Committee approved revisions to those agreements.
The agreements provide for minimum annual salaries of $290,000 and $195,000,
respectively, supplementary insurance coverage and participation in the
Company's supplemental executive retirement plan retroactive to January 1, 1995
(in the case of Mr. Schwartz, with a benefit increase based on a pro forma
adjustment to his tax-qualified retirement benefits). Each agreement is for a
term currently expiring December 31, 2001, and renews automatically at the end
of each year for an additional year (or until age 65, if earlier) unless either
party thereto elects otherwise, but may be terminated by the employee on 180
days' notice (with forfeiture of supplemental retirement benefits). Each
agreement includes non-competition, non-solicitation and confidentiality
obligations on the part of the employee which survive its termination.
16
<PAGE>
The Committee felt it appropriate to enter into formal contracts for
employment with Mr. Gauvreau and Mr. Schwartz and to offer them participation in
a supplemental retirement plan in order to encourage them to continue their
valuable services to the Company.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act of 1934 requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of initial ownership and
changes in ownership with the SEC and the National Association of Securities
Dealers, Inc. Executive officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms the file. Based solely on its review of the copies of
such forms received by it, or written representations from certain reporting
persons, the Company believes that during fiscal 1998 all executive officers and
directors of the Company compiled with all applicable filing requirements.
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
99.1(2) -- Agreement and Plan of Merger, dated as of December 20,
1999, by and among Pittway Corporation, Honeywell
International Inc. and HII-2 Acquisition Corp.
99.2(2) -- Stockholders Agreement, dated as of December 20, 1999, by
and among Honeywell International Inc., HII-2 Acquisition
Corp. and certain Stockholders parties thereto.
99.3 -- Letter Agreement, dated December 20, 1999, between
Honeywell International Inc. and King Harris,
individually, for Pittway Corporation, and on behalf of
the Harris Family.
99.4 -- Engagement Letter, dated November 18, 1999, between
Pittway Corporation and William Blair & Company, L.L.C.
and the related Indemnification Letter of same date.
99.5(2) -- Press Release dated December 20, 1999.
99.6 -- Letter to Stockholders of Pittway Corporation, dated
December 23, 1999.*
99.7(1) -- Fairness Opinion of William Blair and Company, dated
December 18, 1999.*
99.8(3) -- Restated Certificate of Incorporation of the Company.
99.9(3) -- Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated June 23, 1987.
99.10(3) -- Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated December 28, 1989.
99.11(3) -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated May 9, 1996.
99.12(3) -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated May 7, 1998.
99.13(4) -- Bylaws of the Company, as amended to date.
99.14(5) -- Pittway Corporation 1990 Stock Awards Plan, as amended.
99.15(6) -- Pittway Corporation 1998 Director Stock Option Plan.
99.16(7) -- Pittway Corporation 1996 Director Stock Option Plan.
99.17(8) -- Employment Agreement with King Harris dated as of
January 1, 1996.
99.18(9) -- Amended and Restated Employment Agreement with Leo A.
Guthart dated as of January 1, 1999.
99.19 -- Amendment to the Amended and Restated Employment
Agreement with Leo A. Guthart, dated December 20, 1999.
99.20(4) -- Employment Agreement with Paul R. Gauvreau dated as of
January 1, 1998.
99.21(10) -- Amendment to Employment Agreement between Pittway
Corporation and Paul R. Gauvreau dated as of
March 18, 1999.
99.22(4) -- Employment Agreement with Edward J. Schwartz dated as of
January 1, 1998.
99.23(10) -- Amendment to Employment Agreement between Pittway
Corporation and Edward J. Schwartz dated as of
March 18, 1999.
99.24(9) -- Pittway Corporation Change of Control Plan dated as of
September 15, 1999.
99.25 -- Amendment to Pittway Corporation Change of Control Plan
executed by the Company and King Harris on December 20, 1999.
99.26 -- Amendment to Pittway Corporation Change of Control Plan
executed by the Company and Paul R. Gauvreau on
December 20, 1999.
99.27 -- Amendment to Pittway Corporation Change of Control Plan
executed by the Company and Edward J. Schwartz on
December 20, 1999.
99.28(11) -- Company's Information Statement pursuant to Section 14(f)
of the Exchange Act and Rule 14f-1 thereunder.*
99.29 -- Certain portions of pages 3-5 and 9-16 of the Company's
Proxy Statement, dated April 5, 1999, relating to the
Company's Annual Meeting of Shareholders held on
May 6, 1999.
</TABLE>
- ------------
* Included in the materials mailed to the Company's stockholders.
(1) Attached hereto as Annex A.
(2) Incorporated by reference to the Company's current report on Form 8-K filed
with the SEC on December 20, 1999.
(footnotes continued on next page)
18
<PAGE>
(footnotes continued from previous page)
(3) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1998 and filed with the SEC on
August 4, 1998.
(4) Incorporated by reference from the Company's annual report on Form 10-K for
the year ended December 31, 1998 and filed with the SEC on
March 19, 1999.
(5) Incorporated by reference from the Company's registration statement of
Form S-8 (No. 333-71613) filed with the SEC on February 1, 1999.
(6) Incorporated by reference from the Company's registration statement of
Form S-8 (No. 333-71617) filed with the SEC on February 1, 1999.
(7) Incorporated by reference from the Company's registration statement of
Form S-8 (No. 333-12615) filed with the SEC on September 25, 1996.
(8) Incorporated by reference from the Company's annual report on Form 10-K for
the year ended December 31, 1995 filed with the SEC on March 27, 1996.
(9) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1999 and filed with the SEC on
November 2, 1999.
(10) Incorporated by reference to the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 1999 and filed with the SEC on
May 5, 1999.
(11) Attached hereto as Schedule I.
19
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as.................................... 'D'
<PAGE>
December 20, 1999
Honeywell International Inc.
Attention: Kevin Gilligan
Gentlemen:
Reference is made to the Agreement and Plan of Merger (the "Agreement")
dated as of today's date by and among Honeywell International Inc. ("Parent"),
HII-2 Acquisition Corp. ("Purchaser") and Pittway Corporation (the "Company"),
which is about to be executed and delivered. Capitalized terms used herein that
are defined in the Agreement have the meanings given those terms in the
Agreement. This letter, and a second letter between us of even date herewith,
will confirm certain related agreements among Parent, the Company, the Harris
family and King Harris regarding compensation matters.
1. Key Executive Retention Program: Parent, the Company and the Harris
family, as indicated on Schedule 1 attached, will implement the program
described on Schedule 1.
2. Corporate Office Retention and Severance Program: The Company will
provide severance benefits and pay-to-stay bonuses to all Corporate
Office employees who are terminated following the Share Purchase Date
as a result of the transactions contemplated by the Agreement. The
Company expects to terminate all employees in the Tax, Audit,
Benefits/Insurance, and Aircraft Departments. The Company will also
selectively reduce its Accounting staff.
The Company hopes to keep all employees expected to be terminated on
staff until their services are no longer needed. To give them an
incentive to stay, the Company will offer severance benefits (one week
pay for every year of service) and pay-to-stay benefits which may range
from two to six months' pay. Employees to be eligible for pay-to-stay
benefits will be determined by Parent in its discretion. Parent and the
Company will mutually agree to the size of individual pay-to-stay
benefits.
3. Senior Executive Terminations: At the anniversary of the Share Purchase
Date, Paul Gauvreau's and Ed Schwartz's Employment Agreements will be
terminated by the Company without cause, triggering their rights under
the Company's Change of Control Plan. The Company will pay each of them
three times his 2000 base salary as well as one-year's additional bonus
in an amount equal to his normal 1999 bonus.
<PAGE>
Paul and Ed will receive customary year-end bonuses for 1999 and 2000.
The 1999 year-end bonuses will be comprised of two parts: a normal
bonus reflecting their work during the year, and an extra bonus to
reward them for their work on the Agreement. The 2000 bonus will
reflect their work during 2000.
4. King Harris Employment Agreement: The Company's Employment Agreement
with King Harris will be modified, effective as of the Share Purchase
Date, as provided in Schedule 2 attached.
5. Options: Parent will award new options in 2000, exercisable at fair
market value on the grant date, to all current Company employees
currently in the Company's option program. The options awarded are to
have, at a minimum, the same Black-Scholes values that the Company's
options granted in 1999 had at grant on an employee-by-employee basis.
The foregoing agreements may not be amended or modified without the
written consent of the Company and King Harris.
Please confirm the foregoing agreements by executing one copy of this
letter in the space provided below and returning the executed copy to me.
Very truly yours,
/s/ KING HARRIS
Individually, for Pittway Corporation, and on
behalf of the Harris Family
Confirmed on the date first written above:
Honeywell International Inc.
By:
-----------------------------
Its:
-----------------------------
<PAGE>
Schedule 1
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
EXECUTIVE BLACK-SCHOLES $ VALUE OF PARENT UP FRONT BONUS RETENTION BONUS LTIP ($)(4)
2000 VALUE OPTIONS(1) ($)(2) ($)(3)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Fradin 500,000 4,300,000 1,700,000 1,000,000
- ----------------------------------------------------------------------------------------------------------
Roth 500,000 4,300,000 1,700,000 1,000,000
- ----------------------------------------------------------------------------------------------------------
Levy 500,000 5,300,000 1,700,000 1,000,000
- ----------------------------------------------------------------------------------------------------------
Hakanson 300,000 500,000 600,000
- ----------------------------------------------------------------------------------------------------------
Kramvis 200,000 2,000,000 500,000 500,000
- ----------------------------------------------------------------------------------------------------------
Conforti 500,000
- ----------------------------------------------------------------------------------------------------------
Guthart 500,000
- ----------------------------------------------------------------------------------------------------------
TOTAL 3,000,000 15,900,000 6,100,000 4,100,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options: Parent will grant, promptly following the Share Purchase Date,
at an exercise price equal to fair market value on the grant date.
(2) Up Front Bonus: 50% ($7,950,000) will be payable by the Company
promptly following the Share Purchase Date. The Harris family will
contribute this amount to the Company to fund the payment. 16.67% more
will be payable by the Company on the first anniversary of the Share
Purchase Date, 16.67% more will be payable by the Company on the second
anniversary of the Share Purchase Date, and the remainder will be
payable by the Company on the third anniversary of the Share Purchase
Date. Parent guaranties these three final payments.
(3) Retention Bonus: Would cliff vest on the third anniversary of the Share
Purchase Date. Three year performance targets for Ademco, ADI, Ademco
International, Fire-Lite/Notifier and System Sensor will be mutually
set by King Harris and Kevin Gilligan based on realistic, base-case
type, performance. If an executive achieves the target for his
operation, he will receive the Bonus from Parent.
