Case 2:00-cv-03605-DRD-SDW Document 53 Filed 01/31/2001 Page 1 of 37 °'

COHN LIFLAND PEARLMAN HERRMANN & KNOPF PETER S . PEARLMAN New Jersey Bar No. PP8416 West One Park 80 Plaza FC 1\I 1 Saddlebrook, NJ 07663 Telephone: 201/845-9600 JAN 3 1 2001 I MILBERG WEISS BERSHAD HYNES & LERACH LLP /,T WILLIAM S. LERACH ARTHUR C. LEAHY KATHLEEN A. HERKENHOFF DENISE M. DOUGLAS 0 600 West Broadway, Suite 1800 San Diego , CA 92101 Telephone: 619/231-1058 - and - STEVEN G. SCHULMAN SAMUEL H. RUDMAN 0 - One Pennsylvania Plaza New York, NY 10119-0165 Telephone : 212/594-5300

Attorneys for Plaintiff

9 UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

IN RE HONEYWELL INTERNATIONAL, Lead Case No. CV-00-3605- (DRD) • INC. SECURITIES LITIGATION, (Consolidated Cases) CLASS ACTION

CONSOLIDATED COMPLAINT FOR THIS DOCUMENT RELATES TO VIOLATION OF THE SECURITIES • EXCHANGE ACT OF 1934 ALL ACTIONS

DEMAND FOR JURY TRIAL

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• Case 2 : 00-cv-03605-DRD-SDW Document 53 Filed 01/31/2001 Page 2 of 37

Plaintiff alleges:

INTRODUCTION AND OVERVIEW

1. This is a securities class action on behalf of all purchasers of the stock ofHoneywell

International Inc. ("Honeywell" or the "Company") between 12/20/99 and 6/19/00 (the "Class

Period") seeking to pursue remedies under the federal securities laws.

2. In early 99, Honeywell and AlliedSignal, Inc. ("Allied") announced they would merge

to create a huge, 120,000 employee, $20+ billion revenue per year worldwide conglomerate

providing aerospace products and services, control technologies for buildings, homes and industry,

specialty chemicals, fibers and plastics and electronic and advanced materials, conducted by four

strategic business units: Aerospace Solutions, Automation & Controls, Performance Materials and

Power & Transportation Products. Honeywell was the name of the surviving entity, i.e., "new".

Honeywell. The merger became effective on 12/1/99. Michael Bonsignore, Honeywell's CEO,

immediately became the CEO of "new" Honeywell and its Chairman in 4/00 when Lawrence

F Bossidy, Allied's long-time CEO and Chairman retired as Chairman of "new" Honeywell.

3.. During late 99, many analysts and members ofthe investment community viewed the

impending Honeywell/Allied merger with skepticism, fearing that it would be difficult for these two

large companies to quickly integrate their far-flung and diverse operations successfully and

immediately achieve significantly accelerated revenue and earnings per share ("EPS") growth in 00-

01, which Bonsignore had been representing would occur after the merger. Asa result, Honeywell's

stock was basically flat during 6/99-12/99, as the chart below shows:

1

b

r Case 2:00-cv-03605-DRD-SDW Document 53 Filed 01/31/2001 Page 3 of 37

1 i

A n Honeywell International, Inc. June 1, 1999 - December 1, 1999

$80 $60

$70 $70

$60 $60

$50 $50

$40 ------$40

$30 ------$30

$20 ------$20

-- $10 ------$10

$0 $0 J J A S 0 N 0

4. Thus, upon the effectiveness of the merger in early 12/99, there was great interest

among investors and analysts as to how the vital post-merger integration ofthe two companies.was

proceeding and how Bonsignore and his management team would present the prospects ofthe "new"

Honeywell to the investment community. This was a matter ofconsiderable import, since the "new"

Honeywell was a huge company with over 795 million shares of common stock outstanding owned

by thousands of shareholders, including a large institutional shareholder base, and its shares were

listed on the New York Stock Exchange and included in major stock indices, including the Dow

Jones Industrial Average and the Standard & Poor's 500.

5. Since performance of the "new" Honeywell was viewed as a direct test of and a

challenge to Bonsignore and his management team, Bonsignore and his management team were

under pressure to show that the merger was succeeding, that promised merger synergies and savings

were being achieved and that Honeywell would immediately achieve strong EPS gains due to both

accelerated internal growth and acquisitions , thus pushing Honeywell's stock price higher. They

were also motivated to do so by a special new compensation plan implemented in connection with

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the merger which would provide them millions of dollars in 00 for short-term earnings growth and

stock appreciation, by Honeywell's business plan to achieve much of its forecasted growth by

making acquisitions in 00-01 and by their desire to unload significant amounts of the Honeywell

stock they owned to pocket millions in insider trading proceeds. In order to report on the progress

ofthe merger integration process and the financial prospects of "new" Honeywell to analysts and the

investment community, Honeywell held a major analyst and investor conference on Monday,

12/20/99, the first day of the Class Period.

6. In anticipation that Bonsignore and his management team would present a very bullish outlook for the "new" Honeywell at the 12/20/99 analysts' conference, Honeywell's stock moved higher, reaching $63-7/8 on Friday, 12/17/99. On 12120/99, Bonsignore and his management team held a huge conference for analysts and institutional investors in New York City. Bonsignore,

Honeywell's EVPs and Chief Operating Officers, Giannantonio Ferrari and Robert Johnson, and

Honeywell's SVP and ChiefFinancial Officer, Richard Wallman, made bullish presentations. They announced the first of what they indicated would be a series of acquisitions - Pittway Corp., a manufacturer of security and fire systems for homes and buildings -representing that this acquisition would not dilute Honeywell's 00 EPS and would materially benefit Honeywell's 01-02EPS. They also represented that the integration ofthe business operations and information technology/financial and accounting systems of "old" Honeywell and Allied wasproceeding successfully, that the "new"

Honeywell wasforecasting hundreds ofmillions ofdollars in merger synergies and savings and accelerating internal growth which, combined with an ongoing acquisition program, wouldyield

20% EPS gains in 00 to $3.20-$3.25,17% EPS growth in 01 and 15% EPS growth in 02. Despite these positive presentations, Honeywell's stock declined, falling from $63-715 on Friday, 12/17/99 to as low as $56-112 on 12/20/99 and $53-15116 on 12/22/99, as analysts and investors waited for concrete evidence of the success of the merger and the new Honeywell management team's efforts.

7. Then, on 1/19/00, Honeywell reported "record" 4thQ 99 and 99 results. While

Honeywell met its 99 EPS forecast of $2.65, its internal revenue growth was only 1%, its

Performance Materials unit suffered a sharp decrease in profitability and its Aerospace business performed poorly. Analysts determined also that Honeywell's 4thQ 99 EPS were of questionable

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quality, benefitted by one-time events, including a lower tax rate and Honeywell's over-funded

pension plan. However, Honeywell assured analysts and investors that Honeywell's Allied merger

integration was already infull swing and succeeding and, as a result, the "new " Honeywell would

achieve $250 million in merger integration savings in 00 alone (net ofimplementation costs) with further multi-hundred million dollar merger synergies and savings in 01 and 02 - hundreds of

millions more in savings than earlierpromised. They also again assured analysts that the Pittway

acquisition would not be dilutive to Honeywell's 00 results and that price increases by its

Performance Materials unit were "sticking," leading to improved revenues and margins. Finally,

Honeywell told analysts that the "new" Honeywell was raising its 00 cash flow forecast to $1.9

billion from $1.6 billion and was now on track to achieve "at least" 20% EPS growth in 00, followed by "at least " 17% EPS growth in 01 and compounded EPS growth of "at least" 18%

over the next three years, forecasting annual revenue growth of 8%-10% as compared with the

1 % achieved in 4thQ 99. Notwithstanding this presentation, Honeywell's stock again fell, from $60-

3/8 on 1/18/00, to $52-1/2 on 1/19/00, to $44-5/8 on 1/27/00 and to its Class Period low of $42-1/4

on 2/11/00, as investors reacted negatively to the poor quality of Honeywell's reported 4thQ 99 EPS

and performance of its Aerospace and Performance Materials units and continued their "show-me"

attitude awaiting concrete evidence that the "new" Honeywell could achieve the promised merger

synergies and savings and the 00-02 EPS revenue and EPS gains Bonsignore and his top executive

team were forecasting.

8. The relatively poor performance of Honeywell's stock in 12/99 through mid-2/00,

after the Allied/Honeywell merger became effective, was a source of tremendous concern to

Bonsignore, Ferrari and the other members of the "new" Honeywell's top executive team, as

Honeywell's Board and Honeywell's stockholders - especially its large institutional investors -were

demanding they deliver on their promised merger savings and revenue and EPS growth in the near-

term so that the underperformance ofHoneywell's stock would be reversed! This placed increasing

pressure on Bonsignore and his management team to report stellar 1 stQ 00 results for Honeywell

with strong revenue and EPS growth - and EPS of high quality - thus validating Bonsignore's

representations about the success of the Allied/Honeywell merger, the Pittway acquisition and his

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' forecasts for "at least" 20% EPS growth in 00 and "at least" 18%+ EPS growth during 00-02. To

try to halt the decline in Honeywell's stock, after the 1/19/00 conference call, Bonsignore and other

top Honeywell executives repeatedly contacted analysts and were extremely bullish in their

discussions with those analysts, assuring them that the "new" Honeywell's business was

strengthening, actions taken to overcome problems in Honeywell's Performance Materials unit -

including price increases - were working, Honeywell's Aerospace business was doing well, the

Allied/Honeywell merger integration process was succeeding and the promised merger synergies and

savings were being achieved, Pittway was being successfully integrated and its business was

performing up to expectations, and Honeywell was on track for "at least" 20% 00 EPS growth, $1.9

billion in free cash flow in 00 and the " at least" 18% 00-02 EPS growth being forecast.

9. Under these circumstances, investors and analysts were highly focused on

Honeywell's I stQ 00 results, to be announced on or about 4/18/00. On 4/13/00, a week earlier than

expected, Honeywell reported better-than- forecast 1 stQ 00 results - "record" revenues of $6.04

billion and "record" EPS of 5.63 - strong gains over the prior year. Honeywell reported its 1 stQ 00

results a week earlier than expected which Bonsignore said was concrete evidence ofthe success

ofthe integration ofthe operations and information technology/financial and accounting systems

of Allied and "old" Honeywell. During a conference call with analysts and large Honeywell

investors on 4/ 13/00, Bonsignore was euphoric about the state ofHoneywell's business, the quality

of its 1 stQ 00 results, the success of the integration of the AlliedlHaneywell merger and the

performance of the newly acquired Pittway business. According to Bonsignore, the merger

integration had gone amazingly well, the merger was now behind the "new " Honeywell, as he and

his executive team had successfully integrated two great American companies. Bonsignore said

that all of Honeywell's business units were performing well, that rising oil prices were actually

benefitting certain of Honeywell's business units, that the "new" Honeywell had met or exceeded all

of its internal targets and that the early release of the I stQ 00 results and the high quality of those

1 stQ 00 results proved that the "new" Honeywell was well poised to meet its EPS and revenue

commitments for 00 and beyond! As a result of these I stQ 00 results exceeding the forecasts of

Bonsignore and his top executive team and the representations of the successful integration of both

- 5 - Case 2:00-cv-03605-DRD-SDW Document 53 Filed 01/31/2001 Page 7 of 37

Allied's and Honeywell's operations and financial and accounting/control and information technology systems, as well as the reaffirmation of Honeywell's 00-02 EPS forecasts, Honeywell's stock soared higher, reaching $5 8-7/16 by 4125/00. This strong upward movement ofHoneywell's stock was all the more notable because stocks generally declined very sharply during 4/00.

10. However, even though the success of the "new" Honeywell was apparently just beginning in early 00 and the "new "Honeywell was now supposedlypositioned to achieve several years of accelerating revenue and EPS growth, which presumably would.have led to further increases in the price of its stock, during 2/00-4/00, Bonsignore, Ferrari, Redlinger, Johnson,

Porter and Kreindler, six ofseven ofHoneywell's top executives, unloaded over 338,000 shares of their Honeywell stock selling most of those shares as the stock approached its then Class

Period high in late 4/00, pocketing $18.3 million in illegal insider tradingproceeds. These illegal insider sales are detailed below:

% OF SHARES CLASS ACTUALLY NAME PERIOD SALES PROCEEDS OWNED SOLD Bonsignore 80,077 $ 4,444,375 30.4% Ferran 57,386 $ 3,328,388 71.6% Johnson 40,000 $ 2,260,000 100% Kreindler 102,369 $ 5,428,423 40.3% Porter 25 ,000 $ 1,109,423 48.9% Redlinger 31422 * $ 1,815,710 77.3% TOTALS: 338,254 $18 ,386,319 N/A Source: Quicken.excite.com (this sale was not reported on Form 4).

it. During 5/00 and early 6/00, Bonsignore and his executive team continued to bombard analysts and investors with positive assurances and forecasts, reiterating that they were "very comfortable" that Honeywell would meet its 2ndQ 00 EPS forecast of $.78 and achieve 00 free cash flow of $1.9 billion, "at least" 20% EPS growth in 00 to $3.20-$3.30 per share and "at least" 18% compounded EPS growth during 00-02. They also continued to represent that the Allied/Honeywell merger integration process had been successfully completed and those promised merger synergies

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and savings were being achieved, that price increases in its Performance Materials unit were sticking and working and that the Pittway acquisition was going very well, with Pittway meeting its performance objectives. On 6/2/00, Honeywell reached its Class Period high of $59-1/8.

12. The statements made by defendants to the markets and to analysts during the Class

Period were false when made. The true facts, which were concealed, were that:

(a) In order to cover up problems with Honeywell's Performance Materials unit and thus artificially boost Honeywell's 1 stQ 00 revenues and EPS, in late 99 and early 00 Honeywell had imposed polymer and nylon and polyester fiber price increases on customers of its Performance

Materials unit which the defendants knew were unsustainable, but would temporarily boost

Honeywell's revenue and EPS. Defendants knew this made Honeywell's 1 stQ 00 results not indicative ofthe true performance ofHoneywell's business or its 00 EP S prospects and would result in the loss of business and revenues in this important business unit (16% of Honeywell's total revenues) after the 1stQ 00, meaning Honeywell would not achieve the 00 EPS growth being forecast;

(b) The price increases imposed . on customers of Honeywell' s Performance

Materials unit in late 99 and during the I stQ 00 for polymers and nylon and polyester fibers met with extreme customer resistance. While many customers had initially paid the increases under protest while seeking alternative sources ofsupply, Honeywell was quickly losing customers foritspolymer products due to the price increases and was being forced to give secret discounts and price concessions for its polymer products to keep other customers - albeit at reduced revenue and much less profitable levels;

(c) Honeywell's late 99 and early 00 price increases on customers of its

Performance Materials unit for nylon and polyester fiber were being rejected by most customers and not "sticking" because Honeywell's polyester fiber business had mutated into a commodity business where Honeywell had lost the ability to raise prices on these products , even though its raw materials costs were escalating, destroying the margins in this business ; in fact , this business unit was performing so poorly that Honeywell was going to offer it for sale;

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(d) Because Honeywell's Performance Materials unit accounted for 16% of

Honeywell's overall revenues, the severe pricing problems with polymers and nylon and polyester fiber were having a material adverse impact on Honeywell's business and financial results which meant Honeywell would not achieve its 2ndQ 00, 3rdQ 00, 4thQ 00 or 00 EPS growth forecasts;

(e) In order to boost its results prior to being acquired by Honeywell, Pittway had artificially inflated its revenues and profits by creating millions ofdollars of "sales" on commercially unreasonable terms and/or to uncreditworthy customers; as a result, Pittway had accumulated over

$200 million in past due and difficult to collect receivables which was adversely affecting

Honeywell's cash flow, resulting in cash flow well below the levels forecast, meaning that

Honeywell could not achieve its forecasted 00 free cash flow of $1.9 billion;

(f) By 2/00-3/00, Honeywell's Pittway acquisition was encountering substantial operational difficulties, due to integration and other problems - including the loss ofkey personnel and a sharp drop in sales growth, plus an upsurge in past due accounts receivable, resulting in

Pittway's revenues and profits being significantly below forecasted levels and the levels necessary to avoid dilution to Honeywell's 00 EPS;

(g) By 3/00, Honeywell's attempted integration of the Pittway acquisition into

Honeywell's Automation & Controls unit was encountering serious difficulties - several Pittway managers had left and Pittway's revenue growth rate had fallen sharply (by almost 50%). Thus,

Pittway's revenues and profits were significantly below forecasted levels, meaning the Pittway acquisition would be dilutive to Honeywell's EPS in 00, not neutral as represented, and Honeywell would not achieve the 00 revenue and EPS growth being forecast;

(h) Pittway's results from operations (as part of Honeywell's Automation &

Controls unit) were well below the levels internally forecast or budgeted and necessary for

Honeywell to achieve its 00 revenue and EPS growth forecasts due, in part, to three large customers

(ADT, Protection One and Chubb) curtailing purchases and/or purchasing lower priced (and thus lower margin) components;

(i) Honeywell's Aerospace Solutions unit (37% of sales and Honeywell's most profitable business unit) was suffering from serious and persistent problems in obtaining a sufficient

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supply of conforming component parts - especially printed circuit cards or boards - from a supplier

(EFTC) and "ECUs" (electronic control units) to meet demand from Boeing and other aircraft OEM customers; this was badly hurting Honeywell's results and since this problem could not be fixed before the 4thQ 00 at the earliest, this meant that Honeywell would not achieve the 00 EPS growth being forecast;

(j) Honeywell's Power & Transportation Products unit (14% ofHoneywell's total revenues) was performing below expectations due to (i) weak sales of friction materials; (ii) serious component parts shortages for Honeywell's important new Turbocharger products due to supplier production shortfalls; and (iii) sharply lower heavy truck builds (especially in Europe); as a result of these problems, the ramp-up of Honeywell's new Turbocharger product was being delayed,

Honeywell was losing $80-$100 million on this operation and Honeywell's results from operations were being adversely affected;

(k) Honeywell's high-volume generic drug business , called Specialty Chemicals, was performing very poorly and had lost its competitive position (especially for its Naproxin drug), a situation causing $40-$60 million in losses - losses so serious that Honeywell either had to abandon or sell this business;

(1) Honeywell's semiconductor circuit board interface project (ASTI technology), including its pilot manufacturing operation for chip packaging, had failed; the pilot plant operation could not produce commercial yields which was adversely affecting Honeywell's cash flow, causing

$40-$60 million in losses and would require selling or abandoning the project, resulting in a $100 million write-off;

(m) In order to artificially boost its 1stQ 00 revenues and EPS, Honeywell (and

Pittway) had sold hundreds of millions of dollars of products on special, unusual terms - including extended payment terms. As a result, Honeywell had accumulated over $400 million in past due receivables (mostly in its Home and Building Control business), which was adversely impacting

Honeywell's 00 cash flow and would contribute to Honeywell's 00 cash flow being $500 million less than forecast;

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(n) The Allied/Honeywell merger integration was not going nearly as well as represented due, in part, to incompatibility of the financial and accounting systems and controls of the two companies. Honeywell was encountering persistent problems in combining the operations of the merged entities and obtaining accurate financial information necessary to accurately forecast

Honeywell's future operations, resulting in increased costs, not the merger savings forecast;

(o) The Allied/Honeywell merger integration was not going well or succeeding, and, in fact, due to serious problems with the merger process and problems integrating and combining the operations of "old" Honeywell and Allied, the "new" Honeywell was not only not achieving the merger synergies and savings forecast, but rather, was encountering significant problems in combining the operations of the merged entities, resulting in increased costs;

(p) Because its use of"pooling" accounting in the Allied/" old" Honeywell merger prohibited the "new" Honeywell from selling off any significant business unit, Honeywell was stuck with four money-losing or very poorly performing businesses (polymers, chip packaging, pharmaceuticals/specialty chemicals and friction materials), which were adversely impacting

Honeywell's results from operations, but which Honeywell could not sell off due to the pooling accounting restrictions arising from the Allied/Honeywell merger. As a result of the ongoing adverse impact of these operations, Honeywell would not achieve the 00 revenues, BPS and cash flows forecast;

(q) Honeywell's 4thQ 99, year-end 99 and 1 stQ 00 financial results had been deliberately falsified, as detailed in 1 108-29, in order to artificially and improperly boost

Honeywell's reported revenues and EPS and to conceal the fact that Honeywell was not performing as well as represented by defendants;

(r) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of "at least" 20% 00 FPS growth followed by 01 BPS growth of " at least" 17%, followed by 02 EPS growth of 15+%, resulting in "at least" compounded 18% EPS growth over 00-02 were false when made as they could not and would not be achieved; and

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(s) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of 1 stQ

00, 2ndQ 00, 3rdQ 00 and 4thQ 00, as well as 00 EPS of $.62-$.63, $.77-$.78, $.83-$.88, $.97-$1.02 and $3.20-$3.30, respectively, $1.9 billion in 00 free cash flow and 01 and 02 EPS of $3.75-$3.95 and $4.40±, respectively, were false when made as they could not and would not be achieved.

13. During the first two weeks of 6/00, Honeywell's stock began to fall. After reaching its Class Period high of $59-1/8 on 6/2/00, Honeywell's stock fell to $48-1/2 by 6/16/00, just 10 trading days later, as insiders at Honeywell selectively leaked to favored investors that Honeywell would shortly reveal that it would not achieve its forecasted 2ndQ 00 results and that, in fact, the

"new" Honeywell was suffering from serious problems in integrating the "old" Honeywell and Allied and the "new" Honeywell was suffering serious business problems in its Aerospace and Performance.

Materials business units and, as a result, Honeywell's 00-02 EPS growth would be less than earlier forecast.

14. On Monday, 6/19/00, Honeywell shocked analysts and public investors when it revealed that it would not achieve its 2ndQ 00 EPS forecasts due, in part, to component parts shortages for its Aerospace Solutions unit compounded by the impact ofrising oil prices and interest rates on its other operations -- the exact opposite ofwhat it had been telling investors and analysts since 12/20/99! However, analysts and sophisticated investors immediately realized that macro- economic events like rising oil prices and interest rates were not unique to Honeywell or adversely affecting other similar large conglomerate companies to any significant extent and that commercial airplane parts shortages were also not widespread. They thus concluded that something far more serious must be wrong with Honeywell's businesses than had been disclosed. This view was furthered when Honeywell refused toprovide any more detailed information to analysts and large

Honeywell shareholders as to why Honeywell was missing its 2ndQ 00 EPSforecasts. Asa result of the 6/19/00 revelations, analysts slashed their 00-02 growth forecasts for Honeywell and lowered their ratings on the stock. Investors also savaged Honeywell stock. Honeywell's stock, which had already declined from $59-1/8 on 6/2/00 to $48-33/64 on Friday, 6/16/00, due to selective

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disclosure, collapsed to $38 on 6/19/00, $35-1/8 on 6120/00 and $34-114 on 6/23/00 on volume exceeding 20 million shares on some days:

DATE VOLUME HIGH LOW CLOSE 6/16/00 2,866,000 $50-15/16 $48-1/2 $48-33/64 6/19/00 20,690,000 $48-3/4 $38 $40-1/2 6/20/00 24,850,000 $37-3/4 $35-1/8 $36 6/21/00 13,098,000 $37 $35-1/4 $37 6/22/00 15,809,000 $37-1/2 $34-1/2 $35 6/23/00 8,218,000 $35-7116 $34-1/4 $34-11/16

Between 6/2/00 and 6/23/00, Honeywell stock fell 42% (almost $25 per share) - wiping out $16.87 billion in market capitalization as this adverse information was leaked and selectively disclosed into the market and was finally publicly revealed.

