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     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1999
                                                     REGISTRATION NO. 333-
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
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                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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                           LENNOX INTERNATIONAL INC.
             (Exact name of Registrant as specified in its charter)
 
                                                          
           DELAWARE                          3585                         42-0991521
(State or other jurisdiction of  (Primary Industrial Standard          (I.R.S. Employer
incorporation or organization)    Classification Code Number)         Identification No.)
2100 LAKE PARK BLVD. RICHARDSON, TEXAS 75080 (972) 497-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------------- CARL E. EDWARDS, JR. EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY LENNOX INTERNATIONAL INC. 2100 LAKE PARK BLVD. RICHARDSON, TEXAS 75080 (972) 497-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: ANDREW M. BAKER ROBERT F. GRAY, JR. BAKER & BOTTS, L.L.P. FULBRIGHT & JAWORSKI L.L.P. 2001 ROSS AVENUE 1301 MCKINNEY, SUITE 5100 DALLAS, TEXAS 75201 HOUSTON, TEXAS 77010 (214) 953-6500 (713) 651-5151
--------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] - --------- --------------------- CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(2) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share(1)............... $10,000,000 $2,780 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) Estimated solely for the purpose of calculating the registration fee. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and one to be used in a concurrent offering outside the United States and Canada (the "International Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The Prospectuses are identical in all material respects except for the front cover page. The U.S. Prospectus is included herein and is followed by the alternate front cover page to be used in the International Prospectus. The alternate page for the International Prospectus included herein is labeled "Alternate Cover Page for International Prospectus." Final forms of each Prospectus will be filed with the Securities and Exchange Commission under Rule 424(b). 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued April 6, 1999 Shares [LENNOX INTERNATIONAL INC. LOGO] COMMON STOCK ------------------------ LENNOX INTERNATIONAL INC. IS OFFERING SHARES OF COMMON STOCK AND THE SELLING STOCKHOLDERS ARE OFFERING SHARES OF COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------ APPLICATION WILL BE MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "LII." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 9. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS LENNOX STOCKHOLDERS -------- ------------- ----------- ------------ Per Share................. $ $ $ $ Total..................... $ $ $ $
------------------------ The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Lennox International Inc. has granted the underwriters the right to purchase up to an additional shares of common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON WARBURG DILLON READ LLC , 1999 4 [LENNOX INTERNATIONAL INC. LOGO] CLIMATE CONTROL SOLUTIONS IN FOUR KEY BUSINESSES NORTH AMERICAN RESIDENTIAL [PHOTO DEPICTING PRODUCTS] [PHOTO DEPICTING PRODUCTS] COMMERCIAL AIR CONDITIONING [PHOTO DEPICTING PRODUCTS] COMMERCIAL REFRIGERATION HEAT TRANSFER [PHOTO DEPICTING PRODUCTS] [Graphics depicting timeline of various milestones throughout Lennox's history] [GRAPHIC] 1895 1904 Dave Lennox builds and markets the industry's first Lennox establishes a one-step distribution network, riveted-steel furnace. selling directly to installing contractors. [GRAPHIC] [GRAPHIC] 1923 1935 Lennox expands for the first time, building a warehouse Lennox pioneers the introduction of a forced-air furnace in Syracuse, New York. Two years later a factory is for residential heating. added. 1943 1952 Lennox retools its factories to support the World War II Lennox establishes operations in Canada. effort. [GRAPHIC] [GRAPHIC] Lennox expands its product line with the introduction of 1960 residential central air-conditioning systems. Lennox establishes an international division with a facility in Basingstoke, England and sales offices and warehouses in Holland and Germany. [GRAPHIC] 1964 1965 Lennox develops and manufactures the Duracurve heat Lennox introduces packaged multi-zone units for exchanger, reducing noise problems in gas furnaces. commercial heating and cooling. [GRAPHIC] [GRAPHIC] 1972 1973 "Dave Lennox" appears for the first time in a Lennox Lennox increases air conditioning efficiency with the advertising campaign. development of the two-speed hermetic compressor.
5 [LENNOX INTERNATIONAL INC. LOGO] HISTORY AND INNOVATIONS [Graphics depicting timeline of various milestones throughout Lennox's history] 1982 1984 Lennox develops and manufactures the industry's first Lennox International Inc. is established as the parent high-efficiency gas furnace. company for Lennox Industries Inc. and future acquisitions. [GRAPHIC] [HEATCRAFT LOGO] 1986 1988 Lennox International expands into the commercial Lennox International expands into two-step distribution refrigeration and heat transfer markets with the of residential heating and cooling equipment with the establishment of Heatcraft Inc. acquisition of Armstrong Air Conditioning Inc. [ARMSTRONG AIR CONDITIONING, INC. LOGO] Heatcraft implements a 48-hour coil replacement program for commercial air conditioning systems. [GRAPHIC] [LGL LOGO] 1994 1995 Lennox is the first to manufacture and market a complete Lennox Global Ltd. (LGL) is established to expand the combination high-efficiency residential space/water company's presence in worldwide commercial air heating system. conditioning, commercial refrigeration and heat transfer product markets. [GRAPHIC] [GRAPHIC] Lennox enters the hearth products market with the Lennox begins factory configure-to-order for commercial introduction of gas fireplaces. air conditioning with the introduction of the L series. [GRAPHIC] Heatcraft develops Floating Tube and Thermoflex technology, significantly reducing leaks in air-cooled condensers and unit coolers used for commercial refrigeration. [GRAPHIC] 1996 1997 Heatcraft introduces the Beacon Control System, LGL enters into joint venture agreements in Europe, Asia improving the accuracy and reliability of refrigeration and Latin America. system information and easing installation. [GRAPHIC] 1998 Lennox Industries begins to establish a retail distribution network offering full sales and service functions.
6 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 4 Risk Factors................................................ 9 Use of Proceeds............................................. 14 Dividend Policy............................................. 14 Capitalization.............................................. 15 Dilution.................................................... 16 Selected Financial and Other Data........................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 Business.................................................... 29 Management.................................................. 45 Principal and Selling Stockholders.......................... 59 Certain Relationships and Related Party Transactions........ 61 Description of Capital Stock................................ 61 Shares Eligible for Future Sale............................. 68 Certain Federal Income Tax Consequences for Non-U.S. Holders................................................... 69 Underwriters................................................ 71 Legal Matters............................................... 75 Experts..................................................... 75 Where You Can Find More Information......................... 75 Index to Financial Statements............................... F-1
--------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. We own or otherwise have rights to trademarks or trade names that we use in conjunction with the sale of our products. Lennox(R), Armstrong Air(TM), Bohn(R), Larkin(TM), Heatcraft(R), CompleteHeat(R), Climate Control(TM), Chandler Refrigeration(R), Advanced Distributor Products(R), Raised Lance(R), Air-Ease(R), Concord(R), Magic-Pak(R), Superior(TM), Marco(R), Whitfield(R), Security Chimneys(R), Alcair(TM), Friga-Bohn(TM) and Janka(R), among others, are trademarks that are owned by us. This prospectus also makes reference to trademarks of other companies. Until , 1999 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 3 7 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and our financial statements and notes appearing elsewhere in this prospectus. LENNOX We are a leading global provider of climate control solutions. We design, manufacture and market a broad range of products for the heating, ventilation, air conditioning and refrigeration markets, which is sometimes referred to as "HVACR." Our products are sold under well-established brand names including "Lennox", "Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. We are one of the largest manufacturers in North America of heat transfer products, such as evaporator coils and condenser coils. We have leveraged our expertise in heat transfer technology, which is critical to the efficient operation of any heating or cooling system, to become an industry leader known for our product innovation and the quality and reliability of our products. We have also become a leader in the growing market for hearth products, which includes pre-fabricated fireplaces and related products. Historically, we have sold our "Lennox" brand of residential heating and air conditioning products directly to a network of installing dealers, which currently numbers approximately 6,000, making us the largest wholesale distributor of these products in North America. We have recently initiated a program to acquire dealers in metropolitan areas in the U.S. and Canada so we can provide heating and air conditioning products and services directly to consumers. Our furnaces, heat pumps, air conditioners, pre-fabricated fireplaces and related products are available in a variety of designs, efficiency levels and price points that provide an extensive line of comfort systems. A majority of our sales of residential heating and air conditioning products in the U.S. and Canada are to the repair and replacement market, which is less cyclical than the new construction market. We also provide a range of air conditioning products for commercial market applications such as mid-size office buildings, restaurants, churches and schools. Our commercial refrigeration products are used primarily in cold storage applications for food preservation in supermarkets, convenience stores, restaurants, warehouses and distribution centers. Our heat transfer products are used by us in our HVACR products and sold to third parties. Shown below are our four business segments, the key products and brand names within each segment and 1998 net sales by segment. The North American residential segment also includes installation, maintenance and repair services performed by Lennox-owned dealers.