(4) LTIP (Long-Term Incentive Program): More aggressive, but still
realistic three-year performance targets for each major operation will
be mutually set by Harris and Gilligan in 2000. If an executive
achieves target performance, he will receive the LTIP from Parent on
the third anniversary of the Share Purchase Date.
<PAGE>
Schedule 2
CHANGES TO BE MADE IN KING HARRIS' EMPLOYMENT AGREEMENT
1. General: The employment agreement is to be between King Harris and
Parent.
2. Section 2: Harris initially will be President/CEO of the Alarm
Components and Systems Business (or whatever Parent decides to call it)
of the Honeywell Home and Building Control Division. He will report to
the President of the Home and Building Control Division. His title can
be changed to CEO anytime after 90 days following the Share Purchase
Date.
3. Section 2c: Harris will be allowed to continue serving on the
for-profit and not-for-profit boards he currently serves on.
4. Section 3: Covered by Section 5.1 of the Agreement.
5. Section 3f: Harris will continue to receive his current executive
benefits package. Options granted to him will have ten-year terms and
will not expire on account of shift to Consultant status.
6. Section 3g: Harris will continue to receive these benefits as
specified.
7. Sections 4 and 5(e): Covered by Section 5.1(e) of the Agreement.
8. Section 5: Harris will have a two-year employment agreement which could
be extended on a year by year basis by mutual consent. On January 1,
2002 Harris could elect to become a Consultant to Parent. As a
Consultant, he would receive $400,000 per year until age 65 and would
be required to work no more than 8 hours per week on the average. He
would also be reimbursed for business expenses and reasonable office
expenses including the compensation of an assistant performing duties
similar to those of his current assistant.
9. Section 6: If Harris dies, his estate or designated beneficiary will
receive 100% of the amounts he would have received under the terms of
the employment agreement.
10. The remainder of the employment agreement will mirror the current
Employment Agreement.
<PAGE>
November 18, 1999
Mr. King Harris
President
Pittway Corporation
200 South Wacker Drive
Chicago, Illinois 60602-5802
Dear King:
This is to confirm the engagement of William Blair & Company, L.L.C. ("Blair")
by Pittway Corporation (the "Company") to render certain investment banking
services in connection with one or more possible business combinations (through
tender offer, merger, or sale or exchange of 50% or more of the outstanding
capital stock of the Company) of the Company with another company (each such
other company being referred to as an "Other Party") (each, a "Possible
Transaction").
1. SERVICES TO BE RENDERED. Blair will perform such of the
following services in connection with each Possible
Transaction as the Company may reasonably request:
a. Blair will familiarize itself to the extent it deems
appropriate with (i) the business, operations,
financial condition and prospects of the Company and
the financial condition of the Other Party (it being
expressly understood, however, that Blair will not
contact any of the Company's customers or suppliers
without the Company's prior consent) and (ii) the
financial terms of the Possible Transaction;
b. Blair will participate with the Company and its
counsel in negotiations relating to the Possible
Transaction;
c. Blair will participate in meetings of the Board of
Directors of the Company (such participation to be in
person or by telephone, as appropriate) at which the
Possible Transaction is to be considered and, as
appropriate, will report to the Board of Directors
with respect thereto; and
d. If requested, Blair will (i) render an opinion (the
"Opinion") (such Opinion will be in writing if
requested by the Company), as to the fairness, from a
financial point of view, to the Company's Common and
Class A stockholders (other than the Other Party) of
the consideration to be received by such stockholders
in the Possible Transaction or (ii)
<PAGE>
Pittway Corporation -2- November 18, 1999
advise the Board of Directors that Blair is unable to
render an Opinion due to the inadequacy of such
consideration. The Opinion will be in such form and
with such qualifications as determined appropriate by
Blair.
In connection with Blair's activities on the Company's behalf,
the Company agrees to cooperate with Blair and will furnish
to, or cause to be furnished to, Blair all information and
data concerning the Company and each Other Party available to
the Company (the "Information") which Blair reasonably deems
appropriate and will provide Blair with access to the
Company's officers, directors, employees and advisors (it
being expressly understood, however, that Blair will not
contact any of the Company's employees without the Company's
prior consent). The Company represents and warrants that all
Information made available to Blair by the Company with
respect to a Possible Transaction (other than information
regarding the Other Party) will be complete and correct and
that any Company projections, forecasts or other Information
provided by the Company to Blair will have been prepared in
good faith and will be based upon reasonable assumptions. The
Company agrees to promptly notify Blair if the Company
believes that any Information which was previously provided to
Blair has become materially misleading. The Company
acknowledges and agrees that, in rendering its services
hereunder, Blair will be using and relying on the Information
(and information available from public sources and other
sources deemed reliable by Blair) without assuming any duty of
independent verification thereof or independent appraisal or
evaluation of the Company or any Other Party. Blair does not
assume responsibility for the accuracy or completeness of the
Information or any other information regarding the Company or
any Other Party. If all or any portion of the business of the
Company or any Other Party is engaged in through subsidiaries
or other affiliates, the references in this paragraph to the
Company or such Other Party will, when appropriate, be deemed
also to include such subsidiaries or other affiliates.
It is further understood that, except as provided in Section
7, any advice rendered by Blair pursuant to its engagement
hereunder, including any advice rendered during the course of
participating in negotiations and meetings of the Board of
Directors of the Company, as well as any written Opinion(s)
rendered and any written materials provided by Blair, are
intended solely for the benefit and confidential use of the
Board of Directors and will not be reproduced, summarized,
described or referred to or given to any other person for any
purpose without Blair's prior written consent. Notwithstanding
the preceding sentence, any written Opinion may be included in
a proxy statement or an offer to purchase to be mailed to the
stockholders of the Company in connection with a Possible
Transaction, provided that (i) such written Opinion is
reproduced therein in its entirety and (ii) that any
description of or reference to Blair or the advice rendered by
Blair in such proxy statement or offer to purchase is in a
form reasonably acceptable to Blair and its counsel. Blair
hereby consents to reliance on any written Opinion by members
of the Harris Family and others who act in a fiduciary
capacity (as trustees or otherwise) in respect of members of
the Harris Family ( the "Harris Family Fiduciaries").
<PAGE>
Pittway Corporation -3- November 18, 1999
2. FEES. The Company agrees to pay Blair:
a a retainer fee of $250,000, upon execution of this letter
agreement;
b. An additional fee of $1,500,000 will be payable promptly
after Blair (i) has advised the Board of Directors as to the
fairness, from a financial point of view, to the Company's
stockholders of the consideration to be received by such
stockholders with respect to each and every Possible
Transaction or (ii) has advised that it is unable to render
an opinion to such effect.
c. In the event that a Possible Transaction is consummated, the
Company will pay or cause to be paid to Blair a fee equal to
0.35% (thirty-five one-hundredths of one per cent) of the
Transaction Consideration (as defined below) plus an
additional 1.15% of the amount, if any, that the Transaction
Consideration increases due to the price per share for the
Company's capital stock, options, stock appreciation rights
or other equity securities paid or payable being greater
than $45 per share. The fee payable pursuant to this
subparagraph c shall be reduced by the aggregate of all fees
previously paid pursuant to this Section 2.
For purposes of this letter agreement, the term "Transaction
Consideration" will mean the total amount of cash and the fair
market value of all securities or other property paid or
payable directly or indirectly to the Company or any of the
Company's security holders in connection with a Possible
Transaction which is consummated, including, without
limitation, (i) amounts paid (A) to holders of any options or
stock appreciation rights issued by the Company, whether or
not vested; (B) to holders of any warrants or convertible
securities of the Company and (C) pursuant to covenants not to
compete other than any such agreements included in employment
contracts or similar arrangements; and (ii) the total amount
of indebtedness for borrowed money (including capitalized
leases and the like but excluding bankers' acceptances and any
synthetic lease of the proposed Ademco facility) of the
Company repaid, retired, extinguished or assumed in connection
with such Possible Transaction, or which otherwise remains
outstanding with the Company or any affiliate thereof as of
the closing of such Possible Transaction or which is assumed
by the Other Party or an affiliate thereof; reduced by the
total amount of cash and marketable securities (including the
Company's stock holding in Cylink Corporation but excluding
other items listed on the Company's Investment balance sheet
line, each valued at quoted market less taxes payable upon
sale) which remain with the Company or any affiliate thereof
as of such closing.
Amounts paid into escrow in connection with any Possible
Transaction will also be included as part of the Transaction
Consideration and the portion of Blair's fee related to such
escrow payments will be payable upon the release of payment
thereof from such escrow. Transaction Consideration also will
include the aggregate amount of any dividends or other
distributions declared by the Company with respect to its
stock after the date hereof, other than normal recurring cash
dividends in amounts not materially greater than currently
paid.
<PAGE>
Pittway Corporation -4- November 18, 1999
The fee payable to Blair upon consummation of a Possible
Transaction will be payable in full, in cash, upon the closing
of the Possible Transaction except as set forth above;
provided, however, that if the value of the Transaction
Consideration includes consideration the receipt of which is
contingent upon the passage of time or the occurrence of some
future event or circumstance ("Contingent Value"), the portion
of Blair's fee related to the Transaction Consideration
attributable to such Contingent Value will be paid to Blair at
the date on which payment of such Contingent Value is due.
The fee payable to Blair upon consummation of a transaction
involving a tender offer, merger or other purchase or sale of
stock will become payable by the Company when ownership of
outstanding Common stock and/or Class A stock of the Company
having 50% or more of the voting rights on matters other than
the election of directors is acquired by any Other Party,
directly or indirectly, including pursuant to a merger. In
that event, such Transaction Consideration will be calculated
under the above definition of aggregate Transaction
Consideration as though 100% of the outstanding Common stock
and Class A stock had been acquired for the highest per share
amount paid in the transaction in which such ownership is
acquired and outstanding options, warrants, convertible
securities and stock appreciation rights had been cashed out
based on such amount. Nevertheless, Blair's services pursuant
to this letter agreement will continue after such ownership is
obtained to assist the Company with a second step merger, if
any, or similar transaction.
If any portion of the Transaction Consideration is paid in the
form of securities for which a public trading market existed
prior to consummation of the Possible Transaction, the value
of such securities, for purposes of calculating the
Transaction Consideration, will be determined by the closing
or last sales price for such securities on the last trading
day prior to the consummation or effectiveness of the Possible
Transaction. If such securities do not have an existing public
trading market, the value of the securities will be the
mutually agreed upon fair market value on the day prior to the
consummation of the Possible Transaction; provided that
promissory notes or other debt obligations will be valued at
the face amount thereof.