Honeywell International, Inc. June 1 , 1999 - July 12,2000 Daily Share Prices

70

60

a 50

0

40

30

06/01/99 07128199 09123/99 11118199 01118100 03115100 05/11100 07110100 06/29199 08125199 10/21/99 12117199 02/15/00 04/12/00 06109/00

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15. Honeywell later revealed that internal revenue growth was a negative 1% in the

2ndQ 00, that Honeywell hadfired the executives in charge ofallfour ofits business units and that

it would lay off an additional 5,000 employees (on top of the 11,000 Honeywell employees already

let go). Honeywell announced that it was going to close or sell its chip packaging manufacturing operation, its generic pharmaceuticals (specialty chemical) business, its polymers business and its

.friction materials business (but later decided not to only because General Electric agreed to purchase

Honeywell). Honeywell admitted it was burdened with $400 million in past due receivables (most of which camefrom Pittway) and that its 00 cash flow would be millions less than promised (in fact actual 00free cash flow was $500 million less than promised)! Instead of 00 EPS growth of

"at least" 20% to $3.25+, followed by 01 EPS growth of"at least" 17%, Honeywell's 00 EPS growth was just 6% and the Company refuses to offer any guidance for 01 EPS. Gone forever is any forecast of "at least" I S% compounded EPS growth over the next few years.

16. Analysts and investors were surprised and furious over this turn of events. Analysts complained that they had been misled by Honeywell's top executives who now had a severe

"credibility problem" with analysts on Wall Street:

• On 6/19/00, Dow Jones News Service reported:

The company 's announcement caught most investors as well as analysts by surprise. Less than two weeks ago analysts were praising Honeywell's fundamentals and saying the company was on track to report on-target earnings.

• On 6/20/00, The Wall Street Journal reported-

Honeywell ... shocked Wall Street with an announcement that second-quarter earnings would trail analysts' estimates, raising anew questions about management execution at the merged company.

The warning was a surprise ....

"A week and a halfago, they seemed to suggest things werefne," said Art Barry, a portfolio manager at Federated Investors ....

• On 6/20/00, Bloomberg reported:

The warningfrom the biggest maker ofautomated controls comesjust two weeks after ChiefExecutive Michael Bonsign ore told investors [at a conference] that profit would meet predictions.

• On 6/20/00, Dow Jones News Service reported:

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Industrial companies such as Emerson Electric Co. ... and United Technologies Inc.... aren't seeing the parts shortage problems that caused Honeywell International Inc.... to lower its second-quarter earnings forecast, according to analysts.

"It's a Honeywell-specific issue," said Brian K. Langenberg, who covers Honeywell for Credit Suisse First Boston Corp.

Whatparticularly hurt Honeywell 's stock was .., thefact that less than two weeks ago the company said there weren 't any problems with the second quarter.

On 6/21/00, The Star-Ledger Newark reported:

Shares ofHoneywell International Inc. were under siege for a second straight day as analysts downgraded the company's outlook because of a profit warning ... [and] as investors questioned ChiefExecutive Michael Bonsignore's leadership and credibility with Wall Street.

Honeywell has yet to realize the savings expected from its combination with AlliedSignal last year.

17. Honeywell investors condemned the duplicity of Honeywell' s top executives' false

representations and forecasts at the very time those top insiders were unloading millions of dollars worth of their own stock. It is now apparent that the Allied/Honeywell merger was problem-ridden

and not quickly yielding operational synergies and millions in cost savings, and that the "new"

Honeywell's business is not nearly as strong as represented and does not have nearly as strong prospects for EPS growth as forecast by defendants:

• "The market has very little tolerance for CEOs and CFOs who say one thing and then it goes the other way," said Alan Day, who helps oversee $8 billion at Stratevest Group .... "You have every right to be a little upset."

• The warning ... comes just two weeks after Chief Executive Michael Bonsignore told investors at a conference that profit would meet forecasts, said Michael Donnelly, a portfolio manager at Federated Investors.... fThe] warning is "a huge credibility shock," Federated's Donnelly said ....

• [S]aid Thomas Hudson, manager of the Lord Abbett Affiliated Fund .... "There were no hints there was anything going on there."

• "This is very disappointing," said B ob Spremulli, an analyst at TIAA- CREF .... "It would be nice to have a complete discussion of the facts for the investment community."

• "This carne out of nowhere," said Robert Friedman, analyst for the S&P Equity Research ....

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• "I think they will sufferfrom some credibility problems."

• With Sudden Shortfall in 2Q00, Credibility Is In Short Supply .... Management 's credibility is now "underfire " in a major way ....

• As evidenced by the precipitous decline in the common stock, the rapid reversal of management 's opinion on the quarter. caught the market by surprise. - PaineWebber

• "It's all a matter ofmanagement credibility ," said Allen Ashcroft of Allied Investment Advisors ....

• "The bottom line is that people have lost a lot of confidence in management.... A lot of people are very upset and want to see a management change," said Stewart Kalter, an analyst ....

• "I think it was the shock of the announcement that caused the damage," says Merrill Lynch analyst Phua Young. "It was a complete surprise to everyone."

• Credibility - How Long Will It Take To Get It Back?

Now comes the tough part - the credibility issue.... [T]he people are in the streets with pitchforks and a guillotine.... How can management re- gain credibility amid calls for human sacrifices from the investment community ? - Credit Suisse First Boston

18. Subsequently, Bonsignore admitted in conversations with analysts and investors at

Honeywell's 7/10/00 investor conference that:

Honeywell's entire management team is painfully aware that it has a credibility gap to overcome. Bonsignore would be the first to admit that Honeywell did not react as quickly as a fully integrated company might have to compensate for Honeywell's delayed and lost revenue or income disappointments.

Honeywell's 2ndQ 00 cashflow was $339 million downfrom $513 million in 2ndQ 99. This shortfall was driven primarily by poor performance in working capital turnover, particularly receivables. Honeywell had accumulated $400 million in past due receivables

In polymers Honeywell had encountered significant volume erosion, more than offsetting theprice increases that Honeywell announced. Honeywell was not able to achieve its attempted price increases in its nylon and polyester business. The absence ofpricing power in these businesses was striking at a time when raw material prices moved higher to record levels . Honeywell had seen a commoditization of polyester over the last few years, at the same time the raw materials trended upward. This business would be disposed of.

Honeywell's pharmaceuticals business fell considerably short of expectations. Honeywell had invested heavily here, but lost a lot ofmoney on some high-volume generic drugs which were being displaced by competition . This business would be disposed of

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Over the last three years, Honeywell had attempted to create proprietary technologies relating to the interface between the semiconductor and the circuit board. This investment ii at yield sufficient returns due to Honeywell's inability to achieve commercialyields ofthisproduct. Honeywell had to close its large-scale pilot manufacturing operation for chip packaging, taking a $100± million pre-tax write-off.

In automation and control, Honeywell's 2ndQ 00 revenue was lower than expected. Honeywell's newly acquired fire and security unit 's (Pittway) revenue growth declined from low double-digits in the first quarter to mid-single digits in the second quarter. The slowdown resultedfrom several Pittway customers, like AD T and Protection One, repricing the low-end of the security market in anticipation ofhigher installation costs and attrition rates . Honeywell had hoped Pittway would be non-dilutive for the year, but it was dilutive in the first half of 00.

In aerospace, Honeywell 's revenue contracted by 3% during the 2ndQ 00. Honeywell had less revenue growth than forecast, primarily due to a problem with a supplier in Honeywell's Aerospace Electronics Systems business. Honeywell made a decision a year earlier to out-source itsprinted circuit card to a vendor, the vendor was unable to meet Honeywell's commitments in the 2ndQ 00 and the resulting parts shortages impacted Honeywell's ability to make these shipments.

Honeywell missed its 2ndQ 00forecast not because of one or two problems, but due to disappointments in several ofHoneywell's segments.

The complexity ofsimultaneously achieving ambitiousfnancialgoals, integrating two very large and complex companies and dealing with performance shortfalls with several of Honeywell's business units left Honeywell with no margin for error. This situation was a combination of overly aggressive objectives and a confluence offactors working against Honeywell simultaneously.

JURISDICTION AND VENUE

19. The claims asserted arise under §§ 10(b) and 20(a) of the Securities Exchange Act of

1934 ("1934 Act") and Rule lOb- 5. Jurisdiction is conferred by §27 of the 1934 Act. Venue is proper pursuant to §27 of the 1934 Act, as Honeywell is headquartered here, false statements were made here, and acts giving rise to the violations complained of occurred here.

THE PARTIES

20. The Lead Plaintiffs specified in the Court 's Order and Opinion dated November 16,

2000, purchased shares of Honeywell common stock and were damaged thereby as shown in their certifications submitted with their motion for appointment as Lead Plaintiff.

21. Defendant Honeywell International Inc. ("Honeywell") is headquartered at 101

Columbia Road, Morristown, NJ 07962. Honeywell' s common stock trades in an efficient market

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on the NYSE. Honeywell controlled each of the individual defendants and is liable under §20(a) of

the 1934 Act.

22. (a) Defendant Michael R. Bonsignore ("Bonsignore"), whose address is 101

Columbia Road, Morristown, NJ 07962, was CEO of Honeywell as of 12/1/99 and became

Chairman of Honeywell on 4/1/00. During the Class Period, Bonsignore sold 80,077 shares of his

Honeywell stock, pocketing $4.4 million in illegal insider trading proceeds, 30.49% of the

Honeywell stock he actually owned. Bonsignore, by reason of his position with Honeywell, was a

controlling person of Honeywell and is liable under §20(a) of the 1934 Act.

(b) Defendant Giannantonio Ferrari ("Ferrari"), whose address is 101 Columbia

Road, Morristown, NJ 07962, was President and Chief Operating Officer of Honeywell during the

Class Period. During the Class Period, Ferrari sold 57,386 shares ofhis Honeywell stock, pocketing

$3.3 million in illegal insider trading proceeds, 71.67% ofthe Honeywell stock he actually owned.

(c) Defendant Donald J. Redlinger ("Redlinger"),whose address is 101 Columbia

Road, Morristown, NJ 07962, was Senior Vice President-Human Resources of Honeywell during

the Class Period. During the Class Period, Redlinger sold 33 ,422 shares of his Honeywell stock,

pocketing $ 1.8 million in illegal insider trading proceeds , 77.3% ofthe Honeywell stock he actually

owned.

(d) Defendant Robert D. Johnson ("Johnson"), whose address is 101 Columbia

Road, Morristown, NJ 07962, was Executive Vice President, Chief Operating Officer-Aerospace

Businesses of Honeywell during the Class Period . During the Class Period, Johnson sold 40,000 shares of his Honeywell stock, pocketing $2.2 million in illegal insider trading proceeds, 100% of the Honeywell stock he actually owned.

(e) Defendant Richard F. Wallman ("Wallman"), whose address is 101 Columbia

Road, Morristown, NJ 07962, was Senior Vice President and ChiefFinancial Officer of Honeywell during the Class Period.

(f) Defendant Peter M. Kreindler ("Kreindler"), whose address is 101 Columbia

Road, Morristown, NJ 07962, was Senior Vice President and General Counsel of Honeywell during the Class Period. During the Class Period, Kreindler sold 102,369 shares of his Honeywell stock,

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pocketing $5.4 million in illegal insider trading proceeds, 40.35% ofthe Honeywell stock he actually

owned.

(g) Defendant James T. Porter ("Porter"), whose address is 101 Columbia Road,

Morristown, NJ 07962, was Senior Vice President-Infonnation and Business Services ofHoneywell

during the Class Period. During the Class Period, Porter sold 25,000 shares ofhis Honeywell stock,

pocketing $1.1 million in illegal insider trading proceeds, 48.94% ofthe Honeywell stock he actually

owned.

(h) The defendants named in ¶22(a)-(g) are referred to as the " Individual

Defendants."

SCIENTER AND SCHEME ALLEGATIONS

Defendants' Scheme

23. Defendants are liable for intentionally and knowingly making false statements or for

failing to disclose adverse facts while selling Honeywell stock or for intentionally and knowingly

participating in a fraudulent scheme by which they artificially inflated the trading price of

Honeywell's stock during the Class Period.

Pressures to Perform

24. In early 99, Honeywell and Allied announced they would merge to create a huge $20+ billion revenue per year conglomerate. Bonsignore, "old" Honeywell's CEO, became the CEO of the "new" Honeywell. During the second half of 99, many analysts and members ofthe investment community viewed the impending Honeywell/Allied merger with skepticism, fearing that it would be difficult for these two very large companies to quickly integrate their far-flung operations successfully and immediately achieve significantly accelerated revenue and EPS growth in 00-01.

As a result, Honeywell's stock was basically flat during 6/99-12199.

25. Upon the effectiveness of the merger in 12/99, there was great interest among investors and analysts as to how the post-merger integration of the two companies was going and how Bonsignore and his management team would present the prospects of the merged entities, i.e., the "new" Honeywell, to the investment community. Since performance of the "new" Honeywell was viewed as a direct test of and a challenge to Bonsignore and his management team, Bonsignore

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and his management team were under pressure to show that the merger was a success, that the

promised merger synergies and savings were being achieved and would immedi ately result in strong

EPS gains for Honeywell due to both accelerated internal growth and acquisitions , thus pushing

Honeywell's stock price higher.

26. Bonsignore and Ferrari were also under pressure from Honeywell's Board and its

institutional shareholder community to boost the performance ofHoneywell's stock. Because during

the second halfof 99 Honeywell's stock had been a relatively poor performer, upon the effectiveness

of the merger, the Board and "new" Honeywell's institutional shareholder community expected a

strong advance in Honeywell stock as the promised merger synergies and savings and acceleration

of revenue and EPS growth kicked in. When Honeywell's stock declined sharply after the disappointing reaction ofthe investment community to Honeywell's 12/20/99 analyst conference and then fell even further in response to the poor quality of Honeywell's 4thQ 99 results reported on

1/19/00, these pressures on Bonsignore and his team intensified considerably.

27. These pressures were also magnified by the fact that there. was considerable skepticism in the investment community as to whether or not Bonsignore and Ferrari had the ability to effectively manage the "new" Honeywell - a company more than twice as large as any enterprise they had ever managed before - especially since they would face the additional management challenge of successfully combining and integrating not only the far-flung operations of these two large enterprises, but their incompatible financial and accounting systems as well. Thus, Bonsignore and Ferrari and the top executives who were part of their team knew that a failure to forecast and achieve successful merger synergies and financial savings, as well as accelerated revenue and EPS growth and thus show the merger was a success, could well cost them their jobs - positions of power, prestige and profit worth millions of dollars a year to them . This was not the ordinary pressure that all corporate executives of public companies feel to perform well and have their company's stock do well. This was a situation where, because ofthe prominence ofHoneywell and its widespread shareholder community, there was unusual public focus on the ability of these corporate executives to successfully pull off this huge merger, while immediately achieving

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hundreds of millions of dollars of merger savings and substantially increased revenue and EPS

growth - all under the microscope of analyst and investor skepticism and intense scrutiny.

Excessive Merger Reserves

28. In connection with the Allied/Honeywell merger, Bonsignore , Ferrari and Waltman

knew that Honeywell would have to establish financial reserves for several items, including

severance costs, impaired assets, exit costs and merger fees and expenses. Because substantial

reserves are always established in connection with large mergers like the Allied/Honeywell merger

and are thus anticipated by analysts and the investment community, Bonsignore and his management

team knew they could establish a very large merger reserve without adversely impacting Honeywell's

stock price. In order to take advantage of this situation and create a large reserve or cushion to use

to artificially boost "new" Honeywell's results in 00-01, Bonsignore and his top executive team

intentionally established an excessive and unnecessarily large merger reserve of $960+ million.

Bonsignore and his management thus established this excessive reserve because they knew they

would be under pressure to produce strong results in early 00 and if they could not do so based on

Honeywell's actual business operations, they could utilize portions of these excessive merger

reserves to boost the "new" Honeywell's bottom line in 00 and enable Honeywell to report results

that exceeded expectations and appeared to be of high quality, notwithstanding the. actual poor

performance of Honeywell's business and the problems with the merger. Moreover, defendants

knew that excessive write-downs of "impaired assets" would result in lower cost bases for

Honeywell's inventory and fixed assets, which would flow directly to Honeywell's gross profit and

operating incomes when inventory was sold or assets were depreciated.

Problems With Merger Integration

29. Honeywell's top executives knew that because Honeywell/Allied had used "pooling"

accounting in connection with the merger, they were prohibited from selling off any business units

- including poorly performing units - for several months. This meant that Honeywell's top

executives were saddled with several poorly performing or money-losing businesses after the

merger, i.e., polymers, specialty chemicals/generic pharmaceuticals,,friction materials and chip packaging , which were having negative cash flows and/or losses and that these operations would

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have a negative impact on Honeywell's operations in 00, which could not be ameliorated by selling

off these operations.

30. The integration ofAllied and "old" Honeywell did not go nearly as well as defendants

had planned or as was necessary for the forecasted level of merger savings to be achieved in 00.

Honeywell was a global provider of industrial controls, facilities systems controls and avionics,

while Allied was a manufacturer of flight safety products, automotive products, specialty chemical

and performance fibers, plastics and advanced materials. Mergers happen all the time, but not on

this scale. The new company had 120,000+ employees worldwide. Even the business integration

team had 1,200 members. There were 20 integration teams in all. The teams covered six major

areas: infrastructure, which included telecommunications and computing platforms; global

operations; finance; applications; e-commerce; and organization strategy. Each had a defined scope,

deliverables, target dates and communication and reporting processes. Unfortunately, the integration

did not go well.

31. There were problems with the integration from the outset. For example, there were

two business structures. Honeywell was more decentralized than Allied. And Allied's business unit

structure was often based on global regions, whereas Honeywell had more of a regional matrix

structure. Then there were very different corporate cultures. On the Allied side, there was a very

strong set of operating disciplines, including an advanced Six Sigma culture, a broad business portfolio, a lot of capital and cash-generation mechanisms, and a focus on product engineering and manufacturing. Allied also had an internal focus on product improvement. Honeywell was more of a systems and solutions-based company. Moreover, a very high percentage of Honeywell's business was global, and was built around the Baldridge quality-criteria model. The model's balanced orientation brought an external customer focus. Thus, the Honeywell employees came

from a fairly decentralized organization, whereas Allied was more structured. This created problems integrating the two businesses and resulted in increased costs, not merger synergies and savings.

32. There were also problems with the information technologies of the two companies.

For example, Honeywell used SAP AG's enterprise resource planning ("ERP") software, whereas

Allied used Oracle's software products. But they could not agree on which system to use for the

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merged entity. The result was a blended or compromise ERP. The merged corporation's aerospace,

automotive and chemicals businesses used SAP, while the industrial businesses ran on Oracle's

software. This created problems integrating the two businesses and resulted in increased costs, not merger synergies and savings.

33. In the middle of project planning, the European Union ("EU") threw the integration teams a curve ball. The surviving company would have to divest some of its aerospace holdings before the merger could move forward because the EU felt the duplication of aerospace elements in the two organizations could raise antitrust issues . To minimize disruption, they had to stop integration work on aerospace systems. Once Aerospace was ready to go, they had only 30 days to get through integrating. This was not enough time to effectively put the Aerospace operations together. Europe also presented. another problem: Allied had a data center in Scotland and

Honeywell had one in France. Neither was willing to give in to the other. So the new Honeywell has had to keep both open for the time being, creating extra costs and operational confusion.

Inability to Achieve Forecasted Merger Synergies/Savings and Forecasted Growth

34. After the adverse reaction of analysts and the investment community to the poor quality ofHoneywell's 4thQ 99 results announced on 1/19/00, Bonsignore and his top management team knew that it was imperative that Honeywell report 1stQ 00 results at least in line with the expectations their forecasts had created among analysts and investors, and that the earnings appear to be ofhigh quality, having been generated by the strength of Honeywell's business operations and the successful integration of Allied and "old" Honeywell post-merger.

35, However, as Honeywell's 1 stQ 00 unfolded, internally Honeywell's top executives realized that things were not going as they had hoped. As indicated above, the post-merger integration of Allied and "old" Honeywell was not proceeding smoothly. A lack of success in integrating the incompatible reporting and control systems of the two companies was resulting in significant delays in generating the type of accurate financial data necessary to properly monitor

Honeywell's various business units and accurately forecast its results going forward. Secondly, cultural differences among and territorial squabbling between former Allied and "old" Honeywell

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personnel was creating conflicts and operational problems in several areas of the "new" Honeywell business. Similarly, the Pittway integration was troubled, hurting Honeywell's results. Also, because ofthe difficulties with these merger integrations, instead of achieving operational synergies and cost savings, the "new" Honeywell was actually encountering increasing costs, at least for the near term. Third, the decision by Honeywell to outsource production of circuit board products for its aerospace division to a company named EFTC turned into a debacle with EFTC unable to timely produce the required quantities of conforming circuit boards necessary for Honeywell to meet its shipment obligations to Boeing and other customers, which created serious customer difficulties and delays in receipt of needed revenues. Fourth, price increases imposed by Honeywell on customers of its Performance Materials division were met with intense customer protests and resistance, resulting in the loss of some customers who refused to accept the price increases and the necessity for Honeywell to give secret price discounts or concessions to keep other customers. Fifth,

Honeywell's Power & Transportation division was performing below plan due to component parts shortages resulting in Turbocharger sales shortfalls, especially in Europe. Sixth, Honeywell's

Automation & Asset Management business was encountering soft, below plan sales, as the Pittway acquisition was troubled and, due to integration difficulties, was encountering revenues and earnings significantly below forecasted levels. As a result ofthe foregoing, Honeywell's top executives knew that unless some drastic action was taken, Honeywell would fall short of its forecasted 1 stQ 00 results, which would have a catastrophic impact on its now recovering stock price.

Falsifying Honeywell's 4thQ99, year end 99 and 1 stQ 00 Results

36. In order to artificially inflate Honeywell's financial results for its 4thQ 99 and year end 99, defendants caused Honeywell to improperly recognize revenue, and also created phony sales and manipulated the Company's costs. In Honeywell's Home and Building Control segment, revenue was concocted by: (i) recording revenue forj obs that had not yet been performed; (ii) recording more revenue than was permissible under the "percentage-of-completion" method of accounting; and

(iii) recording revenue from false sales to fictitious customers or for potential customers who had not even signed a contract with Honeywell. In addition, Honeywell, through its Home and Building

Control segment, did not properly record costs and expenses, holding and not paying invoices from

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suppliers and subcontractors for up to two years without recording or accruing the costs, and by

switching current period costs to "lease" jabs, where such costs were improperly amortized over five

to ten years, thereby inflating current period earnings. These financial manipulations are detailed

in ¶¶108-20.

37. In addition, in order to manipulate upward and artificially inflate Honeywell's lstQ

00 financial results, Honeywell's top executives engaged in a number of artifices. First of all, they repeated the improper and phony revenue recognition and cost manipulations they committed in

4thQ 99, as detailed in ¶1108-20. Moreover, in order to cover up problems with Honeywell's

Performance Materials unit, and thus boost Honeywell's 1 stQ 00 revenues and EPS, Honeywell had imposed polymer and nylon and polyester fiber price increases on customers of its Performance

Materials unit which Honeywell knew were unsustainable, but would temporarily boost Honeywell's revenue. Defendants knew that this made Honeywell's I stQ 00 results not indicative of the true performance of its business or its 00 EPS prospects, and that it would result in the loss of business and revenues in this important business unit (16% of sales) after the istQ 00, meaning Honeywell would not achieve the 00 results being forecast by and for it. Honeywell's price increases imposed on customers of its Performance Materials unit late in 99 and during the I stQ 00 for polymers and nylon and polyester fibers met with extreme customer resistance. Honeywell was losing customers for its polymer products due to the price increases and was being forced to give secret discounts and price concessions for its polymer products to keep other customers, but at reduced revenue levels.