SEGMENT PRODUCTS BRAND NAMES 1998 NET SALES ------- -------- ----------- -------------- (IN MILLIONS) North American residential Furnaces, heat pumps, air Lennox, Armstrong Air, $1,013.7 conditioners, packaged Air-Ease, Concord, Magic-Pak, heating and cooling systems Advanced Distributor and related products; Products, Superior, Marco, pre-fabricated fireplaces, Whitfield and Security freestanding stoves, Chimneys fireplace inserts and accessories Commercial air conditioning Unitary air conditioning and Lennox, Alcair and Janka 392.1 applied systems Commercial refrigeration Chillers, condensing units, Bohn, Friga-Bohn, Larkin, 237.3 unit coolers, fluid coolers, Climate Control and Chandler air cooled condensers and air Refrigeration handlers Heat transfer Evaporator and condenser Heatcraft and Friga-Bohn 178.7 coils and equipment and tooling to manufacture coils -------- Total........................ $1,821.8 ========
4 8 We market our products using multiple brand names and distribute our products through multiple distribution channels to penetrate different segments of the HVACR market. Our "Lennox" brand of residential heating and air conditioning products is sold directly through installing dealers -- the "one-step" distribution system -- which has created strong and long-term relationships with our dealers in North America. Our "Armstrong Air", "Air-Ease", "Concord" and "Magic-Pak" residential heating and air conditioning brands are sold to regional distributors that in turn sell the products to installing contractors -- the "two-step" distribution system typically utilized in the heating and air conditioning industry. The acquisition of heating and air conditioning dealers in Canada and the planned acquisition of dealers in the U.S. allows us to participate in the retail sale and service of heating and air conditioning products. Our hearth products, commercial air conditioning products and refrigeration products are also sold under multiple brand names and through a combination of wholesalers, contractors, original equipment manufacturers, manufacturers' representatives and national accounts. From our beginning in 1895 until the mid-1980's, we focused primarily on the North American residential heating and air conditioning market. In the 1980's, we expanded our product offerings by acquiring several heat transfer and commercial refrigeration businesses. In the mid-1990's, we increased our international presence, product offerings and brand portfolio through acquisitions in Europe, Latin America and the Asia Pacific region. We recently expanded our product offerings to include hearth products through the acquisitions of four hearth products companies in the third quarter of 1998 and in the first quarter of 1999. As a result of these acquisitions, we are one of the largest manufacturers of hearth products in the U.S. and Canada, offering a broad line of products through a variety of distribution channels. COMPETITIVE STRENGTHS We have a combination of strengths that position us to continue to be a leading provider of climate control solutions, including: - strong brand recognition and reputation, particularly with the well recognized "Lennox" name; - one of the broadest distribution systems of any major HVACR manufacturer; - leading heat transfer design and manufacturing expertise; - commitment to product innovation and technological leadership; and - demonstrated manufacturing efficiency for our products. GROWTH STRATEGY Our growth strategy is designed to capitalize on our competitive strengths in order to expand our market share and profitability in the worldwide HVACR markets. We will continue to pursue internal programs and strategic acquisitions that broaden our product and service offerings, expand our market opportunities and enhance our technological expertise. The key elements of this strategy include: EXPAND MARKET IN NORTH AMERICA Our program to acquire heating and air conditioning dealers in the U.S. and Canada represents a new direction for the heating and air conditioning industry because, to our knowledge, no other major manufacturer has made a significant investment in retail distribution. This strategy will enable us to extend our distribution directly to the consumer, thereby permitting us to participate in the revenues and margins available at the retail level while strengthening and protecting our brand equity. We believe that the retail sales and service market represents a significant growth opportunity because this market is large and highly fragmented. The retail sales and service market in the U.S. is comprised of over 30,000 dealers. We started this program in September 1998, and as of March 31, 1999 we had acquired 37 dealers in Canada for an aggregate purchase price of approximately $55 million and had signed letters of intent to acquire nine additional Canadian dealers for an aggregate purchase price of approximately $9 million. We believe our long history of direct relationships 5 9 with our dealers through the one-step distribution system and the resulting knowledge of local markets will give us advantages in identifying and acquiring suitable candidates. We also intend to increase our market share in North America by: - strengthening our independent dealer network by providing dealers with enhanced services and support; - expanding the network of independent "Lennox" dealers; - promoting the cross-selling of our "Armstrong Air" brand of products and our hearth products to our "Lennox" dealers; - expanding the geographic market of the "Armstrong Air" brand of products from its traditional presence in the Northeast and Central U.S.; and - pursuing complementary acquisitions that expand our product offerings or geographic presence. EXPLOIT INTERNATIONAL OPPORTUNITIES Principally as a result of acquisitions in Europe, Latin America and Asia Pacific, our international sales have grown from $28.5 million in 1996 to $244.5 million in 1998. We will continue to focus on expanding our international operations through acquisitions and internal growth because we believe that increasing international demand for HVACR products presents substantial opportunities, especially in emerging markets and particularly for heat transfer and refrigeration products. INCREASE PRESENCE IN HEARTH PRODUCTS MARKET With our recent acquisitions of hearth products companies, we now manufacture and sell one of the broadest lines of hearth products in North America. We believe that we can increase our penetration of this market by selling in the distribution channels we acquired and through our historical distribution channels. CONTINUE PRODUCT INNOVATION An important part of our growth strategy is to continue to invest in research and new product development. We have designated certain of our facilities as "centers for excellence" that are responsible for the research and development of the core competencies vital to our success. Technological advances are disseminated from these "centers for excellence" to all of our operating divisions. This commitment to research and development has resulted in recent product innovations such as the CompleteHeat, a high efficiency combination hot water heater and furnace, and the Beacon control system, an integrated electronic control system for commercial refrigeration applications. --------------------- We are located at 2100 Lake Park Blvd., Richardson, Texas 75080 and our telephone number is (972) 497-5000. 6 10 THE OFFERING Common stock offered by: Lennox................... shares Selling stockholders..... ____ shares Total............ shares Common stock offered in: U.S. offering............ shares International offering... ____ shares Total............ shares Common stock to be outstanding after this offering................. shares Use of proceeds............ We will receive approximately $ million in net proceeds from the offering. The net proceeds will be used to repay amounts borrowed under our revolving credit facility and term credit agreement, to fund the purchase of additional dealers and for general corporate purposes. We will not receive any proceeds from the sale of the shares of common stock offered by the selling stockholders. Proposed NYSE symbol....... LII All information in this prospectus relating to the number of shares of our common stock or options has been adjusted to reflect a -for-one stock split of our common stock which occurred on , 1999. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to shares of common stock which the underwriters have the option to purchase solely to cover over-allotments. If the underwriters exercise their over-allotment option in full, shares of common stock will be outstanding after the offering. The number of shares of our common stock to be outstanding immediately after the offering does not take into account shares of our common stock that will be issuable upon the exercise of stock options, substantially all of which were awarded under our stock option plans. For more information on our stock option plans, see "Management -- 1998 Incentive Plan." 7 11 SUMMARY FINANCIAL AND OTHER DATA The following summary financial and other data for each of the years ended December 31, 1996, 1997 and 1998 have been derived from our audited financial statements included elsewhere in this prospectus. Effective September 30, 1997 we increased our ownership of Ets. Brancher S.A., our European joint venture, from 50% to 70% and, accordingly, changed our accounting method of recognizing this investment from the equity method to the consolidation method. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus for a further explanation of the financial data summarized here. The as adjusted amounts give effect to this offering and the use of the net proceeds as set forth under "Use of Proceeds."
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1997 1998 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales................................................ $1,364,546 $1,444,442 $1,821,836 Cost of goods sold....................................... 961,696 1,005,913 1,245,623 ---------- ---------- ---------- Gross profit................................... 402,850 438,529 576,213 Selling, general and administrative expenses............. 298,049 326,280 461,143 Other operating expense, net............................. 4,213 7,488 8,467 Product inspection charge(1)............................. -- 140,000 -- ---------- ---------- ---------- Income (loss) from operations.................. 100,588 (35,239) 106,603 Interest expense, net.................................... 13,417 8,515 16,184 Other.................................................... (943) 1,955 1,602 Minority interest........................................ -- (666) (869) ---------- ---------- ---------- Income (loss) before income taxes.............. 88,114 (45,043) 89,686 Provision (benefit) for income taxes..................... 33,388 (11,493) 37,161 ---------- ---------- ---------- Net income (loss).............................. $ 54,726 $ (33,550) $ 52,525 ========== ========== ========== Earnings (loss) per share: Basic.................................................. Diluted................................................ Weighted average shares outstanding: Basic.................................................. Diluted................................................ Dividends per share...................................... OTHER DATA: EBITDA(2)................................................ $ 135,680 $ 136,902 $ 149,415 Depreciation and amortization............................ 34,149 33,430 43,545 Capital expenditures..................................... 31,903 34,581 52,435 Research and development expenses........................ 23,235 25,444 33,260
DECEMBER 31, 1998 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 28,389 Working capital............................................. 263,289 Total assets................................................ 1,152,952 Total debt.................................................. 317,441 Stockholders' equity........................................ 376,440
- --------------- (1) Represents a pre-tax charge taken in the fourth quarter of 1997 for estimated costs of an inspection program for our Pulse furnaces installed from 1982 to 1990 in the U.S. and Canada. We initiated the inspection program because we received anecdotal reports of accelerated corrosion of a component of these products under extreme operating conditions. We periodically review the reserve balance and at this time we believe the remaining reserve of $27.3 million at December 31, 1998 will be adequate to cover the remaining costs associated with this inspection program. This program ends on June 30, 1999. (2) EBITDA is defined as earnings before interest, taxes and depreciation and amortization expense. For 1997, EBITDA excludes the product inspection charge. EBITDA is presented here as an alternative measure of our ability to generate cash flow and should not be construed as an alternative to operating income or to cash flows from operating activities, as determined in accordance with generally accepted accounting principles. EBITDA is not calculated under generally accepted accounting principles and is not comparable to similarly titled measures of other companies. 8 12 RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus. RISK FACTORS RELATING TO OUR BUSINESS Our business is subject to the following risks, which include risks relating to the industry in which we operate. WE MAY INCUR MATERIAL COSTS AS A RESULT OF WARRANTY AND PRODUCT LIABILITY CLAIMS The development, manufacture, sale and use of our products involve a risk of warranty and product liability claims. In addition, as we increase our efforts to acquire installing heating and air conditioning dealers in the U.S. and Canada, we incur the risk of liability claims for the installation and service of heating and air conditioning products. We maintain product liability insurance. Our product liability insurance policies have limits, however, that if exceeded, may result in losses that could have an adverse effect on our future financial results. In addition, warranty claims are not covered by our product liability insurance and there may be certain types of product liability claims that are also not covered by our product liability insurance. WE ARE SUBJECT TO RISKS IN CONNECTION WITH OUR ACQUISITION STRATEGY Our plan to make acquisitions part of our growth strategy is subject to several business risks, including: - we may have difficulties consummating acquisitions and we may incur significant expenses in connection with acquisitions; - we may have difficulties in assimilating the operations of the acquired business into our operations; - we may lose the acquired customer base or key personnel; - we face contingent risks with past operations of the acquired business; - we may not achieve any cost savings or other synergies from our acquisitions; - we may face competition for acquisitions, such as competition from consolidators and utility companies for the acquisition of dealers; - competition for acquisitions could cause the cost of acquiring businesses to increase materially; and - acquisition candidates may not be available on terms and conditions acceptable to us. WE ARE ENTERING NEW BUSINESSES IN WHICH WE HAVE LIMITED EXPERIENCE With our recently initiated program of acquiring heating and air conditioning dealers and with our recent acquisitions of hearth products manufacturers, we have entered into new lines of business. We cannot assure you that we will be able to successfully manage or operate these new businesses. 