3. EXPENSES. The Company will reimburse Blair for all
out-of-pocket expenses (including fees and expenses of its
counsel and any other independent experts retained by Blair)
reasonably incurred by it in connection with its engagement
hereunder. Such reimbursement will be payable promptly upon
submission by Blair of statements to the Company. It is
expressly understood that the foregoing shall not apply to any
expenses incurred by David Coolidge in his capacity as a
director of the Company.
4. INDEMNIFICATION AND CONTRIBUTION. Blair and the Company have
entered into a separate indemnity agreement, dated the date
hereof (the "Indemnity Agreement"), providing among other
things for the indemnification of Blair by the Company in
connection with Losses and Expenses (as defined in the
Indemnity Agreement) in connection with Blair's engagement
hereunder. The terms of the Indemnity Agreement are
incorporated by reference into this letter agreement.
<PAGE>
Pittway Corporation -5- November 18, 1999
5. TERMINATION. Blair's engagement hereunder may be terminated
(x) by the Company at any time, with or without cause, upon
written notice to Blair, (y) by Blair at any time for cause
upon written notice to the Company or (z) by Blair at any time
more than three months after the date hereof, with or without
cause, upon written notice to the Company; provided, however,
that (a) no such termination will affect Blair's right to
expense reimbursement under Section 3, the payment of any
accrued and unpaid fees pursuant to Section 2, the
indemnification contemplated by Section 4 or the Indemnity
Agreement and (b) if the Company, directly or indirectly,
consummates any Possible Transaction within twenty-four months
following such termination with any party (i) with respect to
a Possible Transaction with which (whether or not proposed by
such party) Blair has rendered material advice to the Company
during its engagement hereunder or (ii) with which during
Blair's engagement hereunder the Company has directly or
indirectly held discussions regarding, or to which during such
engagement the Company has furnished information regarding the
Company in the context of, a Possible Transaction, then Blair
will be entitled to the full amount of the fee contemplated by
Section 2; provided, however, that Blair will not be entitled
to any fee contemplated by Section 2 (other than any such fee
accrued and unpaid as of such termination) if in connection
with the Possible Transaction with such party the Company
offers to reinstate Blair's engagement on the terms provided
herein and Blair declines such engagement (and does not accept
engagement on other mutually agreeable terms) or does not
fulfill such engagement.
6. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL. This letter
agreement and the Indemnity Agreement will be deemed made in
Illinois and will be governed by the laws of the State of
Illinois. The Company irrevocably submits to the jurisdiction
of any court of the State of Illinois or the United States
District Court of the Northern District of the State of
Illinois for the purpose of any suit, action or other
proceeding arising out of this letter agreement or the
Indemnity Agreement, or any of the agreements or transactions
contemplated hereby, which arises between Blair and the
Company. Each of the Company (and, to the extent permitted by
law, on behalf of the Company's equity holders and creditors)
and Blair hereby knowingly, voluntarily and irrevocably waives
any right it may have to a trial by jury in respect of any
claim based upon, arising out of or in connection with the
Indemnity Agreement, this letter agreement and the
transactions contemplated hereby (including, without
limitation, any Possible Transaction).
7. NO RIGHTS IN EQUITYHOLDERS, CREDITORS. This letter agreement
does not create, and will not be construed as creating, rights
enforceable by any person or entity not a party hereto, except
those entitled thereto by virtue of the Indemnity Agreement
and the Harris Family Fiduciaries as provided in Section 1.
The Company acknowledges and agrees that (i) Blair will act as
an independent contractor and is being retained solely to
assist the Company in its consideration of any efforts to
effect a Possible Transaction and that, other than as
expressly stated in any Opinion, Blair is not being retained
to advise the Company on, or to express any opinion as to, the
wisdom, desirability or prudence of consummating a Possible
Transaction, (ii) Blair is not and will not be construed as a
fiduciary of the Company or any affiliate thereof and will
have no duties or liabilities to the equityholders or
creditors of the Company, any affiliate of the Company or any
<PAGE>
Pittway Corporation -6- November 18, 1999
other person by virtue of this letter agreement and the
retention of Blair hereunder, all of which duties and
liabilities are hereby expressly waived, and (iii) any Opinion
or advice rendered by Blair does not constitute a
recommendation to any equityholder that such equityholder
might or should take action in connection with a Possible
Transaction. Neither equityholders nor creditors of the
Company are intended beneficiaries hereunder.
8. BLAIR; OTHER ADVISORS. It is understood and agreed that Blair
may, from time to time, make a market in, have a long or short
position, buy and sell or otherwise effect transactions for
customer accounts and for their own accounts in the securities
of, or perform investment banking or other services for, the
Company and other entities which are or may be the subject of
the engagement contemplated by this letter agreement. The
Company confirms that it will rely on its own counsel,
accountants and other similar expert advisors for legal,
accounting, tax and other similar advice.
9. OTHER. The Company agrees that it will not enter into an
agreement involving a sale of all or substantially all of the
Company's assets or operations, unless such agreement
expressly provides for the unconditional assumption of the
Company's obligations to Blair under this letter agreement and
the Indemnity Agreement. This letter agreement may not be
modified or amended except in writing executed by the parties
hereto. This letter agreement, and any modification or
amendment thereto, may be executed in counterparts, each of
which will be deemed an original and all of which will
constitute one and the same instrument.
If the foregoing correctly sets forth our agreement, please so indicate by
signing below and returning an executed copy to us. We look forward to working
with you.
Very truly yours,
WILLIAM BLAIR & COMPANY, L.L.C.
By:___________________________________
ACCEPTED AND AGREED AS OF
THE DATE FIRST ABOVE WRITTEN
PITTWAY CORPORATION
By:_________________________________
Name:
Title:
<PAGE>
Pittway Corporation
200 South Wacker Drive
Chicago, Illinois 60602-5802
November 18, 1999
William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Gentlemen:
In connection with your engagement by Pittway Corporation (the "Company")
pursuant to the letter agreement of even date herewith (the "Engagement
Letter"), as the same may be modified or amended from time to time hereafter,
the Company hereby agrees to indemnify and hold harmless William Blair &
Company, L.L.C. ("Blair") and each of the Other Indemnified Parties (as defined
below) to the fullest extent permitted by law, from and against any and all
losses, claims, damages, obligations, penalties, judgments, awards, costs,
disbursements and liabilities (including amounts paid in settlement)
(collectively, "Losses") and expenses (including, without limitation, all fees
and expenses of Blair's and each of the Other Indemnified Parties' counsel and
all of Blair's and each of the Other Indemnified Parties' reasonable travel and
other out-of-pocket expenses incurred at the Company's request or otherwise
incurred in connection with the investigation of any pending or threatened
claims or the preparation for, the defense of, or the furnishing of evidence in,
any pending or threatened litigation, investigation or proceedings, whether or
not Blair or any Other Indemnified Party is a party thereto) (collectively,
"Expenses") based upon, arising out of or in any way relating to (a) oral or
written information provided by the Company to Blair or any party to a Possible
Transaction (as defined in the Engagement Letter), (b) action by the Company or
action by Blair at the request of the Company or with the Company's consent, (c)
any Possible Transaction or any Opinion (as defined in the Engagement Letter) or
(d) Blair's engagement under the Engagement Letter; provided that the Company
will have no obligation to indemnify and hold harmless Blair or any of the Other
Indemnified Parties pursuant to this clause (d) in respect of any Losses or
Expenses which are finally judicially determined to have resulted primarily and
directly from the gross negligence or bad faith of Blair in fulfilling its
duties under the Engagement Letter. Expenses will be reimbursed or advanced when
and as incurred promptly upon submission by Blair of statements to the Company.
The Other Indemnified Parties will mean and include (i) Blair's affiliates, (ii)
the respective members, principals, partners, directors, officers, agents and
employees of and counsel to Blair and its affiliates, (iii) each other person,
if any, controlling Blair or any of its affiliates (in the case of clauses (i)
through (iii), excluding David Coolidge solely in his capacity as a director of
the Company) and (iv) the successors, assigns, heirs and personal
representatives of any of the foregoing.
If any litigation, investigation or proceeding is commenced as to which Blair
proposes to demand indemnification, Blair will notify the Company with
reasonable promptness; provided, however, that any failure by Blair to notify
the Company will relieve the Company from its obligations hereunder only to the
extent the Company has been prejudiced by such failure or delay. Blair will have
the right to retain counsel (and local counsel, if appropriate) of its own
choice to represent it, and the Company will pay the reasonable fees, expenses
and disbursements of such counsel. The Company retains the right to participate
in the defense of such litigation, investigation or
<PAGE>
Pittway Corporation -2- November 18, 1999
proceeding as to which Blair seeks indemnification through counsel of the
Company's choice (the cost of which will be paid by the Company) and Blair will
reasonably cooperate with such counsel and the Company (including, to the extent
possible and consistent with its own interests, keeping the Company reasonably
informed of such defense). The Company will be liable for any settlement of any
claim against Blair made with the Company's written consent, which consent will
not be unreasonably withheld.
If, for any reason, the foregoing indemnification is unavailable to Blair or any
of the Other Indemnified Parties or is insufficient to hold them harmless in
respect of any Losses or Expenses, then the Company will contribute to the
amount paid or payable by Blair or any of the Other Indemnified Parties as a
result of such Losses and Expenses in such proportion as is appropriate to
reflect the relative benefits (or anticipated benefits) to the Company and its
stockholders on the one hand and Blair and the Other Indemnified Parties on the
other hand from the Possible Transaction, or if such allocation is not permitted
by applicable law, then in such proportion as is appropriate to reflect not only
the relative benefits received by the Company and its stockholders on the one
hand and Blair and the Other Indemnified Parties on the other hand, but also the
relative fault of the Company, its directors, officers, employees, agents and
advisers (other than Blair) on the one hand and Blair and the Other Indemnified
Parties on the other hand, as well as any other relevant equitable
considerations. The relative benefits received (or anticipated to be received)
by the Company and its stockholders on the one hand and by Blair and the Other
Indemnified Parties on the other hand will be deemed to be in the same
proportion as the Transaction Consideration (as defined in the Engagement
Letter) bears to the total fees paid to Blair pursuant to the Engagement Letter.