Honeywell's price increases on customers of its Performance Materials unit for nylon and polyester fiber were being rejected and not sticking as Honeywell's polyester fiber business had mutated into a pure commodity business where Honeywell had lost the ability to raise prices on the product, even though its raw materials costs were escalating, destroying the margins on this business. Honeywell's top executives also reversed millions of dollars of the $960+ million reserve established in connection with the Allied/"old" Honeywell merger in the 4thQ 99. This flowed directly to

Honeywell's 1 stQ 00 bottom line and boosted its EPS to help meet forecasted levels. Honeywell's top executives had knowingly established excessive reserves at the time of the Allied/Honeywell merger during the 4thQ 99 in order to have a reservoir to draw down on in the event they

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encountered an earnings shortfall during 00. By not disclosing this reserve reversal or draw-down,

Honeywell's top executives not only manipulated its 1 stQ 00 results upward, but also concealed that

its 1 stQ 00 results were the result of financial manipulation, not merger successes and the strength

ofHoneywell's underlying business. Finally, in order to boost its results prior to being acquired by

Honeywell, Pittway had artificially inflated its revenues and profits by making millions of dollars

of sales on secret commercially unreasonable terms and to uncreditworthy customers; as a result,

Pittway had accumulated over $200 million in past due and difficult to collect receivables which was

adversely affecting Honeywell's cash flow, putting the cash flow below the levels forecast. By not

writing-offthese receivables in the 1 stQ 00 or disclosing their existence, as well as the Performance

Materials failed price increases, defendants made Honeywell's 1 stQ 00 results false and misleading.

These financial statement manipulations are detailed in ¶1121-29.

Motive and Opportunity to Commit Fraud

38. In addition to the pressures to perform pleaded above, the Individual Defendants had

the opportunity to commit fraud and were motivated by several factors to make false and misleading

statements , commit the financial manipulations complained of and artificially inflate Honeywell's

stock, as this would create concrete benefits for Honeywell and each of the Individual Defendants.

39. Bonsignore and his top executive team at Honeywell had new and unusual incentive compensation arrangements which made them highly motivated to manipulate Honeywell's financial results and falsify Honeywell's reported revenues and profits immediately after the merger. When the "new" Honeywell was put together, Bonsignore and Ferrari persuaded Honeywell's Board to put in place a new and unusual, if not unique, compensation arrangement which caused an unusually large amount of the "new" Honeywell's top executives' annual cash compensation to be dependent upon the "new" Honeywell reaching specified revenue and EPS growth targets during 00.

Honeywell's 00 Proxy described these unique compensation plans, as follows: EXECUTIVE COMPENSATION POLICIES AND PROGRAMS

The Company's executive compensation programs ... link each executive's compensation directly to performance. A significant portion of each executive's compensation is dependent upon stock price appreciation and meeting financial goals ...

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There are three basic components to the Company's "pay for performance" system: base pay; annual incentive bonus; and long-term incentive compensation (primarily stock options).

Annual Incentive Bonus. Award levels ... are intended to motivate the executives by providing substantial bonus payments for the achievement of aggressive goals....

Long Term Incentive Compensation. The principal purpose ofthe long-term incentive compensation program is to encourage the Company's executives to enhance the ... price ofthe Common Stock ....

Shortly following the closing of the merger in December 1999, the Committee approved stock option grants to executive officers, a portion of which vest only upon satisfaction ofperformance conditions tied to growth in earnings per share. These performance conditions parallel the vesting conditions for Mr. Bonsignore's performance options ... described below. The timing of these option grants was designed to link executive and shareowner interest immediatelyfollowing the merger.

In accordance with the terms ofhis employment agreement, Mr. Bonsignore received a grant in December of 1999 of 1,000,000 stock options. These options become exercisable in increments of 40%, 30% and 30%, respectively, on December 31 of 2000, 2001 and 2002.... Mr. Bonsignore also received a grant of 500,000 stock options which will vest upon the achievement ofcertain earningsper share growth targets.

40. Again, this was not the usual situation where executives of public companies want their company to perform well so that they can receive higher compensation; but rather, a unique company-specific, time-sensitive compensation arrangement tied to the merger, which highly incentivized specifically identified top executives to meet specifically identified revenue and EPS growth targets in the very short term , thus increasing the pressure on them to manipulate

Honeywell's finances in a manner to enable them to cause Honeywell to publicly report financial results meeting these triggering targets so they could pocket concrete benefits. In fact, during the

Class Period, Honeywell's top executives frequently told analysts and institutional investors that one of the reasons they could be assured that Honeywell would, in fact, achieve its publicly forecasted

EPS growth in 00 of "at least 20%" was that Honeywell's top executives were so highly incentivized

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to achieve those results, i.e., so much of the executives' cash compensation was dependent on

reaching that target that Honeywell would reach that target. For instance:

A 12/21 /99, Prudential Securities report stated:

[S]trong management incentive compensation - HON's senior management compensation is highly weighted to achieving improving fundamental performance, with base salary comprising 17%-28% of total compensation in the 2000-2002 period, cash bonuses 13%-17% and long-term incentive compensation 55%-70% of management compensation. HON's senior management's annual cash bonus incentive compensation is closely tied to accelerated revenue targets (40%), earnings growth (20%), productivity improvement (20%) and cash flow growth (20%). Management's incentive stock plan components are also tightly correlated with shareholder value creation, with performance options tied to EPS growth....

A 1/6/00 Merrill Lynch report stated:

Management Is Highly Incentivized

Michael Bonsignore ... and other senior managers are heavily incentivized to achieve the predetermined financial goals indicated above. At the conclusion of the deal, Bonsignore received one million options. He will receive 125,000 restricted shares per year from 2000-02 as operating margins hit 15% in 2000, 16% in 2001 and 17% in 2002. Achieving the EPS growth targets of at least. 20% in 2000, 17% in 2001 and 16% in 2002, means that he will be awarded 500,000 additional options per year. Others in senior management received options at the deal closing and have similar EPS and profitability targets to achieve. Approximately 55%-70% of compensation is tied to performance. In addition, annual bonus incentives are in place based on cash generation ....

During Honeywell's 1/19/00 conference call following the release of Honeywell's 4thQ 99

results , Waltman stated to analysts:

Let me remind you that 40% ofmanagement 's 2000 cash compensation is tied to achieving a revenuegrowth goal with the balance tied toproductivity earnings and cash flow.... You will see EPS growth of at least 20% as we realize $250 million of merger cost savings ....

41. Another factor motivating Honeywell's top executives to keep Honeywell's stock trading at inflated levels was that Honeywell's corporate business plan for the years 00-02 called for

Honeywell to achieve its ambitious revenue and EPS growth forecasts by a combination ofinternal growth plus growth -by-acquisition , using cash or stock or a combination ofcash and stock. Indeed,

frequently during the Class Period in discussions with analysts and institutional investors,

Honeywell's top executives stressed that their plan for the "new" Honeywell called for a significant contribution to Honeywell's growth - especially in the earlier part of that period, i.e., 00-01 - to

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comefrom acquisitions ofother companies while the acceleration ofHoneywell's internal organic growth might take longer to kick in. For instance:

During Honeywell's 4/13/00 conference call, Bonsignore stated to analysts:

[W]e believe that that financial flexibility gives us the opportunity to go out and continue to augment internal growth with acquisition growth which I think is going to be very important until we can get the bulk ofour revenue growth down the road from internal growth as opposed to acquisition.

I would expect that the 50% revenue growth from acquisitions would certainly be the case in the year 2000.

A 12/6/99 Salomon Smith Barney report on Honeywell stated:

Management has indicated that it isfinancially positioned to continue building its strategic platforms via acquisition.

The base case is for the new Honeywell to produce top line revenue growth of 8-1.0%, both by virtue ofinternal growth and acquisition.

• A 12/6/99 Prudential Securities report on Honeywell stated:

Bonsignore has set aggressive top line growth targets ... and will be looking for acquisitions....

• A 3/9/00 Warburg Dillon Read report on Honeywell stated:

Honeywell's target is to grow revenue by 8%-10% annually for the next three years, with acquisitions accounting for roughly 4-6 percentage points of that increase.

• A 1/20/00 Salomon Smith Barney report on Honeywell stated:

Both sales and EPS growth should accelerate over each ofthe nextfour quarters as ... follow on acquisitions are made.

• A 12/21/99 Lehman Brothers report on Honeywell stated:

ITJheHoneywellAllied combination created a very strongglobal company with the strength and cash flow to build significant growth opportunities... [W]e consider the proposed acquisition of Pittway Corp. as an indication of the kind of deals Honeywell is looking to do. That is, to buypremier companies that bolster growth and add to the company's overall capability to deliver services and solutions.

On 5/6/00, Bloomberg quoted Honeywell's Chief Operating Officer, Johnson, as stating:

"We want to grow our business [revenues] long term 10 percent a year," he said. "At least 4 to 6 percent of that from internal growth and the restfrom either new products or acquisitions or joint ventures."

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42. Honeywell's executives wanted to keep Honeywell's stock price trading at an inflated level, as this would permit the use of Honeywell stock as currency for acquisitions. This was because the higher the stock price, the fewer shares that would have to be issued to complete a given acquisition - thus making the acquisitions less dilutive to Honeywell's EPS power. Also, apparent financial success on the part of Honeywell and a high stock price would make the stock more attractive to stockholders of companies to be acquired, making it more likely that acquisitions could be successfully concluded. Again, this was not a situation of where corporate executives desired their company's stock price to trade at a high level because of a generalized desire to be able to make acquisitions using the corporation's stock as currency; but rather, a situation of where the. corporate executives in question were implementing a specific corporate business plan where their ability to achieve the forecasted levels of revenue and EPS growth was dependent upon making acquisitions in the near-term - acquisitions which the Company was actively considering during the Class Period.

43. Bonsignore was also motivated to have Honeywell report success with the

Honeywell/Allied merger and strong I stQ 00 results to influence a Honeywell shareholder vote on a shareholder resolution to sharply limit his compensation. Honeywell's 00 Annual Meeting was to be held on 5/1/00.. One of the shareholder proposals to be voted on at that meeting was a

"Shareholder Proposal Regarding CEO Compensation," which would have limited the pay of

Honeywell's CEO. It stated:

THEREFORE, BE IT RESOLVED, that shareholders urge the Board of Directors to address the issue of runaway remuneration of CEOs and the widening gap between highest and lowest paid workers by:

1) Establishing a cap on CEO compensation expressed as a multiple of pay of the lowest paid worker at Honeywell International;

2) Preparing a report for shareholders explaining the determinations used in order to determine the appropriate cap.

Had this resolution passed, it could have cost Bonsignore millions of dollars personally. Because passage of the resolution would have humiliated him and likely limited his pay, Bonsignore was adamantly opposed to this resolution and got the Honeywell Board to recommend a vote against it.

The Honeywell 00 Proxy for the 511100 meeting circulated during 4/00, right when Honeywell was to report its critical lstQ 00 results, which, if successful, would provide the first concrete evidence

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ofBonsignore's success in orchestrating the Allied/Honeywell merger and the success of the newly

merged enterprise. Bonsignore therefore was highly motivated to be sure that no adverse revelations

about him or his executive team, their management of Honeywell, the lack of success with the

merger or Honeywell's diminished revenue and EPS growth prospects were to be revealed during the time leading up to the 5/1/00 Honeywell Annual Meeting.

44. Honeywell's top executives were also motivated to artificially inflate Honeywell's

stock because they wanted to be able to sell off shares of Honeywell stock they owned or could acquire by exercise of stock options at artificially inflated prices, thus pocketing millions of dollars ofillegal insider trading proceeds before the truth came out and Honeywell's stock plummeted lower.

Unfortunately, during 12/99 and 1/00-2/00, Honeywell's stock declined in reaction to the events of the 12/20/99 analyst conference and the 1/ 19/00 4thQ 99 earnings release and conference call, falling to a low of $42-1/4 on 2/11/00. However, when Honeywell's stock began to recover, Honeywell's executives began to take advantage ofthe artificial inflation in the stock's price by selling off shares of stock that they owned. When subsequent to the 4/13/00 1stQ 00 release of Honeywell's better- than-expected EPS and its extremely bullish conference call, Honeywell's stock soared higher - reaching $58-3/8 on 4/26/00 - and the executives stepped up their insider selling to take advantage of this now even greater artificial inflation in the price of Honeywell's stock. During 2/00 and 4/00,

Honeywell's top executives sold 338,524 shares of their Honeywell stock, as set forth below, pocketing over $18.3 million in illegal insider trading proceeds:

% OF SHARES CLASS ACTUALLY NAME PERIOD SALES PROCEEDS OWNED SOLD Bonsignore 80,077 $ 4,444,375 30.4% Ferrari 57,386 $ 3,328,388 71.6% Johnson 40,000 $ 2,260,000 100% Kreindler 102,369 $ 5,428,423 40.3%

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Porter 25,000 $ 1,109,423 48.9% Redlinger 33,422* •$ 1,815,710 77.3% TOTALS: 338,254 $18,386,319 N/A * Source: Quicken.excite.com (this sale was not reported on Form 4).

45. These insider sellers were the very top executives of Honeywell - the individuals

who, on a day-to-day basis, were in charge ofoverseeing and managing the key parts ofHoneywell's

business which were, in fact, enduring significant operational problems, and in charge ofcompleting

the integration of Allied and "old" Honeywell pursuant to the merger, as well as the integration of

Pittway - which integrations were not going well, resulting in increased costs, not operational

synergies and financial savings. In addition, defendant Kreindler, the general counsel ofHoneywell,

was unusually involved in operational matters for a general counsel, thus having more exposure and

access to operational information than would normally be the case with a corporate general counsel.

In addition, Honeywell had a corporate policy requiring that sales of Honeywell stock by top corporate executives be cleared through Kreindler so that he could try to make sure that certain technical SEC rules were not violated regarding the volume ofsales of otherwise unregistered shares by corporate executives not exceeding SEC limits and to assure the timely filing.of Form 4's with the SEC by the Honeywell executives who sold stock, which was necessary for Honeywell to continue to enjoy certain filing exemptions and benefits with the SEC. Thus, Kreindler was in an unique position to know that virtually all the other top executives ofHoneywell were bailing out oftheir stock ata time when thepublic was being told that the merger which had created the new

Company had been an extraordinary success - indeed, more successful than had originally been contemplated - and that the "new "Honeywell was on the verge ofyears ofextraordinary revenue and EPS growth - events which presumably would have resulted in a strong increase in

Honeywell's stockprice over that time. Thus, Kreindler knew that these top insiders were engaged in a significant bail-out of their Honeywell stock holdings inconsistent with what they were representing to the investment community, and thus this unique perspective, combined with his own knowledge of the operational problems of the business and those being encountered in connection

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with the merger integration, caused Kreindler to sell off substantial portions ofHoneywell stock that he actually owned.

Black-Scholes Options Valuation as Evidence of Scienter

46. An analysis of the timing of an insider's exercise of stock options and sale of the underlying shares can provide clear and convincing evidence that these transactions were either irrational or based on non-public information. The analysis is based on the common sense foundation that executives will not irrationally, and needlessly, waste large amounts of their wealth.

If the finder of fact is unwilling to believe that financially sophisticated executives, privy to all of the Company's non-public information, engage in dramatically irrational personal financial decisions, then the irrefutable conclusion from the analysis is that the transactions were based on non-public information which indicated an impending decline in the price of the Company's stock.

47. The assets at issue here are defendants' executive options. Options are valuable rights because the option allows its owner to preserve the opportunity for upside gain without any capital commitment and without any risk of loss. The analytical tool that can be used to evaluate options is the Black-Scholes formula, named for its authors, Black and Scholes, who earned the Nobel Prize for this now well-established methodology.' The Black-Scholes formula calculates the expected market value of any option based on several factors: stock price, exercise price of the option, expiration date ofthe option, volatility ofthe stock, and the risk-free rate ofreturn. At any time prior to its expiration date, the market value of any option has two components: (1) "intrinsic value," the amount of money that one could obtain by exercising the option as of today (stock price less the strike or exercise price of the option); and (2) "time value," the value from any potential increase in the stock price during the term of the option. The formula demonstrates that a rational investor in an environment of efficient markets, relying solely upon public information, would not exercise an option to purchase a non-dividend paying stock prior to the expiration date of the option. The reason

See generally F. Black and M. Scholes, The Pricing of Options and Corporate Liabilities, J. Pol. Econ. (May/June 1973); Sheldon Natenberg, Options Volatility &. Pricing: Advanced Trading Strategies and Techniques ( 1994); Vineer Bhensali, Pricing and Managing Exotic and Hybrid Options ( 1998).

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for this conclusion is that an early exercise of an option to purchase forfeits the substantial time value of the option between the date of exercise and the date the option expires.

48. Holding the option to maturity maximizes the holder's wealth, given the assumption that the holder makes transactions based only on public information. The rational executive will never forfeit more than a de minirnus amount of this value because it is unnecessary to do so. Any desire for asset liquidity or diversification can be achieved by any number of financial instruments readily available and commonly used by executives for these purposes. For example, executives. commonly protect themselves from risk by the use of put options, call options, zero cost collars and/or equity swaps. All of these instruments are readily available, are commonly used, and can be obtained by a simple phone call to a broker. Similarly, information regarding these options is readily available to these executives through financial advisors and is part of the course-work involved in obtaining business degrees. Further, such instruments are commonly used by executives in performing their duties for their companies.

49. Should the holder of an executive option exercise the option early, the Black-Scholes formula quantifies the resulting loss to the executive. The premature exercise of vested options, and its associated dollar cost to the Individual Defendants (as calculated by the Black-Scholes formula), can be explained as rational, i.e., to maximize the returns on their asset only if the Individual

Defendants were in possession ofmaterial adverse undisclosed inside information. Those Individual

Defendants would be willing to forego the time value ofthe option because they know that the value is based upon an artificially inflated stock price - a price that does not yet reflect the non-public adverse information on which the executive is basing his decision to exercise and sell his stocks.

50. The Black-Scholes option pricing formula is widely accepted and used. Studies of executive pay regularly use the Black-Scholes formula to estimate the value of executive stock options. For example, the Black-Scholes formula has served as the basis for the following studies and analyses:

• A Los Angeles Times' executive pay study conducted by Watson Wyatt Worldwide.

The 2000 CFO Compensation Survey undertaken by the consulting firm of Towers Perrin.

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• The Wall Street Journal's CEO Compensation Survey, conducted by William M. Mercer, Inc., one of the nation's leading consulting organizations.

• A Deloitte & Touche study ranking CEO pay at Dallas-Fort Worth's 100 largest public companies.

• A general overview of executive options published by Harvard University Graduate School of Business Administration, entitled What You Need to Know About Stock Options.

In addition, the nation's ranking expert on executive compensation, Graef Crystal, has argued

vigorously for many years that all U.S. companies should use the Black-Scholes formula in

determining the expenses associated with executive stock options. Crystal argues that the failure to

do so by some companies has caused top executive pay to escalate wildly out of control.

51. As a result, the Black-Scholes formula is often used by corporations to value

executive stock options. For example, Gateway Computer and 3Com used the Black-Scholes

formula for valuing executive options in recent Proxy Statements. Indeed, Honeywell itselfused the

Black-Scholes formula to value the exact same executive stock options at issue in its 3/13/00 14A

Proxy Statement at 17 ("[Executive] Options are valued using a Black-Scholes option pricing model

...."}.z All in all, 12% of tech companies and 44% of non-tech companies use the Black-Scholes

formula to evaluate their options.

52. The Black-Scholes formula is also used by executives to value their own stock

options. For example, the employment agreement for Gateway's chief executive officer, Jeffrey

2 See also Honeywell's 3/11/99 10-K which describes the evaluation of certain employee options in the following manner:

The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and represents the difference between the fair market value on the date of grant and the estimated market value on the exercise date. The following weighted average assumptions are used in the Black-Scholes model for grants in 1998, 1997 and 1996, respectively: dividend yield of 1.4, 1.5 and 1.5 percent; expected volatility of 24, 24 and 27 percent; risk-free interest rates of 4.7, 5.6 and 6.3 percent; and expected life of four years for all options except the international stock purchase plan which has a three year life. The "Assumed" line identifies the options Honeywell assumed in the 97 acquisition of Measurex and converted to options to purchase Honeywell shares.

Id. at 53.

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Weitzen, requires that Gateway pay Mr. Weitzen option grants worth $4.9 million as calculated

using the Black-Scholes formula:

(c) Recurring Options. Commencing in calendar year 2000 and thereafter in each calendar year during the Employment Period, the Company willrecommend to the Compensation Committee that the Executive receive, twice annually in accordance with the terms of the Flan (or any replacement plan therefor), an option grant (calculated using the Black Scholes formula of option pricing) that would be equivalent to a Black Scholes value of $4,876,000. For example, using the Black Scholes formula, if the stock price of Gateway common stock was $50/share at the time of the grant, the Executive would receive 160,026 shares of Gateway common stock ($4,876,000 divided by $30.47 being the Black Scholes value at $50/share, which equals 160,026 shares of stock).

Hence, such a formula is recognized as a necessity for executives to be able to accurately evaluate

their own employment pay packages.

53. Indeed, on 3/31/00, the Financial Accounting Standards Board (FASB) issued an

Interpretation of Accounting Principles Board (APB) Opinion No. 25, entitled "Accounting for

Certain Transactions Involving Stock Compensation." FASB Interpretation No. 44. Under this

standard, where a corporation is required to formally recognize an expense for a stock option award:

The method for determining the charge is to be based on the "fair value" of the option, using an option pricing model such as Black-Scholes. On this basis, the option is to be "marked to market" over the period until it vests. (This method of charging earnings is to be distinguished from (i) the "intrinsic value" method and (ii) the "variable accounting" method applicable in the case of certain modifications to options as described in subsequent sections of the column.)

54. Using the Black-Scholes formula in this case reveals that defendants exercised their

options in a way which demonstrates their use and possession of insider information. For example,

on 4/19/00, Kreindler prematurely exercised an option for 25,000 shares - an option that would not

have expired for 5.8 years. The total risk-adjusted value of Kreindler's options on that day was

$938,750. That is, were one to attempt to purchase such options at an options exchange or in an

over-the-counter transaction one would have paid approximately $93 8,750 to obtain options similar to these. Nevertheless, Kreindler prematurely exercised this option and obtained only $742,000.

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Absent Kreindler' s possession and use ofinside information, this transaction makes no rational sense as he forfeited $196,750 of value by this early exercise.'

55. Kreindler's otherwise irrational act is clearly rational when we view his actions as informed by inside information. The options that were valued at $938,750 on the day he exercised the options, declined precipitously to $632,960 after the bad news was revealed between 6/16/00-

6/20/00. Hence, Kreindler's option exercise, while irrational when informed only by public information, was rational ifbased upon insider information, as Kreindler's early exercise added over

$116,879 dollars to the value he would have held had he not sold the option. This trading practice is clearly suspicious and is designed to "'maximize the personal benefit from undisclosed inside information."' In re Silicon Graphics Sec. Litig., 183 F.3d 970, 986-87 (9th Cir. 1999) (quoting In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989)).

56. Numerous other suspicious transactions can be found in this case:

On 4/25/00, Ferrari prematurely exercised options for 13,732 shares of Honeywell common stock. The market value of these options on that day was $514,263. Despite this, Ferrari obtained only $277,936, wiping out $236,328 (46%) in value by early exercise of these options. On that same day, Ferrari exercised options for 10,415 shares of Honeywell common stock. The market value of these options on that day was $389,313. Despite this, Ferrari exercised these options, ensuring that he would only obtain $205,905, wiping out $183,408 (47%) in value by his early exercise of these options. Ferrari again exercised 33,239 shares of Honeywell common stock on that same day. The market value ofthese options was $1,294,327. Despite this, Ferrari exercised these options ensuring that he would only obtain $626,223, wiping out $668,104 (52%) in value by his early exercise ofthese options. This trading is clearly suspicious and is designed to "'maximize the personal benefit from undisclosed inside information."' Id.