9 13 THE CONSOLIDATION OF DISTRIBUTORS AND DEALERS COULD FORCE US TO LOWER OUR PRICES OR HURT OUR BRAND NAMES There is currently an effort underway in the U.S. by certain companies to purchase independent distributors and dealers and consolidate them into large enterprises. These large enterprises may be able to exert pressure on us or our competitors to reduce prices. Additionally, these new enterprises tend to emphasize their company name, rather than the brand of the manufacturer, in their promotional activities, which could lead to dilution of the importance and value of our brand names. Future price reductions and the brand dilution caused by such consolidation among HVACR distributors and dealers could have an adverse effect on our future financial results. OUR DEALER ACQUISITION PROGRAM COULD LEAD TO LOSS OF SALES FROM INDEPENDENT DEALERS AND DEALERS OWNED BY CONSOLIDATORS With our recently initiated program of acquiring heating and air conditioning dealers in the U.S. and Canada, we face the risk that dealers owned by consolidators and independent dealers may discontinue using our heating and air conditioning products because we are and increasingly will be in competition with them. We sold approximately $50 million of heating and air conditioning products to consolidators in 1998, representing 2.7% of our net sales. OUR PROFITABILITY IS STRONGLY AFFECTED BY THE WEATHER Demand for our products and for our services is strongly affected by the weather. Hotter than normal summers generate strong demand for our replacement air conditioning and refrigeration products and colder than normal winters have the same effect on our heating products. Conversely, cooler than normal summers and warmer than normal winters depress our sales. Because a high percentage of our overhead and operating expenses are relatively fixed throughout the year, operating earnings and net earnings tend to be lower in quarters with lower sales. WE MAY NOT BE ABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE HVACR BUSINESS Competition in our various markets could cause us to reduce our prices or lose market share, or could negatively affect our cash flow, which could have an adverse effect on our future financial results. Substantially all of the markets in which we participate are highly competitive. The most significant competitive factors we face are product reliability, product performance, service and price, with the relative importance of these factors varying among our product lines. In addition, with respect to our new distribution channel whereby we will sell our products directly to consumers, we face competition from independent dealers and dealers owned by consolidators and utility companies, some of whom may be able to provide their services at lower rates than we can. WE MAY BE ADVERSELY AFFECTED BY PROBLEMS IN THE AVAILABILITY OF OR INCREASES IN THE PRICES OF COMPONENTS AND RAW MATERIALS We are dependent upon components purchased from third parties as well as raw materials such as copper, aluminum and steel. We enter into contracts each year for the supply of certain key components at fixed prices. However, if a key supplier is unable or unwilling to meet our supply requirements, we could experience supply interruptions or cost increases which could have an adverse effect on our future financial results. In addition, we regularly pre-purchase a portion of our raw materials at a fixed price each year to hedge against price fluctuations, but a large increase in raw materials prices could significantly increase the cost of our products. Accordingly, increases in raw material costs or their lack of availability could have an adverse effect on our future financial results. OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO ECONOMIC, POLITICAL AND OTHER RISKS Our international operations are subject to various economic, political and other risks that are generally not present in our North American operations. We sell products in over 70 countries and have business units 10 14 located in Europe, Asia Pacific, Latin America and Mexico. Sales of our products outside of the U.S. and Canada represented approximately 13.4% of our 1998 net sales. We anticipate that, over time, international sales will continue to grow as a percentage of our total sales. International risks include: - instability of foreign economies and governments; - price and currency exchange controls; - unfavorable changes in monetary and tax policies and other regulatory changes; - fluctuations in the relative value of currencies; - expropriation and nationalization of our foreign assets; and - war and civil unrest. THE NATURE OF OUR OPERATIONS PRESENTS INHERENT RISKS OF LOSS THAT, IF NOT FULLY INSURED AGAINST, COULD ADVERSELY AFFECT OUR FUTURE FINANCIAL RESULTS Our operations are subject to hazards and risks inherent in operating large manufacturing facilities, such as fires, natural disasters and explosions, all of which can result in loss of life or severe damage to our properties and the suspension of operations. We maintain business interruption and other types of property insurance as protection against operating hazards. The occurrence of a significant event not fully covered by insurance could have an adverse effect on our future financial results. OUR BUSINESS MAY BE ADVERSELY IMPACTED BY WORK STOPPAGES AND OTHER LABOR RELATIONS MATTERS We are subject to a risk of work stoppage and other labor relations matters because a significant percentage of our workforce is unionized. As of December 31, 1998, approximately 30% of our workforce was unionized. Within the U.S., we currently have eight manufacturing facilities and five distribution centers, along with our North American Parts Center in Des Moines, Iowa, with collective bargaining agreements ranging from three to eight years in length. With respect to our significant manufacturing facilities, two collective bargaining agreements expire in April 1999 and one expires in December 1999. Outside of the U.S., we have 12 significant facilities that are represented by unions. The agreement for our manufacturing facility in Toronto, Ontario expires in April 1999 and the agreement for our facility in Laval, Quebec expires in December 1999. As we expand our operations, we are subject to increased unionization of our workforce. The results of future negotiations with these unions, including the effects of any production interruptions or labor stoppages, could have an adverse effect on our future financial results. You should read "Business -- Employees" for a more complete discussion of our collective bargaining agreements. WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL REGULATIONS Our future financial results could be adversely affected by current or future environmental laws. We are subject to extensive and changing federal, state and local laws and regulations designed to protect the environment in the U.S. and in other parts of the world. These laws and regulations could impose liability for remediation costs or result in civil or criminal penalties in cases of non-compliance. Compliance with environmental laws increases our costs of doing business. Because these laws are subject to frequent change, we are unable to predict the future costs resulting from environmental compliance. The U.S. and other countries have established programs for limiting the production, importation and use of certain ozone depleting chemicals, including refrigerants used by us in most of our air conditioning and refrigeration products. Some categories of these refrigerants have been banned completely and others are currently scheduled to be phased out in the U.S. by the year 2030. The U.S. is under pressure from the international environmental community to accelerate the current 2030 deadline. In Europe, this phaseout may occur even sooner. The industry's failure to find suitable replacement refrigerants for substances that have been or will be banned or the acceleration of any phase out schedules for these substances by governments could have an adverse effect on our future financial results. You should read "Business -- Regulation" for a more complete discussion of environmental regulations which affect our business. 11 15 WE MAY BE ADVERSELY IMPACTED BY THE YEAR 2000 AND OTHER INFORMATION TECHNOLOGY ISSUES Year 2000 problems might require us to incur unanticipated expenses that could have an adverse effect on our future financial results. In 1996, we began converting all of our major domestic management information systems from mainframe systems to distributed processing systems. In order to avoid disruption to our operations, we have conducted the conversion on a phased basis. We anticipate that our major domestic operations will be supported by distributed processing by the end of 1999. In addition, we have and will continue to make investments in our computer systems and applications in an effort to ensure that they are Year 2000 compliant. However, we may experience interruptions of operations because of problems in implementing distributed processing or because of Year 2000 problems within our company. Our suppliers or customers might experience Year 2000 problems. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance" and "Business -- Information Systems" for a more complete discussion of our systems upgrade and Year 2000 compliance initiative. THE NORRIS FAMILY WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER OUR COMPANY Following the closing of the offering, approximately 110 descendants of or persons otherwise related to D.W. Norris, one of our original owners, will be able to collectively control % of the outstanding shares of our common stock. Accordingly, if the Norris family were to act together, it would have the ability to: - control the vote of most matters submitted to our stockholders, including any merger, consolidation or sale of all or substantially all of our assets; - elect the members of our Board of Directors; - prevent or cause a change in control of our company; and - decide whether to issue additional common stock or other securities or declare dividends. RISK FACTORS RELATING TO SECURITIES MARKETS There are risks relating to the securities markets that you should consider in connection with your investment in and ownership of our stock. ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY Our governing documents contain certain provisions that may have the effect of delaying, deterring or preventing a change in control by making it difficult to implement certain corporate actions. Examples of these provisions include: - the Board of Directors is authorized to issue shares of preferred stock without stockholder action; - a vote of more than 80% of the outstanding voting stock is required for stockholders to amend certain provisions of the governing documents; - the Board of Directors is divided into three classes, each serving three-year terms; - members of the Board of Directors may be removed only for cause and only upon the affirmative vote of at least 80% of the outstanding voting stock; and - a vote of more than 80% of the outstanding voting stock is required to approve certain transactions between us and any person or group that owns at least 10% of our voting stock. In addition, the Delaware General Corporation Law, under which we are incorporated, contains certain provisions that impose restrictions on business combinations such as mergers between us and a holder of 15% or more of our voting stock. You should read the "Description of Capital Stock" section for a more complete description of these provisions. 12 16 A SUBSTANTIAL NUMBER OF OUR SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC MARKET AFTER THE OFFERING AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE Sales of a substantial number of shares of our common stock into the public market after the offering, or the perception that these sales could occur, could adversely affect our stock price or could impair our ability to obtain capital through an offering of equity securities. After this offering, we will have outstanding shares of common stock assuming no exercise of the over-allotment option granted to the underwriters of this offering. In addition, shares will be issuable upon exercise of options outstanding under our stock option plan and shares will be reserved for issuance pursuant to our stock option plan. All shares of common stock sold in the offering will be freely tradable without restrictions or registration under the Federal securities laws unless purchased by an "affiliate" of Lennox, as that term is defined in Rule 144 under the Securities Act of 1933, as amended. All remaining shares of common stock held by existing stockholders will be "restricted" securities, as that term is defined in Rule 144. We, along with our executive officers and directors, the selling stockholders and certain of our stockholders, have agreed, subject to certain exceptions, not to sell any common stock for a period of 180 days from the date of this prospectus without the prior consent of Morgan Stanley & Co. Incorporated. You should read the "Shares Eligible For Future Sale" section for a more complete discussion of these matters. OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY AFTER THE OFFERING AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT Prior to the offering, there has been no public market for our common stock. We do not know how our common stock will trade in the future. The initial public offering price will be determined through negotiations between the underwriters and us. You may not be able to resell your shares at or above the initial public offering price as the price of our common stock may be affected by a number of factors, including: - actual or anticipated fluctuations in our operating results; - changes in expectations as to our future financial performance or changes in financial estimates of securities analysts; - announcements of new products or technological innovations; and - the operating and stock price performance of other comparable companies. In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. You should read the "Underwriters" section for a more complete discussion of the factors considered in determining the initial public offering price. 13 17 USE OF PROCEEDS We estimate that our net proceeds from the sale of our common stock in the offering, after deducting estimated expenses of $ million and underwriting discounts and commissions, will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $ per share. We will use the proceeds: - to repay borrowings under our revolving credit facility and term credit agreement; - to fund some of the cash portion of the purchase of additional dealers and for other acquisitions; - to provide working capital for our expanded operations; - to fund capital expenditures; and - for other general corporate purposes. We have no agreements or commitments with respect to any material acquisitions. As of March 31, 1999, approximately $115 million was outstanding under our revolving credit facility at an average interest rate of 5.3% and approximately $40 million was outstanding under our term credit agreement at an interest rate of 6.0%. Borrowings under our revolving credit facility and term credit agreement were used for: - seasonal working capital needs; - the acquisitions of the hearth products companies; - the acquisitions of heating and air conditioning dealers in Canada; - certain international acquisitions, including McQuay do Brasil S.A.; and - expenses incurred in our Pulse inspection program. For more information about our revolving credit facility and term credit agreement, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." We will not receive any proceeds from the sale of common stock offered by the selling stockholders. DIVIDEND POLICY We paid cash dividends of $ , $ and $ per share on our common stock during 1996, 1997 and 1998, respectively. We anticipate that we will continue to pay cash dividends on our common stock, but any future determination as to the payment or amount of dividends will depend upon our future results of operations, capital requirements, financial condition and such other factors as our Board of Directors may consider. In addition, our revolving credit facility, term credit agreement and certain of our other debt instruments prohibit the payment of dividends unless we can incur $1.00 of additional indebtedness pursuant to the terms of such instruments. For more information about our debt instruments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 14 18 CAPITALIZATION The following table sets forth our cash and cash equivalents, short-term debt and capitalization as of December 31, 1998 and as adjusted to give effect to the offering and the use of the net proceeds as set forth under "Use of Proceeds." The outstanding share information excludes shares of common stock issuable upon the exercise of outstanding options as of December 31, 1998. You should read the information presented below in conjunction with our consolidated financial statements and notes thereto, "Selected Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Management -- 1998 Incentive Plan" included elsewhere in this prospectus.