The relative fault of any party or other person will be determined by reference
to such party's or person's knowledge, access to information and opportunity to
prevent or correct any misstatement, omission, misconduct or breach of duty. In
no event will the amount required to be contributed by Blair and the Other
Indemnified Parties hereunder exceed the total amount of fees paid to Blair
pursuant to the Engagement Letter. You and we agree that it would not be just
and equitable if contribution were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above.
The reimbursement, indemnity and contribution obligations of the Company
hereunder will (i) be in addition to any liability which the Company may
otherwise have, (ii) survive the completion or termination of Blair's engagement
under the Engagement Letter and (iii) shall be binding upon any successors and
assigns of the Company.
In the event that any litigation, investigation or proceeding relating to the
transaction contemplated by the Engagement Letter is commenced or threatened
against the Company, the Company will not settle any such pending or threatened
litigation, investigation or proceeding unless (i) Blair, by name, and the Other
Indemnified Parties, by description, are included in any release or settlement
agreement, whether or not Blair and the Other Indemnified Parties are named as
defendants in such litigation or proceeding, (ii) Blair and the Other
Indemnified Parties are unconditionally released from all claims and liabilities
asserted or which could have been asserted in such litigation, investigation or
proceeding and (iii) there is no statement in any such release or settlement
agreement as to an admission of fault, culpability or failure to act by or on
behalf of Blair or the Other Indemnified Parties.
This Indemnity Agreement will be deemed made in Illinois. The validity and
interpretation of this Indemnity Agreement will be governed by, and construed
and enforced in accordance with, the laws of the State of Illinois applicable to
agreements made and to be fully performed therein (excluding the conflicts of
laws rules). The Company irrevocably submits to the jurisdiction of
<PAGE>
Pittway Corporation -3- November 18, 1999
any court of the State of Illinois or the United States District Court of the
Northern District of the State of Illinois for the purpose of any suit, action
or other proceeding arising out of this Indemnity Agreement which is brought by
or against the Company. Each of the Company (and, to the extent permitted by
law, on behalf of the Company's equity holders and creditors) and Blair hereby
knowingly, voluntarily and irrevocably waives any right it may have to a trial
by jury in respect of any claim based upon, arising out of or in connection with
this Indemnity Agreement.
This Indemnity Agreement may not be modified or amended except in writing
executed by the parties hereto. This Indemnity Agreement, and any modification
or amendment thereto, may be executed in counterparts, each of which will be
deemed an original and all of which will constitute one and the same instrument.
Very truly yours,
PITTWAY CORPORATION
By: ________________________________
Agreed and accepted as of
the date above.
WILLIAM BLAIR & COMPANY, L.L.C.
By: ______________________________
<PAGE>
[LOGO]
December 23, 1999
To Our Stockholders:
On behalf of the Board of Directors of Pittway Corporation (the 'Company'),
I am pleased to inform you that as of December 20, 1999, the Company entered
into an Agreement and Plan of Merger (the 'Merger Agreement') with Honeywell
International Inc. and HII-2 Acquisition Corp. (the 'Acquisition Subsidiary'),
its wholly owned subsidiary, pursuant to which the Acquisition Subsidiary today
has commenced a cash tender offer (the 'Offer') to purchase all of the
outstanding shares of Common Stock of the par value of $1.00 per share of the
Company (the 'Common Stock') and all of the outstanding shares of Class A Stock
of the par value of $1.00 per share of the Company (the 'Class A Stock,' and
together with the Common Stock, the 'Shares') at $45.50 per Share, net to the
seller in cash, without interest. Under the Merger Agreement, the Offer will be
followed by a merger (the 'Merger') in which any remaining Shares will be
converted into the right to receive $45.50 per Share in cash, without interest
(except any Shares as to which the holder has properly exercised appraisal
rights). Certain members of the Harris Family beneficially owning approximately
52.9% of the outstanding Common Stock and 18.4% of the outstanding Class A Stock
have agreed to tender substantially all of their Shares in the Offer so long as
the Merger Agreement has not been terminated.
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE OFFER AND MERGER ARE FAIR
AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND HAS APPROVED
THE OFFER AND MERGER; AND THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO
THE OFFER.
In arriving at its recommendation, the Board of Directors gave careful
consideration to the factors described in the attached
Solicitation/Recommendation Statement on Schedule 14D-9 (the 'Schedule 14D-9')
that is being filed today with the Securities and Exchange Commission. Among
other things, the Board of Directors considered the opinion of its financial
advisor, William Blair & Company, L.L.C., that the consideration to be received
by the holders of Shares in the Offer and Merger is fair to such holders from a
financial point of view.
In addition to the attached Schedule 14D-9, enclosed also is the
Acquisition Subsidiary's Offer to Purchase dated December 23, 1999, together
with related materials, including a Letter of Transmittal to be used for
tendering your certificates representing Shares in the Offer. These documents
state the terms and conditions of the Offer and the Merger and provide
instructions as to how to tender your Shares. We urge you to read these
documents carefully in making your decision with respect to tendering your
Shares pursuant to the Offer.
On behalf of the Board of Directors,
King Harris
King Harris
President and
Chief Executive Officer
<PAGE>
ANNEX A
[LETTERHEAD OF WILLIAM BLAIR & COMPANY, L.L.C.]
December 18, 1999
Board of Directors
Pittway Corporation
200 South Wacker Drive
Suite 700
Chicago, Illinois 60606-5802
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares (the 'Shares') of Common Stock
of the par value of $1.00 per share ('Common Stock') and Class A Stock of the
par value of $1.00 per share ('Class A Stock') of Pittway Corporation (the
'Company') of the consideration proposed to be paid to the Stockholders pursuant
to the Agreement and Plan of Merger dated as of December 20, 1999 (the
'Agreement') by and among Honeywell International Inc. ('Parent'), HII-2
Acquisition Corp. ('Purchaser'), a wholly-owned subsidiary of Parent, and the
Company. Pursuant to the terms of and subject to the conditions of the
Agreement, (i) Purchaser will make a tender offer (the 'Tender Offer') at $45.50
per share in cash (the 'Consideration') for all of the outstanding Shares of the
Company, and (ii) following consummation of the Tender Offer, Purchaser will be
merged with and into the Company in a merger ('Merger') in which all of the
outstanding Shares (other than Shares owned by Parent or the Company or their
subsidiaries) will be converted into the right to receive the Consideration (the
Tender Offer and the Merger are, collectively, the 'Transaction').
In connection with our review of the proposed Transaction and the
preparation of our opinion herein, we have examined: (a) the Agreement and the
Stockholders Agreement of even date therewith; (b) certain audited historical
financial statements of the Company for the three years ended December 31, 1998,
1997 and 1996 and unaudited financial statements of the Company for the quarters
ended September 30, 1999, June 30, 1999, and March 31, 1999; (c) certain
internal business, operating and financial information and forecasts of the
Company (the 'Forecasts'), prepared by the senior management of the Company; (d)
information regarding the amount and timing of cost savings and related expenses
and synergies which senior management of the Company expects will result from
the Merger (the 'Expected Synergies'); (e) certain publicly available financial
and stock market data relating to selected public companies that we considered
relevant to our inquiry; (f) information regarding publicly available financial
terms of certain recently-completed transactions that we considered relevant to
our inquiry; (g) current and historical market prices and trading volumes of the
Shares of the Company; (h) information regarding percentage premiums paid for
public companies over trading market prices prior to the announcement of an
acquisition or merger transaction of relevant size utilizing cash consideration;
and (i) certain other publicly available information on the Company. We have
also held discussions with members of the senior management of the Company to
discuss the foregoing, have considered other matters which we have deemed
relevant to our inquiry and have taken into account such accepted financial and
<PAGE>
investment banking procedures and considerations and performed such analyses as
we have deemed relevant or appropriate.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all the information examined
by or otherwise reviewed by or discussed with us for purposes of this opinion,
including without limitation the Forecasts provided by senior management. We
have not made or obtained an independent valuation or appraisal of the assets or
liabilities or solvency of the Company. We have been advised by senior
management of the Company that the Forecasts examined by us have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the senior management of the Company. In that regard, we have
assumed, with your consent, that (i) the Forecasts will be achieved and the
Expected Synergies will be realized in the amounts and at the times contemplated
thereby, (ii) all material assets and liabilities (contingent or otherwise) of
the Company are as set forth in the Company's financial statements or other
information made available to us, (iii) the Transaction will be accounted for
under the purchase method and (iv) that the value of non-operating assets of the
Company which were provided by senior management are senior management's best
estimates thereof. We express no opinion with respect to the Forecasts or the
estimates and judgments on which they are based. Our opinion herein is based
upon economic, market, financial and other conditions existing on, and other
information disclosed to us as of, the date of this letter. It should be
understood that, although subsequent developments may affect this opinion, we do
not have any obligation to update, revise or reaffirm this opinion. In rendering
our opinion, we have assumed that the Transaction will be consummated on the
terms described in the Agreement, without any waiver of any material terms or
conditions by the Company. We were not requested to, nor did we, seek
alternative participants for the proposed Transaction. In our analysis we have
assumed that shares of the Company's Common Stock and Class A Stock are
equivalent. We note that although the Current Harris Group (as defined in the
Company's Proxy Statement dated April 5, 1999) own a majority of the Shares
which elect a majority of the Company's Board and approximately 42.3% of the
outstanding votes on matters other than election of the directors, the Agreement
includes a condition to the Transaction that requires that two-thirds of the
Shares and Shares accounting for two-thirds of the vote on matters other than
the election of directors be validly tendered and not withdrawn prior to the
expiration of the Tender Offer.
William Blair & Company, L.L.C. ('Blair') has been engaged in the
investment banking business since 1935. We continually undertake the valuation
of investment securities in connection with public offerings, private
placements, business combinations, estate and gift tax valuations and similar
transactions. In the ordinary course of our business, we may from time to time
trade the securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have acted as the investment banker to the Company in
connection with the Transaction and will receive a fee from the Company for our
services, a significant portion of which is contingent upon consummation of the
Transaction. In addition, the Company has agreed to indemnify us against certain
liabilities arising out of our engagement. Blair has provided investment banking
and financial advisory services to the Company in the past for which we have
received customary compensation. E. David Coolidge, III, Chief Executive Officer
of Blair, serves as a member of the Board of Directors of the Company.