On 4/20/00, Johnson prematurely exercised options for 12,000 shares of Honeywell common stock. The market value of these options on that day was $432,960. Despite this, Johnson obtained only $242,520, wiping out $190,440 (44%) in value by early exercise of these options. On that same day, Johnson exercised options for 8,000 shares ofHoneywell common stock. The market value ofthese options on that day was $294,400. Despite this, Johnson exercised these options ensuring that he would only obtain $156,240, wiping out $138,160 (47%) in value by his early exercise of these options. Johnson again exercised 20,000 shares of Honeywell common stock on that same day.. The market value of these options was $736,000. Despite this, Johnson exercised these options ensuring that he would only obtain $410,600, wiping out $325,400 (44%) in value by his early exercise ofthese options.

3 The source of information for all ofthe calculations in this section are defendants' own Proxy Statements, Forms 3, 4 and 5 filed with the SEC, publicly available risk-free interest rate data, publicly available volatility calculations for Honeywell stock, and publicly available Honeywell price data.

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This trading is clearly suspicious and is designed to "'maximize the personal benefit from undisclosed inside information."' Id.

On 2/18/00, Kreindler prematurely exercised options for25,000 shares ofHoneywell common stock. The market value of these options on that day was $674,750. Despite this, Kreindler obtained only $493,100, wiping out $181,650 (27%) in value by early exercise of these options. On 4/19/00, Kriendler again exercised options for 25,000 shares of Honeywell common stock. The market value of these options on that day was $1,004,250. Despite this, Kriendler exercised these options ensuring that he would only obtain only $810,750 wiping out $193,500 (19%) in value by his early exercise of these options. This trading is clearly suspicious and is designed to "'maximize the personal benefit from undisclosed inside information."' Id.

CLASS PERIOD FALSE AND MISLEADING STATEMENTS

57. In anticipation that Honeywell's executive team would present a bullish outlook for the "new" Honeywell at an analysts' conference on Monday, 12/20/99, Honeywell's stock moved higher, reaching $63-7/8 on Friday, 12/17/99. On 12/20/99, Honeywell executives Bonsignore,

Ferrari, Redlinger, Johnson, Wallman and Porter appeared at the analyst and investor conference in

New York City. In a formal presentation and in break-out sessions, they told assembled analysts, money and portfolio managers, institutional investors, brokers and stock traders that:

• The merger integration of "old" Honeywell and Allied was going well and according to schedule. The "new" Honeywell would achieve substantial operation synergies and $750 million in cost savings during 00-02, $250 million more than earlier expected, with $250 million in merger cost savings in 00 alone.

• The merger synergies and savings would accelerate as 00 unfolded.

• Honeywell's EPS growth would accelerate as 00 unfolded.

• Honeywell was acquiring Pittway, which would not dilute Honeywell's EPS growth in 00 and would materially boost Honeywell's EPS in 01-02.

• The Pittway acquisition would boost Honeywell's cash flow in 00.

• Honeywell would achieve the following quarterly 00 EPS:

i s# 2nd jrdQ 4thQ Year

$.62-$.63 $.76-$.78 $.83-$.88 $.97-$1.02 $3.20-$3.30

• Honeywell would achieve EPS growth of 20% in 00 to $3.20-$3.25, followed by 17% EPS growth in 01 and 15% in 02 - compounded EPS growth of 18% going forward post-merger.

Despite these positive presentations, Honeywell's stock declined, falling from $63-7/8 on Friday,

12/17/99, to as low as $56-1/2 on 12/20/99 and $53-15/16 on 12/22/99 , as analysts and investors

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continued to be skeptical as to the ability of Bonsignore's executive team to successfully integrate the operations of "old" Honeywell with Allied, plus the new Pittway acquisition, and waited for concrete evidence of the success of the merger and "new" Honeywell's management team.

58. On 12/20/99, Deutsche Banc Alex. Brown issued a report on Honeywell by Baldwin, which was based on and repeated information provided in the 12/20/99 conference and in follow-up conversations with Bonsignore, Ferrari or Wallman. The report forecast 00 EPS of $3.20 for

Honeywell and stated:

* Honeywell International hosted its first analyst meeting since the merger [and] ... the tone was positive.

* [M]eeting highlights included 1) reconfirmation of HON EPS expectations ($3.22 in 2000, at least 17% growth in 2001 and 15% in 2002 to $4.40 or better) ....

59. On 12/21/99, Prudential Securities issued a report on Honeywell by Heymann, after discussions with Bonsignore, Ferrari or Wallman, which was based on and repeated information provided by them at the 12/20/99 conference. The report forecast 00 and 01 EPS of $3.23 and $3.78 and the following 00/01 quarterly results for Honeywell:

EPS 00 FPS 01 QTR 1st: S.62 $.72 2nd: $.78 $.91 3rd: $.84 $.99 4th: $199 1.16 Year: $3.23 $3.78

It also stated:

Our preliminary 2001 EPS forecast for HON is ... a range of $3.75-$3 .80 ... we believe both our 2000 but particularly our 2001 EPS expectation could prove to be conservative .... * * *

HON's quarterly EPS growth throughout 2000 will initially be low-double digits rising to mid-20 %s gains. Some investors perceive this variability to indicate cyclicality when in reality it reflects the progressive nature of the integration savingsfrom merging HON and ALD .... HON did raise its expected organic sales growth projections to 6 %-8 % from 4 %-6 % ....

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60. On 12/21/99, J.P. Morgan issued a report on Honeywell by Mac Dougall, which was based on and repeated information provided to him in the 12/20/99 conference and in follow-up conversations with Bonsignore, Ferrari or Wallman. The report forecast 00 and 01 EPS of $3.28 and

$3.95 for Honeywell and stated:

We left the Honeywell meeting thinking management had done an excellent job ofarticulating its growth story, and delivering a confident earnings message. The company reiterated confidence in its ability to sustain 18-20% earnings growth over the next three years, drive revenue growth of 8-10%, and reach free cash flow of $3.0 billion by 2002.

Management provided thefirstformal guidance on earnings by quarterfor 2000, and growth is skewed to the second half of the year. The company expects to report Y/YEPS growth of12-14% for IQ, 15-17% for 2Q, 21-23%for 3Q and 23- 25% for 4Q.

Management provided detailed information on the additional integration savings (an additional $250 mm over the original $500 mm).... The expected savings will total $250 million in 2000, $575 [million] in 2001, and $750 million by 2002.

61. On 12/21/99, Lehman Brothers issued a report on Honeywell by Cornell, which was based on and repeated information provided to him in the 12/20/99 conference and in follow-up conversations with Bonsignore , Ferrari or Wallman. The report forecast 00 EPS of $3.25 for

Honeywell and stated:

At the meeting, management defined its plan to drive revenue growth at 8-10% per year with EPS growth averaging 18% growth per year in the next three years. Management did note that there was room for upside movement in its stated goals .... Next year Honeywell sees merger-related cost cuts of$250 million, rising to a run rate of $750 million in three years. EPS growth is seen accelerating in fiscal 2000from 12-14% in IQ to 20-25% in 4Q, due to acquisition costs early in the year that will moderate later on.

[M]anagement had two messages to communicate in this analysts meeting. One was that the $750 million of cost take-out in the newly-defined Honeywell was very much on target and as assured as such numbers can be. With regard to top line growth, management noted that 1999 was about 1%, well below what the company characterized as a 4-6% base expectation.

We are surprised Honeywell's stock weakened so much after Monday's analysts meeting. Our view is that the Honeywell/Allied combination created a very strong global company with the strength and cash flow to build significant growth

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opportunities. In that regard, we consider the proposed acquisition of Pittway Corp. as an indication ofthe kind ofdeals Honeywell is looking to do. That is, to buy premier companies that bolster growth and add to the company 's overall capability to deliver services and solutions.

62. On 1/6/00, Merrill Lynch issued a report on Honeywell by Young, after discussions. with Bonsignore and Ferrari, which was based on and repeated information provided by them.

Bonsignore , Ferrari or Wallman reviewed this report before it was issued and assured Young it was accurate. The report forecast 00 EPS of $3.25, a 17% five-year EPS growth rate for Honeywell, and

stated:

We view the combination ofAlliedSignal and Honeywelllnc. veryfavorably because the combined company should demonstrate acceleratedEPSgrowth in the ensuing years .... The company has promised to deliver 20% or better growth in 2000 and high-teens rate ofEPS expansion in 2001 and 2002.

A variety of issues emerged from the December 20 gathering that caused investor anxiety. These issues include ... the rate of quarterly EPS growth in 2000, ... the health of fundamentals and the ability to meet its sales target.

On the quarterly EPS front, Honeywell International is suggesting 13% growth in the fourth quarter of 1999 and quarterly EPS growth of 13%, 16%[,] 23% and 25% in 2000. The impact ofthe repositioning costs weigh on earnings early in 2000 and become less burdensome as 2000 progresses.... Honeywell International is extremely confident in its ability to reach its promised targets.

"Show Me" Stock With Strong Upside

The bottom line on Honeywell International's stock is that ... the shares are a "show me" story.... Since the earnings growth for 2000 is back end loaded, investors may need to see earnings accelerate before confidence in the company rises.

Honeywell is confident that it can achieve EPS of $3.22-$3.25 in 2000, up 20%-21%....

Longer term, Honeywell expects EPS to rise from the current consensus of $2.68 in 1999 to at least $4.40 in 2002-18% compounded annual growth rate.

Profitability should benefit from merger synergies of $750 million and better productivity.

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Synergy Savings Have Been Revised Upward

Honeywell International remains very confident about its ability to realize $750 million in cost savings (initially estimated at $500 million) over the next three years.... The company revised its estimate up to $750 million from $500 million ....

Honeywell's stock jumped from as low as $54-1/2 on 1/6/00 to $59-3/8 on 1/7/00 and over $60 by

1/11/00.

63. The statements made between 12/20/99 and 1/6/00 were false when made. The true facts, which were concealed, were that:

(a) In order to cover up problems with Honeywell's Performance Materials unit and thus artificially boost Honeywell's 1 stQ 00 revenues and EPS, in late 99 and early 00 Honeywell had imposed polymer and nylon and polyester fiber price increases on customers ofits Performance.

Materials unit which the defendants knew were unsustainable, but would temporarily boost

Honeywell's revenue and EPS. Defendants knew this made Honeywell's 1stQ 00 results not indicative of the true performance of Honeywell's business or its 00 EPS prospects and would result in the loss of business and revenues in this important business unit (16% of Honeywell's total revenues) after the 1 stQ 00, meaning Honeywell would not achieve the 00 EPS growth being forecast;

(b) The price increases imposed on customers of Honeywell's Performance

Materials unit in late 99 and during the I stQ 00 for polymers and nylon and polyester fibers met with extreme customer resistance. While many customers had initially paid the increases under protest while seeking alternative sources ofsupply, Honeywell was quickly losing customers forits polymer products due to the price increases and was being forced to give secret discounts and price concessions for its polymer products to keep other customers -- albeit at reduced revenue and much less profitable levels;

(c) Honeywell' s late 99 and early 00 price increases on customers of its

Performance Materials unit for nylon and polyester fiber were being rejected by most customers and not "sticking " because Honeywell's polyester fiber business had mutated into a commodity business where Honeywell had lost the ability to raise prices on these products, even though its raw materials

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costs were escalating, destroying the margins in this business; in fact, this business unit was

performing so poorly that Honeywell was going to offer it for sale;

(d) Because Honeywell's Performance Materials unit accounted for 16% of

Honeywell's overall revenues, the severe pricing problems with polymers and nylon and polyester

fiber were having a material adverse impact on Honeywell's business and financial results which

meant Honeywell would not achieve its 2ndQ 00, 3rdQ 00, 4thQ 00 or 00 EPS growth forecasts;

(e) In order to boost its results prior to being acquired by Honeywell, Pittway had

artificially inflated its revenues andprofits by creating millions ofdollars of "sales" on commercially

unreasonable terms and/or to uncreditworthy customers; as a result, Pittway had accumulated over

$200 million in past due and difficult to collect. receivables which was adversely affecting

Honeywell's cash flow, resulting in cash flow well below the levels forecast, meaning that

Honeywell could not achieve its forecasted 00 free cash flow of $1.9 billion;

(f) By 2/00-3/00, Honeywell's Pittway acquisition was encountering substantial

operational difficulties due to integration and other problems, including the loss of key personnel

and a sharp drop in sales growth, plus an upsurge in past due accounts receivable, resulting in

Pittway's revenues and profits being significantly below forecasted levels and the levels necessary

to avoid dilution to Honeywell's 00 EPS;

(g) By 3/00, Honeywell's attempted integration of the Pittway acquisition into

Honeywell's Automation & Controls unit was encountering serious difficulties - several Pittway

managers had left and Pittway's revenue growth rate had fallen sharply (by almost 50%). Thus,

Pittway's revenues and profits were significantly below forecasted levels, meaning the Pittway

acquisition would be dilutive to Honeywell's EPS in 00, not neutral as represented, and Honeywell

would not achieve the 00 revenue and EPS growth being forecast; i {h) Pittway' s results from operations (as part of Honeywell's Automation &

Controls unit) were well below the levels internally forecast or budgeted and necessary for

Honeywell to achieve its 00 revenue and EPS growth forecasts due, in part, to three large customers 1 (ADT, Protection One and Chubb) curtailing purchases and/or purchasing lower priced (and thus

lower margin) components; b -42- Case 2 : 00-cv-03605-DRD-SDW Document 53-2 Filed 01/31 /2001 Page 7 of 34

(i) Honeywell's Aerospace Solutions unit (37% of sales and Honeywell's most

profitable business unit) was suffering from serious and persistent problems in obtaining a sufficient

supply of conforming component parts - especially printed circuit cards or boards - from an

outsourced supplier (EFTC) and "ECUs" ( electronic control units) to meet demand from Boeing and

other aircraft OEM customers; this was badly hurting Honeywell's results and since this problem

could not be fixed before the 4thQ 00 at the earliest, this meant that Honeywell would not achieve

the 00 EPS growth being forecast;

(j) Honeywell's Power & Transportation Products unit (14% ofHoneywell's total

revenues) was performing below expectations due to (i) weak sales of friction materials; (ii) serious

component parts shortages for Honeywell's important new Turbocharger products due to supplier

production shortfalls; and (iii) sharply lower heavy truck builds (especially in Europe); as a result

of these, problems, the ramp-up of Honeywell's new Turbocharger product was being delayed,

Honeywell was losing $80-$100 million on this operation and Honeywell's results from operations

were being adversely affected;

(k) Honeywell's high-volume generic drug business, called Specialty Chemicals,

was performing very poorly and had lost its competitive position (especially for its Naproxin drug),

a situation causing $40-$60 million in losses - losses so serious that Honeywell either had to

abandon or sell this business;

(1) Honeywell's semiconductor circuit board interface project (ASTI technology),

including its pilot manufacturing operation for chip packaging, had failed; the pilot plant operation

could not produce commercial yields which was adversely affecting Honeywell's cash flow, causing

$40-$60 million in losses and would require selling or abandoning the project, resulting in a $100

million write-off;

(m) In order to artificially boost its 1stQ 00 revenues and EPS, Honeywell (and

Pittway) had sold hundreds of millions of dollars of products on special , unusual terms - including

extended payment terms. As a result, Honeywell had accumulated over $400 million in past due

receivables (mostly in its Home and Building Control business), which was adversely impacting

-43- I Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 8 of 34

Honeywell's 00 cash flow and would contribute to Honeywell's 00 cash flow being $500 million less than forecast, i.e., $1.4 billion, not the $1.9 billion forecast;

(n) The Allied/Honeywell merger integration was not going nearly as well as represented due, in part, to incompatibility of the financial and accounting systems and controls of the two companies. Honeywell was encountering persistent problems in combining the operations ofthe merged entities and obtaining accurate financial information necessary to accurately forecast

Honeywell's future operations, resulting in increased costs, not the merger savings forecast;

(o) The Allied/Honeywell merger integration was not going well or succeeding, and, in fact, due to serious problems with the merger process and problems integrating and combining the operations of "old" Honeywell and Allied, the "new" Honeywell was not only not achieving the merger synergies and savings forecast, but rather, was encountering significant. problems in combining the operations of the merged entities, resulting in increased costs;

(p) Because its use of"pooling" accounting in the Allied/" old" Honeywell merger prohibited the "new" Honeywell from selling offany significant business unit, Honeywell was stuck with four money-losing or very poorly performing businesses (polymers, chip packaging, pharmaceuticals/specialty chemicals and friction materials), which were adversely impacting

Honeywell's results from operations, but which Honeywell could not sell off due to the pooling accounting restrictions arising from the Allied/Honeywell merger. As a result of the ongoing adverse impact of these operations, Honeywell would not achieve the 00 revenues, EPS and cash flows forecast;

(q) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of "at least" 20% 00 EPS growth, followed by 01 EPS growth of "at least" 17%, followed by 02 EPS growth of 15+%, resulting in "at least" compounded 18% EPS growth over 00-02 , were false when made as they could not and would not be achieved; and

(r) As a result of the foregoing adverse conditions which were impacting

Honeywell's business , Honeywell and the Individual Defendants each knew that the forecasts of 1 stQ

00, 2ndQ 00, 3rdQ 00 and 4thQ 00, as well as 00 EPS of $.62-$.63, $.77-$.78, $.83-$.88, $.97-$1.02

-44- Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 9 of 34

and $3.20-$3.30, respectively, $1.9 billion in 00 free cash flow and 01 and 02 EPS of $3.75-$3.95 and $4.40±, respectively, were false when made as they could not and would not be achieved.

64. On 1/19/00, Honeywell reported its 4thQ 99 and 99 results via a release (a "group- published" document), stating:

Honeywell Achieves Record 1999 Earnings Per Share Of $2.68, Up 15%From 1998 EPS Of $2.34

1999 Growth Driven by... Home & Building Control Businesses

Company On Track To Achieve $250 Million In Merger Savings In 2000 And $750 Million In Savings In 2002

Leading the company's 1999 sales performance was strong growth in ... home and building control products ....

2000 Forecast

Michael R. Bonsignore, Honeywell's ChiefExecutive Officer, said, " With the merger complete, the new Honeywell has the financial flexibility, ... productivity discipline and portfolio strength to increase its earnings per share by 20% in 2000. We are also confident that earnings will grow at a compounded annual rate ofat least 18% over the next three years.

"We expect that 2000 and beyond will be rewarding and exciting timesfor the new Honeywell," Bonsignore continued. " We have a rich portfolio of businesses ...."

"Although revenues expanded only modestly in 1999, the prospect for achieving our targeted 8%-to-I0% annual revenue growth is bright. Revenue growth in 2000 will comefrom continued strength in the aerospace aftermarket and turbochargers; improvements in Industrial Control, Specialty Chemicals and Polymers businesses; and new products in turbogenerators and chip packaging. Strategic acquisitions ... will also bolster revenue growth in 2000."

Merger Integration

The company said that the merger integration is in full swing and that it anticipates delivering firstyear merger-related savings of $250 million .... The merger 's costsavings estimatefor 2002 was recently raised to $750 million from $500 million.

-45- Case 2: 00-cv-03605-DRD-SDW Document 53-2 Filed 01/31 /2001 Page 10 of 34

Automation and Asset Management

Revenue gains were seen in Home & Building Control products ....4

65. On 1/19/00, subsequent to the release of its 4thQ 99 and 99 results, Honeywell held a conference call for analysts, money and portfolio managers, institutional investors and large

Honeywell shareholders to discuss Honeywell's results, its business and its prospects. During the call - and in follow-up conversations with analysts - Waltman stated:

[W]hen you think about the new Honeywell, think growth and productivity. This will enable us to drive strong and consistent revenue EPS and cash-flow growth.... We closed our merger and increased merger cost savings to $750 million by 2002. All told we are well positioned to deliver on our revenue income and cashflow targets for 2000.... Revenue growth will accelerate in 2000..... The Pittway acquisition ... by itselfprovides an additional 6 to 7% revenue growth putting the company on the path to double-digit top-line expansion.... EPS growth will accelerate to at least 20% in 2000.... IAJs we enter 2000 ... our previously announced price increases are holding up well.... [T]he merger integration process willgenerate cost synergies of$750 million annually by 2002.... We've laid a solidfoundation on which to drive at least 18 % EPS growth over the next three years....

[The]fourth quarter is our most difficult comparison, as raw materials cost were at the lowest in the fourth quarter of 1998 and at their highest in the fourth quarter of 1999. We have instituted price increases across most product lines which are holding up well.... The squeeze we're seeing on operating margins should begin to abate in the first half as our price increases take affect.

... We expect 2000 to be a very good year for Honeywell. With 4 to 6% internalgrowth. We expect double-digit overall top-linegrowth including Pittway. Looking at revenue growth, our aerospace segment will be up 2 to 3%.... Performance materials will grow in the 6 to 8% range .... For 2000, Honeywell has built a robustfinancial plan that will deliver afinancial commitment in a variety of economic conditions. You will see EPS growth of at least 20% as we realize $250 million ofmerger cost savings.... As a result ofthese efforts we are raising. our outlookfor 2000free-cash flow by $300 million to $1.9 billion .... This sets us on a clear path to achieving our target of $3 billion in free-cash flow in 2002.

... We will have great results in 2000.

The release also stated:

This release contains forward-looking statements as defined in Section 21 E of the Securities Exchange Act of 1934, including statements about future business operations, financial performance and market conditions. Such forward-looking statements involve risk and uncertainties inherent in business forecasts.

-46- Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 11 of 34

In response to a question, Waltman stated:

[W]e've taken a number of steps to improve the performance of Performance Materials in the '99 and 2000 period .... We've implemented price increases that rangefrom 5 to 15%. We've exited .unprofitable businesses.... [YJou'll see a much improvedpicture in 2000 relative to this fourth quarter performance.... fWJe're going to see some quick recovery. The pricing actions are happening, the cost actions are happening.

[TJhe material cost increases rangefrom 5 to 15% so our price actions will more than cover the increases in raw materials.

In conclusion, Honeywell's Scott Clements stated:

[WJe're very confident about our ability to deliver on the commitments of2000 ....

66. Notwithstanding this presentation, Honeywell's stock again fell, from $60-3/8 on

1/18/00 to $52-1/2 on 1/19/00 and to as low as $44-5/8 on 1/27/00, as investors reacted negatively

to the poor quality ofHoneywell's reported 4thQ 99 EPS (EPS that, unbeknownst to the public, had been falsely inflated) and continued to adopt a skeptical "show-me" attitude, awaiting concrete

evidence that the "new" Honeywell could achieve the promised merger synergies and savings and the 00-02 revenue and EPS gains forecast. On 1/19/00, Bloomberg reported:

[Honeywell's] ... [i]nternal sales growth of about 1 percent fell short of analyst and investor expectations.

To regain confidence among investors, the company needs to show at least one quarter of solid internal revenue growth in the. aerospace business and an improved margin in performance materials ..

67. On 1/19/00, Deutsche Banc Alex. Brown issued a report on Honeywell by Baldwin, which was based on and repeated information provided to her in the 1/19/00 conference call and in follow-up conversations with Bonsignore, Ferrari or Waltman. The report forecast 00 EPS of $3.20 and the following quarterly 00 EPS for Honeywell:

00 Q1 $.62 Q2 $.78 Q3 $.83 Q4 .97 Year $3.20

-47- Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 12 of 34

It also stated:

* We believe that new positives on the conference call outweigh disappointing 4Q Aerospace revenue growth and Performance Materials margins....