DECEMBER 31, 1998 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 28,389 ======== Short-term debt (including current maturities of long-term debt)..................................................... $ 74,848 ======== Long-term debt.............................................. $242,593 Stockholders' equity: Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding............ -- -- Common stock, $.01 par value, 200,000,000 shares authorized, shares issued and outstanding actual and shares as adjusted.......................... 11 Additional paid-in capital................................ 33,233 Retained earnings......................................... 350,851 Currency translation adjustments.......................... (7,655) -------- Total stockholders' equity........................ 376,440 -------- Total capitalization.............................. $619,033 ========
15 19 DILUTION Our net tangible book value as of December 31, 1998 was approximately $ million or $ per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock issued and outstanding. After giving effect to the sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share and the use of the net proceeds as set forth under "Use of Proceeds", our pro forma net tangible book value as of December 31, 1998 would have been $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price....................... $ Net tangible book value before the offering............... $ Increase in pro forma net tangible book value attributable to new investors....................................... Pro forma net tangible book value after the offering........ ---- Dilution to new investors................................... $ ====
The following table summarizes, on a pro forma basis as of December 31, 1998, the differences in the total consideration paid and the average price per share paid by our existing stockholders and by purchasers of the shares of common stock in the offering:
TOTAL SHARES PURCHASED CONSIDERATION AVERAGE ----------------- ----------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ------- ------- ------- ------- --------- Existing stockholders........ % $ % $ New investors................ % % ------- ------- ------- ------- Total.............. % $ % ======= ======= ======= =======
The computations in the tables above exclude shares of common stock issuable upon exercise of stock options substantially all of which were awarded under our stock option plans. For more information on our stock option plans, see "Management -- 1998 Incentive Plan." 16 20 SELECTED FINANCIAL AND OTHER DATA The following selected financial and other data for each of the years in the five-year period ended December 31, 1998 have been derived from our financial statements which have been audited by Arthur Andersen LLP. Effective September 30, 1997 we increased our ownership of Ets. Brancher, our European joint venture, from 50% to 70% and, accordingly, changed our accounting method of recognizing this investment from the equity method to the consolidation method. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus for a further explanation of the financial data summarized here.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1994 1995 1996 1997 1998 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.................................................. $1,168,099 $1,306,999 $1,364,546 $1,444,442 $1,821,836 Cost of goods sold......................................... 815,511 946,881 961,696 1,005,913 1,245,623 ---------- ---------- ---------- ---------- ---------- Gross profit....................................... 352,588 360,118 402,850 438,529 576,213 Selling, general and administrative expenses............... 273,421 285,938 298,049 326,280 461,143 Other operating expense, net............................... 7,460 2,555 4,213 7,488 8,467 Product inspection charge(1)............................... -- -- -- 140,000 -- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations...................... 71,707 71,625 100,588 (35,239) 106,603 Interest expense, net...................................... 20,830 20,615 13,417 8,515 16,184 Other...................................................... 836 (622) (943) 1,955 1,602 Minority interest.......................................... -- -- -- (666) (869) ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes.................. 50,041 51,632 88,114 (45,043) 89,686 Provision (benefit) for income taxes....................... 19,286 17,480 33,388 (11,493) 37,161 ---------- ---------- ---------- ---------- ---------- Net income (loss).................................. $ 30,755 $ 34,152 $ 54,726 $ (33,550) $ 52,525 ========== ========== ========== ========== ========== Earnings (loss) per share: Basic.................................................... Diluted.................................................. Weighted average shares outstanding: Basic.................................................... Diluted.................................................. Dividends per share........................................ OTHER DATA: EBITDA(2).................................................. $ 103,767 $ 104,459 $ 135,680 $ 136,902 $ 149,415 Depreciation and amortization.............................. 32,896 32,212 34,149 33,430 43,545 Capital expenditures....................................... 36,189 26,675 31,903 34,581 52,435 Research and development expenses.......................... 22,773 22,682 23,235 25,444 33,260
DECEMBER 31, -------------------------------------------------------------- 1994 1995 1996 1997 1998 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 2,980 $ 73,811 $ 151,877 $ 147,802 $ 28,389 Working capital............................................ 252,301 307,502 325,956 335,891 263,289 Total assets............................................... 737,528 768,517 820,653 970,892 1,152,952 Total debt................................................. 243,480 219,346 184,756 198,530 317,441 Stockholders' equity....................................... 286,849 315,313 361,464 325,478 376,440
- --------------- (1) Represents a pre-tax charge taken in the fourth quarter of 1997 for estimated costs of an inspection program for our Pulse furnaces installed from 1982 to 1990 in the U.S. and Canada. We initiated the inspection program because we received anecdotal reports of accelerated corrosion of a component of these products under extreme operating conditions. We periodically review the reserve balance and at this time we believe the remaining reserve of $27.3 million at December 31, 1998 will be adequate to cover the remaining costs associated with this inspection program. This program ends on June 30, 1999. (2) EBITDA is defined as earnings before interest, taxes and depreciation and amortization expense. For 1997, EBITDA excludes the product inspection charge. EBITDA is presented here as an alternative measure of our ability to generate cash flow and should not be construed as an alternative to operating income or to cash flows from operating activities, as determined in accordance with generally accepted accounting principles. EBITDA is not calculated under generally accepted accounting principles and is not comparable to similarly titled measures of other companies. 17 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We participate in four reportable business segments of the HVACR industry. The first segment is the North American residential market in which we manufacture and market a full line of heating, air conditioning and hearth products for the residential replacement and new construction markets in the U.S. and Canada. The North American residential segment also includes installation, maintenance and repair services performed by Lennox-owned dealers. The second segment is the global commercial air conditioning market in which we manufacture and sell rooftop products and applied systems for commercial applications. The third segment is the global commercial refrigeration market which consists of unit coolers, condensing units and other commercial refrigeration products. The fourth segment is the heat transfer market in which we design, manufacture and sell evaporator and condenser coils, copper tubing and related manufacturing equipment to original equipment manufacturers and other specialty purchasers on a global basis. We sell our products to numerous types of customers, including distributors, installing dealers, homeowners, national accounts and original equipment manufacturers. The demand for our products is cyclical and influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends and general economic conditions, especially consumer confidence. In addition to economic cycles, demand for our products is seasonal and dependent on the weather. Hotter than normal summers generate strong demand for replacement air conditioning and refrigeration products and colder than normal winters have the same effect on heating products. Conversely, cooler than normal summers and warmer than normal winters depress sales of HVACR products. The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead and estimated costs of warranty expense. The principal raw materials used in our manufacturing processes are copper, aluminum and steel. In instances where we are unable to pass on to our customers increases in the costs of copper and aluminum, we enter into forward contracts for the purchase of such materials. We have forward commitments for the substantial majority of our internal needs of aluminum through December 1999 and copper through December 2000. We attempt to minimize the risk of price fluctuations in certain key components by entering into contracts, typically at the beginning of the year, which generally provide for fixed prices for our needs throughout the year. These hedging strategies enable us to establish product prices for the entire model year while minimizing the impact of price increases of components and raw materials on our margins. Warranty expense is estimated based on historical trends and other factors. In September 1997, we increased our ownership in Ets. Brancher from 50% to 70%. As a result, we assumed control of the venture and began consolidating the financial position and operating results of the venture in the fourth quarter of 1997. Previously, we used the equity method of accounting for our investment in this entity. In the fourth quarter of 1998, we restructured our ownership of our various European entities to allow for more efficient transfer of funds and to provide for tax optimization. Although our European operations contributed to revenue, they had an operating loss in both 1997 and 1998, primarily due to the performance of the commercial air conditioning business. We have installed a new management team for our European operations and are bringing our manufacturing and operating expertise to the European businesses. We acquired Superior Fireplace Company, Marco Mfg., Inc. and Pyro Industries, Inc. in the third quarter of 1998 and Security Chimneys International, Ltd. in the first quarter of 1999 for an aggregate purchase price of approximately $120 million. These acquisitions give us one of the broadest lines of hearth products in the industry. These businesses had aggregate revenues of approximately $150 million in 1998, $68.6 million of which was reflected in our 1998 net sales. We recently initiated a program to acquire high quality heating and air conditioning dealers in metropolitan areas in the U.S. and Canada to market "Lennox" and other brands of heating and air conditioning products. This strategy will enable us to extend our distribution directly to the consumer, thereby 18 22 permitting us to participate in the revenues and margins available at the retail level while strengthening and protecting our brand equity. We believe that the retail sales and service market represents a significant growth opportunity because this market is large and highly fragmented. The retail sales and service market in the U.S. is comprised of over 30,000 dealers. In addition, we believe that the heating and air conditioning service business is somewhat less seasonal than the business of manufacturing and selling heating and air conditioning products. As of March 31, 1999, we had acquired 37 dealers in Canada for an aggregate purchase price of approximately $55 million and had signed letters of intent to acquire nine additional Canadian dealers for an aggregate purchase price of approximately $9 million. As we acquire more heating and air conditioning dealers, we expect that we will incur additional costs to expand our infrastructure to effectively manage these businesses. Our fiscal year ends on December 31 of each year, and our fiscal quarters are each comprised of 13 weeks. For convenience, throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, the 13 week periods comprising each fiscal quarter are denoted by the last day of the calendar quarter. RESULTS OF OPERATIONS The following table sets forth, as a percentage of net sales, our statement of income data for the years ended December 31, 1996, 1997 and 1998.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 1998 ----- ----- ----- Net sales................................................... 100.0% 100.0% 100.0% Cost of goods sold.......................................... 70.5 69.6 68.4 ----- ----- ----- Gross profit...................................... 29.5 30.4 31.6 ----- ----- ----- Selling, general and administrative expenses................ 21.8 22.6 25.3 Other operating expense, net................................ 0.3 0.5 0.4 Product inspection charge................................... -- 9.7 -- ----- ----- ----- Income (loss) from operations..................... 7.4 (2.4) 5.9 Interest expense, net....................................... 1.0 0.6 0.9 Other....................................................... (0.1) 0.1 0.1 Minority interest........................................... -- 0.0 0.0 ----- ----- ----- Income (loss) before income taxes................. 6.5 (3.1) 4.9 Provision (benefit) for income taxes........................ 2.5 (0.8) 2.0 ----- ----- ----- Net income (loss)................................. 4.0% (2.3)% 2.9% ===== ===== =====
19 23 The following table sets forth net sales by business segment and geographic market (dollars in millions):