Our investment banking services and our opinion are provided for the use
and benefit of the Board of Directors of the Company in connection with its
consideration of the Transaction. Our opinion is limited to the fairness, from a
financial point of view, to the stockholders of the Company
<PAGE>
of the Consideration in connection with the Transaction, and we do not address
the merits of the underlying decision by the Company to engage in the
Transaction and this opinion does not constitute a recommendation to any
stockholder with respect to the Transaction. It is understood that this letter
may not be disclosed or otherwise referred to without Blair's prior written
consent, except that the opinion may be included in its entirety in a tender
offer document or proxy statement mailed to the stockholders of the Company and
filed with the Securities and Exchange Commission with respect to the
Transaction.
Based upon and subject to the foregoing, it is our opinion as investment bankers
that, as of the date hereof, the Consideration to be paid to the holders of the
Company's Shares pursuant to the Tender Offer and the Merger is fair, from a
financial point of view, to such stockholders.
Very truly yours,
WILLIAM BLAIR & COMPANY, L.L.C.
<PAGE>
AMENDMENT
Reference is made to the Amended and Restated Employment Agreement
dated as of January 1, 1999 between Pittway Corporation, a Delaware corporation,
and Leo A. Guthart (the "Existing Employment Agreement").
Paragraph 17 of the Existing Employment Agreement is hereby amended by
adding the following sentence at the end thereof:
Notwithstanding the preceding sentence, for purposes of clause
(i) above none of the transactions contemplated by the
Agreement and Plan of Merger dated as of December 20, 1999 by
and among Honeywell International, Inc., HII-2 Acquisition
Corp. and the Company and the Stockholders Agreement referred
to therein, either individually or in the aggregate, will
constitute a Change of Control of the Company unless and
until, following the Change of Control of the Company that
would otherwise result from any or all thereof, the Company
breaches this Agreement, in which event a Change of Control of
the Company will be deemed to have occurred at the time of
such breach.
Dated: December 20, 1999
PITTWAY CORPORATION
By:
------------------------------------
Its:
-----------------------------------
---------------------------------------
LEO A. GUTHART
<PAGE>
AMENDMENT
The undersigned Pittway Corporation has established a Change of Control
Plan effective September 15, 1999 (the "Existing Plan"). The other undersigned
(the "Participant") is a participant in the Existing Plan.
The undersigned hereby amend Section 4.3 of the Existing Plan as to the
Participant by adding the following paragraph immediately prior to the final
paragraph thereof:
Notwithstanding the preceding paragraph, for purposes
of Section 3.6 as it relates to a particular participant, none
of the transactions contemplated by the Agreement and Plan of
Merger dated as of December 20, 1999 by and among Honeywell
International, Inc., HII-2 Acquisition Corp. and the Company
and the Stockholders Agreement referred to therein, either
individually or in the aggregate, will constitute a Change of
Control of the Company unless and until, following the Change
of Control of the Company that would otherwise result from any
or all thereof, the participant's employer breaches his or her
Employment Agreement, in which event a Change of Control of
the Company will be deemed to have occurred at the time of
such breach.
Dated: December 20, 1999
PITTWAY CORPORATION
By:
------------------------------------
Its:
-----------------------------------
---------------------------------------
KING HARRIS
<PAGE>
AMENDMENT
The undersigned Pittway Corporation has established a Change of Control
Plan effective September 15, 1999 (the "Existing Plan"). The other undersigned
(the "Participant") is a participant in the Existing Plan.
The undersigned hereby amend Section 4.3 of the Existing Plan as to the
Participant by adding the following paragraph immediately prior to the final
paragraph thereof:
Notwithstanding the preceding paragraph, for purposes
of Section 3.6 as it relates to a particular participant, none
of the transactions contemplated by the Agreement and Plan of
Merger dated as of December 20, 1999 by and among Honeywell
International, Inc., HII-2 Acquisition Corp. and the Company
and the Stockholders Agreement referred to therein, either
individually or in the aggregate, will constitute a Change of
Control of the Company unless and until, following the Change
of Control of the Company that would otherwise result from any
or all thereof, the participant's employer breaches his or her
Employment Agreement, in which event a Change of Control of
the Company will be deemed to have occurred at the time of
such breach.
Dated: December 20, 1999
PITTWAY CORPORATION
By:
------------------------------------
Its:
-----------------------------------
---------------------------------------
PAUL R. GAUVREAU
<PAGE>
AMENDMENT
The undersigned Pittway Corporation has established a Change of Control
Plan effective September 15, 1999 (the "Existing Plan"). The other undersigned
(the "Participant") is a participant in the Existing Plan.
The undersigned hereby amend Section 4.3 of the Existing Plan as to the
Participant by adding the following paragraph immediately prior to the final
paragraph thereof:
Notwithstanding the preceding paragraph, for purposes
of Section 3.6 as it relates to a particular participant, none
of the transactions contemplated by the Agreement and Plan of
Merger dated as of December 20, 1999 by and among Honeywell
International, Inc., HII-2 Acquisition Corp. and the Company
and the Stockholders Agreement referred to therein, either
individually or in the aggregate, will constitute a Change of
Control of the Company unless and until, following the Change
of Control of the Company that would otherwise result from any
or all thereof, the participant's employer breaches his or her
Employment Agreement, in which event a Change of Control of
the Company will be deemed to have occurred at the time of
such breach.
Dated: December 20, 1999
PITTWAY CORPORATION
By:
------------------------------------
Its:
-----------------------------------
---------------------------------------
EDWARD J. SCHWARTZ
<PAGE>
5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership (as such term is used in Section 13(d) of the Securities Exchange Act
of 1934 (the "Exchange Act")) as of March 25, 1999 of Common Stock and Class A
Stock by (a) the persons known by the Company to be the beneficial owners of
more than 5% of the outstanding shares of Common Stock or Class A Stock, (b)
each director, and nominee for director, of the Company, (c) each of the
executive officers of the Company listed in the Summary Compensation Table, (d)
all directors, nominees and executive officers of the Company as a group, and
(e) the current members of the Harris Group. The information set forth in the
table as to directors, nominees and executive officers is based upon information
furnished to the Company by them in connection with the preparation of this
Proxy Statement. Except where otherwise indicated, the mailing address of each
of the stockholders named in the table is: c/o Pittway Corporation, 200 South
Wacker Drive, Suite 700, Chicago, Illinois 60606-5802.
<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
NUMBER OF PERCENT OF NUMBER OF PERCENT OF VOTES ON
SHARES OF OUTSTANDING SHARES OF OUTSTANDING MATTERS OTHER
COMMON STOCK SHARES OF CLASS A SHARES OF THAN ELECTION
NAME (1) COMMON STOCK STOCK (1) CLASS A STOCK OF DIRECTORS
---- ------------ ------------ --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
William Harris Investors, Inc (2) (3).... 2,543,800 32.3% 3,615,748 10.4% 25.6%
2 North LaSalle Street
Suite 400
Chicago, Illinois 60602
Mario J. Gabelli et al. (4).............. 1,553,414 19.7 4,036,022 11.6 17.2
One Corporate Center
Rye, New York 10580
Janus Capital Corporation (5)............ None - 3,638,057 10.4 3.2
100 Fillmore Street, Suite 300
Denver, Colorado 80206
Katherine Harris (3) (6)................. 632,786 8.0 1,066,606 3.1 6.5
Roberta Harris (3) (7)................... 401,400 5.1 417,180 1.2 3.9
Jack Polsky (3) (8)...................... 878,724 11.2 1,335,070 3.8 8.9
Boardman Lloyd (3) (7)................... 401,400 5.1 417,180 1.2 3.9
Irving B. Harris (3) (9)................. 2,543,800 32.3 3,615,748 10.4 25.6
King Harris (3) (10)..................... 897,836 11.4 2,025,561 5.8 9.7
Neison Harris (3) (11)................... 778,298 9.9 1,111,426 3.2 7.8
William W. Harris (3) (12) (14).......... 2,543,800 32.3 3,626,283 10.4 25.6
Eugene L. Barnett (13) (14).............. 1,200 * 12,491 * *
Robert L. Barrows (3).................... 80,528 1.0 131,258 .4 .8
Fred Conforti (15)....................... 7,800 .1 364,460 1.0 .4
E. David Coolidge III (14)............... 2,200 * 25,535 .1 *
Anthony Downs (16)....................... 3,300 * 19,645 .1 *
Leo A. Guthart (17)...................... None - 372,178 1.1 .3
Jerome Kahn, Jr. (3) (14) (18)........... 2,543,800 32.3 3,626,283 10.4 25.6
John W. McCarter, Jr.(19)................ 1,000 * 5,400 * *
Paul R. Gauvreau (20).................... None - 188,517 .5 .2
Edward J. Schwartz (21).................. None - 55,955 .2 *
All Directors, Nominees and Executive
Officers of the Company as a group
(16 persons) (22)..................... 4,172,017 53.0 7,894,132 22.7 43.7
The Current Harris Group (3)............. 4,155,977 52.8 6,762,236 19.4 42.5
</TABLE>
* Less than one-tenth of one percent
(1) Except as otherwise indicated below, beneficial ownership means the
sole power to vote and dispose of shares.
3
<PAGE>
6
(2) The information as to William Harris Investors, Inc. ("WHI") is derived
in part from statements, as amended February 16, 1999, filed with the
Securities and Exchange Commission (the "Commission") pursuant to
Section 13(g) of the Exchange Act. Such statements, together with advice
furnished to the Company separately by WHI, disclose that (i) WHI, an
investment adviser registered under the Investment Advisers Act of 1940,
holds all such shares on behalf, and in terminable discretionary
accounts, of Irving B. Harris, William W. Harris, Robert Barrows and
certain other members of the Harris Group and Jerome Kahn, Jr., (ii) WHI
shares voting power with such persons, and has sole dispositive power,
with respect to all such shares, (iii) Irving B. Harris and his children
(including William W. Harris) are the sole voting stockholders of WHI
and (iv) Irving B. Harris and Jerome Kahn, Jr. are, respectively, the
Chairman and the President of WHI.
(3) The information as to the Current Harris Group (as defined below),
Katherine Harris, Roberta Harris, Jack Polsky, Boardman Lloyd, Irving B.
Harris, King Harris, Neison Harris, Robert Barrows and William W. Harris
is derived in part from statements, as amended January 15, 1990, filed
with the Commission pursuant to Section 13(d) of the Exchange Act and
statements, as amended March 16, 1999, filed with the Commission
pursuant to such Section. Such statements, as amended, were filed on
behalf of such persons as well as those other persons and entities who
are currently members of the Harris Group beneficially owning, directly
or indirectly, shares of Common Stock or Class A Stock (collectively
referred to as the "Current Harris Group"). Such statements disclose
that, because of the relationships among members of the Current Harris
Group, such persons may be deemed to be a group within the meaning of
Section 13(d) of the Exchange Act and the rules and regulations
thereunder. Jerome Kahn, Jr. may also be deemed to be a member of any
such group. Irving B. Harris, King Harris, Neison Harris, William W.