New Positive: On the.conference call, CFO Richard Wallman raised HON's 2000 free cash flow target to $1.9B from $1.6B ....

New Positive: Also on the call, Waltman said HON expects EPS growth to accelerate to "at least " 20% in 2000, suggestingpossible upside to current $3.22 (20% growth) guidance. * *

AEROSPACE

... Two factors that should help HON meet 2000 internal sales targets:... HON's controls and avionics businesses should continue to enjoy solid retrofit demand ....

2000EPS visibility is high thanks to relatively straightforward cost cutting targets ($250MM visibility in 2000 is based solely on head count reduction and better bulk purchasing).

68. On 1/20/00, Salomon Smith Barney issued a report on Honeywell, which was based

on and repeated information provided in the 1/19/00 conference call and in follow-up conversations

with Bonsignore, Ferrari or Waltman. The report forecast 00 and 01 EPS of $3.30 and $3.80 and

the following quarterly 00 EPS for Honeywell:

00 Q1 $.62 Q2 $.78 Q3 $.88 Q4 $ 1.02 Year $3.30

It also stated:

Both sales and EPSgrowt!: should accelerate over each ofthe nextfour quarters .... The recentpick up in oilprices and improving capital spending better positions this business for 2000.

69. On 1/20/00, Lehman Brothers issued a report on Honeywell by Cornell, which was based on and repeated information provided to him in the 1/19/00 conference call and in follow-up conversations with Bonsignore, Ferrari or Wallmaii. The report forecast 00 and 01 EPS of $3..25 and

$3.83 and the following quarterly 00 EPS for Honeywell:

-48- Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 13 of 34

00 Q1 $.63 Q2 $.77 Q3 $ .85 Q4 1.00 Year $3.25

It also stated:

Management says it is committed to EPS growth of at least 20% in 2000.

70. On 1/20/00, DLJ Securities issued a report on Honeywell by Blackstock, which was

based on and repeated information provided to him in the 1/19/00 conference call and in follow-up

conversations with Bonsignore, Ferrari or Wallman. The report forecast 00 and 01 EPS of $3.30 and

$3.85 for Honeywell and stated:

[W]e did not learn anything today that shook our confidence in our estimates for 2000 or beyond.... [T]he firm demonstrated its ability to deliver solid results in the face of adversity, building credibility to its self-proclaimed "HON will make the numbers regardless of the environment " argument.... Beyond these internal improvements, we continue to expect merger cost savings to exceed management's $250mm target.

71. On 1/21/00, Brown Brothers Harriman issued a report on Honeywell by Fanning,

which was based on and repeated information provided to him in the 1/ 19/00 conference call and in

follow-up conversations with Bonsignore, Ferrari or Wallman. The report forecast 00 EPS of $3.20

and the following quarterly 00 EPS for Honeywell: 00 Qi $.62 Q2 $.76 Q3 $.84 Q4 .98 Year $3.20

It also stated: -

* Management recommitted to EPS growth of 20%, to $3.22.

* Significant steps taken to .turn Performance Materials around .... fP]rices were raised by 5-15% in thefourth quarter ....

72. The statements made between 1119/00 and 1/2 1 /00 were false when made. The true

facts, which were concealed, were that:

-49- Case 2 : 00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 14 of 34

(a) In order to cover up problems with Honeywell's Performance Materials unit and thus artificially boost Honeywell's 1 stQ 00 revenues and EPS, in late 99 and early 00 Honeywell had imposed polymer and nylon and polyester fiber price increases on customers of its Performance

Materials unit which the defendants knew were unsustainable, but would temporarily boost

Honeywell's revenue and EPS. Defendants knew this made Honeywell's 1 stQ 00 results not indicative ofthe true performance ofHoneywell's business or its 00 EPS prospects and would result in the loss of business and revenues in this important business unit (16% of Honeywell's total revenues) after the IstQ 00, meaning Honeywell would not achieve the 00 EPS growth being forecast;

(b) The price increases imposed on customers of Honeywell's Performance

Materials unit in late 99 and during the 1 stQ 00 for polymers and nylon and polyester fibers met with extreme customer resistance. While many customers had initially paid the increases under protest while seeking alternative sources ofsupply, Honeywell was quickly losing customers for its polymer products due to the price increases and was being forced to give secret discounts and price concessions for its polymer products to keep other customers - albeit at reduced revenue and much less profitable levels;

(c) Honeywell's late 99 and early 00 price increases on customers of its

Performance Materials unit for nylon and polyester fiber were being rejected by most customers and not "sticking" because Honeywell's polyester fiber business had mutated into a commodity business where Honeywell had lost the. ability to raise prices on these products, even though its raw materials costs were escalating, destroying the margins in this business; in fact, this business unit was performing so poorly that Honeywell was going to try to sell it;

(d) Because Honeywell's Performance Materials unit accounted for 16% of

Honeywell's overall revenues, the severe pricing problems with polymers and nylon and polyester fiber were having a material adverse impact on Honeywell's business and financial results which meant Honeywell would not achieve its 2ndQ 00, 3rdQ 00, 4thQ 00 or 00 EPS growth forecasts;

(e) In order to boost its results prior to being acquired by Honeywell, Pittway had artificially inflated its revenues and profits by creating millions ofdollars of "sales" on commercially

-50- Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 15 of 34

unreasonable terms and/or to uncreditworthy customers; as a result, Pittway had accumulated over

$200 million in past due and difficult to collect receivables which was adversely affecting

Honeywell's cash flow, resulting in cash flow well below the levels forecast, meaning that

Honeywell could not achieve its forecasted 00 free cash flow of $1.9 billion;

(f) By 2/00-3/00, Honeywell's Pittway acquisition was encountering substantial operational difficulties due to integration and other problems, including the loss of key personnel and a sharp drop in sales growth, plus an upsurge in past due accounts receivable, resulting in

Pittway's revenues and profits being significantly below forecasted levels and the levels necessary to avoid dilution to Honeywell's 00 EPS;

(g) By 3/00, Honeywell's attempted integration of the Pittway acquisition into

Honeywell's Automation & Controls unit was encountering serious difficulties - several Pittway managers had left and Pittway's revenue growth rate had fallen sharply (by almost 50%). Thus,

Pittway's revenues and profits were significantly below forecasted levels, meaning the Pittway acquisition would be dilutive to Honeywell's EPS in 00, not neutral as represented, and Honeywell would not achieve the 00 revenue and.EPS growth being forecast;

(h) Pittway's results from operations (as part of Honeywell's Automation &

Controls unit) were well below the levels internally forecast or budgeted and necessary for

Honeywell to achieve its 00 revenue and EPS growth forecasts due, in part, to three large customers

(ADT, Protection One and Chubb) curtailing purchases and/or purchasing lower priced (and thus lower margin) components;

(i) Honeywell's Aerospace Solutions unit (37% of sales and Honeywell's most profitable business unit) was suffering from serious and persistent problems in obtaining a sufficient supply of conforming component parts - especially printed circuit cards or boards - from an outsourced supplier (EFTC) and "ECUs " (electronic control units) to meet demand from Boeing and other aircraft OEM customers ; this was badly hurting Honeywell's results and since this problem could not be fixed before the 4thQ 00 at the earliest, this meant that Honeywell would not achieve the 00 EPS growth being forecast;

- 51 - Case 2: 00-cv-03605 - DRD-SDW Document 53-2 Filed 01/31/2001 Page 16 of 34

(j) Honeywell's Power & Transportation Products unit (14% ofHoneywell's total revenues) was performing below expectations due to (i) weak sales of friction materials; (ii) serious

component parts shortages for Honeywell's important new Turbocharger products due to supplier production shortfalls; and (iii) sharply lower heavy truck builds (especially in Europe); as a result

of these problems, the ramp-up of Honeywell's new Turbocharger product was being delayed,

Honeywell was losing $80-$100 million on this operation and Honeywell's results from operations were being adversely affected;

(k) Honeywell's high-volume generic drug business, called Specialty Chemicals, was performing very poorly and had lost its competitive position (especially for its Naproxin drug),

a situation causing $40-$60 million in losses - losses so serious that Honeywell either had to abandon or sell this business;

(1) Honeywell's semiconductor circuit board interface project (ASTI technology), including its pilot manufacturing operation for chip packaging, had failed; the pilot plant operation could not produce commercial yields which was adversely affecting Honeywell's cash flow, causing

$40-$60 million in losses and would require selling or abandoning the project, resulting in a $100 million write-off;

(m) In order to artificially boost its I stQ 00 revenues and EPS, Honeywell (and

Pittway) had sold hundreds of millions of dollars of products on special , unusual terms - including extended payment terms. As aresult, Honeywell had accumulated over $400 million in past due receivables (mostly in its Home and Building Control business), which was adversely impacting

Honeywell's 00 cash flow and would contribute to Honeywell's 00 cash flow being $500 million less than forecast, i.e., $1.4 billion, not the $1.9 billion forecast;

(n) The Allied/Honeywell merger integration was not going nearly as well as represented due, in part, to incompatibility of the financial and accounting systems and controls of the two companies. Honeywell was encountering persistent problems in combining the operations of the merged entities and obtaining accurate financial information necessary to accurately forecast

Honeywell's future operations, resulting in increased costs, not the merger savings forecast;

-52- Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 17 of 34

(o) The Allied/Honeywell merger integration was not going well or succeeding,

and, in fact, due to serious problems with the merger process and problems integrating and

combining the operations of "old" Honeywell and Allied, the "new" Honeywell was not only not

achieving the merger synergies and savings forecast, but rather, was encountering significant

problems in combining the operations of the merged entities, resulting in increased costs;

(p) The Allied/Honeywell merger was not succeeding as represented because, in

connection with the merger, huge reductions in workforce had occurred and many key sales

employees were laid off; as a result, Honeywell was losing significant orders from customers, as the

customers were nervous about signing contracts with Honeywell because of the massive shake-up

in personnel and chaos created by the merger. For example, Honeywell's Industrial and Automation

Controls segment lost between $200-$500 million in revenue from customers that decided not to

purchase from Honeywell because of the personnel shake-up and merger chaos. This issue was

constantly communicated to Honeywell's top executives, especially defendant Ferrari.

(q) Because its use of"pooling" accounting in the Allied/"old" Honeywell merger

prohibited the "new" Honeywell from selling off any significant business unit, Honeywell was stuck

with four money-losing or very poorly performing businesses (polymers, chip packaging,

pharmaceuticals/specialty chemicals and friction materials), which were adversely impacting

Honeywell's results from operations, but which Honeywell could not sell off due to the pooling

accounting restrictions arising from the Allied/Honeywell merger. As a result of the ongoing

adverse impact of these operations, Honeywell would not achieve the 00 revenues, EPS and cash

flows forecast;

(r) Honeywell's 4thQ 99 and 99 financial results had been falsified by defendants

through their improper recognition of revenue, their creation ofphony sales, and their manipulation

of current period costs, as detailed in ¶¶108-20;

(s) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of "at

least" 20% 00 EPS growth, followed by 01 EPS growth of "at least" 17%, followed by 02 EPS

- 53 - Case 2:00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 18 of 34

growth of 15%+, resulting in "at least" compounded 18% EPS growth over 00-02, were false when made as they could not and would not be achieved; and

(t) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of 1 stQ

00, 2ndQ 00, 3rdQ 00 and 4thQ 00, as well as 00 EPS of $.62-$.63, $.77-$.78, $.83-$.88, $.97-$1.02 and $3.20-$3.30, respectively, $1.9 billion in 00 free cash flow and 01 and 02 EPS of $3.75-$3.95 and $4.40+, respectively, were false when made as they could not and would not be achieved.

73. Honeywell's 4thQ 99 results and the investment community's negative reaction to them intensified the pressure on Bonsignore and his top executive team to perform, to have

Honeywell report strong 1 stQ 00 results and to demonstrate that Honeywell's Allied merger integration and Pittway acquisition were both succeeding. On 1/31/00; The Wall Street Journal. reported:

Heard On The Street - Honeywell's Slide May Be Overdone, Some Analysts Say

Investors who had embraced AlliedSignal's plan to acquire Honeywell Inc. last year have shunned shares of the combined company. The stock has plunged about 25% since Dec. 2 ....

The real test for Honeywell will come in the next few earnings reports.

Even Honeywell executives were unhappy with the [4thQ 99] performance. "We didn 't like the makeup of the fourth quarter" report, Honeywell Chief Executive Michael Bonsignore says. He adds that the company has been calling investors, seeking to reassure them that the company would meet its financial targets.

"There's certainly questions about whether the new management team will be able to execute these [strategic] plans ... " says [one analyst].

What 's clear is that Honeywell 's every inove will be scrutinized by the market. Investors will be particularly lookingfor the nextfew earnings reports to show that the merger synergies and cost savings are materializing.

-54- Case 2 : 00-cv-03605-DRD-SDW Document 53-2 Filed 01/31 /2001 Page 19 of 34

74. On 2123100, Honeywell filed its Form I 0-K with the SEC. The Form 10-K contained

Honeywell's falsified 99 financial results.

75. On 3/9/00, Warburg Dillon Read issued a report "initiating coverage" on Honeywell

by Nufer. Because this was Warburg's first report on Honeywell, it was issued only after Nufer had

extensive discussions with Bonsignore, Ferrari and Wallman and was based on and repeated

information provided by them. Bonsignore, Ferrari or Wallman reviewed this report before it was

issued and assured Nufer it was accurate. The report forecast the following quarterly 00-02 EPS for

Honeywell:

Fiscal Year Quarterly Estimates-EPS

1st 2ndQ 3rdQ 4thO 2000 $.62A $.78E $ .86E $ .98E 2001 $.75E $ .92E $1.00E $1.13E 2002 -$.88E $1.07E $1.15E $1.30E

It also stated:

[W]e remain confident in Honeywell's ability to meet its well-communicated financial targets, which include 20% EPS growth in 2000E ....

• First Quarter should be a Catalyst-In a recent meeting with senior management at Honeywell, CEO Michael Bonsignore stated that he considers April 18th, Honeywell's 1Q00 earnings release, to be the beginning ofthe new Honeywellfrom a shareholder sentimentperspective.

• Higher Near-Term Revenue Growth .... Honeywell's target is to grow revenue by 8%-10% annually for the next three years, with acquisitions accounting for roughly 4-6 percentage points of that increase.

76. On 3/20/00, Merrill Lynch issued a report on Honeywell by Young, written after discussions with Bonsignore, Ferrari or Waltman, which was based on and repeated information provided by them. Bonsignore, Ferrari or Wallman reviewed this report before it was issued and assured Young it was accurate. The report forecast 00 and 01 EPS of $3.25 and $3.85 for

Honeywell. It also stated:

Honeywell International remains confident that it will achieve all of the financial goals that it haspromisedfor 2000. These targets include 4%-6% internal top line expansion, operating margins of 15% [and] EPS growth to $3.25 or better

We continue to estimate 2000 EPS of $3.25, rising to $3.80 in 2001.

- 55 - Case 2 : 00-cv-03605-DRD-SDW Document 53-2 Filed 01/31 /2001 Page 20 of 34

77. On 3/30/00, Sanford C. Bernstein & Co. issued a report on Honeywell by Shalett,

written after discussions with Bonsignore, Ferrari or Wallman, which was based on and repeated

information provided by them. Bonsignore, Ferrari or Wallman reviewed this reportbefore it was

issued and assured Shalett it was accurate. The report forecast 00 and 01 EPS of $3.25 and $3.85

for Honeywell, and stated:

... Following recent discussions with HON management, we are confident that Q1 :2000 earnings estimates ... should be met. Importantly, as we expected, organic top line growth pre-fx should reaccelerate ... with solid and improving results in all major business units . Sequential margin improvement in all business units and initial gains in post merger integration savings ... suggest that operating profit growth will match the 13% bottom line gains.

* Overall outlookfor +20 % earnings and cashflow growth in 2000 on track. Bottom line is that 2000 should represent a major breakout year for the newly combined company with post-merger synergies combining with new e-commerce initiatives and cyclical rebounds in key business units. We remain confident in our full yearforecast of earnings growth reacclerating to above 20% ....

78. On or about 3/31/00, Honeywell issued its 99 Annual Report. The Annual Report, a "group-published" document, contained Honeywell's falsified 99 financial statements. In addition, the Annual Report contained a letter signed by Bonsignore dated 2111100, which stated:

"A MERGER MADE INHEAVEN' - New York Times, June 8, 1999

The press seldom greets merger announcements so enthusiastically. But people recognized immediately that the combination of AlliedSignal and Honeywell was no ordinary merger.

They saw, as we did, that this combination makes perfect sense because it delivers immediate financial benefits and strengthens our ability to grow.

We recognize that mergers can only deliver the promised results if ... a superior merger plan is created and executed.... /OJur companies fit together extremely well .... And we dedicated ourselves to creating and implementing a merger integration plan that is second to none.

We are confident about our ability toperform in 2000 and beyond and don't intend to disappoint our shareowners.

We have set aggressive three-year performance targets and have tied incentive compensation for our senior leaders to making these numbers.

We are focused on:

-56- Case 2: 00-cv-03605 - DRD-SDW Document 53-2 Filed 01/31/2001 Page 21 of 34

* Achieving annual sales growth of 8 percent to 10 percent;

* Expanding operating margin by at least one point per year;

* Growing earnings per share at a compounded annual growth rate of at least 18 percent. * * *

In June, we said our integration process would yield $250 million in first-year savings and $500 million in savings in 2002. But the 600 employees who worked on the integration exceeded our expectations and developed a world-class integration plan that identifies savings of $750 million in 2002. We are aggressively implementing the plan to deliver the savings we 've promised.'

79. . The importance ofHoneywell's exceptionally bullish 99 Annual Report is shown by a 415100 Merrill Lynch report which stated:

* Honeywell['s] ... 1999 annual report expresses confidence in "our ability to perform in 2000 and beyond and don 't intend to disappoint."

* The annual reaffirms, among other things, the company 's commitment to grow EPS at a compounded 18% per year through 2002. * We estimate 2000 EPS of $3.25 - up 21% from ... 1999. * * *

* We believe the integration of AlliedSignal and Honeywell continues to progress smoothly. Cost synergies of $250M are expected to be realized in 2000.

* ... We believe that the company will achieve all of its financial targets in 2000. * * *

Annual Report Emphasizes Confidence on Achieving Goals

Honeywell's 99 Annual Report also stated:

Statements contained in this report concerning the company's goals, strategies and expectations for business and financial results are "forward-looking statements" based on current expectations. No assurances can be given that the results in any forward-looking statements will be achieved and actual results could differ materially. Please review the section of the report captioned "Management's Discussion and Analysis" as well as reports the company filed periodically with the Securities and Exchange Commission for information concerning factors which could affect the company's business.

However, neither the MD&A section ofHoneywell's 99 Annual Report or Honeywell's 9910-K filed with the SEC stated any special risk factors regarding the Honeywell/Allied merger or Honeywell's ability to achieve the 00-02 EPS forecast.

-57- Case 2 : 00-cv-03605-DRD-SDW Document 53-2 Filed 01/31/2001 Page 22 of 34

Honeywell ... 1999 annual report makes for interesting reading. In our view, the company clearly understands what they need to do in order for the shares to appreciate. Much time is devoted in the annual report to expressing confidence that the company will meet all of itsfinancial commitments to investors ....

The annual indicates that... "[wJe are confident about our ability toperform in 2000 and beyond and don 't intend to disappoint our shareowners."

Here is a recap of the company's financial targets through 2002:

* Achieving annual sales growth of 8%-10%;

* Expanding operating margin by at least one percentage point per year;

* Growing EPS at a compounded annual growth rate of at least 18%;

* Achieving at least 7% productivity improvement each year; and

* Increasing free cash flow before dividends to $3 billion by 2002. * * *

Internal sales and EPS growth should pick up momentum as the year progresses.... [I}nvestors' confidence in the company and its stock should rise as the yearproceeds. We are comfortable that Honeywell International will achieve its financial targets.

80. The statements made between 1/31100 and 4/5/00 were false when made. The true facts, which were concealed, were that:

(a) In order to cover up problems with Honeywell's Performance Materials unit and thus artificially boost Honeywell's 1 stQ 00 revenues and EPS, in late 99 and early 00 Honeywell had imposed polymer and nylon and polyester fiber price increases on customers of its Performance

Materials unit which the defendants knew were unsustainable, but would temporarily boost

Honeywell's revenue and EPS. Defendants knew this made Honeywell's lstQ 00 results not indicative of the true performance ofHoneywell's business or its 00 EPS prospects and would result in the loss of business and revenues in this important business unit (16% of Honeywell's total revenues) after the 1 stQ 00, meaning Honeywell would not achieve the 00 EPS growth being forecast;

(b) The price increases imposed on customers of Honeywell's Performance

Materials unit in late 99 and during the I stQ 00 for polymers and nylon and polyester fibers met with extreme customer resistance. While many customers had initially paid the increases under protest

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while seeking alternative sources of supply, Honeywell was quickly losing customers forits polymer products due to the price increases and was being forced to give secret discounts and price concessions for its polymer products to keep other customers - albeit at reduced revenue and much less profitable levels;

(c) Honeywell's late 99 and early 00 price increases on customers of its

Performance Materials unit for nylon and polyester fiber were being rejected by most customers and not "sticking" because Honeywell's polyester fiber business had mutated into a commodity business where Honeywell had lost the ability to raise prices on these products, even though its raw materials costs were escalating, destroying the margins in this business; in fact, this business. unit was performing so poorly that Honeywell was going to try to sell it;

(d) Because Honeywell's Performance Materials unit accounted for 16% of

Honeywell's overall revenues, the severe pricing problems with polymers and nylon and polyester fiber, were having a material adverse impact on Honeywell's business and financial results which meant Honeywell would not achieve its 2ndQ 00, 3rdQ 00, 4thQ 00 or 00 EPS growth forecasts;

(e) In order to boost its results prior to being acquired by Honeywell, Pittway had artificially inflated its revenues and profits by creating millions ofdollars of"sales" on commercially unreasonable terms and/or to uncreditworthy customers; as a result, Pittway had accumulated over

$200 million in past due and difficult to collect receivables which was adversely affecting

Honeywell's cash flow, resulting in cash flow well below the levels forecast, meaning that

Honeywell could not achieve its forecasted 00 free cash flow of $1.9 billion;

(f) By 2/00-3/00, Honeywell' s Pittway acquisition was encountering substantial operational difficulties, due to integration and other problems - including the loss of key personnel and a sharp drop in sales growth, plus an upsurge in past due accounts receivable, resulting in

Pittway's revenues and profits being significantly below forecasted levels and the levels necessary to avoid dilution to Honeywell's 00 EPS;

(g) By 3/00, Honeywell's attempted integration of the Pittway acquisition into

Honeywell's Automation & Controls unit was encountering serious difficulties - several Pittway managers had left and Pittway's revenue growth rate had fallen sharply (by almost 50%). Thus,

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Pittway's revenues and profits were significantly below forecasted levels, meaning. the Pittway acquisition would be dilutive to Honeywell's EPS 11100, not neutral as represented, and Honeywell would not achieve the 00 revenue and EPS growth being forecast;

(h) Pittway's results from operations (as part of Honeywell's Automation &

Controls unit) were well below the levels internally forecast or budgeted and necessary for

Honeywell to achieve its 00 revenue and EPS growth forecasts due, in part, to three large customers

(ADT, Protection One and Chubb) curtailing purchases and/or purchasing lower priced (and thus lower margin) components;

(i) Honeywell' s Aerospace Solutions unit (37% of sales and Honeywell's most profitable business unit) was suffering from serious and persistent problems in obtaining a sufficient supply of conforming component parts - especially printed circuit cards or boards - from an outsourced supplier (EFTC) and "ECUs" (electronic control units) to meet demand from Boeing and other aircraft OEM customers; this was badly hurting Honeywell's results and since this problem could not be fixed before the 4thQ 00 at the earliest, this meant that Honeywell would not achieve the 00 EPS growth being forecast;

{0) Honeywell's Power & Transportation Products unit (14% ofHoneywell's total revenues) was performing below expectations due to (i) weak sales of friction materials; (ii) serious component parts shortages for Honeywell's important new Turbocharger products due to supplier production shortfalls; and (iii) sharply lower heavy truck builds (especially in Europe); as a result of these problems, the ramp-up of Honeywell's new Turbocharger product was being delayed,

Honeywell was losing $80-$ 100 million on this operation and Honeywell's results from operations were being adversely affected;

(k) Honeywell's high-volume generic drug business, called Specialty Chemicals, was performing very poorly and had lost its competitive position (especially for its Naproxin drug), a situation causing $40-560 million in losses - losses so serious that Honeywell either had to abandon or sell this business;

(1) Honeywell's semiconductor circuit board interface project (ASTI technology), including its pilot manufacturing operation for chip packaging, had failed; the pilot plant operation

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could not produce commercial yields which was adversely affecting Honeywell's cash flow, causing

$40-$60 million in losses and would require selling or abandoning the project, resulting in a $100

million write-off;

(m) In order to artificially boost its I stQ 00 revenues and EPS, Honeywell (and

Pittway) had sold hundreds of millions of dollars of products on special, unusual terms - including

extended payment terms. As a result, Honeywell had accumulated over $400 million in past due

receivables (mostly in its Home and Building Control business), which was adversely impacting

Honeywell's 00 cash flow and would contribute to Honeywell's 00 cash flow being $500 million less

than forecast, i.e., $1.4 billion, not the $1.9 billion forecast;

(n) The Allied/Honeywell merger integration was not going nearly as well as

represented due, in part, to incompatibility of the financial and accounting systems and controls of

the two companies. Honeywell was encountering persistent problems in combining the operations

of the merged entities and obtaining accurate financial information necessary to accurately forecast

Honeywell's future operations, resulting in increased costs, not the merger savings forecast;

(o) The Allied/Honeywell merger integration was not going well or succeeding,

and, in fact, due to serious problems with the merger process and problems integrating and

combining the operations of "old" Honeywell and Allied, the "new" Honeywell was not only not

achieving the merger synergies and savings forecast, but rather, was encountering significant

problems in combining the operations of the merged entities, resulting in increased costs;

(p) The Allied/Honeywell merger was not succeeding. as represented because, in

connection with the merger, huge reductions in workforce had occurred and many key sales

employees were laid off; as a result, Honeywell was losing significant orders from customers, as the

customers were nervous about signing contracts with Honeywell because of the.massive shake-up

in personnel and chaos created by the merger. For example, Honeywell's Industrial and Automation

Controls segment lost between $200-$500 million in revenue from customers that decided not to purchase from Honeywell because of the personnel shake-up and merger chaos. This issue was constantly communicated to Honeywell's top executives, especially defendant Ferrari.

