December 20, 1999
Honeywell International Inc.
Attention: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
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 ▇▇▇▇▇▇
family and ▇▇▇▇ ▇▇▇▇▇▇ regarding compensation matters.
1. Key Executive Retention Program: Parent, the Company and the ▇▇▇▇▇▇
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, ▇▇▇▇ ▇▇▇▇▇▇▇▇'▇ and ▇▇ ▇▇▇▇▇▇▇▇'▇ 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.
▇▇▇▇ and ▇▇ 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. ▇▇▇▇ ▇▇▇▇▇▇ Employment Agreement: The Company's Employment Agreement
with ▇▇▇▇ ▇▇▇▇▇▇ 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 ▇▇▇▇ ▇▇▇▇▇▇.
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/ ▇▇▇▇ ▇▇▇▇▇▇
Individually, for Pittway Corporation, and on
behalf of the ▇▇▇▇▇▇ Family
Confirmed on the date first written above:
Honeywell International Inc.
By:
-----------------------------
Its:
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Schedule 1
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EXECUTIVE BLACK-SCHOLES $ VALUE OF PARENT UP FRONT BONUS RETENTION BONUS LTIP ($)(4)
2000 VALUE OPTIONS(1) ($)(2) ($)(3)
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Fradin 500,000 4,300,000 1,700,000 1,000,000
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▇▇▇▇ 500,000 4,300,000 1,700,000 1,000,000
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Levy 500,000 5,300,000 1,700,000 1,000,000
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▇▇▇▇▇▇▇▇ 300,000 500,000 600,000
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▇▇▇▇▇▇▇ 200,000 2,000,000 500,000 500,000
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▇▇▇▇▇▇▇▇ 500,000
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▇▇▇▇▇▇▇ 500,000
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TOTAL 3,000,000 15,900,000 6,100,000 4,100,000
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(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 ▇▇▇▇▇▇ 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 ▇▇▇▇▇ ▇▇▇▇ 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 ▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ in 2000. If an executive
achieves target performance, he will receive the LTIP from Parent on
the third anniversary of the Share Purchase Date.
Schedule 2
CHANGES TO BE MADE IN ▇▇▇▇ ▇▇▇▇▇▇' EMPLOYMENT AGREEMENT
1. General: The employment agreement is to be between ▇▇▇▇ ▇▇▇▇▇▇ and
Parent.
2. Section 2: ▇▇▇▇▇▇ 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: ▇▇▇▇▇▇ 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: ▇▇▇▇▇▇ 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: ▇▇▇▇▇▇ 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: ▇▇▇▇▇▇ will have a two-year employment agreement which could
be extended on a year by year basis by mutual consent. On January 1,
2002 ▇▇▇▇▇▇ 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 ▇▇▇▇▇▇ 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.