Harris and Jerome Kahn, Jr. (and, if elected a director, Robert Barrows)
may be deemed in control of the Company by reason of beneficial
ownership of stock of the Company by themselves and other members of the
Current Harris Group and by reason of their positions with the Company
and its subsidiaries. The aggregate number of outstanding shares which
may be deemed to be beneficially owned by the Current Harris Group
includes all the shares shown in this table for WHI, Katherine Harris,
Roberta Harris, Jack Polsky, Boardman Lloyd, Irving B. Harris, King
Harris, Neison Harris, Robert Barrows and William W. Harris. Total
excludes duplication of shares within the Current Harris Group. Addition
of the shares owned directly by Jerome Kahn, Jr. would not affect the
percentages of outstanding shares or outstanding votes shown for the
Current Harris Group.
(4) The information as to Mario J. Gabelli and entities controlled directly
or indirectly by Mr. Gabelli is derived from statements, as amended
November 3, 1997 and July 10, 1998, filed with the Commission pursuant
to Section 13(d) of the Exchange Act. Such statements disclose that (i)
Mr. Gabelli is the chief investment officer for most of the entities
signing such statements and is deemed to have beneficial ownership of
the shares beneficially owned by all such entities, (ii) Mr. Gabelli and
such entities do not admit that they constitute a group within the
meaning of Section 13(d) of the Exchange Act and the rules and
regulations thereunder and (iii) Mr. Gabelli and such entities have the
sole power to vote and dispose of all the shares of which they are
beneficial owners (unless the aggregate voting interest of all such
entities exceeds 25% of the Company's total voting interest or other
special circumstances exist, in which case the proxy voting committees
of certain of such entities would have the sole power to vote certain of
426,700 shares of Common Stock and 374,500 shares of Class A Stock)
except 6,450 shares of Common Stock and 42,733 shares of Class A Stock
as to which they have no voting power.
(5) The information as to Janus Capital Corporation ("Janus") is derived
from a statement, as amended February 5, 1999, filed with the Commission
pursuant to Section 13(g) of the Exchange Act. Such statement discloses
that (i) Thomas H. Bailey is President and Chairman of the Board of
Janus, owns approximately 12.2% of Janus and may be deemed to exercise
control over Janus, (ii) Janus is deemed to have beneficial ownership of
all 3,638,057 shares, (iii) Janus and Mr. Bailey share voting and
dispositive power with respect to such shares, (iv) all such shares are
held by managed portfolios to which Janus is an investment advisor or
sub-advisor and (v) Mr. Bailey disclaims beneficial ownership of such
shares.
(6) Consists of shares held as co-trustee of trusts created by members of
the Current Harris Group. Ms. Harris shares with other members of the
Current Harris Group the power to vote and dispose of such shares.
(7) Consists of shares held by Ms. Harris and Mr. Lloyd as co-trustees of a
trust created by a member of the Current Harris Group. They share with
other members of the Current Harris Group the power to vote and dispose
of such shares.
(8) Includes 872,116 shares of Common Stock and 1,324,302 shares of Class A
Stock held as co-trustee of trusts created by members of the Current
Harris Group. Mr. Polsky shares with other members of the Current Harris
Group the power to vote and dispose of such shares.
4
<PAGE>
7
(9) Consists of the shares held by WHI (of which Irving B. Harris may be
deemed to share control), certain of which are held by WHI for the
account of Mr. Harris or would otherwise be deemed beneficially owned by
him without regard to WHI. As set forth in note (2), the voting power of
the shares held by WHI is shared by WHI with the respective persons for
whose account they are held and WHI has sole dispositive power with
respect to such shares.
(10) King Harris shares the power to vote and dispose of 684,618 of such
shares of Common Stock and 1,213,913 of such shares of Class A Stock.
Includes 331,183 shares of Class A Stock which Mr. Harris has the right
to acquire within 60 days through the exercise of options awarded under
the Company's 1990 Stock Awards Plan.
(11) Neison Harris shares the power to vote and dispose of 335,918 of such
shares of Common Stock and 631,364 of such shares of Class A Stock.
(12) Consists of the shares held by WHI (of which William W. Harris may be
deemed to share control), certain of which are held by WHI for the
account of Mr. Harris or would otherwise be deemed beneficially owned by
him without regard to WHI. As set forth in note (2), the voting power of
the shares held by WHI is shared by WHI with the respective persons for
whose account they are held and WHI has sole dispositive power with
respect to such shares.
(13) Mr. Barnett shares power to vote and dispose of all such shares.
(14) Includes 10,400 shares and 135 shares of Class A Stock which he has the
right to acquire within 60 days through the exercise of options awarded
under the Company's 1996 Director Stock Option Plan and 1998 Director
Stock Option Plan, respectively.
(15) Does not include 18,000 shares of Class A Stock owned by Mr. Conforti's
wife, as to which shares he disclaims beneficial ownership. Includes
158,590 shares of Class A Stock as to which Mr. Conforti shares voting
and dispositive power. Includes 197,245 shares of Class A Stock which he
has the right to acquire within 60 days through the exercise of options
awarded under the Company's 1990 Stock Awards Plan.
(16) Includes 5,200 shares and 67 shares of Class A Stock which he has the
right to acquire within 60 days through the exercise of options awarded
under the Company's 1996 Director Stock Option Plan and 1998 Director
Stock Option Plan, respectively.
(17) Mr. Guthart shares power to vote and dispose of 56,816 of such shares.
Includes 192,060 shares of Class A Stock which Mr. Guthart has the right
to acquire within 60 days through the exercise of options awarded under
the Company's 1990 Stock Awards Plan.
(18) Consists of the shares held by WHI, with respect to which Mr. Kahn acts
as portfolio manager, including 540 shares of Common Stock and 878
shares of Class A Stock owned by Mr. Kahn. As set forth in note (2), the
voting power of the shares held by WHI is shared by WHI with the
respective persons for whose account they are held and WHI has sole
dispositive power with respect to such shares.
(19) Mr. McCarter shares power to vote and dispose of such shares of Common
Stock. Such shares of Class A Stock consist of shares which he has the
right to acquire within 60 days through the exercise of an option
awarded under the Company's 1998 Director Stock Option Plan.
(20) Includes 62,029 shares of Class A Stock which Mr. Gauvreau has the right
to acquire within 60 days through the exercise of options awarded under
the Company's 1990 Stock Awards Plan.
(21) Includes 43,075 shares of Class A Stock which Mr. Schwartz has the right
to acquire within 60 days through the exercise of options awarded under
the Company's 1990 Stock Awards Plan.
(22) Includes 2,980,367 shares of Common Stock and 4,562,371 shares of Class
A Stock as to which voting power is shared other than with directors,
nominees and executive officers of the Company and 921,747 shares of
Common Stock and 1,791,491 shares of Class A Stock as to which
dispositive power is so shared. Includes 893,397 shares of Class A Stock
which executive officers of the Company have the right to acquire within
60 days through the exercise of options awarded under the Company's 1990
Stock Awards Plan and 52,807 shares of Class A Stock which non-employee
directors of the Company have the right to acquire within 60 days
through the exercise of options awarded under the Company's 1996 and
1998 Director Stock Option Plans. Total excludes duplication of shares
within such group.
COMPENSATION
BOARD COMPENSATION
During 1998, compensation to non-officer directors was paid at the rate of
$2,500 per quarter plus $3,000 for each Board meeting attended in person, $1,000
for each Board meeting attended by telephone and $1,000 for each committee
meeting attended, except that $250 was paid for attending a committee meeting
held on the same day as a Board meeting. The Chairman of the Audit Committee was
paid an additional $2,000 per year. Effective January 1, 1999, the compensation
per quarter was increased to $3,500 and the Chairman of the Compensation
Committee will be paid an additional $2,000 per year. Officer directors are not
separately compensated for serving as directors.
Under the Company's 1998 Director Stock Option Plan, the Board may from time to
time grant to directors who are not employees of the Company or any of its
subsidiaries ("Eligible Directors") non-qualified options to purchase shares of
Class A Stock at the market values on the dates of grant. The maximum number of
shares which may be issued under the Plan is 135,000 (subject to adjustment).
Each option may have a term of up to 10 years, but, if earlier than scheduled
expiration, will expire five years after the optionee's service as a member of
the Board terminates for any reason. Each option becomes exercisable as
determined by the Board, but except in the event of death or disability cannot
be exercised during the six months subsequent to grant.
Pursuant to the Plan, during 1998 non-qualified options were granted as follows:
Mr. McCarter - 5,400 shares; Mr. Barnett - 540 shares; Mr. Coolidge - 540
shares; Mr. Downs - 270 shares; Mr. W. Harris - 540 shares; Mr. Kahn - 540
shares. Mr. McCarter's option was exercisable upon grant with respect to 50% and
becomes exercisable with respect to the balance on the first anniversary of
grant provided he is then an Eligible Director. Each of the other options was
exercisable upon grant with respect to 25% and becomes exercisable with respect
to an additional 25% on each anniversary of grant provided the holder is then an
Eligible Director. Mr. McCarter's option was granted to him following his
initial election to the Board at the 1998 annual meeting. The options granted to
the other directors were granted to them to avoid dilution under their options
pursuant to the Company's 1996 Director Stock Option Plan that were outstanding
at the time of the Spinoff.
9
<PAGE>
12
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information for the President and
Chief Executive Officer of the Company (who served as such throughout 1998) and
for each of the Company's four most highly compensated other executive officers
serving at the end of 1998. No other person who served as an executive officer
of the Company at any time during 1998 had 1998 compensation in excess of the
1998 compensation of any of the executive officers named in the table.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------------------
RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
COMPENSATION AWARDS OPTIONS/SARS
------------ ($) (1) (#) (1) ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (2) (3) (2) (4) COMPENSATION
- - ---------------------------------------- ---- ------ ------- -------- ------------ -------------
(1)
----
<S> <C> <C> <C> <C> <C> <C>
King Harris, President and 1998 $650,000 $720,000 54,600 $5,256 (5)
Chief Executive Officer 1997 550,000 470,000 71,614 5,206
1996 550,000 500,000 $250,000 52,650 4,946
Fred Conforti, President of 1998 500,000 280,000 37,200 5,256 (5)
Pittway Systems Technology Group 1997 460,000 500,000 35,910 5,206
(division of the Company) 1996 425,000 150,000 51,048 4,590
Leo A. Guthart, Chairman and Chief 1998 500,000 590,000 100,000 36,400 3,363 (6)
Executive Officer of Pittway Security 1997 460,000 100,000 56,173 4,612
Group (division of the Company) 1996 425,000 450,000 35,100 4,612
Paul R. Gauvreau, Financial Vice President, 1998 290,000 210,000 26,439 5,256 (5)
Treasurer and Chief Financial Officer 1997 275,000 180,000 10,800 5,206
1996 260,000 70,000 30,000 13,324 4,944
Edward J. Schwartz, 1998 195,000 100,000 12,587 5,243 (7)
Vice President 1997 185,000 90,000 10,206 5,169
1996 172,000 60,000 10,000 10,370 4,880
</TABLE>
- - -----------
(1) All of the restricted stock awards, options and SARs relate to Class A
Stock.