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1996 1997 1998 ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % -------- ----- -------- ----- -------- ----- BUSINESS SEGMENT: North American residential...... $ 857.1 62.8% $ 865.1 59.9% $1,013.7 55.7% Commercial air conditioning..... 228.9 16.8 278.8 19.3 392.1 21.5 Commercial refrigeration........ 135.6 9.9 154.3 10.7 237.3 13.0 Heat transfer................... 142.9 10.5 146.2 10.1 178.7 9.8 -------- ----- -------- ----- -------- ----- Total net sales....... $1,364.5 100.0% $1,444.4 100.0% $1,821.8 100.0% ======== ===== ======== ===== ======== ===== GEOGRAPHIC MARKET: U.S. and Canada................. $1,336.0 97.9% $1,368.1 94.7% $1,577.3 86.6% International................... 28.5 2.1 76.3 5.3 244.5 13.4 -------- ----- -------- ----- -------- ----- Total net sales....... $1,364.5 100.0% $1,444.4 100.0% $1,821.8 100.0% ======== ===== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales. Net sales increased $377.4 million, or 26.1%, to $1,821.8 million for the year ended December 31, 1998 from $1,444.4 million for the year ended December 31, 1997. If the effect of the consolidation of Ets. Brancher is excluded, net sales would have increased by $226.7 million, or 16.1%, to $1,630.9 million for 1998 as compared to 1997. Net sales related to the North American residential segment were $1,013.7 million during 1998, an increase of 17.2% from $865.1 million for 1997. This increase was primarily due to sales growth of both the "Lennox" and "Armstrong Air" brands and the inclusion of $68.6 million of sales beginning in the third quarter of 1998 of the hearth products companies. Hot weather in the spring of 1998 and an expanded dealer and distributor base led to greater sales of the "Lennox" and "Armstrong Air" brands. Commercial air conditioning revenues increased $113.3 million, or 40.6%, to $392.1 million for 1998 compared to 1997. If the effect of the consolidation of Ets. Brancher is excluded, commercial air conditioning revenues would have increased $46.5 million, or 17.9%, to $306.1 million for 1998 as compared to 1997. This increase was primarily due to increased rooftop air conditioner business in the U.S. and Canada. Net sales related to the commercial refrigeration segment were $237.3 million during 1998, an increase of 53.8% from $154.3 million for 1997. If the effect of the consolidation of Ets. Brancher is excluded, net sales related to the commercial refrigeration products segment would have increased $20.2 million, or 14.8%, to $156.8 million for 1998 as compared to 1997. This increase is primarily due to hot weather in North America in the spring of 1998 and the acquisition of McQuay do Brasil in September 1998. Heat transfer revenues increased $32.5 million, or 22.3%, to $178.7 million for 1998 compared to 1997. If the effect of the consolidation of Ets. Brancher is excluded, heat transfer revenues would have increased $11.4 million, or 8.0%, to $154.3 million for 1998 as compared to 1997. This increase is primarily due to hot weather in North America in the spring of 1998. Gross profit. Gross profit was $576.2 million for the year ended December 31, 1998 as compared to $438.5 million for the year ended December 31, 1997, an increase of $137.7 million. Gross profit margin increased to 31.6% in 1998 from 30.4% for 1997. The increase of $137.7 million in gross profit was primarily attributable to increased sales in 1998 as compared to 1997 and the effect of the consolidation of Ets. Brancher for the full year. Ets. Brancher contributed $47.7 million and $11.2 million to gross profit in 1998 and 1997, respectively, and its gross profit margin was 25.0% and 27.9% in 1998 and 1997, respectively. If the effect of the consolidation of Ets. Brancher is excluded, gross profit margin would have been 32.4% and 30.4% for 1998 and 1997, respectively. The improved gross profit margin for 1998 is due to lower material costs, improved manufacturing processes and increased overhead absorption associated with the higher volume of sales in North America. Selling, general and administrative expenses. Selling, general and administrative expenses were $461.1 million for 1998, an increase of $134.8 million, or 41.3%, from $326.3 million for 1997. Selling, general 20 24 and administrative expenses represented 25.3% and 22.6% of total net revenues for 1998 and 1997, respectively. If the effect of the consolidation of Ets. Brancher is excluded, selling, general and administrative expenses would have been $413.9 million for 1998, an increase of $99.8 million, or 31.8%, from $314.1 million for 1997, representing 25.4% and 22.4% of total net sales for 1998 and 1997, respectively. Approximately $16.7 million of the increase in selling, general and administrative expenses is composed of three non-recurring items: $7.1 million associated with the settlement of a lawsuit; approximately $5.0 million of incremental expense associated with the implementation of the SAP enterprise business software system; and $4.6 million associated with increased expenses of a terminated performance share plan. If the effect of these non-recurring items and the consolidation of Ets. Brancher is excluded, selling, general and administrative expenses would have been $397.2 million for 1998, an increase of $83.1 million, or 26.5%, from $314.1 million for 1997, representing 24.4% and 22.4% of total net sales for 1998 and 1997, respectively. The remaining increase in selling, general and administrative expenses is primarily due to increased variable costs associated with sales growth in North America and costs associated with creating infrastructure to manage international businesses, such as the establishment of a sales office in Singapore and the business development functions for our global operation. Other operating expense, net. Other operating expense, net totaled $8.5 million for 1998, an increase of $1.1 million from $7.4 million for 1997. Other operating expense, net is comprised of (income) loss from joint ventures, amortization of goodwill and other intangibles and miscellaneous items. The $1.1 million increase is due to increases in amortization of goodwill of $1.7 million and losses from joint ventures of $1.3 million, partially offset by a decrease in other intangible and miscellaneous expense of $2.0 million. Product inspection charge. In the fourth quarter of 1997, we recorded a non-recurring pre-tax charge of $140.0 million to provide for projected expenses of the product inspection program related to our Pulse furnace. We have offered the owners of all Pulse furnaces installed between 1982 and 1990 a subsidized inspection and a free carbon monoxide detector. The inspection includes a severe pressure test to determine the serviceability of the heat exchanger. If the heat exchanger does not pass the test, we will either replace the heat exchanger or offer a new furnace and subsidize the labor costs for installation. The cost required for the program depends on the number of furnaces located, the percentage of those that do not pass the pressure test and the replacement option chosen by the homeowner. We periodically review the reserve balance and at this time believe the remaining reserve of $27.3 million at December 31, 1998 will be adequate to cover the remaining costs associated with this inspection program. This program ends on June 30, 1999. Income (loss) from operations. Income (loss) from operations was $106.6 million for 1998 compared to $(35.2) million for 1997. Excluding the Ets. Brancher consolidation, the special charge for the Pulse inspection program and the three non-recurring selling, general and administrative expense items mentioned above, income from operations would have been $122.6 million for 1998, or 7.5% of net sales, as compared to $106.1 million for 1997, or 7.6% of net sales. Interest expense, net. Interest expense, net for 1998 increased to $16.2 million from $8.5 million for 1997. Of the $7.7 million increase in interest expense, $3.6 million was due to the incurrence of $75 million in additional long-term borrowings in April 1998, $1.3 million was due to the consolidation of Ets. Brancher for the full year and the remainder was due to less interest income in 1998. Other. Other expense was $1.6 million for 1998 and $2.0 million for 1997. Other expense is primarily comprised of currency exchange gains or losses. Minority interest. Minority interest in subsidiaries' net loss of $(0.7) million in 1997 and $(0.9) million in 1998 represents the minority interest in Ets. Brancher and, for 1998, McQuay do Brasil. Provision (benefit) for income taxes. The effective tax rates for the 1998 provision and the 1997 benefit were 41.4% and 25.5%, respectively. The effective tax rates differ from the federal statutory rate of 35% primarily due to state income taxes and valuation reserves provided for foreign operating losses. Net income (loss). Net income (loss) was $52.5 million and $(33.6) million for the year ended December 31, 1998 and 1997, respectively. If the effects of the consolidation of Ets. Brancher and the non-recurring charge relating to the Pulse inspection program are excluded, net income would have been 21 25 $52.9 million and $55.2 million for 1998 and 1997, representing 3.2% and 3.9% of net sales for 1998 and 1997, respectively. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales. Net sales increased $79.9 million, or 5.9%, to $1,444.4 million for the year ended December 31, 1997 from $1,364.5 million for the year ended December 31, 1996. If the effect of the consolidation of Ets. Brancher is excluded, net sales would have increased by $39.7 million, or 2.9%, to $1,404.2 million for 1997 compared to 1996. Net sales related to the North American residential segment were $865.1 million during 1997, an increase of 0.9% from $857.1 million for 1996. This increase was principally due to increases in the number of heating and air conditioning units sold by us, despite the fact that industry shipments were generally down 5% for 1997. The weather in 1997 was mild with a cool spring and modest winter over most of the U.S., and inventory levels for both dealers and distributors were higher than normal at the end of 1996. Commercial air conditioning revenues increased $49.9 million, or 21.8%, to $278.8 million for 1997 compared to 1996. Of the $49.9 million increase, 61.5% was due to increased rooftop air conditioner business in North America and the balance was due to the consolidation of Ets. Brancher in the fourth quarter of 1997. Rooftop air conditioner business increased in 1997 principally due to focused sales efforts through commercial districts that we established early in 1997 as well as the continued roll out of the L Series rooftop product line. Net sales related to the commercial refrigeration segment were $154.3 million during 1997, an increase of 13.8% from $135.6 million for 1996. This increase was primarily due to the consolidation of Ets. Brancher in the fourth quarter of 1997. Heat transfer revenues increased $3.3 million, or 2.3%, to $146.2 million for 1997 compared to 1996. Ets. Brancher contributed $3.3 million to heat transfer product sales in 1997. Gross profit. Gross profit was $438.5 million for the year ended December 31, 1997 as compared to $402.9 million for the year ended December 31, 1996, an increase of $35.6 million. Gross profit margins were 30.4% and 29.5% for 1997 and 1996, respectively. The increase of $35.6 million in gross profit was primarily attributable to increased sales in 1997 and the effect of the consolidation of Ets. Brancher. Ets. Brancher contributed $11.2 million to gross profit in 1997, and its gross profit margin was 27.9%. If the effect of the consolidation of Ets. Brancher is excluded, gross profit margin would have remained the same for 1997. Selling, general and administrative expenses. Selling, general and administrative expenses were $326.3 million for 1997, an increase of $28.3 million, or 9.5%, from $298.0 million for 1996. Selling, general and administrative expenses represented 22.6% and 21.8% of net sales for 1997 and 1996, respectively. Of the $28.3 million increase, $12.2 million was related to the consolidation of Ets. Brancher. Excluding the effect of the consolidation of Ets. Brancher, selling, general and administrative expenses would have represented 22.4% of net sales in 1997. The remaining $16.1 million increase in selling, general and administrative expenses related to expenses in establishing specialized commercial sales districts in North America, increased expenses related to a profit sharing plan and other variable cost increases associated with increased sales. Other operating expense, net. Other operating expense, net totaled $7.4 million for 1997, an increase of $3.2 million from $4.2 million for 1996. In 1996, we recognized a non-recurring $4.6 million gain on the sale of a portion of our interest in Alliance Compressors, a joint venture to manufacture compressors. After the sale, we owned a 24.5% interest in Alliance Compressors. Income (loss) from operations. Income (loss) from operations was $(35.2) million in 1997, a decrease of $135.8 million from $100.6 million in 1996. The $135.8 million decrease was primarily due to the $140.0 million non-recurring pre-tax charge relating to the Pulse inspection program. Excluding the special charge for the Pulse inspection program and the consolidation of Ets. Brancher, income from operations would have been $106.1 million in 1997, representing 7.6% of net sales, the same percent as in 1996. Interest expense, net. Interest expense, net for 1997 decreased to $8.5 million from $13.4 million for 1996. The decrease of $4.9 million in interest expense was primarily due to higher average cash balances resulting from improved working capital management. We did not have any short-term borrowings in 1996 or 1997 and long-term debt remained fairly consistent each year. 22 26 Other. Other expense was $2.0 million for 1997 and $(0.9) million for 1996. Other expense is primarily comprised of currency exchange gains or losses. Minority interest. Minority interest in subsidiaries' net loss of $(0.7) million in 1997 represents the minority interest in Ets. Brancher. Provision (benefit) for income taxes. The effective tax rates for the 1997 benefit and the 1996 provision were 25.5% and 37.9%, respectively. The effective tax rates differ from the federal statutory rate of 35% primarily due to state income taxes and valuation reserves provided for foreign operating losses. Net income (loss). There was a net loss of $(33.6) million for the year ended December 31, 1997 compared to net income of $54.7 million for the year ended December 31, 1996. If the non-recurring charge relating to the Pulse inspection program and the consolidation of Ets. Brancher are excluded, net income would have been $55.2 million for 1997, representing 3.9% of net sales, compared to 4.0% of net sales for 1996. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations and capital requirements from internally generated funds and, to a lesser extent, borrowings from external sources. Our capital requirements have related principally to acquisitions, the expansion of our production capacity and increased working capital needs that have accompanied sales growth. We closely monitor controllable working capital, which we define as inventories plus trade accounts receivables less accounts payable. To measure the effectiveness of our management of controllable working capital, we calculate the amount of controllable working capital as a percent of sales on a rolling twelve month basis. From January 1996 to December 1998, controllable working capital as a percent of sales has declined from 36.1% to 26.7%. If controllable working capital management had not improved, we estimate that our investment in working capital would have been approximately $180 million higher at December 31, 1998. Controllable working capital has improved primarily because we have introduced the concepts of "Demand Flow"(R) technology, cellular manufacturing, just-in-time inventory management and configure-to-order processes to reduce production cycle lead times in our manufacturing facilities. Prior to introducing these manufacturing efficiencies, lead times were as long as 90 days or more and, consequently, substantial buffer stocks were required to cover anticipated forecast errors. These stocks were often inventoried in one location when the demand would occur in another location. With lead times as short as one week, we now require minimal safety stock and rarely have to redeploy inventory from one location to another. Net cash provided by operating activities totaled $158.8 million, $58.5 million and $5.0 million for 1996, 1997 and 1998, respectively. The reduction in cash provided by operating activities is primarily due to the Pulse inspection program as we spent $26.6 million and $86.1 million on this program in 1997 and 1998, respectively. In addition, we had unusually strong sales of our "Lennox" brand of North American air conditioning products late in 1997 and accordingly accounts receivable in December 1997 were higher than normal. Net cash used in investing activities totaled $37.1 million, $44.6 million and $212.4 million for 1996, 1997 and 1998, respectively. The greater use of cash for investing relates primarily to increased acquisition activity as we spent $14.3 million and $160.5 million for acquisitions in 1997 and 1998, respectively. Net cash provided by (used in) financing activities was ($44.0) million, ($17.3) million and $89.5 million for 1996, 1997 and 1998, respectively. In 1998, we issued $75.0 million principal amount of notes and increased short term borrowings by $36.7 million. Due to the seasonality of the air conditioning and refrigeration businesses, we typically use cash in the first six months and generate cash during the latter half of the year. Our internally generated cash flow, along with borrowings under our revolving credit facility, have been sufficient to cover our working capital, capital expenditure and debt service requirements over the last three years. In the past, we have used a combination of internally generated funds, external borrowings and our stock to make acquisitions. We intend to acquire additional heating and air conditioning dealers in the U.S. and Canada. We plan to finance these acquisitions with a combination of cash, including a portion of the net proceeds of this offering, stock and debt. As of March 31, 1999, we had acquired 37 dealers in Canada for an 23 27 aggregate purchase price of approximately $55 million and had signed letters of intent to acquire nine additional Canadian dealers for an aggregate purchase price of approximately $9 million. Our capital expenditures were $31.9 million, $34.6 million and $52.4 million for 1996, 1997 and 1998, respectively. We have budgeted $80 million for capital expenditures for 1999. These expenditures primarily relate to production equipment (including tooling), training facilities and information systems. The majority of these planned capital expenditures are discretionary. We plan to finance these capital expenditures using cash flow from operations and a portion of the net proceeds from this offering. At December 31, 1998, we had long-term debt obligations outstanding of $261.4 million. The total long-term debt consists primarily of six issues of notes with an aggregate principal amount of $240.6 million, interest rates ranging from 6.56% to 9.69% and maturities ranging from 2001 to 2008. The notes contain certain restrictive covenants, including covenants that place certain limitations on our ability to incur additional indebtedness, encumber our assets or pay dividends. Our ability to incur debt is limited to 60.0% of our consolidated capitalization. As of December 31, 1998, our consolidated indebtedness as a percent of consolidated capitalization was 43.4%. Under the terms of the notes, we are not allowed to pay dividends unless we could incur $1.00 of additional indebtedness. In addition, we are required to maintain a consolidated net worth equal to $261.0 million plus 15% of our consolidated quarterly net income beginning April 1, 1998. At December 31, 1998, the required consolidated net worth was $267.8 million and we had a consolidated net worth of $376.4 million. Our debt service requirements (including principal and interest payments) for long-term debt are $38.1 million for 1999. As of December 31, 1998, we had approximate minimum commitments on all non-cancelable operating leases of $22 million and $19 million in 1999 and 2000, respectively. We have $135 million of borrowings available under our revolving credit facility. Our revolving credit facility provides for both "standby loans" and "offered rate loans." Standby loans are made ratably by all lenders under the revolving credit facility, while offered rate loans are, subject to the terms and conditions of the credit facility, separately negotiated between us and one or more members of the lending syndicate. Standby loans bear interest, at our option, at a rate equal to either (a) the London Interbank Offered Rate plus a margin equal to 0.150% to 0.405% depending on the ratio of our debt to total capitalization, or (b) the greater of (1) the Federal Funds Effective Rate plus 0.5%, and (2) the Prime Rate. Offered rate loans bear interest at a fixed rate agreed to by us and the lender or lenders making such loans. Under the revolving credit facility, we are obligated to pay certain fees, including (a) a quarterly facility fee to each lender under the credit facility equal to a percentage, varying from 0.100% to 0.220% (depending on the ratio of our debt to total capitalization) of each lender's total commitment, whether used or unused, under the revolving credit facility and (b) certain administrative fees to the administrative agent and documentation agent under the revolving credit facility. The revolving credit facility contains the same restrictive covenants and maintenance tests as the notes. The revolving credit facility will expire on July 13, 2001, unless earlier terminated pursuant to its terms and conditions. In March 1999, we entered into a term credit agreement which provides for borrowings of up to $115 million. Repayments of borrowings result in a permanent reduction of the commitment. Loans bear interest, at our option, at a rate equal to (a) the rate offered by the administrative agent in its London offices plus 1.00% to 1.75%, depending upon the period, or (b) the greater of (1) the Federal Funds Effective Rate plus 0.5% or (2) the Prime Rate, in each case plus 0% to 0.75%, depending upon the period. Under the term credit agreement, we are obligated to pay certain fees, including (a) a quarterly commitment fee equal to 0.15% of the unused portion of the commitment and (b) certain administrative fees to the administrative agent. We are required to use the net proceeds from any issuance of our securities, including the net proceeds from this offering, to repay any amounts outstanding under the term credit agreement. The term credit agreement otherwise expires on December 31, 1999. We believe that cash flow from operations, as well as the net proceeds from the offering and available borrowings under our revolving credit facility, will be sufficient to fund our operations for the foreseeable future. 24 28 QUARTERLY RESULTS OF OPERATIONS The following table presents certain of our quarterly information for the years ended December 31, 1997 and 1998. Such information is derived from our unaudited financial statements and, in the opinion of our management, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of such information. Operating results for any given quarter are not necessarily indicative of results for any future period and should not be relied upon as an indicator of future performance. Beginning with the fourth quarter of 1997, our results of operations reflect the consolidation of Ets. Brancher.
QUARTER ENDED ------------------------------------------------------------------------------- 1997 1998 -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- (IN MILLIONS) Net sales.................................... $307.1 $365.4 $381.9 $390.0 $379.6 $456.0 $529.2 $457.0 Cost of goods sold........................... 211.6 252.0 265.2 277.1 261.8 309.0 359.6 315.2 ------ ------ ------ ------- ------ ------ ------ ------ Gross profit................................. 95.5 113.4 116.7 112.9 117.8 147.0 169.6 141.8 ------ ------ ------ ------- ------ ------ ------ ------ Selling, general, administrative and other expenses................................... 79.1 80.3 81.0 93.3 99.6 116.9 121.7 131.4 Product inspection charge.................... -- -- -- 140.0 -- -- -- -- ------ ------ ------ ------- ------ ------ ------ ------ Income (loss) from operations................ 16.4 33.1 35.7 (120.4) 18.2 30.1 47.9 10.4 ------ ------ ------ ------- ------ ------ ------ ------ Net income (loss)............................ $ 7.9 $ 17.6 $ 18.5 $(77.6) $ 8.3 $ 17.2 $ 24.5 $ 2.5
The following table sets forth, as a percentage of net sales, statement of income data by quarter for the years ended December 31, 1997 and 1998.
QUARTER ENDED ------------------------------------------------------------------------------- 1997 1998 -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold........................... 68.9 69.0 69.4 71.1 69.0 67.8 68.0 69.0 ----- ----- ----- ------ ----- ----- ----- ----- Gross profit................................. 31.1 31.0 30.6 28.9 31.0 32.2 32.0 31.0 ----- ----- ----- ------ ----- ----- ----- ----- Selling, general and administrative expenses................................... 25.8 22.0 21.2 23.9 26.2 25.6 22.9 28.8 Product inspection charge.................... -- -- -- 35.9 -- -- -- -- ----- ----- ----- ------ ----- ----- ----- ----- Income (loss) from operations................ 5.3 9.0 9.4 (30.9) 4.8 6.6 9.1 2.2 ----- ----- ----- ------ ----- ----- ----- ----- Net income (loss)............................ 2.6% 4.8% 4.8% (19.9)% 2.2% 3.8% 4.6% .5%
Our quarterly operating results have varied significantly and are likely to vary significantly in the future. Demand for our products is seasonal and dependent on the weather. In addition, a majority of our revenue is derived from products whose sales peak in the summer months. Consequently, we often experience lower sales levels in the first and fourth quarters of each year. Because a high percentage of our overhead and operating expenses are relatively fixed throughout the year, operating earnings and net earnings tend to be lower in quarters with lower sales. MARKET RISK The estimated fair values of our financial instruments approximate their respective carrying amounts at December 31, 1998, except as follows (in thousands):
FAIR VALUE ------------------- CARRYING INTEREST AMOUNT AMOUNT RATE -------- ------- -------- 9.69% promissory notes.................................. $24,600 $26,601 6.75% 9.53% promissory notes.................................. 21,000 21,923 6.75 11.10% promissory notes................................. 7,547 7,739 9.00
The fair values presented above are based on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. 25 29 The fair values are estimates as of December 31, 1998, and are not necessarily indicative of amounts for which we could settle currently or indicative of the intent or ability of us to dispose of or liquidate such instruments. Our results of operations can be affected by changes in exchange rates. Net sales and expenses in currencies other than the U.S. dollar are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. During 1996, 1997 and 1998, net sales from outside the U.S. and Canada represented 2.1%, 5.3% and 13.4%, respectively, of total net sales. Historically, foreign currency transaction gains (losses) have not had a material effect on our operations. We have entered into foreign currency exchange contracts to hedge our investment in Ets. Brancher. We do not engage in currency speculation. These contracts do not subject us to risk from exchange rate movements because the gains or losses on the contracts offset the losses or gains, respectively, on the assets and liabilities of Ets. Brancher. As of December 31, 1998, we had entered into foreign currency exchange contracts with a nominal value of 165.5 million French francs (approximately $30.0 million). These contracts require us to exchange French francs for U.S. dollars at maturity, which is in May 2003, at rates agreed to at inception of the contracts. If the counterparties to the exchange contracts do not fulfill their obligations to deliver the contracted currencies, we could be at risk for any currency related fluctuations. From time to time we enter into foreign currency exchange contracts to hedge receivables from our foreign subsidiaries. These contracts do not subject us to risk from exchange rate movements because the gains or losses on the contracts offset losses or gains, respectively, on the receivables being hedged. As of December 31, 1998, we had obligations to deliver the equivalent of $33.2 million of various foreign currencies by March 31, 1999, for which the counterparties to the contracts will pay fixed contract amounts. INFLATION Historically, inflation has not had a material effect on our results of operations. YEAR 2000 COMPLIANCE The Year 2000 issue concerns the ability of information technology and non-information technology systems and processes to properly recognize and process date-sensitive information before, during and after December 31, 1999. We have a variety of computer software program applications, computer hardware equipment and other equipment with embedded electronic circuits, including applications used in our financial business systems, manufacturing processes and administrative functions, which are collectively referred to as the "Systems". We expect that our Systems will be ready for the Year 2000 transition. In order to identify and resolve Year 2000 issues affecting us, we established a Year 2000 Compliance Program. The Year 2000 Compliance Program is administered by a Task Force, consisting of members of senior management as well as personnel from our accounting, internal audit and legal departments, which has oversight of the information systems managers and other administrative personnel charged with implementing our Year 2000 Compliance Program. The Task Force has established a specific compliance team for Lennox Corporate and for each of our operating locations. In 1994 we began the replacement of all core business systems for our domestic subsidiaries. The purpose of this replacement was to upgrade systems architecture and functionality, improve business integration and implement process improvements. SAP was selected as the enterprise resource for planning ("ERP") system to replace mission critical software and hardware for Lennox Industries, Heatcraft (Heat Transfer and Refrigeration Products Divisions) and the Lennox Corporate operations. Fourth Shift was selected as the ERP system for the Electrical Products Division of Heatcraft and is also being implemented for various subsidiaries of Lennox Global. A new version of ROI Manage 2000 was implemented for Armstrong. As of December 31, 1998, all replacements were complete except for the Heat Transfer Division of Heatcraft, which is scheduled to be complete by September 30, 1999, and replacements for certain subsidiaries of Lennox Global. SAP, Fourth Shift and ROI Manage 2000 have certified that these systems are Year 2000 compliant. Hardware, operating systems and databases installed to support these systems are either compliant or have 26 30 Year 2000 vendor supplied updates to be applied in 1999. Other smaller applications integrated with SAP have been replaced or upgraded with Year 2000 compliant software. The implementations of SAP, Fourth Shift and ROI Manage 2000 and the related hardware, operating systems and databases comprise the systems that are most critical to our operations ("Critical Systems") and address the areas of our business which would have otherwise been significantly affected by the Year 2000. As of March 15, 1999, we were approximately 85% complete with the implementation of the Year 2000 Compliance Program for all Critical Systems, and we expect to be 100% complete by September 30, 1999. Our Year 2000 Program also addresses compliance in areas in addition to Critical Systems, including: voice and data networks, desktop computers, peripherals, EDI, contracted or purchased departmental software, computer controlled production equipment, test stations, building security, transport and heating and air conditioning systems, service providers, key customers and suppliers and Lennox manufactured and purchased products. As of March 15, 1999, we were more than 50% complete with the implementation of the Year 2000 Compliance Program for all such areas, and we