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(q) Because its use of "pooling" accounting in the Allied/"old" Honeywell merger prohibited the "new" Honeywell from selling off any significant business unit, Honeywell.was stuck with four money-losing or very poorly performing businesses (polymers, chip packaging, pharmaceuticals/specialty chemicals and friction materials), which were adversely impacting

Honeywell's results from operations, but which Honeywell could not sell off due to the pooling accounting restrictions arising from the Allied/Honeywell merger. As a result of the ongoing adverse impact of these operations, Honeywell would not achieve the 00 revenues, EPS and cash flows forecast;

(r) Honeywell's 4thQ 99 and 99 financial results had been falsified by defendants through their improper recognition of revenue, their creation ofphony sales, and their manipulation of current period costs, as detailed in I¶108-20;

(s) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of "at least" 20% 00 EPS growth followed by 01 EPS growth of "at least" 17%, followed by 02 EPS growth of 15%+, resulting in "at least " compounded 18% EPS growth over 00-02 were false when made as they could not and would not be achieved; and

(t} As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each knew that the forecasts of I stQ

00, 2ndQ 00, 3rdQ 00 and 4thQ 00, as well as 00 EPS of $.62-$.63, $.77-$.78, $.83-$.88, $.97-$1.02 and $3.20-$3.30, respectively, $1.9 billion in 00 free cash flow and 01 and 02 EPS of $3.75-$3.95 and $4.40±, respectively, were false when made as they could not and would not be achieved.

81. On or about 4/1/00, the 4/10/00 edition of Business Week was published. It stated:

CAN BONSIGNORE GET THE NEW HONEYWELL HUMMING?

Following a legend has never been easy.... That's why many eyes will be on Honeywell CEO Michael R. Bonsignore starting Apr. 1. That's when he takes over the chairmanship from the hard-charging Lawrence A. Bossidy, the dynamic ex-GE exec who led AlliedSignal Inc. from 1991 until its merger with the old Honeywell Inc. in December, 1999 . "Those are tough shoes tuft!!for anyone, " says Frederic. M. Poses, chairman and CEO at American Standard Companies Inc. and a 30- yearAllied veteran .... Certainly Bonsignore, 58, has set some lofty goals for the new

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Honeywell .... [H]e is targeting sales growth of 8% to 10%. That's at the high end of what the two companies had been generating on their own. "I never doubted [integration] would be difficult, but it has gone amazingly well," says Bonsignore.

82. On 4/13/00, Honeywell reported its much anticipated 1 stQ 00 results via a release (a

"group-published" document) headlined and stating:

Honeywell's 1st-Quarter Sales Up 8% To A Record $6.04 Billion; Earnings Per Share Grow 15% To A Record $0.63

Company Well-Positioned To Meet 2000 Growth Commitments And Merger Savings Target Of $250 Million

Honeywell [NYSE:HON/ said today that sales in the first quarter were a record $6.04 billion ....

First-quarter earnings per share were a record $0.63 ....

"Our excitingfirst-quarter results demonstrate that the merger is behind us and that we have successfully integrated two great companies ," said Michael R. Bonsignore, Honeywell Chairman and ChiefExecutive Officer. "The majority ofour businesses experienced solid top-line growth this quarter.... Our first-quarter performance supports our confidence that Honeywell is wellpoised to meet its earnings and revenue commitments for 2000 and beyond."

He reaffirmed that the company will meet its $250 million first-year merger savings target ....

Strong product sales in the Home & Building Control business helped to drive revenues higher in the segment....

Operating margins expanded due to the results of aggressive cost reductions and growth in profitable products and services.'

Honeywell's 1 stQ 00 release also stated:

This release contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, including statements about future business operations, financial performance and market conditions . Such forward-looking statements involve risks and uncertainties inherent in business forecasts.

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83. On 4/13/00, subsequent to the release of its lstQ 00 results, Honeywell held a conference call for analysts, money and portfolio managers, institutional investors and large

Honeywell shareholders to discuss Honeywell's results, its business and its prospects. During the call, and in follow-up conversations with analysts, Bonsignore stated:

Bonsignore: ... We exceeded our targetsfor growth andprofitability.... Thefact that we were able to accelerate the earnings release by almost a week is tangible evidence of our merger progress. We're really off to a terrific start. The fundamentals are sound and we'refeeling very good about the outlook.... We are pleased with the ... good visibility that we have in meeting our goals going forward.

I must say we're very delighted with ourprogress in the first quarter since, it sets the right tonefor the rest ofthe year. As we lookforward to the balance of2000, we'refeeling comfortable.... We are stillfully committed to 20% EPS growth and ... this quarter's results provide better visibility to achieving that goal. The merger. synergies will ramp up as the year progresses .... We've completed the inward- looking mergerphase, and we're reallyfeelinggood about our ability to deliver on the synergies promised by this merger, including the ,5250 million ofsavings in the year 2000. We're meeting or exceeding our commitments ....

With respect to the integration of Allied and Honeywell, Bonsignore stated:

I think we are way ahead of where I thought we'd be three months ago. The integration has gone more smoothly. Obviously, the discipline of integrating the two financial systems, we've made great progress there that 's enabled us to be reporting these earnings earlier than we thought.

84. On 4/13/00, Bonsignore was interviewed on CNBC's "Squawk Box" and stated:

Question: What is the chief driver here ... of your earnings strength right now?

Bonsignore: We've had earnings growth across all the businesses. We are clearly seeing the benefits ofthe mergerfowing through. One ofthe things I am mostpleased about [is that] the earnings for the quarter demonstrate we are able to get beyond the integration .... RAJ lot of incremental productivity improvements ... have contributed to these earnings improvements.

85. On 4/13/00, Sanford C. Bernstein & Co. issued a report on Honeywell by Shalett, which was based on and repeated information provided in the 4/13/00 conference call and in follow- up conversations with Bonsignore, Ferrari or Waltman. The report forecast 00 and 01 EPS of $3.25 and $3.85 for Honeywell and stated:

* ... HON reported $0.63/sh, an upside surprise of a penny ....

* Organic Growth:... [O]rganic growth of 4% ... came in ... higher than our expectations. This rebound in organic growth is very significant given the concerns that arosefrom the company 's flat Q4:99 sales performance....

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* Earnings Quality: In addition to top line strength, we were glad to note that operating profits grew a much better than expected 21% .... This ... underscores successful progress on ongoing restructuring programs and no loss of momentum due to the merger. *

* Speed of Quarterly Close: Finally the speed ofthe quarterly close, the early reporting and the spot on guidance leading up to the report, lends comfort and credibility to the idea that post-merger integration is completely on track and that the "composition surprise" ofQ4: 99 earnings was a one-off event.

86. On 4/14/00, Salomon Smith Barney issued a report on Honeywell by Sprague, which was based on and repeated information provided to him in the 4/13/00 conference call and in follow- up conversations with Bonsignore, Ferrari or Wailman. The report forecast 00 and 01 EPS of $3.30 and $3.80 for Honeywell and also stated:

Q1 ERASES UNCERTAINTY AND SETS THE STAGE FOR STRONG 2000...

HON reported ... a penny better than consensus . Earnings quality was high....

We believe this quarter clearly erases the uncertainty caused by mediocre Q499 results and sets the stagefor the stock to move higher. Both sales and EPS growth should accelerate over the remainder of 2000 as divestitures are lapped, industrial end markets improve, merger cost reductions kick in, and follow-on acquisitions are made.... We believe investor concerns about 2000 earnings being back-end loaded have turned into enthusiasm about sequential acceleration in earnings and revenue growth.

87. On 4/14/00, Warburg Dillon Read issued a report on Honeywell by Nufer, which was based on and repeated information provided to Nufer in the 4/13/00 conference call and in follow-up conversations with Bonsignore, Ferrari or Wallman. The report forecast0.0, 01 and 02 EPS of $3.25,

$3.80 and $4.41 and the following quarterly 00, 01 and 02 EPS for Honeywell:

1st 2nd 3rdO 4th 12/00 $.63A $.77E $ .86E $ .99E 12/01 $.75E $.92E $1.OOE $1.13E 12/02 $.88E $1.06E $1.15E $1.30E

It also stated:

NEW HONEYWELL TURNS THE CORNER

HON reported 1 Q00 EPS ... $0.01 above ... consensus.... [T]he solid quarter is likely to calm the earnings expectation and merger integration fears surrounding the stock recently....

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... Over the last months, as concerns of a first-quarter EPS disappointment mounted, HON management gave specific guidance .... In thefirst quarter, it met or exceeded every one of those targets. This reinforces our contention that the merger integration is progressing as (or better than) expected and that HON will meet its financial targets.

88. On 4/14/00, Lehman Brothers issued a report on Honeywell by Cornell, which was based on and repeated information provided to him in the 4/13/00 conference call and in follow-up

.conversations with Bonsignore, Ferrari or Waltman. The report forecast 00 and 01 EPS of $3.25 and

$3.81 and the following quarterly 00 EPS for Honeywell: 00 Q1 $ .63A Q2 $ .77 Q3 $ .85 Q4 $ 1.00 Year $3.25

It also stated:

Honeywell reported a very strong quarter with management Is comment that the company is offto a good start this year. Actually, we think it is a great start. Management also noted th at the distractions associated with the merger are largely in the past, and that the cultural blending ofthe two organizations is ahead of plan.

89. On 4/14/00, PNC Institutional Investment Service issued a report on Honeywell by

Ayscue, which was based on and repeated information provided in the 4/13/00 conference call and in follow-up conversations with Bonsignore, Ferrari or Waltman. The report forecast 00 EPS of

$3.20 for Honeywell and stated:

The shares of Honeywell were strong ... driven by strong quarterly comparisons. The company reported first-quarter EPS ... beating the consensus estimate by I cent.

Earnings visibility is very high on HON, and we expect management to meet itsfinancial goalsfor the year. The company is committed to revenue growth of8-10%, from 4%+ internal growth plus acquisitions. We believe HON's 20% EPS growth forecast is very attainable. The company should be able to achieve huge cost savings ($250 million) ... from the AlliedSignal merger.

90. On 4/14/00 , Prudential Securities issued a report on Honeywell by Heymann, which was based on and repeated information provided to him in the 4/13/00 conference call and in follow-

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up conversations with Bonsignore, Ferrari or Waltman. The report forecast 00 and 01 EPS of $3.24 and $3.80 for Honeywell and stated:

Yesterday, Honeywell reported 1Q00 EPS ... apenny higher than consensus of $0.62, up 15% from $0.55 in 1Q99. All in all, the quarter was extremely sound, with solid performances turned at each business segment, notably:

HON is extremely confident thatfree cash flow will reach $1.9 billion in 2000 ....

[SJubstantial holes have been filled in its Performance Materials segment as 5%-15% price increases made in both December 1999 and March 2000 have enabled substantial improvements in margins (up 3.9% during the quarter to 9.3%, exceeding even HON's own initial expectations).

HON continues to remain confident that it can achieve 20% EPS growth will occur during 2000 [sic].

91. On 4/14/00, J.P. Morgan issued a report on Honeywell by Mac Dougall, which was based on and repeated information provided in the 4/13/00 conference call and in follow-up conversations with Bonsignore, Ferrari or Waltman. The report forecast 00 and 01 EPS of$3.25 and

$3.95 for Honeywell and stated:

Honeywell delivered convincingly strong first quarter results, setting a positive tone for the new Honeywell under Mike Bonsignore and affirming our beliefthe company has passed an inflection point seen in thefourth quarter. CEO Bonsignore knew that delivering in the current quarter was critical to maintaining credibility, and exceeding them should move the stock out ofthe "show me" status it has been stuck with since 4Q/99. Results are notable for delivering solid improvement and beating expectations at a time when the commercial aerospace decline is in full swing and the Materials segment was severely pressured by feedstock costs.... The increased visibility ofthis opportunity along with renewed credibility should soon lead the market to begin embracing the Honeywell story.... Many investors have questioned us about where the upside on HON can come from given the aggressive expectations that were set last year. We think the answer is that plenty of upside potential exists, as soon as the market ... gains 100% confidence in new management. The current quarter represents a solid step in that direction....

Quarter Summary

Honeywell posted 1Q00 EPS of $0.63, up 15% from the same period last year and a penny ahead of our expectations. Surprisingly strong growth at Aerospace and Home and Building Controls combined with a sequential rebound in operating margins at Performance Materials to drive results.... Recent price increases ... resulted in nice margin improvementfrom a weak 4Q99 at Materials. Performance at Automation and control was mostly driven by contributions from recently acquired Pittway.... Lastly, robust demandfor turbochargers in Europe

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resulted in a strong quarter at Power and Transportation, in spite oftremendous forex pressures....

92. On 4/17/00, Merrill Lynch issued a report on Honeywell by Young, which was based on and repeated information provided in the 4/13/00 conference call and in follow-up conversations with Bonsignore, Ferrari or Wallman. The report forecast 00 and 01 EPS of $3.25 and $3.80 for

Honeywell and stated:

* ... Honeywell International reported stronger than expected 2000 first quarter EPS of $0.63 ... $0.01 higher than consensus.

* We are impressed by the turnaround in the company 'sperformance during the quarter. The quality ofresults was high and will serve as a strong confidence boosterfor investors.

[After the strong performance in the 2000first quarter, there should be a lot less doubt about the company's ability to meet the commitments that Honeywell International has made to investors for 2000 and beyond.

In the first quarter, the company met all of its promises and then some. EPS grew 15% to $0.63 - the high end oftheir guidance.... Investors should be heartened by the quality of the first quarter earnings release and confidence should come back into the shares sooner rather than later.

The integration of AlliedSignal and Honeywell is on track. The distractions related to the merger in the 1999 fourth quarter are behind the company. The operating environment has improved sequentially as product selling prices are higher in Performance Materials .... Higher oil prices should benefit Industrial Controls.

93. The statements made between 4/1/00 and 4/17/00 were false when made. The true facts, which were concealed, were that:

(a) In order to cover up problems with Honeywell's Performance Materials unit and thus artificially boost Honeywell's 1 stQ 00 revenues and EPS, in late 99 and early 00 Honeywell had imposed polymer and nylon and polyester fiber price increases on customers of its Performance

Materials unit which the defendants knew were unsustainable, but would temporarily boost

Honeywell's revenue and EPS. Defendants knew this made Honeywell's 1 stQ 00 results not indicative of the true performance ofHoneywell's business or its 00 FPS prospects and would result in the loss of business and revenues in this important business unit (16% of Honeywell's total

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revenues) after the 1 stQ 00, meaning Honeywell would not achieve the 00 EPS growth being

forecast;

(b) The price increases imposed on customers of Honeywell's Performance

Materials unit in late 99 and during the 1 stQ 00 for po lymers and nylon and polyester fibers met with

extreme customer resistance. While many customers had initially paid the increases under protest

while seeking alternative sources of supply, Honeywell was quickly losing customers for its polymer

products due to the price increases and was being forced to give secret discounts and price

concessions for its polymer products to keep other customers - albeit at reduced revenue and much

less profitable levels;

(c) Honeywell's late 99 and early 00 price increases on customers of its

Performance Materials unit for nylon and polyester fiber were being rej ected by most customers and

not "sticking" because Honeywell's polyester fiber business had mutated into a commodity business

where Honeywell had lost the ability to raise prices on these products, even though its raw materials

costs were escalating, destroying the margins in this business; in fact, this business unit was

performing so poorly that Honeywell was going to try to sell it;

(d) Because Honeywell's Performance Materials unit accounted for 16% of

Honeywell's overall revenues, the severe pricing problems with polymers and nylon and polyester

fiber were having a material adverse impact on Honeywell's business and financial results which

meant Honeywell would not achieve its 2ndQ 00, 3rdQ 00, 4thQ 00 or 00 EPS growth forecasts;

(e) In order to boost its results prior to being acquired by Honeywell, Pittway had

artificially inflated its revenues and profits by creating millions ofdollars of" sales" on commercially

unreasonable terms and/or to uncreditworthy customers; as a result, Pittway had accumulated over

$200 million in past due and difficult to collect receivables which was adversely affecting

Honeywell's cash flow, resulting in cash flow well below the levels forecast, meaning that

Honeywell could not achieve its forecasted 00 free cash flow of $1.9 billion;

{f) By 2/00-3/00, Honeywell's Pittway acquisition was encountering substantial

operational difficulties, due to integration and other problems - including the loss of key personnel and a sharp drop in sales growth, plus an upsurge in past due accounts receivable, resulting in

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Pittway's revenues and profits being significantly below forecasted levels and the levels necessary to avoid dilution to Honeywell's 00 EPS;

(g) By 3/00, Honeywell's attempted integration of the Pittway acquisition into

Honeywell's Automation & Controls unit was encountering serious difficulties - several Pittway managers had left and Pittway's revenue growth rate had fallen sharply (by almost 50%). Thus,

Pittway's revenues and profits were significantly below forecasted levels, meaning the Pittway acquisition would be dilutive to Honeywell's EPS in 00, not neutral as represented, and Honeywell would not achieve the 00 revenue and EPS growth being forecast;

(h) Pittway's results from operations (as part of Honeywell's Automation &

Controls unit) were well below the levels internally forecast or budgeted and necessary for

Honeywell to achieve its 00 revenue and EPS growth forecasts due, in part, to three large customers

(ADT, Protection One and Chubb) curtailing purchases and/or purchasing lower priced (and thus lower margin) components;

(i) Honeywell's Aerospace Solutions unit (37% of sales and Honeywell's most profitable business unit) was suffering from serious and persistent problems in obtaining a sufficient supply of conforming component parts - especially printed circuit cards or boards - from an outsourced supplier (EFTC) and "ECUs" (electronic control units) to meet demand from Boeing and other aircraft OEM customers; this was badly hurting Honeywell's results and since this problem could not be fixed before the 4thQ 00 at the earliest, this meant that Honeywell would not achieve the 00 EPS growth being forecast;

(j) Honeywell's Power & Transportation Products unit (14% ofHoneywell's total revenues) was performing below expectations due to (i) weak sales of friction materials; (ii) serious component parts shortages for Honeywell's important new Turbocharger products due to supplier production shortfalls; and (iii) sharply lower heavy truck builds (especially in Europe); as a result of these problems, the ramp-up of Honeywell's new Turbocharger product was being delayed,

Honeywell was losing $80-$100 million on this operation and Honeywell's results from operations were being adversely affected;

-70- Case 2 : 00-cv-03605-DRD-SDW Document 53-3 Filed 01/31 /2001 Page 1 of 28

(k) Honeywell's high-volume generic drug business, called Specialty Chemicals,

was performing very poorly and had lost its competitive position (especially for its Naproxin drug),

a situation causing $40-$ 60 million in losses - losses so serious that Honeywell either had to

abandon or sell this business;

(1) Honeywell's semiconductor circuit board interface project (ASTI technology),

including its pilot manufacturing operation for chip packaging, had failed; the pilot plant operation

could not produce commercial yields which was adversely affecting Honeywell's cash flow, causing

$40-$60 million in losses and would require selling or abandoning the project, resulting in a $100

million write-off;

(m) In order to artificially boost its 1stQ 00 revenues and EPS, Honeywell (and

Pittway) had sold hundreds of millions of dollars of products on special, unusual terms - including

extended payment terms. As a result, Honeywell had accumulated over $400 million in past due

receivables (mostly in its Home and Building Control business), which was adversely impacting

Honeywell's 00 cash flow and would contribute to Honeywell's 00 cash flow being $500 million less than forecast, i.e., $1.4 billion, not the $1.9 billion forecast;

(n) The Allied/Honeywell merger integration was not going nearly as well as

represented due, in part, to incompatibility of the financial and accounting systems and controls of

the two companies. Honeywell was encountering persistent problems in combining the operations of the merged entities and obtaining accurate financial information necessary to accurately forecast

Honeywell's future operations, resulting in increased costs, not the merger savings forecast;

(o) The Allied/Honeywell merger integration was not going well or succeeding, and, in fact, due to serious problems with the merger process and problems integrating and combining the operations of "old" Honeywell and Allied, the "new" Honeywell was not only not achieving the merger synergies and savings forecast, but rather, was encountering significant problems in combining the operations of the merged entities, resulting in increased costs;

(p) The Allied/Honeywell merger was not succeeding as represented because, in connection with the merger, huge reductions in workforce had occurred and many key sales employees were laid off; as a result, Honeywell was losing significant orders from customers, as the

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customers were nervous about signing contracts with Honeywell because of the massive shake-up in personnel and chaos created by the merger. For example, Honeywell's Industrial and Automation

Controls segment lost between $200-$500 million in revenue from customers that decided not to purchase from Honeywell because of the personnel shake-up and merger chaos. This issue was constantly communicated to Honeywell's top executives, especially defendant Ferrari.