(2) All of the restricted stock awards and the following SARs were awarded
in lieu of bonuses or portions of bonuses that would otherwise have been
paid in cash: K. Harris, 18,964 shares for 1997; F. Conforti, 15,138
shares for 1996; L. Guthart, 21,073 shares for 1997; P. Gauvreau, 2,524
for 1996; and E. Schwartz, 3,587 shares for 1998, 2,106 shares for 1997
and 2,270 shares for 1996.
(3) The restricted stock awards shown for 1998 were awarded in 1999 and thus
were not outstanding at the end of 1998. The other restricted stock awards
shown remained outstanding in full at the end of 1998. The aggregate value
of the 40,351 shares subject to such other awards and to three other
restricted stock awards held by named executive officers that remained
outstanding at the end of 1998 was then $1,334,105. Each award shown was a
Performance Shares Award scheduled to vest in equal pro rata installments
over the five years subsequent to its grant. Under the terms of each
award, no shares are distributable until vesting of such award in full or
earlier termination of employment, and at the time shares are distributed
an amount is payable equal to the normal quarterly dividends which would
have been paid on such shares had such shares been issued on the date such
award was granted.
(4) Includes a SAR awarded for 1998 in 1999 (and thus not shown in the
following sections titled "Option/SAR Grants During Year" and "Option/SAR
Exercises and Year-End Values") to E. Schwartz for 3,587 shares. The SAR
was a Bonus Shares Award vested in full upon grant. Under the terms of
such SAR, following a date approximately three years after the date of
grant (or following the date of any earlier termination of employment),
such shares are issued and an amount is payable equal to the normal
quarterly dividends which would have been paid on such shares had such
shares been issued on the date such SAR was granted. The Compensation
Committee may, in its sole discretion, determine to pay the fair market
value of such shares in cash rather issue such shares.
(5) Consists of $4,800 annual matching Company contributions during the year
to the Company's salary reduction plan and $456 for term life insurance
provided by the Company during the year.
(6) Consists of $3,249 annual matching Company contributions during the year
to the Company's salary reduction plan and $114 for term life insurance
provided by the Company during the year.
(7) Consists of $4,800 annual matching Company contributions during the year
to the Company's salary reduction plan and $443 for term life insurance
provided by the Company during the year.
10
<PAGE>
13
OPTION/SAR GRANTS DURING YEAR
The following table sets forth information with respect to options and stock
appreciation rights ("SARs") granted during 1998 to executive officers named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(4)
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR PRICE ($/ SH) DATE 5%($) 10%($)
- - ---- ------------ ------------ ---------------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
King Harris (1)............. 54,600 6.0 $23.74 8/18/05 527,685 1,229,731
King Harris (2)............. 18,964 2.1 0 1/20/01 520,881 598,893
Fred Conforti (1)........... 37,200 4.1 23.74 8/18/05 359,522 837,839
Leo A. Guthart (1).......... 36,400 4.0 23.74 8/18/05 351,790 819,821
Leo A. Guthart (2).......... 21,073 2.3 0 1/20/01 578,809 665,496
Paul R. Gauvreau (1)........ 12,000 1.3 23.74 8/18/05 115,975 270,271
Paul R. Gauvreau (3)........ 14,439 1.6 27.2454 6/15/05 160,152 373,222
Edward J. Schwartz (1)...... 9,000 1.0 23.74 8/18/05 86,981 202,703
Edward J. Schwartz (2)...... 2,106 .2 0 1/20/01 57,845 66,509
</TABLE>
- - -----------
(1) Consists of non-qualified options to purchase Class A Stock granted under
the Company's 1990 Stock Awards Plan at exercise prices equal to the
market prices on the dates of grant. Each option becomes exercisable on
the third anniversary of the date of grant, subject to acceleration in the
event of earlier termination of employment (full acceleration if earlier
termination is on account of death, permanent disability or retirement
upon or after reaching age sixty-five; partial acceleration in increments
of 33 1/3% each year commencing one year after the date of grant if
termination is for any other reason other than for "cause").
(2) Consists of SAR's with respect to Class A Stock awarded under the
Company's 1990 Stock Awards Plan (in lieu of a portion of a bonus that
would otherwise have been paid in cash) at a reference price of zero
dollars and fully vested at grant. Under the terms of each SAR, following
a date approximately three years after the date of grant (or following the
date of any earlier termination of employment), the shares of Class A
Stock are issued and an amount is payable equal to the normal quarterly
dividends which would have been paid on such shares had such shares been
issued on the date the SAR was granted. The Compensation Committee may, in
its sole discretion, determine to pay the fair market value of such shares
in cash rather than issue such shares.
(3) Consists of a non-qualified option to purchase Class A Stock granted under
the Company's 1990 Stock Awards Plan at an exercise price equal to the
market price on the date of grant. The option was fully exercisable on the
date of grant. The option was granted in exchange for Mr. Gauvreau's
surrender of a portion of a SAR previously granted to him under the Plan.
See "Compensation Committee Report on Executive Compensation - Stock
Option and Stock Appreciation Right (SAR) Program".
(4) The assumed annual rates of appreciation in the price of Class A Stock are
in accordance with rules of the Securities and Exchange Commission and are
not predictions of future market prices of the Class A Stock nor of the
actual values the named executive officers will realize. In order for such
annual rates of appreciation to be realized over the 3-year term of the
SARs, the market price of Class A Stock would have to increase to
$27.47/share (5%) or $31.58/share (10%) at the end of that term. In order
for such annual rates of appreciation to be realized over the 7-year term
of the options, the market price of Class A Stock would have to increase
to $33.40/share (5%) or $46.26/share (10%) during that term. In such
events, and assuming corresponding annual rates of increase for the market
price of Common Stock, the market value of all currently outstanding
shares of Common Stock and Class A Stock would have increased by
approximately $160,000,000 (5%) or $335,000,000 (10%) during that 3-year
term and by approximately $413,000,000 (5%) or $962,000,000 (10%) during
that 7-year term.
11
<PAGE>
14
OPTION/SAR EXERCISES AND YEAR-END VALUES
The following table sets forth information with respect to exercises of options
and SARs during 1998 by the executive officers named in the Summary Compensation
Table and the values of unexercised options and SARs held by them as of December
31, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN 1998 AND YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
SHARES OPTIONS/SARS AT YEAR-END(#) SARS AT YEAR-END($)
ACQUIRED ON VALUE ----------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
King Harris 97,716 $2,385,071 278,533 208,024 $7,024,166 $3,665,714
Fred Conforti 25,631 622,559 161,335 140,358 3,941,234 1,965,404
Leo A. Guthart 0 0 156,960 127,673 3,833,467 2,079,802
Paul R. Gauvreau 16,407 340,885 57,989 39,364 1,132,858 623,592
Edward J. Schwartz 3,078 73,763 34,975 32,168 854,154 555,144
</TABLE>
EMPLOYMENT AGREEMENTS
Employment agreements between the Company and K. Harris and L. Guthart provide
for minimum annual salaries of $550,000 and $425,000, respectively,
supplementary insurance coverage (or its cash equivalent) and participation in
the Company's supplemental executive retirement plan. The agreements are for
terms expiring December 31, 2001 and September 26, 2002, respectively. Each
agreement renews automatically at the end of each year for an additional year
(or until age 65, if earlier) unless either party thereto elects otherwise, but
may be terminated by the executive officer on specified advance notice (with
forfeiture of supplemental retirement benefits). Each agreement includes
non-competition, non-solicitation and confidentiality obligations on the part of
the executive officer which survive its termination. In 1998, the Company
entered into similar agreements with Mr. Gauvreau and Mr. Schwartz. See
"Compensation Committee Report on Executive Compensation - Employment Agreement
with P. Gauvreau and E. Schwartz" below.
PLANS AND ARRANGEMENTS
In the descriptions of plans and arrangements which follow, and in the
descriptions elsewhere in this Proxy Statement of outstanding restricted stock
awards, options and SARs, references are made to shares of Class A Stock. If the
Change of Control Date (as defined in the Company's Restated Certificate of
Incorporation, as amended) should occur, the Class A Stock will change into
Common Stock on a share-for-share basis. In the event of any such change,
references to Class A Stock in such descriptions should be understood to refer
to Common Stock.
Salary Reduction Plan
Under the Company's salary reduction plan, eligible covered employees of the
Company, its divisions and subsidiaries may elect to have a portion of their
"earnings" (total cash compensation less certain items) contributed to the plan
by their employers, and their employers match such contributions with specified
percentages thereof. The percentages vary and are determined from time to time
by their respective employers. For 1998, such percentages ranged from 1.5% to
3.0% of eligible covered employees' "earnings." Contributions and matches are
invested in one or more investment funds selected by the employees from among
those available under the plan. Such funds include a fund which invests solely
in Class A Stock. Salary reduction contributions vest immediately. Subject to
acceleration in the event of termination of employment upon retirement after age
65 or on account of death or disability, employer matching contributions vest on
a cumulative basis of 20% per year of credited service under the plan. Vested
contributions (after any earnings or losses from the investment thereof) are
distributed in a lump sum or installments following termination of employment,
but account balances may under certain circumstances and subject to certain
conditions be withdrawn or borrowed earlier.
12
<PAGE>
15
Retirement Plans
The Company and its subsidiaries have tax-qualified retirement plans covering
all domestic salaried employees, and certain domestic hourly employees, after
three months of service. The plans are fully paid for by the Company, and
employees become fully vested after five years of service. The annual benefit
payable to an employee under the plans upon retirement, computed as a straight
life annuity amount, equals the sum of the separate amounts the employee accrues
for each of his years of service under the plans plus certain increases put into
effect prior to 1998. Such separate amounts are determined as follows: for each
year through 1988, 1.2% of such year's compensation up to the Social Security
wage base for such year and 1.8% (2.0% for years after 1986) of such year's
compensation above such wage base; for each year after 1988 through the year in
which the employee reaches thirty-five years of service, 1.2% of such year's
"covered compensation" and 1.85% of such year's compensation above such "covered
compensation"; and for each year thereafter, 1.2% of such year's compensation.