expect to be 100% complete by September 30, 1999. We have initiated communications with significant suppliers, customers and other third parties to identify and assess Year 2000 risks and to develop solutions that will minimize the impact on us. If third party providers, due to the Year 2000 issue, fail to provide us with components or materials which are necessary to manufacture our products, with sufficient electrical power and other utilities to sustain our manufacturing process, or with adequate and reliable means of transporting our products to our customers, then any such failure could have an adverse effect on our future financial results. The amount of potential liability and lost revenue cannot be estimated. Currently, we are not aware of any of our significant third party providers or customers that are not or will not be Year 2000 compliant. In order to address the potential Year 2000 non-compliance by third parties affecting our operations, we will continue to survey our key customers and third party providers requesting that they respond regarding their Year 2000 plans. If we find a third party whose lack of Year 2000 readiness could have a substantial impact on our operations, we intend to take corrective action. However, no assurance can be given that third party suppliers or others on whom we rely will address such issues successfully. The implementation of Critical Systems began in 1994 and was not accelerated as a result of the Year 2000. We do not separately track the costs of our Year 2000 Compliance Program because the majority of such costs consist of internal payroll and related benefits of our compliance teams. Year 2000 remediation costs are expensed in the year incurred. We do not expect future remediation expenditures to be material. To date, we have no indication that the time to replace or convert any specific function or system is so great as to threaten our present schedule. If we complete our remediation plans, then any adverse effects from the Year 2000 problem will result from circumstances outside our control. As we cannot anticipate such circumstances now, we have not yet developed "most reasonably likely worst case Year 2000 scenarios." Although at this time we believe that we are adequately addressing the Year 2000 issues, there can be no assurance that the Year 2000 issues will not have an adverse effect on our future financial results. In addition, disruptions in the economy generally resulting from Year 2000 issues could have a materially adverse effect on us. FORWARD-LOOKING STATEMENTS "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this prospectus contain forward-looking statements which are subject to various risks and uncertainties. Actual results could differ materially from those discussed herein. Important factors that could cause or contribute to such differences include those discussed under "Risk Factors" as well as those discussed elsewhere in this prospectus. 27 31 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts (collectively referred to as derivatives) and for hedging activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. We do not believe that the adoption of this pronouncement will have a significant impact on our financial statements. 28 32 BUSINESS We are a leading global provider of climate control solutions. We design, manufacture and market a broad range of products for the HVACR markets. Our products are sold under well-established brand names including "Lennox", "Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. We are also one of the largest manufacturers in North America of heat transfer products, such as evaporator coils and condenser coils. We have leveraged our expertise in heat transfer technology, which is critical to the efficient operation of any heating or cooling system, to become an industry leader known for our product innovation and the quality and reliability of our products. As a result of recent acquisitions, we have also become a leader in the growing market for hearth products, which includes pre-fabricated fireplaces and related products. Historically, we have sold our "Lennox" brand of residential heating and air conditioning products directly to a network of installing dealers, which currently numbers approximately 6,000, making us the largest wholesale distributor of these products in North America. We have recently initiated a program to acquire dealers in metropolitan areas in the U.S. and Canada so that we can provide heating and air conditioning products and services directly to consumers. Our furnaces, heat pumps, air conditioners, pre-fabricated fireplaces and related products are available in a variety of designs, efficiency levels and price points that provide an extensive line of comfort systems. A majority of our sales of residential heating and air conditioning products in the U.S. and Canada are to the repair and replacement market, which is less cyclical than the new construction market. We also provide a range of air conditioning products for commercial market applications such as mid-size office buildings, restaurants, churches and schools. Our commercial refrigeration products are used primarily in cold storage applications for food preservation in supermarkets, convenience stores, restaurants, warehouses and distribution centers. Our heat transfer products are used by us in our HVACR products and sold to third parties. Shown below are our four business segments, the key products and brand names within each segment and 1998 net sales by segment. The North American residential segment also includes installation, maintenance and repair services performed by Lennox-owned dealers. See our audited financial statements included elsewhere in this prospectus for more information on our segments.
SEGMENT PRODUCTS BRAND NAMES 1998 NET SALES ------- -------- ----------- -------------- (IN MILLIONS) North American residential Furnaces, heat pumps, air Lennox, Armstrong Air, Air-Ease, $1,013.7 conditioners, packaged heating Concord, Magic-Pak, Advanced and cooling systems and related Distributor Products, Superior, products; pre-fabricated Marco, Whitfield and Security fireplaces, free standing Chimneys stoves, fireplace inserts and accessories Commercial air conditioning Unitary air conditioning and Lennox, Alcair and Janka 392.1 applied systems Commercial refrigeration Chillers, condensing units, unit Bohn, Friga-Bohn, Larkin, 237.3 coolers, fluid coolers, air Climate Control and Chandler cooled condensers and air Refrigeration handlers Heat transfer Evaporator and condenser coils Heatcraft and Friga-Bohn 178.7 and equipment and tooling to manufacture coils -------- Total........................... $1,821.8 ========
We market and distribute our products using multiple brand names through multiple distribution channels to penetrate different segments of the HVACR market. Our "Lennox" brand of residential heating and air conditioning products is sold directly through installing dealers -- the "one-step" distribution system -- which has created strong and long-term relationships with dealers in North America. Our "Armstrong Air," "Air-Ease," "Concord" and "Magic-Pak" residential heating and air conditioning brands are sold to regional distributors that in turn sell the products to installing contractors -- the "two-step" distribution system typically utilized in the heating and air conditioning industry. The acquisition of heating 29 33 and air conditioning dealers in Canada and the planned acquisition of dealers in the U.S. allows us to participate in the retail sale and service of heating and air conditioning products. Our hearth products, commercial air conditioning products and refrigeration products are also sold under multiple brand names and through a combination of wholesalers, contractors, original equipment manufacturers, manufacturers' representatives and national accounts. From our beginning in 1895 until the mid-1980's, we focused primarily on the North American residential heating and air conditioning market. In the 1980's, we expanded our product offerings by acquiring several heat transfer and commercial refrigeration businesses. In the mid-1990's, we increased our international presence, product offerings and brand portfolio through acquisitions in Europe, Latin America and the Asia Pacific region. The most significant international acquisition was the purchase in 1996 of a 50% interest in two operating subsidiaries of Ets. Brancher for approximately $22.0 million, which significantly expanded our geographic presence and provided us with an entry into the commercial air conditioning and refrigeration markets in Europe. In 1997, we increased our ownership interest in Ets. Brancher to 70% for an additional $18.4 million. In September 1998, we acquired a majority interest in McQuay do Brasil S.A., a Brazilian company which participates in the commercial refrigeration and heat transfer markets in Brazil and surrounding countries, for $20.5 million. We recently expanded our product offerings to include hearth products through the acquisitions of Superior Fireplace Company, Marco Mfg., Inc. and Pyro Industries, Inc. in the third quarter of 1998 and Security Chimneys International, Ltd. in the first quarter of 1999 for an aggregate purchase price of approximately $120 million. As a result of these acquisitions, we are one of the largest manufacturers of hearth products in the U.S. and Canada, offering a broad line of products through a variety of distribution channels. We were founded in 1895 in Marshalltown, Iowa when Dave Lennox, who owned a machine repair business for the railroads, successfully developed and patented a riveted steel coal-fired furnace which was substantially more durable than the cast iron furnaces used at the time. By 1904, the manufacture of these furnaces had grown into a significant business and was diverting the Lennox Machine Shop from its core business. As a result, in 1904, a group of investors headed by D.W. Norris bought the furnace business and named it the Lennox Furnace Company. Over the years, D.W. Norris ensured that ownership of Lennox was distributed to all generations of his family. Today, Lennox's ownership is broadly distributed among approximately 110 descendants of or persons otherwise related to D.W. Norris. INDUSTRY OVERVIEW NORTH AMERICAN RESIDENTIAL Residential Heating and Air Conditioning. The residential market in the U.S. and Canada is divided into two basic categories: furnaces and air conditioning systems. Air conditioning is further divided into two basic categories: residential split systems and heat pumps and window and room air conditioners. We do not participate in the window and room air conditioner category. Split system air conditioners are comprised of a condensing unit, normally located outside of the household, and an evaporator unit, which is typically positioned indoors to use the blower mechanism of a furnace or fan coil unit in the case of a heat pump. In recent decades the functions performed by the products of this market have become increasingly important to modern life. The advent of modern, high efficiency air conditioning was one of the significant factors contributing to the growth of large metropolitan areas in parts of the southern U.S. According to a report published by the U.S. Department of Housing and Urban Development for 1995, 98% of all new houses constructed in the southern region of the U.S. and 80% of all new houses in the U.S. included central air conditioning. According to the U.S. Census Bureau, manufacturers' sales for all residential air conditioners and warm air furnaces produced in 1997 for the U.S. market were approximately $5.5 billion, reflecting a compound annual growth rate of approximately 7.2% from 1993 to 1997. We estimate that manufacturers' sales in Canada were approximately $200 million in 1997. Services in the residential market in North America consist of the installation, replacement, maintenance and repair of heating and air conditioning systems at existing residences and the installation of heating and air conditioning systems at newly constructed homes. This market is served by small, owner-operated businesses 30 34 operating in a single geographic area and dealers owned by consolidators, utility companies and others, some of whom may operate under a uniform trade name and in multiple geographic locations. The retail sales and service market in the U.S. is comprised of over 30,000 dealers. The principal factors affecting market growth in the North American residential market are new home construction, the weather and economic conditions, especially consumer confidence. Residential heating and air conditioning products are sold for both the replacement and new construction markets. The residential new construction market has historically been a more price sensitive market because many homebuilders focus on initial price rather than operating efficiency or ongoing service costs. Hearth Products. The main components of the hearth products market are pre-fabricated gas fireplaces and inserts, pre-fabricated wood burning fireplaces and inserts, pellet stoves, gas logs, and accessories and miscellaneous items. We participate in all major aspects of the hearth products market. According to the Hearth Products Association, an industry trade group, there were 2.3 million unit sales in 1998, including all gas and wood burning appliances, and this market is expected to grow at 7.5% per year through 2000. The addition of a fireplace is considered one of the best return on investment decisions that a homeowner can make. Hearth products are distributed and sold through many channels, ranging from contractors to specialty retailers. COMMERCIAL AIR CONDITIONING The global commercial air conditioning market is divided into two basic categories: unitary air conditioners and applied systems. We primarily participate in the unitary air conditioning market in North America and in both the unitary and applied systems markets in Europe. Unitary products consist of modular split systems and packaged products with up to 30 tons of cooling capacity. One ton of cooling capacity is equivalent to 12,000 BTUs and is generally adequate to air condition approximately 500 square feet of space. Packaged units are self-contained heating and cooling or cooling only units that typically fit on top of a low rise commercial building such as a shopping center or a restaurant. Applied systems are typically larger engineered systems, which are designed to operate in multi-story buildings and include air cooled and water cooled chillers, air handling units and equipment to monitor and control the entire system. According to the Air-Conditioning & Refrigeration Institute, an industry trade group, global manufacturers' sales for all commercial air conditioning systems produced in 1994 (the latest available data) were approximately $14 billion. The principal factors affecting growth in this market are new construction, economic conditions and environmental regulation of refrigerants. Unlike residential heating and air conditioning systems, some commercial air conditioning systems use refrigerants that have been banned or that are currently being phased out, especially in Europe. We expect that such regulation will lead to increased growth in this market. COMMERCIAL REFRIGERATION The global refrigeration market is a highly diversified market, including everything from household refrigerators and walk-in coolers to large, ammonia based flash freezing plants and process cooling equipment. We define our served market as the design and manufacture of equipment used in cold storage, primarily for the preservation of perishable goods. Our served market includes condensing units, unit