(q) Because its use of"pooling" accounting in the Allied/"old" Honeywell merger prohibited the "new" Honeywell from selling off any significant business unit, Honeywell was stuck with four money-losing or very poorly performing businesses (polymers, chip packaging, pharmaceuticals/specialty chemicals and friction materials), which were adversely impacting

Honeywell's results from operations, but which Honeywell could not sell off due to the pooling accounting restrictions arising from the Allied/Honeywell merger. As a result of the ongoing adverse impact of these operations, Honeywell would not achieve the 00 revenues, EPS and cash flows forecast;

(r) Honeywell's "record " 1 stQ 00 financial results had been attained only through defendants' falsification ofsuch results, through their improper recognition ofrevenue, their creation of phony sales, and their manipulation of current period costs in Honeywell's Home and Building

Control segment, as detailed in ¶¶108-20, and defendants' improper manipulation of reserves, and non-disclosures, as detailed in ¶1121-29;

(s) As a result of the foregoing adverse conditions which were impacting

Honeywell' s business , Honeywell and the Individual Defendants each knew that the forecasts of "at least" 20% 00 EPS growth followed by 01 EPS growth of "at least" 17%, followed by 02 EPS growth of 15%+, resulting in "at least" compounded 18% EPS growth over 00-02 were false when made as they could not and would not be achieved; and

(t) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, and also because Honeywell's Industrial and Automation Controls segment was experiencing a material revenue shortfall in 2ndQ 00 caused by defective HPM boards delivered by a board supplier named Wong, Honeywell and the Individual Defendants each knew that the forecasts of 2ndQ 00, 3rdQ 00 and 4thQ 00, as well as 00 EPS of $.77-$.78, $.83-$.88, $.97-$1.02

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and $3.20-$3.30, respectively, $1.9 billion in 00 free cash flow and 01 and 02 EPS of $3.75-$3.95 and $4.40*, respectively, were false when made as they could not and would not be achieved.

94. On 511100, Honeywell held its annual meeting. At the meeting, shareholders voted on a proposal to sharply limit Bonsignore's annual compensation. Dow Jones News Service reported on 5/1/00:

Honeywell International Inc. (HON) shareholders ... rejected ... proposals, including one to set a cap on executive pay.

In his talk to shareholders, Michael Bonsignore, chairman and chief executive, reiterated that the company would increase its earnings per share by 20% this year, as a result of merger savings, sales growth and productivity improvements ....

95. On 5/6/00, Bloomberg reported: HONEYWELL COO JOHNSON SEES 18% AVERAGE EPS GROWTH

Honeywell International Inc. ... expects earnings per share to grow by an average 18 percent a year as business picks up, said the company's chief operating officer, Bob Johnson.

The company expects earnings per share to rise 20 percent this year, followed by 18 percent in 2001 and 17 percent in 2002.

"We want to grow our business long term 10 percent a year," he said. "At least 4 to 6 percent of that from internal growth and the rest from either new products or acquisitions or joint ventures."

96. On 5/9/00, Honeywell executive Bonsignore appeared at an investor/analyst conference in New York City. In a formal presentation and in break-out sessions, he told the assembled analysts, money and portfolio managers, institutional investors, brokers and stock traders that:

• The merger integration of "old" Honeywell and Allied was successful. Thus, "new" Honeywell would achieve substantial operation synergies and at least $250 million in merger savings in 00 alone.

• The merger synergies and savings would accelerate as 00 unfolded. Honeywell's EPS growth would accelerate as 00 unfolded. Honeywell would achieve 00 free cash flow of $1.9 billion.

• Honeywell was on track to achieve 2ndQ 00 EPS of $.78.

• Price increases had turned the Performance Materials business around.

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• Honeywell would achieve EPS growth of 20% in 00 to $3.20-$3.25 followed by at least 17% EPS growth in 01 and compounded EPS growth of at least 18% over the next three years.

• The Pittway acquisition would not dilute Honeywell's 00 EPS. Honeywell's acquisition ofPittway was a success and would boost Honeywell's revenue and EPS growth rate in 01-02 and its cash flow in 00.

97. On 5/19/00, Sanford C. Bernstein & Co. issued a report on Honeywell by Shalett,

after discussions with top Honeywell executives, which was based on and repeated information provided by them. The report forecast 00 and 01 EPS of $3.25 and $3.85 for Honeywell and stated:

* Following a small group meeting with HON management ... our meeting gave us further insights into additional opportunities for growth and profit improvement in some of the lower profile businesses. * * *

* Electronic Materials: Additional upside to our 13 % 5 year sales CAGR estimate could occur ifHONs vision of doubling to tripling the size of its Wafer Fab business comes to fruition....

* Specialty Chemicals: The 2003 phase-out ofHCFCs could increase Fluorines organic growth from 6-8% to 9-11%, suggesting that our.2% 5 year sales CAGR estimate for the division is probably conservative. Additionally, HON price increases and the company's expectation of a return of ethylene prices to more normal levels should ease the margin squeeze in polyethylene businesses.

* Transportation & Power Systems: ... [W]e fully anticipate success of the current turbogenerator rollout ....

98. On 6/5/00, Merrill Lynch issued a report on Honeywell by Young, written after discussions with top executives of Honeywell's aerospace operations, which was based on and repeated information provided by them. The report forecast 00 and 01 EPS of $3.25 and $3.81 for

Honeywell and stated:

* On 6/1-2, we visited Honeywell's Aerospace Solutions business , 40% oftotal sales. A lot ofgood details emerged to provide confidence that it can modestly grow sales in 2000, significantly boost margins, and is wellpositioned to dominate many of its markets. * * *

* Honeywell is on track to meet its 2Q00 and 2000 internal sales (4%-6%) growth, EBIT margin rise (100bps), free cashflow ($1.3B) and 20%+EPS growth targets.

* *

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* 1Q00, which was in line to slightly better than expected, was a strong start to 2000 and a nice confidence booster after a confusing 4Q99. We expect the company to continue to meet or slightly surpass its guidance going through 2000 and beyond.

99. On 6/7 /00, Honeywell executive Bonsignore appeared at an investor/analyst conference in New York City. In a formal presentation and in break-out sessions, he told the assembled analysts, money and portfolio managers, institutional investors, brokers and stock traders that:

• The merger integration of "old" Honeywell and Allied was successful. Thus, "new" Honeywell would achieve substantial operation synergies and at least $250 million in merger savings in 00 alone.

• The merger synergies and savings would accelerate as 00 unfolded.

• Honeywell was on track to achieve 2ndQ 00 EPS of $.78.

• Honeywell would achieve EPS growth of at least 20% in 00 to $3.20-$3.25 followed by at least 17% EPS growth in 01 and compounded EPS growth of at least 18% over the next three years.

• Honeywell's EPS growth would accelerate as 00 unfolded.

• Honeywell's acquisition ofPittway was a success. The Pittway acquisition would not dilute Honeywell's 00 EPS and would add to Honeywell's 01-02 EPS.

100. On 6/8/00, J.P. Morgan issued a report on Honeywell by Mac Dougall, written after discussions with Bonsignore or Ferrari, which was based on and repeated information provided by them. It stated:

Honeywell shares are down sharply today, following a steep decline yesterday. We are unable to find anything Honeywell specific that would explain such a drop, and attribute the fall to general sector weakness. Honeywell was speaking at a conference yesterday, though we understand from attendees that the presentation contained no surprises .... Our own view is that the fundamentals here remain on an improvement track, and we have a positive outlook on earnings in coming quarters. The merger integration is going quite well, and we should begin to see significant contribution from these savings in the second half of this year. After checking in with management, we remain comfortable that results in the current quarter will meet our expectations.

101. During the first two weeks of 6/00, Honeywell's stock began to fall. After reaching its Class Period high of $59-118 on 6/2/00, Honeywell's stock fell to $48-1/2 by 6/16/00, just 10 trading days later as insiders at Honeywell illegally leaked and selectively disclosed to favored investors that Honeywell would shortly reveal that it would not achieve its forecasted 2ndQ 00

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results and that, in fact, the Thew" Honeywell was suffering from serious problems in integrating the

"old" Honeywell and Allied, and the "new" Honeywell was suffering serious business problems,

quite contrary to what had been recently represented and forecast earlier and, as a result, Honeywell's

00-02 EPS would be far less than earlier forecast.

102. The statements made between 511100 and 6/8/00 were false when made. The true

facts, which were concealed, were that:

(a) In order to cover up problems with Honeywell's Performance Materials unit

and thus artificially boost Honeywell's 1 stQ 00 revenues and EPS, in late 99 and early 00 Honeywell

had imposed polymer and nylon and polyester fiber price increases on customers of its Performance

Materials unit which the defendants knew were unsustainable, but would temporarily boost

Honeywell's revenue and EPS. Defendants knew this made Honeywell's lstQ 00 results not.

indicative ofthe true performance ofHoneywell's business or its 00 EPS prospects and would result

in the loss of business and revenues in this important business unit (16% of Honeywell's total

revenues) after the 1 stQ 00, meaning Honeywell would not achieve the 00 EPS growth being

forecast;

(b) The price increases imposed on customers of Honeywell' s Performance

Materials unit in late 99 and during the 1 stQ 00 for polymers and nylon and polyester fibers met with

extreme customer resistance. While many customers had initially paid the increases under protest

while seeking alternative sources ofsupply, Honeywell was quickly losing customers for its polymer

products due to the price increases and was being forced to give secret discounts and price

concessions for its polymer products to keep other customers - albeit at reduced revenue and much

less profitable levels;

(c) Honeywell's late 99 and early 00 price increases on customers of its

Performance Materials unit for nylon and polyester fiber were being rejected by most customers and

not "sticking" because Honeywell's polyester fiber business had mutated into a commodity business where Honeywell had lost the ability to raise prices on these products, even though its raw materials

costs were escalating, destroying the margins in this business; in fact, this business unit was performing so poorly that Honeywell was going to try to sell it off;

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(d) Because Honeywell's Performance Materials unit accounted for 16% of

Honeywell's overall revenues, the severe pricing problems with polymers and nylon and polyester fiber were having a material adverse impact on Honeywell's business and financial results which meant Honeywell would not achieve its 2ndQ 00, 3rdQ 00, 4thQ 00 or 00 EPS growth forecasts;

(e) In order to boost its results prior to being acquired by Honeywell, Pittway had artificially inflated its revenues and profits by creating millions of dollars of"sales" on commercially unreasonable terms and/or to uncreditworthy customers; as a result, Pittway had accumulated over

$200 million in past due and difficult to collect receivables which was adversely affecting

Honeywell's cash flow, resulting in cash flow well below the levels forecast, meaning that

Honeywell could not achieve its forecasted 00 free cash flow of $1.9 billion;

(f) By 2/00-3/00, Honeywell's Pittway acquisition was encountering substantial operational difficulties, due to integration and other problems - including the loss of key personnel and a sharp drop in sales growth, plus an upsurge in past due accounts receivable, resulting in

Pittway's revenues and profits being significantly below forecasted levels and the levels necessary to avoid dilution to Honeywell's 00 EPS;

(g) By 3/00, Honeywell's attempted integration of the Pittway acquisition into

Honeywell's Automation & Controls unit was encountering serious difficulties - several Pittway managers had left and Pittway's revenue growth rate had fallen sharply (by almost 50%). Thus,

Pittway's revenues and profits were significantly below forecasted levels, meaning the Pittway acquisition would be dilutive to Honeywell's EPS in 00, not neutral as represented, and Honeywell would not achieve the 00 revenue and EPS growth being forecast;

(h) Pittway's results from operations (as part of Honeywell's Automation &

Controls unit) were well below the levels internally forecast or budgeted and necessary for

Honeywell to achieve its 00 revenue and EPS growth forecasts due, in part, to three.large customers

(ADT, Protection One and Chubb) curtailing purchases and/or purchasing lower priced (and thus lower margin) components;

(i) Honeywell's Aerospace Solutions unit (37% of sales and Honeywell's most profitable business unit) was suffering from serious and persistent problems in obtaining a sufficient

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supply of conforming component parts - especially printed circuit cards or boards - from an outsourced supplier (EFTC) and "ECUs" (electronic control units) to meet demand from Boeing and other aircraft OEM customers; this was badly hurting Honeywell's results and since this problem could not be fixed before the 4thQ 00 at the earliest, this meant that Honeywell would not achieve the 00 EPS growth being forecast;

(j) Honeywell's Power & Transportation Products unit (14% ofHoneywell's total revenues) was performing below expectations due to (i) weak sales of friction materials; (ii) serious component parts shortages for Honeywell's important new Turbocharger products due to supplier production shortfalls; and (iii) sharply lower heavy truck builds (especially in Europe); as a result of these problems, the ramp-up of Honeywell's new Turbocharger product was being delayed,

Honeywell was losing $80-$100 million on this operation and Honeywell's results from operations. were being adversely affected;

(k) Honeywell's high-volume generic drug business, called Specialty Chemicals, was performing very poorly and had lost its competitive position (especially for its Naproxin drug), a situation causing $40-$60 million in losses - losses so serious that Honeywell either had to abandon or sell this business;

(1) Honeywell's semiconductor circuit board interface project (ASTI technology), including its pilot manufacturing operation for chip packaging, had failed; the pilot plant operation could not produce commercial yields which was adversely affecting Honeywell's cash flow, causing

$40-$60 million in losses and would require selling or abandoning the project, resulting in a $100 million write-off;

(m) In order to artificially boost its 1 stQ 00 revenues and EPS, Honeywell (and

Pittway) had sold hundreds of millions of dollars of products on special, unusual terms - including extended payment. terms. As a result, Honeywell had accumulated over $400 million in past due receivables (mostly in its Home and Building Control business), which was adversely impacting

Honeywell's 00 cash flow and would contribute to Honeywell's 00 cash flow being $500 million less than forecast, i.e., $1.4 billion, not the S1.9 billion forecast;

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(n) The Allied/Honeywell merger integration was not going nearly as well as represented due, in part, to incompatibility of the financial and accounting systems and controls of the two companies. Honeywell was encountering persistent problems in combining the operations of the merged entities and obtaining accurate financial information necessary to accurately forecast

Honeywell's future operations, resulting in increased costs, not the merger savings forecast;

(o) The Allied/Honeywell merger integration was not going well or succeeding, and, in fact, due to serious problems with the merger process and problems integrating and combining the operations of "old" Honeywell and Allied, the "new" Honeywell was not only not achieving the merger synergies and savings forecast, but rather, was encountering significant problems in combining the operations of the merged entities, resulting in increased costs;

(p) The Allied/Honeywell merger was not succeeding as represented because, in connection with the merger, huge reductions in workforce had occurred and many key sales employees were laid off; as a result, Honeywell was losing significant orders from customers, as the customers were nervous about signing contracts with Honeywell because of the massive shake-up in personnel and chaos created by the merger. For example, Honeywell's Industrial and Automation

Controls segment lost between $200-$500 million in revenue from customers that decided not to purchase from Honeywell because of the personnel shake-up and merger chaos. This issue was constantly communicated to Honeywell's top executives, especially defendant Ferrari. In 5100 or

6/00, Weyerhauser Company chose ABB (a competitor ofHoneywell's) over Honeywell's Industrial and Automation Controls unit because of the merger chaos and particularly the personnel changes cause by Honeywell's massive lay-offs, causing Honeywell to lose $8 million in annual revenue.

(q) Because its use of "pooling" accounting in the Allied/"old" Honeywell merger prohibited the "new" Honeywell from selling off any significant business unit, Honeywell was stuck with four money-losing or very poorly performing businesses (polymers, chip packaging, pharmaceuticals/specialty chemicals and friction materials), which were adversely impacting

Honeywell's results from operations, but which Honeywell could not sell off due to the pooling accounting restrictions arising from the Allied/Honeywell merger. As a result of the ongoing

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adverse impact of these operations, Honeywell would not achieve the 00 revenues, EPS and cash

flows forecast;

(r) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, and also because Honeywell's Industrial and Automation Controls segment

was experiencing a material revenue shortfall in 2ndQ 00 caused by defective HPM boards delivered by a board supplier named Wong, Honeywell and the Individual Defendants each knew that the

forecasts of "at least" 20% 00 EPS growth followed by 01 EPS growth of "at least" 17%, followed by 02 EPS growth of 15%+, resulting in "at least" compounded 18% EPS growth over 00-02 were

false when made as they could not and would not be achieved; and

(s) As a result of the foregoing adverse conditions which were impacting

Honeywell's business, Honeywell and the Individual Defendants each . knew that the forecasts of

2ndQ 00, 3rdQ 00 and 4thQ 00, as well as 00 EPS of $.77-$.78, $. 83-$.88 , $.97-$1.02 and $3.20-

$3.30, respectively, $1.9 billion in 00 free cash flow and 01 and 02 EPS of $3. 75-$3.95 and $4.40±, respectively, were false when made as they could not and would not be achieved.

103. On Monday, 6/19/00, Honeywell shocked analysts and public investors when it revealed that it would miss its 2ndQ 00 EPS forecasts due to component parts shortages for its

Aerospace operations, which hurt revenues, and the adverse impact of rising oil prices and interest rates on its other operations. However, analysts and sophisticated investors immediately realized that macro-economic events like rising oil prices and interest rates were not adversely affecting other similar large conglomerate companies and that commercial airplane parts shortages were not widespread. They thus concluded that something far more serious must be wrong with Honeywell than had been disclosed. This view was furthered when Honeywell refused to provide any more detailed information to analysts and large Honeywell shareholders as to the reasons for Honeywell missing its 2ndQ 00 EPS forecasts, stating that no more detailed information would be forthcoming until a 7/10/00 analysts' conference. As a result of the 6/19/00 revelations, analysts and investors were furious with Bonsignore and his fellow top executives for having lied to them while they were unloading their own Honeywell stock. As a result, analysts slashed their 00-02 growth forecasts for

Honeywell and lowered their ratings on the stock. At the same time, investors savaged Honeywell

-go- Case 2:00-cv-03605-DRD-SDW Document 53-3 Filed 01/31/2001 Page 11 of 28

stock. Honeywell's stock, which had already declined from $59-118 on 6/2/00 to $48-33/64 on

Friday, 6/16/00, collapsed to $38 on 6/19/00,$35-1/8 on 6120/00 and $34-1/4 on 6/23100 on volume exceeding 20 million shares on some days. Honeywell's stock price, which had already fallen from a high of $59-1/8 on 6/2/00 to as low as $48-112 on 6/16/00, as there was selective disclosure and leaks of trouble at Honeywell, utterly collapsed on the revelations of 6/19/00, as shown below:

DATE VOLUME HIGH LOW CLOSE 6/16/00 2,866,000 $50-15/16 $48-1/2 $48-33164 6/19/00 20,690,000 $48-3/4 $38 $40-112 6/20/00 24,850,000 $37-314 $35-1/8 $36. 6/21/00 13,098,000 $37 $35-114 $37 6/22/00 15,809,000 $37-112 $34-1/2 $35 6/23/00 8,218,000 $35-7/16 $34-1/4 $34-11/16

Between 6/2/00 and 6/23/00, Honeywell lost $16.87 billion in market capitalization as this adverse information was leaked and selectively disclosed into the market and was finally publicly revealed.

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Honeywell International, Inc. June 1, 1999 - July 12, 2000 Daily Share Prices

70

60

4P a 50 I-m a

40

30 06101199 07/28199 09123199 11118199 01118100 03115/00 05111100 07/10/00 06/29/99 08125/99 10121/99 12/17199 02/15/00 04/12/00 06/09100

104. Honeywell later revealed that internal revenue growth was a negative 1 % in the 2ndQ

00 and that Honeywell hadfired the executives in charge ofits four business units and would lay off an additional 5,000 Honeywell employees (on top of the 11,000 Honeywell employees already let go). Honeywell took steps to close or sell its chip packaging manufacturing operation, its generic pharmaceuticals (Specialty Chemicals) business, its polymers business and its friction materials business, but later discontinued such efforts only after General Electric agreed to purchase the entire

Company. Honeywell has admitted it is burdened with $400 million in past due receivables and that its 00 cash flow was $500 million less than promised. Instead of 00 EPS growth of " at least"

20% to $3.25+, followed by 01 EPS growth of "at least" 17%, Honeywell's 00 EPS growth was just

6% and the Company refuses to offer any guidance for 01 EPS. Gone forever is any forecast of 18% compounded EPS growth over the next few years.

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105. Analysts and investors were surprised and furious over this turn of events. Analysts complained that they had been misled by Honeywell's top executives who now had a severe

"credibility problem" with analysts on Wall Street:

• On 6/19/00, Dow Jones News Service reported:

The company 's announcement caught most investors as well as analysts by surprise. Less than two weeks ago analysts were praising Honeywell's fundamentals and saying the company was on track to report on -target earnings.

• On 6/20/00, The Wall Street Journal reported:

Honeywell International Inc. shocked Wall Street with an announcement that second-quarter earnings would trail analysts' estimates, raising anew questions about management execution at the merged company.

The warning was a surprise....

"A week and a halfago, they seemed to suggest things werefine," said Art Barry, a portfolio manager at Federated Investors ....

• On 6/20/00, Bloomberg reported:

The warning from the biggest maker of automated controls came just two weeks after ChiefExecutive MichaelBonsignore told investors at a conference thatprofit would meetforecasts.

• On 6/20100, Dow Jones News Service reported:

Industrial companies such as Emerson Electric Co. (EMR) and United Technologies Inc. (UTX) aren't seeing the parts shortage problems that caused Honeywell International Inc. (HON) to lower its second-quarter earnings forecast, according to analysts.

"It's a Honeywell-specific issue," said Brian K. Langenberg, who covers .Honeywell for Credit Suisse First Boston Corp.

Whatparticularly hurt Honeywell's stock was... thefact that less than two weeks ago the company said that there weren't any problems with the second quarter.

On 6/21/00, The Star-Ledger Newark reported:

Shares ofHoneywell International Inc. were under siege for a second straight day as analysts downgraded the company's outlook because of a profit warning ... [and] as investors questioned Chief Executive Michael Bonsignore's leadership and credibility with Wall Street.

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Honeywell has yet to realize the savings expected from its combination with AlliedSignal last year.

106. Honeywell investors condemned the duplicity ofHoneywell' s top executives as those executives were issuing false representations and forecasts about the Company at the very time those top insiders were unloading millions of dollars worth of their own stock. It is now apparent that the

Atlied/Honeywell merger was problem-ridden and was not quickly yielding operational synergies and millions in cost savings, that the "new" Honeywell's business is not nearly as strong as represented and its prospects are not nearly as strong for EPS growth going forward as forecast by defendants throughout the Class Period. Set forth below are comments of large Honeywell shareholders and analysts that followed Honeywell:

• "The market has very little tolerancefor CEOs and CFOs who say one thing and then itgoes the other way," said Alan Day, who helps oversee $8 billion at Stratevest Group.... "You have every right to be a little upset."

• The warning ... comes just two weeks after Chief Executive Michael Bonsignore told investors at a conference that profit would meet forecasts, said Michael Donnelly, a portfolio manager at Federated Investors.

fThej warning is "a huge credibility shock," Federated's Donnelly said

• [S]aid Thomas Hudson, manager of the Lord Abbett Affiliated Fund .... "There were no hints there was anything going on there. It's always a little disquieting."

• "This is very disappointing," said Bob Spremulli, an analyst at TIAA- CREF .... "It would be nice to have a complete discussion ofthefacts for the investment community."

• "This came out ofnowhere," said Robert Friedman, analyst for the S&P Equity Research ....

"I think they will sufferfrom some credibility problems."