The employee's compensation under the plans for any year includes all salary
(before any election under the Company's salary reduction plan or cafeteria
plan), commissions and overtime pay and, beginning in 1989, bonuses (in the case
of each executive officer named in the Summary Compensation Table, the
equivalent of the sum of the amounts set forth for such executive officer for
such year in the Annual Compensation column of such Table and the amount taxable
to such executive officer during such year related to options and SARs awarded
pursuant to the Company's 1990 Stock Awards Plan); subject to such year's limit
applicable to tax-qualified retirement plans ($160,000 for 1999 and, currently,
for each year thereafter). The employee's "covered compensation" under the plans
for any year is generally the average, computed such year, of the Social
Security wage bases for each of the thirty-five years preceding the employee's
Social Security retirement age, assuming that such year's Social Security wage
base will not change in the future. Normal retirement age under the plans is age
65, and reduced benefits are available as early as age 55. Benefits are not
subject to reduction for Social Security benefits or other offset amounts.
Estimated annual benefits payable under the plans upon retirement at normal
retirement age for the following persons (assuming 1999 and future compensation
at the $160,000 limit currently applicable and that covered compensation remains
constant; but without regard to the formula limitation on annual benefits
imposed on tax-qualified retirement plans, currently $130,000) are: K. Harris,
$119,730; F. Conforti, $109,808; L. Guthart, $130,101; P. Gauvreau, $99,410; and
E. Schwartz, $56,887.
Supplemental Executive Retirement Plan
Four executive officers of the Company and three other employees of the Company
or a subsidiary participate in the Company's supplemental executive retirement
plan, which is not tax-qualified. The annual benefit payable to a participant
under the plan at age 65, computed as a straight life annuity amount, equals the
sum of the separate amounts the participant accrues for each of his years of
service after January 1, 1995 plus, in one case, an increase based on a pro
forma adjustment to tax-qualified retirement benefits. The separate amount for
each such year is 1.85% of that portion of the participant's salary and annual
discretionary cash bonus, if any, for such year (before any election under the
Company's salary reduction plan, and including any portion of such bonus taken
in the form of Performance Shares Awards and/or Bonus Shares Awards) in excess
of $150,000 (or any higher limit applicable that year to tax-qualified
retirement plans) but less than $300,000. Benefits are not subject to reduction
for Social Security benefits or other offset amounts. Accrued benefits are
subject to forfeiture in certain events. Estimated annual benefits payable under
the plan upon retirement at age 65 for the following persons (assuming 1999 and
future annual salary and discretionary cash bonus of not less than $300,000 for
each of them and that the $160,000 limit applicable in 1999 remains constant)
are: K. Harris, $34,902; L. Guthart, $20,442; P. Gauvreau, $28,644; and E.
Schwartz, $48,353.
13
<PAGE>
16
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") makes
salary, bonus and long-term incentive plan decisions with respect to the
Company's senior executive officers, in the case of senior executive officers
who have employment agreements subject to provisions regarding base salary which
appear in those agreements. The Company delegates compensation decisions
relating to other executive officers to the Chief Executive Officer and senior
executive officers who report directly to him.
In making its compensation decisions, the Committee's primary goal is to make
such compensation competitive with compensation offered by other firms in
similar industries with similar levels of size and performance. While the
Committee is mindful of Section 162(m) of the Internal Revenue Code of 1986, as
amended, and the loss of deductibility for federal income tax purposes of
certain remuneration of a covered executive officer in excess of $1,000,000
during any year, the Committee does not base decisions primarily on preserving
such deductibility.
The Committee set the salaries of the Company's Chairman of the Board and
Chairman of the Executive Committee (neither of whom receives any other
compensation from the Company) for 1998 based on the Committee's perception of
the value of their services to the Company.
The Committee's policies applicable to compensation of the Company's other
senior executive officers, other than its chief executive officer, for 1998 were
as follows:
SALARY
The Committee obtained from an outside compensation specialist a detailed report
regarding salaries being paid to top-level executives in a wide variety of
companies roughly the same size as the Company. The outside specialist also
compiled data from certain similar-sized companies in the electronic and
electrical equipment field. 1,947 companies were analyzed via statistical
regression to prepare the general industry data. 55 companies were included in
the data for the electronic and electrical equipment field.
Only six of the companies included in the report had their performance reflected
in the Value Line Electronics Industry Index used in the Performance Graph which
follows this Report. The Committee does not know whether any of the companies
included in the report had its performance reflected in the Wilshire 5000 Index
used in such Performance Graph. Because nearly all of the Company's major direct
competitors are either divisions of larger diversified companies or privately
held, those competitors generally are not included in either the outside
compensation specialist's report or such indices. The Committee believes that
the electronic/communications equipment companies included in the outside
compensation specialist's report are, as a group, as comparable to the companies
included in the Value Line Electronics Industry Index as any other group of
companies for which compensation information was available to the Committee.
The report specifically identified salaries at the 50th, 75th and 90th
percentiles of the ranges of salaries surveyed. It also showed pay differentials
between presidents and chief executive officers (CEOs) of free-standing
companies and presidents and CEOs of division-based companies. The Committee
tended to focus on salaries paid in free-standing companies for two reasons.
First, Company businesses are given a high degree of autonomy and effectively
run as free-standing companies. Second, Company executives are likely targets of
management recruiters from free-standing competitors of the Company.
The Committee also reviewed published compensation information from five
publicly-held companies in the alarm equipment business. While three of these
companies are smaller than the Company's Groups, they still are indicative of
what competitive firms are paying in the alarm industry. As for salary policy in
general, the Committee aimed at setting salaries somewhere between the 50th and
75th percentile of the salary ranges reported by the outside compensation
specialist.
14
<PAGE>
17
BONUS
The cash bonuses of Mr. Conforti and Mr. Guthart were determined by formulas set
by the Compensation Committee during the first 90 days of 1998. The cash bonuses
of Mr. Gauvreau and Mr. Schwartz were set by the Committee on a discretionary
basis after an evaluation of their individual performances, their accomplishment
of pre-established goals and objectives, and the relative financial performance
of the Company. In the process of determining these discretionary bonuses, the
Committee also reviewed the general industry information relating to total cash
compensation (base salary plus cash bonus) in comparably-sized companies
supplied by the outside compensation specialist.
For 1998, bonuses for these executive officers ranged from 66% to 118% of their
base salaries and total cash compensation ranged between the 74th and 90th
percentile of the ranges for free-standing companies reported by the outside
compensation specialist.
On a discretionary basis, a Performance Shares Award was awarded to Mr. Guthart
in addition to the cash bonus earned by him during the year. A Bonus Shares
Award was awarded to Mr. Schwartz in lieu of a portion of his bonus which would
otherwise have been paid in cash.
STOCK OPTION AND STOCK APPRECIATION RIGHT (SAR) PROGRAM
In 1993, the Committee established a Stock Option and Stock Appreciation Right
(SAR) Program to more closely tie the financial interests of managers with those
of stockholders. In 1998, 579,900 stock options were granted to 139 top and
middle managers, including all five executive officers named in the Summary
Compensation Table. The exercise price of the options was the market price of
the Company's Class A Stock on the date of the grant.
The Program was designed by the Company's outside compensation specialist, who
patterned it after programs used by many other companies of the Company's size.
In 1998, the Committee, after consultation with its outside compensation
specialist, determined that, subject to continuing improvement in the Company's
profits, over the seven-year period beginning with 1998 the annual target for
awards of stock options and SARs under the Program should be between 1.5% and
1.75% of the Company's outstanding shares.
The specific stock option grants given in 1998 were allocated among executives
on the basis of their positions and levels of responsibility. The numbers and
values of options and SARs already held by the executives were not a factor in
the allocation.
The Bonus Shares and Performance Shares Awards which were awarded in 1998 as
part of the Company's bonus program were not part of the Stock Option and SAR
Program.
During 1998, the Company offered each holder of a then outstanding SAR (other
than a Bonus Shares Award) the opportunity to surrender some or all of such SAR
and receive in exchange a fully-exercisable, seven-year non-qualified option to
purchase a formula number of shares of Class A Stock at an exercise price equal
to the market price on the date of the new grant. The options granted as a
result of acceptances were also not part of the Program.
15
<PAGE>
18
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee reviewed the same information and analysis described above insofar
as it related to compensation being paid to Presidents and CEOs of similar-sized
companies. The compensation specialist's report specifically identified in
dollar terms the 50th, 75th and 90th percentile of base salary, total cash
compensation (base salary plus cash bonus) and total compensation (including
stock options and other consideration) being paid to comparable Presidents and
CEOs. Mr. Harris's base salary was at the 61st percentile of compensation
reported for similar-sized companies in general industry. His cash bonus was
derived from a formula set by the Compensation Committee during the first 90
days of 1998. His total cash compensation was at the 78th percentile of
compensation reported for general industry companies.
EMPLOYMENT AGREEMENTS WITH P. GAUVREAU AND E. SCHWARTZ
In 1998, the Committee approved employment agreements with P. Gauvreau and E.
Schwartz, and in 1999 the Committee approved revisions to those agreements. The
agreements provide for minimum annual salaries of $290,000 and $195,000,
respectively, supplementary insurance coverage and participation in the
Company's supplemental executive retirement plan retroactive to January 1, 1995
(in the case of Mr. Schwartz, with a benefit increase based on a pro forma
adjustment to his tax-qualified retirement benefits). Each agreement is for a
term currently expiring December 31, 2001, and renews automatically at the end
of each year for an additional year (or until age 65, if earlier) unless either
party thereto elects otherwise, but may be terminated by the employee on 180
days' notice (with forfeiture of supplemental retirement benefits). Each
agreement includes non-competition, non-solicitation and confidentiality
obligations on the part of the employee which survive its termination.
The Committee felt it appropriate to enter into formal contracts for employment
with Mr. Gauvreau and Mr. Schwartz and to offer them participation in a
supplemental retirement plan in order to encourage them to continue their
valuable services to the Company.
Compensation Committee
Anthony Downs, Chairman
William W. Harris,
Jerome Kahn, Jr.
John W. McCarter, Jr.
16