• With Sudden Shortfall in 2Q00, Credibility Is In Short Supply ....

Management 's credibility is now "under fire" in a major way

• MANAGEMENT CREDIBILITY HAS BEEN INJURED ....

As evidenced by the precipitous decline in the common stock, the rapid reversal of management 's opinion on the quarter caught the market by surprise. - PaineWebber

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• "It's all a matter ofmanagement credibility ," said Allen Ashcroft of Allied Investment Advisors ....

"The bottom line is that people have lost a lot of confidence in management."

A lot of people are very upset and want to see a management change," said Stewart Kalter, an analyst ....

"I think it was the shock of the announcement that caused the damage," says Merrill Lynch analyst Phua Young. "It was a complete surprise to everyone."

Credibility - How Long Will It Take To Get It Back?

Now comes the tough part- the credibility issue.... [Tjhe people are in the streets with pitchforks and a guillotine.

How can management re-gain credibility amid calls for human sacrifices from the investment community? - Credit Suisse First Boston

107. Subsequently, Bonsignore admitted in conversations with analysts and investors at

Honeywell's 7/10/00 investors conference that:

Honeywell 's entire management team is painfully aware that it has a credibility gap to overcome. Bonsignore would be thefirst to admit that Honeywell did not react as quickly as a fully integrated company might have to compensate for Honeywell 's delayed and lost revenue or income disappointments.

Honeywell's 2ndQ 00 cashflow was $339 million downfrom $513 million in 2ndQ 99. This shortfall was driven primarily by poor performance in working capital turnover, particularly receivables. Honeywell had accumulated $400 million in past due receivables

In polymers Honeywell had encountered significant volume erosion, more than offsetting theprice increases that Honeywell announced. Honeywell was not able to achieve its attempted price increases in its nylon and polyester business. The absence ofpricing power in these businesses was striking at a time when raw material prices moved higher to record levels . Honeywell had seen a commoditization of polyester over the last few years, at the same time the raw materials trended upward. This business would be disposed of.

Honeywell's pharmaceuticals business fell considerably short of expectations. Honeywell had invested heavily here, but lost a lot ofmoney on some high-volume generic drugs which were being displaced by competition . This business would be disposed of

Over the last three years, Honeywell had attempted to create proprietary technologies relating to the interface between the semiconductor and the circuit board. This investment did notyield sufficient returns due toHoneywell's inability

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to achieve commercialyields ofthisproduct Honeywell had to close its large-scale pilot manufacturing operation for chippackaging, taking a$] oft million pre-lax write-off.

• In automation and control, Honeywell 's 2ndQ 00 revenue was lower than expected Honeywell's newly acquiredfire and security unit 's (Pittway) revenue growth declinedfrom low double-digits in thefirst quarter to mid-single digits in the second quarter. The slowdown resulted from several Pittway customers, like ADT and Protection One, repricing the low-end of the security market in anticipation ofhigher installation costs and attrition rates. Honeywell had hoped Pittway would be non-dilutive for the year, but it was dilutive in the first half of 00.

• In aerospace, Honeywell's revenue contracted by 3% during the 2ndQ 00. Honeywell had less revenue growth than forecast, primarily due to a problem with a supplier in Honeywell's Aerospace Electronics Systems business. Honeywell made a decision a year earlier to out-source itsprin ted circuit card to a vendor, the vendor was unable to meet Honeywell 's commitments in the 2ndQ 00 and the resulting parts shortages impacted Honeywell's ability to make these shipments.

• Honeywell missed itsforecastfor the 2ndQ 00 not because ofone or twoproblems, but due to disappointments in several ofHoneywell's segments.

• The complexity ofsimultaneously achieving ambitiousfinancialgoals, integrating two very large and complex companies and dealing with performance shortfalls with several of Honeywell's business units left Honeywell with no margin for error. This situation was a combination of overly aggressive objectives and a confluence offactors working against Honeywell simultaneously.

HONEYWELL'S FALSE FINANCIAL STATEMENTS

108. Honeywell's financial statements and related disclosures for its 4thQ 99, year end 99 and lstQ 00 were materially false and misleading due to defendants' improper revenue and cost recognition and defendants' manipulation of restructuring reserves, causing Honeywell's financial results and related disclosures to be presented in violation of Generally Accepted Accounting

Principles ("GAAP") and SEC rules. Honeywell's financial statements for its 1st Q 00 were also materially false and misleading due to defendants' failure to accurately and fully disclose the fact that

Honeywell's price increases in the 4thQ 99 and 1 stQ 00, which increased its 1 stQ 00 results, were not being accepted by customers and would lead to decreased sales in future quarters and would cause its lstQ 00 operating income to be materially higher than it would have otherwise been.

Moreover, defendants failed to disclose at the end of Honeywell's I stQ 00 that, its receivables included $400 million of overdue receivables which would have a negative impact on cash flows in future quarters as the receivables had to be discounted and/or written off. As a result, Honeywell's operating results were materially overstated and were not indicative of Honeywell's underlying

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business nor ofthe business trends investors could expect based on those results, causing the results and related disclosures to be presented in violation of GAAP and SEC rules.

109. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practices at a particular time. Regulation S-X (17 C.F.R. §210.4-01 (a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate.

Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

Honeywell' s Improper Revenue and Cost Recognition

110. During the Class Period, Honeywell engaged in a pervasive and ongoing scheme to inflate the Company's reported revenues and earnings through Honeywell's Home and Building

Control business segment. The Home and Building Control segment is part of Honeywell's

Automation & Control business unit which contributed 25% of Honeywell's 99 revenues and 23% of 99's profits. Honeywell used several methods to inflate revenue including: (1) pre-billing jobs - Honeywell billed customers for work on contracts which had not yet been performed and recorded the amount of the bill as revenue; (2) abusing the "percentage of completion" method of accounting by prematurely accruing revenue on long term contracts based on work which Honeywell had not yet performed; and (3) recording revenue on non-existent jobs, including recording revenue on contracts Honeywell hoped to get (but which had not been signed and which, in most cases, were never signed) or simply creating revenue for completely fictitious clients.

111. Honeywell' s Home . and Building Control segment also improperly understated its costs to inflate the Company's earnings. This manipulation took several forms, including:

(1) holding back costs - holding invoices from subcontractors and suppliers Honeywell owed money to and not paying them while also not accruing or recording the payables in its accounting records - resulting in an understatement of costs and overstatement of earnings; and (2) shifting current period costs from "sales" jobs to unrelated "lease" jobs, which costs were then amortized over five to ten years to reduce current period expenses.

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112. GAAP, as set forth in AICPA Statement ofPosition ("SOP") No. 81-1, describes the requirements for accruing revenue under the "percentage of completion" method, which Honeywell represented that it used.' According to Accounting Research Bulletin ("ARB") No. 45, "the percentage-of-completion method recognizes income as work on a contract progresses." ARB No.

45, ¶4. According to SOP No. 81-1.68:

Contract costs must be identified, estimated, and accumulated with a reasonable degree of accuracy in determining income earned. At any time during the life of the contract, total estimated contract costs consists of two components: costs incurred to date and estimated cost to complete the contract. A company should be able to determine costs incurred on a contract with a relatively high degree of precision, depending on the adequacy and effectiveness of its cost accounting system.

113. Contrary to GAAP, as set forth in SOP No. 81-1 and ARB No. 45, Honeywell recognized revenue under the percentage ofcompletion method not based on the costs it had incurred on contracts, but based on the revenue and income it wished to report to the market. Honeywell's

Home and Building Control segment artificially inflated its revenue by prematurely accruing more revenue than it should have on certain large jobs, including Office Depot, which was an abuse of the

"percentage of completion" method of accruing revenue under GAAP. For example, Honeywell accrued between 25%-100% of the revenue on jobs even though it had not performed any work yet and had not incurred any costs. This manipulation also included prematurely recording revenue at the time Honeywell ordered equipment for a job even though the equipment had not yet been received by Honeywell, Honeywell had not paid for it and the job had not even been started.

114. Honeywell's Home and Building Control segment also created phony revenue by billing customers for work which had not been performed, booking the amount ofthe bill as revenue at the time the bill was sent. When some customers became upset with the fact that they had received bills for work that had not been performed, Honeywell changed the address of where the bills were sent. Honeywell addressed the bills to itself so that the bills could be mailed, the revenue booked, and the bills were received at Honeywell offices so that customers would not receive the

7 According to Honeywell's 1999 Form 10-K, "Sales under long-term contracts in the Aerospace Solutions and Automation & Asset Management [including the Home and Building Control] segments are recorded on a percentage-of-completion method measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts."

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bills and then complain about work that was not done. Contrary to GAAP, as set forth in ARB No.

45 and SOP No. 81-1, the revenue was not recognized as work was performed, but rather only

through the mailing of phony bills.

115. Honeywell's Home and Building Control segment also often recorded revenue orsj obs

that simply did not exist, in violation of GAAP. Honeywell booked revenue for contracts that it was

hoping to get (but which it had not and, in most cases , would never get). In addition, Honeywell

simply created revenue for completely fictitious clients . For example , in the IstQ 00, Home and

Building Control Districts within the southeastern part of the United States recorded hundreds of

thousands of dollars of revenue for phony customers for which no contracts had been executed and

for which no work was ever performed. In the District which contained Dallas, Texas, the same

manipulations occurred . After the Class Period it was necessary to reverse the revenue.

116. Honeywell' s Home and Building Control segment also manipulated costs and

expenses. In order to hold down costs on the jobs it performed, Honeywell held invoices from

subcontractors and suppliers it owed money to, and did not pay the bills for extended periods of

time. At the same time, the costs were not accrued or recorded in the accounting records, in

violation of GAAP as set forth in FASB Statement No. 5, thereby artificially inflating earnings and

net profit. Honeywell held and did not pay many bills that were due so that it was placed on "credit

hold" with at least 20 vendors it did business with, i.e., the vendors would not allow Honeywell to

buy any further goods or services on credit. These vendors included Detection Systems, Radionics,

Sentrol, Gyra, Ultrak, Altronix, Phillips Burle, Graybar, ]BL and Hoover.

117. The largest cost manipulation abuses involved the Home and Building Control

segment's shifting of "sales" job costs to unrelated "lease" jobs. The Home and Building Control

segment essentially had two types of jobs - sales and lease jobs. On sales jobs, the customer purchased the product and Honeywell would immediately realize and record all costs (labor and materials) associated with the sale. With lease jobs, however, the customer did not purchase the product, but rather leased it. When a lease job occurred, Honeywell would not immediately realize and book all costs associated with the transaction as it did with sales jobs, but rather amortized the costs (labor and material) over five to ten years. In order to manipulate current period costs

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downward, Honeywell took those current period costs and expenses associated with "sales" jobs and shifted such costs to unrelated lease jobs. The effect of this activity was to greatly and artificially reduce current expenses and improve earnings, since by moving the current costs and expenses to lease jobs, they were then capitalized and amortized over five to ten year periods of time. For example, with lease jobs, equipment expenses were amortized over ten years and labor was amortized over five years. Had such expenses been properly allocated to the sales jobs to which they belonged, the entire amount of the equipment and labor would have been a current expense, greatly reducing Honeywell's profitability. This manipulation occurred in numerous Honeywell Home and

Building Control offices throughout the nation. For example, it occurred in Seattle, Denver, San

Jose, Houston, Pittsburgh, Ann Arbor, Long Island, Philadelphia, Atlanta, Memphis, Fort

Lauderdale, and Baton Rouge, as well as in other offices. Millions of dollars in current period costs were improperly shifted to lease jobs and amortized over five to ten years. For example, in one

District in the southeast, at least $400-500 thousand in artificial profit was created in j ust two months during 1st Q 00 by shifting sales job costs to lease jobs, and at least $1 million in artificial profit was created in another District in the southeast. Similar abuses occurred in the District that covered

Dallas, Texas.

118. Honeywell's Building and Control segment also had an expense account called

"burden." This account accumulated all current expenses that were not directly allocable to any specific jobs and were considered part of the general administrative expenses. Nonetheless, burden expenses were routinely and improperly allocated to lease jobs so that such current expenses could be capitalized and amortized over five or ten years, thereby inflating earnings and reducing current period expenses.

119. The revenue manipulations and cost shenanigans alleged herein were widespread and rampant throughout the Home and Building Controls segment, affecting all or nearly all Districts throughout the nation. Accountants employed in Corporate Audit at Honeywell's New Jersey headquarters, and financial analysts employed at Honeywell's Minneapolis offices openly admitted this to other Honeywell employees. Top management ofHoneywell was well aware ofand accepted

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the fact that these manipulations were the only way that the Home and Building segment could meet

the unrealistic financial forecasts they imposed on it.

120. These financial manipulations occurred because top Honeywell executives were under.

extreme pressure to meet overly aggressive earnings projections they had made to Wall Street. At the end of 99, Honeywell corporate dictated to each business segment a number representing the profit that segment was expected to achieve in 00. There was no inquiry from corporate about whether the number was realistic or attainable. Rather, the segment was told by management that it was required to achieve that profit number regardless of whether it was attainable.

Improper Manipulation of Reserves

121. In connection with the Allied/Honeywell merger, Bonsignore, Ferrari and Waliman knew that Honeywell would have to establish financial reserves for several items, including severance costs, impaired assets, exit costs and merger fees and expenses. Because substantial reserves are always established in connection with large mergers like the Allied/Honeywell merger and are thus anticipated by analysts and the investment community, Bonsignore and his management team knew they could establish a very large merger reserve without adversely impacting Honeywell's stock price. In order to take advantage of this situation and create a large reserve or cushion to use to artificially boost the "new" Honeywell's results, Bonsignore and his top executives intentionally established an excessive and unnecessarily large merger reserve of $960+ million. Bonsignore and his management did this because they knew they would be under pressure to produce strong, high- quality financial results in early 00 and if they could not do so based on Honeywell's actual business operations, they could secretly reverse portions of these excessive merger reserves, which would go straight to the "new" Honeywell's bottom line and enable Honeywell to report results that exceeded expectations and appeared to be of high quality, notwithstanding the actual poor performance of

Honeywell's business and the problems with the merger. Moreover, defendants knew that any excess write-down of "impaired assets" included in the restructuring charge would automatically flow through to Honeywell's operating profit as inventory and fixed assets would have a lower basis.

122. After the adverse reaction of analysts and the investment community to the poor quality of Honeywell's 4thQ 99 results announced on 1/19/00, Bonsignore and his top management

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team knew that it was imperative that Honeywell report 1 stQ 00 results in line with the expectations their forecasts had created among analysts and investors and that the earnings appear to be of high quality, having been generated by the strength ofHoneywell's business operations and the successful integration of Allied and "old" Honeywell post-merger.

123. However, as Honeywell's 1 stQ 00 unfolded, internally Honeywell's top executives realized that things were not going as they had hoped. The post-merger integration of Allied and

"old" Honeywell was not proceeding smoothly. A lack of success in integrating the incompatible reporting and control systems ofthe two companies was resulting in significant delays in generating the type ofaccurate financial data necessary to properly monitor Honeywell's various business units and accurately forecast its results going forward, Secondly, cultural differences among and territorial squabbling between former Allied and "old" Honeywell personnel was creating conflicts and operational problems in several areas of the "new" Honeywell business. And, because of the difficulties with the merger integration, instead of achieving Operational synergies and cost savings, the "new" Honeywell was actually encountering increasing costs which would continue at least for the near term. Third, the decision by Honeywell to outsource production of circuit board products for its Aerospace division to a company named EFTC turned into a debacle with EFTC unable to timely produce the required quantities ofconforming circuit boards necessary for Honeywell to meet its shipment obligations to Boeing and other customers, which created serious customer difficulties and delays in receipt of needed revenues. Fourth, price increases imposed by Honeywell on customers of its Performance Materials division were met with intense customer protests and resistance, the loss of some customers who refused to accept the price increases and the necessity for Honeywell to give secret price discounts or concessions to keep other customers. Fifth,

Honeywell's Power & Transportation division was performing below plan due to poor Turbocharger sales, especially in Europe. Sixth, Honeywell's Automation & Asset Management business was encountering soft, below plan sales. Also, the Pittway acquisition was troubled and due to integration difficulties was encountering revenues and earnings significantly below forecasted levels.

As a result of the foregoing, Honeywell's top executives knew that unless some drastic action was

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taken, Honeywell would fall short of its forecasted 1 stQ 00 results, which would have a catastrophic

impact on its now recovering stock price.

124. In order to manipulate upward and artificially inflate Honeywell's 1 stQ 00 financial

results, defendants reversed millions of dollars of the $960+ million in reserves established in

connection with the merger in the 4thQ 99. This reversal flowed directly to Honeywell's 1 stQ 00

bottom line and boosted its EPS to help meet forecasted levels. Honeywell's top executives had

knowingly established excessive reserves at the time of the Allied/Honeywell merger during the

4thQ 99 in order to have a reservoir to draw down on in the event they encountered an earnings

shortfall during 00. Moreover, by including excessive asset impairment charges in the restructuring,

Honeywell's cost basis in its inventory and fixed assets was artificially deflated and caused

Honeywell's gross margins and operating income to be artificially inflated in the 1 stQ 00. By not

disclosing this reserve reversal or draw-down, Honeywell's top executives not only manipulated its

1 stQ 00 results upward, but also concealed that its 1 stQ 00 results were the result of financial

manipulation, not merger successes and the strength of Honeywell's underlying business. As the

SEC has noted, it is inappropriate and a violation of GAAP to accrue an excess restructuring charge

to benefit future earnings. In a 12/22/99 letter to the AICPA, Lynn Turner, Chief Accountant of the

SEC wrote:

As further discussed in the above AAERs, as well as in SAB 100, restructuring charges and other loss accruals must be supported under GAAP at the time established. Such liabilities should be analyzed at each balance sheet date and adjusted as required by GAAP. Any need to adjust the accrued liabilities should be completed on a timely basis and should be adjusted against only the financial statement line item through which the accrued liabilities were originally recorded. Amortizing immaterial amounts of the accrued liabilities into income after concluding that no basis exists for ongoing accrual, rather than reversing the entire accrual, would be indicative of inappropriate earnings management. Similarly, maintaining an unsupported restructuring liability or other loss accrual and offsetting or reducing it in a later period for a change in an unrelated item would be inappropriate and not in conformity with GAAP.

Honeywell's Inadequate Disclosures Regarding Its Financial Results

125. In order to cover up problems with Honeywell's Performance Materials unit and thus

boost Honeywell's 1 stQ 00 revenues and EPS, Honeywell had imposed price increases on polymer, nylon and polyester fiber customers of its Performance Materials unit which Honeywell knew were

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unsustainable, but would temporarily boost Honeywell's revenue. Honeywell's price increases had met with extreme customer resistance. Honeywell's price increases on customers ofits Performance

Materials unit for nylon and polyester fiber were being rejected and not sticking, as Honeywell's polyester fiber business had mutated into a pure commodity business where Honeywell had lost the ability to raise prices on the product, even though its raw materials costs were escalating, destroying the margins on this business. Honeywell. was losing customers for its polymer products due to the price increases and was being forced to give secret discounts and price concessions for its polymer products to keep other customers for its polymer products -- at reduced revenue levels. Defendants knew that this made Honeywell's lstQ 00 results not indicative of the true performance of its business or its 00 EPS prospects, and would result in the loss of business and revenues in this important business unit (16% of sales) after the 1 stQ 00, meaning Honeywell would not achieve the

00 results being ,forecast by and for it.

126. The SEC requires that, as to annual and interim financial statements filed with the

SEC, registrants include a management's discussion and analysis section which provides information with respect to the results of operations and "also shall provide such other information that the registrant believes to be necessary to an understanding of its financial condition, changes in financial

condition and results ofoperations ." See Regulation S -K 17 C.F.R. §229.303. Regulation S-K states that as to annual results this management's discussion and analysis section shall-

(1) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount ofreported income from continuing operations and, in each case, indicate the extent to which income was so affected. In addition, describe any other significant components of revenues or expenses that, in the registrant's judgment, should be described in order to understand the registrant's results of operations.

(ii) Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

17 C.F.R. §229.303(a)(3).

127. As to interim financial statements the discussion shall include the following:

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4. The registrant's discussion ofmaterial changes in results ofoperations shall identify any significant elements of the registrant's income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant' s ongoing business.

Instructions to Paragraph (b) of Item 303.

128. GAAP, as set forth in FASB Statement of Concepts No. 1,1¶34 and 42, states that:

34. Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.

42. Financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' and creditors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

129. - For this reason, financial reporting includes not only financial statements, but also

other means of communicating information that relates directly or indirectly to the information in

the financial statements . See FASB Statement of Concepts No. 1, ¶7.

STATUTORY SAFE HARBOR

130. The statutory safe harbor provided for forward- looking statements ("FLS") does not

apply to the false FLS pleaded. None of the specific oral FLS were identified as "forward-looking

statements" when made, it was not stated that actual results "could differ materially from those

projected," nor did meaningful cautionary statements identifying important factors that could cause

actual results to differ materially from those in the FLS accompany those FLS. The defendants are

liable for the false FLS pleaded because, at the time each FLS was made, the speaker knew the FLS

was false and the FLS was authorized and/or approved by an executive officer of Honeywell who knew that the FLS was false. None of the historic or present-tense statements made by defendants were assumptions underlying or relating to any plan, projection or statement of future economic

performance, as they were not stated to be such assumptions underlying or relating to any projection

or statement of future economic performance when made, nor were any of the projections or

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forecasts made by defendants expressly related to or stated to be dependent on those historic or present- tense statements when made.

CLASS ACTION ALLEGATIONS

131. This is a class action on behalf of purchasers of Honeywell stock between 12/20/99 and 6/19/00, excluding defendants (the "Class"). Class members are so numerous that joinder of them is impracticable.

132. Common questions of law and fact predominate and include whether defendants: (i) violated the 1934 Act; (ii) omitted and/or misrepresented material facts ; (iii) knew or recklessly disregarded that their statements were false ; (iv) artificially inflated Honeywell' s stock .price; and

(v) the extent of and appropriate measure of damages.

133. Plaintiffs claims are typical of those of the Class. Prosecution of individual actions would create a risk of inconsistent adjudications. Plaintiff will adequately protect the interests of the Class. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

CLAIM FOR RELIEF

134. Defendants violated §10(b) and Rule 10b-5 by:

(a) Employing devices, schemes and artifices to defraud;

(b) Making untrue statements ofmaterial facts and omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and

(c) Engaging in acts, practices and a course of business that operated as a fraud or deceit upon the Class in connection with their purchases of Honeywell stock.

135. Class members were damaged. In reliance on the integrity of the market, they paid artificially inflated prices for Honeywell stock.

136. The undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be

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disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

137. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of the market, they paid artificially inflated prices for Honeywell stock. Plaintiff and the Class would not have purchased Honeywell stock at the prices they paid, or at all, ifthey had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements.

PRAYER

WHEREFORE, plaintiff prays for judgment as follows: declaring this action to be a proper class action; awarding damages, including interest; and such other equitable/injunctive relief as the.

Court may deem proper.

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: January 31, 2001 COHN LIFLAND PEARLMAN HERRMANN & KNOPF PETE PEARLMAN

PETER S. PEARLMAN

Park 80 Plaza West One Saddlebrook, NJ 07663 Telephone: 201/845-9600

MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH ARTHUR C. LEAHY KATHLEEN A. HERKENHOFF DENISE M . DOUGLAS 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone : 619/231-1058

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MILBERG WEISS BERSHAD HYNES & LERACH LLP STEVEN G. SCHULMAN SAMUEL H. RUDMAN One Pennsylvania Plaza New York, NY 10119-0165 Telephone: 212/5945300

Attorneys for Plaintiff

N:1CAS£S\Honeywel NES80337.cpt

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