coolers, air cooled condensers, non-supermarket racks and packaged systems. According to the U.S. Census Bureau, our served market in the U.S. accounted for approximately $510.9 million in revenues in 1997, reflecting a compound annual growth rate of approximately 5.3% from 1993 to 1997. The principal factors affecting growth in the commercial refrigeration market are: - new commercial construction activity, including construction of supermarkets, restaurants, convenience stores and distribution centers; - replacement and retrofit activity in commercial buildings such as efficiency improvements and store design changes; and 31 35 - emergency replacement activity such as replacement of weather related product/component breakdowns and product maintenance. HEAT TRANSFER The heat transfer surface or coil is a fundamental technology employed in the heating and cooling cycles for HVACR products. The global heat transfer surface market is comprised not only of the traditional HVACR applications such as furnaces, air conditioners and unit coolers, but also numerous other applications such as ice machines, refrigerated trucks, certain farm equipment and off-road vehicles, recreational vehicles, computer room air conditioners and process cooling equipment used with sophisticated laser cutting machines. We produce heat transfer surfaces not only for traditional HVACR applications, but also for many of these other applications. Many HVACR manufacturers produce standard coils for their own use and generally do not sell coils to third parties. Coils are also designed and produced by independent coil manufacturers and sold to original equipment manufacturers for use in their products. Coils are typically designed, developed and sold by engineers who work with customers to produce a coil that will meet the customer's precise specifications. Factors affecting a coil purchaser's decision are quality, delivery time, engineering and design capability, and price. Since heat transfer products are a fundamental part of HVACR products, the heat transfer market is driven by the same economic factors that affect the HVACR markets generally. Because of the fragmented nature of this market and the fact that coils are often produced internally by HVACR manufacturers, it is difficult to gauge the size of the worldwide served heat transfer market. According to the U.S. Census Bureau, the served market in the U.S. (i.e., third party sales) accounted for approximately $528.1 million in revenues in 1997, reflecting a compound annual growth rate of approximately 6.2% from 1993 to 1997. COMPETITIVE STRENGTHS We have a combination of strengths that position us to continue to be a leading provider of climate control solutions including: STRONG BRAND RECOGNITION AND REPUTATION We believe that our well known brand names and reputation for quality products and services position us to compete successfully in our existing markets and to continue to expand internationally. Our studies indicate that our "Lennox" brand is the most widely recognized brand name in the North American residential heating and air conditioning markets. Furthermore, in a recent survey of home builders, the "Lennox" brand received the highest overall rating in terms of product quality for furnaces and unitary air conditioners. We market our other HVACR and hearth products under the well known brand names of "Armstrong Air", "Bohn", "Larkin" and "Superior", among others. BREADTH OF DISTRIBUTION We market and distribute our products using multiple brand names through multiple distribution channels to penetrate different segments of the HVACR market. We sell our heating and air conditioning products through independent and Lennox-owned installing dealers, as well as through regional distributors. Our hearth products, commercial air conditioning and refrigeration products are also sold under multiple brand names and through a combination of wholesalers, installing contractors, manufacturers' representatives, original equipment manufacturers, national accounts and specialty retailers. We believe that sales growth is driven, in part, by the level of exposure to our customers and our distribution strategy is designed to maximize this exposure. PROVEN HEAT TRANSFER EXPERTISE Heat transfer surfaces, which include evaporator and condenser coils, are critical to the operation of most HVACR products. For a given application, a variety of factors must be evaluated, such as the size of the HVACR unit and desired energy efficiency, while considering such additional elements as manufacturing 32 36 ease. Since our acquisition of the Heatcraft business in 1986, we have devoted significant resources to the development of heat transfer surfaces. We use computer-aided design and other advanced software to improve the efficiency of designs and simulate and evaluate the movement of refrigerants even before a prototype is built. Since we also produce coils for sale to third parties, we are able to spread our research and development costs over third party purchases of heat transfer products as well as sales of our own HVACR products. We have recently agreed to acquire Livernois Engineering Holding Company, which will provide us with access to additional heat transfer technology. Livernois produces heat transfer manufacturing equipment for the HVACR and automotive industries. COMMITMENT TO PRODUCT INNOVATION AND TECHNOLOGICAL LEADERSHIP Throughout our history, we have dedicated substantial resources to research and development and product innovation. We pioneered the introduction of the forced air furnace in 1935, which resulted in new approaches to home design for more efficient heating. Other examples of our product innovation include: - the multi-zone rooftop air conditioner in 1965; - the two-speed condensing unit for more efficient air conditioning in 1973; - the high efficiency gas furnace in 1982; - the first commercially available high efficiency combination hot water heater and furnace in 1994; and - "Floating Tube" and "Thermoflex" technologies, which significantly reduce leaks in air cooled condensers and unit coolers, in 1995. We have invested approximately $125 million over the last five years on research and development activities, and we intend to continue to invest in these activities to create innovative and technologically superior products. DEMONSTRATED MANUFACTURING EFFICIENCY Over the last several years, we have introduced concepts of "Demand Flow"(R) technology, cellular manufacturing, just-in-time inventory management and configure-to-order processes to reduce production cycle lead times to a week or as little as 48 hours in many of our manufacturing facilities, compared to lead times of 90 days or more before the introduction of such concepts. The increases in manufacturing efficiency have led to improvements in inventory turnover. Without these improvements, along with improvements in accounts receivable and accounts payable management, we estimate that our investment in working capital would have been approximately $180 million higher at December 31, 1998. GROWTH STRATEGY Our growth strategy is designed to capitalize on our competitive strengths in order to expand our market share and profitability in the worldwide HVACR markets. We will continue to pursue internal programs and strategic acquisitions that broaden our product and service offerings, expand our market opportunities and enhance our technological expertise. The key elements of this strategy include: EXPAND MARKET IN NORTH AMERICA Our program to acquire heating and air conditioning dealers in the U.S. and Canada represents a new direction for the heating and air conditioning industry because, to our knowledge, no other major manufacturer has made a significant investment in retail distribution. This strategy will enable us to extend our distribution directly to the consumer, thereby permitting us to participate in the revenues and margins available at the retail level while strengthening and protecting our brand equity. We believe that the retail sales and service market represents a significant growth opportunity because this market is large and highly fragmented. The retail sales and service market in the U.S. is comprised of over 30,000 dealers. We started this program in September 1998, and as of March 31, 1999 we had acquired 37 dealers in Canada for an aggregate purchase 33 37 price of approximately $55 million and had signed letters of intent to acquire nine additional Canadian dealers for an aggregate purchase price of approximately $9 million. We intend to start acquiring dealers in the U.S. by initially focusing on our existing "Lennox" dealers and will try to achieve a balance between residential new construction, residential replacement and light commercial activities. We believe our long history of direct relationships with our dealers through the one-step distribution system and the resulting knowledge of local markets will give us advantages in identifying and acquiring suitable candidates. We have assembled an experienced management team to administer the dealer operations, and we have developed a portfolio of training programs, management procedures and goods and services that we believe will enhance the quality, effectiveness and profitability of dealer operations. In addition to our acquisition program, we have initiated a program to strengthen our independent dealer network by providing all dealers with a broad array of services and support. Participants in a newly-created Associate Dealer Program will receive certain retirement and other benefits in exchange for agreeing that a certain percentage of their purchases will be of our products and for granting us a right of first refusal to acquire their businesses. All independent dealers, including participants in the Associate Dealer Program, will be provided with access to Lennox-sponsored volume purchasing programs with third parties for goods and services used in their businesses. We also intend to increase our market share in North America by: - selectively expanding our "Lennox" independent dealer network; - promoting the cross-selling of our "Armstrong Air" and other residential heating and air conditioning brands to our existing network of "Lennox" dealers as a second line; - promoting the cross-selling of our hearth products to our "Lennox" dealer base; - expanding the geographic market for the "Armstrong Air" brand of residential heating and air conditioning products from its traditional presence in the Northeast and Central U.S. to the southern and western portions of the U.S.; - exploiting the fragmented third-party evaporator coil market; and - pursuing complementary acquisitions that expand our product offerings or geographic presence. EXPLOIT INTERNATIONAL OPPORTUNITIES Worldwide demand for residential and commercial heating, air conditioning, refrigeration and heat transfer products is increasing. We believe that the increasing international demand for these products presents substantial opportunities, especially in emerging markets and particularly for heat transfer and refrigeration products. An example is the increasing use of refrigeration products to preserve perishables including food products in underdeveloped countries. Refrigeration products generally have the same design and applications globally. To take advantage of international opportunities, we have made substantial investments in manufacturing facilities in Europe, Latin America and Asia Pacific through acquisitions, including a 70% interest in Ets. Brancher. Our international sales have grown from $28.5 million in 1996 to $244.5 million in 1998. We will continue to focus on expanding our international operations through acquisitions and internal growth to take advantage of international growth opportunities. We are also investing additional resources in our international operations with the goal of achieving manufacturing and distribution efficiencies comparable to that of our North American operations. INCREASE PRESENCE IN HEARTH PRODUCTS MARKET With our recent acquisitions of hearth products companies, we now manufacture and sell one of the broadest lines of hearth products in North America. We offer multiple brands of hearth products at a range of price points. We believe that this broad product line will allow us to compete successfully in the hearth products market since many distributors prefer to concentrate their product purchases with a limited number of suppliers. We believe that we can increase our penetration of this market by selling in the distribution 34 38 channels we acquired and through our historical distribution channels. Many of our heating and air conditioning dealers have begun to expand their product offerings to include hearth products. CONTINUE PRODUCT INNOVATION An important part of our growth strategy is to continue to invest in research and new product development. We have designated certain of our facilities as "centers for excellence" that are responsible for the research and development of core competencies vital to our success, such as combustion technology, vapor compression, heat transfer and low temperature refrigeration. Technological advances are disseminated from these "centers for excellence" to all of our operating divisions. Historically, our commitment to research and development has resulted in product innovations such as the first high efficiency gas furnace. More recently, we were the first to manufacture and market a complete combination high efficiency water heater and furnace, the CompleteHeat, and also developed an integrated electronic refrigeration control system, the Beacon control system. PRODUCTS NORTH AMERICAN RESIDENTIAL PRODUCTS AND SERVICES Heating and Air Conditioning Products. We manufacture and market a broad range of furnaces, heat pumps, air conditioners, packaged heating and cooling systems and related products. These products are available in a variety of product designs and efficiency levels at a range of price points intended to provide a complete line of home comfort systems for both the residential replacement and new construction markets. We market these products through multiple brand names. In addition, we manufacture zoning controls, thermostats and a complete line of replacement parts. We believe that by maintaining a broad product line with multiple brand names, we can address different market segments and penetrate multiple distribution channels. Our Advanced Distributor Products division builds evaporator coils, unit heaters and air handlers under the "ADP" brand as well as the "Lennox" and "Armstrong Air" brands. This division supplies us with components for our heating and air conditioning products and produces evaporator coils to be used in conjunction with competitors' heating and air conditioning products and as an alternative to such competitors' brand name components. We started this business in 1993 and have been able to achieve an approximate 20% share of this market for evaporator coils through the application of our technological and manufacturing skills. Hearth Products. We believe we are the only North American HVACR manufacturer that also designs, manufactures and markets residential hearth products. Our hearth products include prefabricated gas and wood burning fireplaces, free standing pellet and gas stoves, fireplace inserts, gas logs and accessories. Many of the fireplaces are built with a blower or fan option and are efficient heat sources as well as attractive amenities to the home. Prior to the hearth products acquisitions, we offered a limited selection of hearth products in Canada and, to a lesser extent, in the U.S. We substantially expanded our offering of hearth products and distribution outlets with these acquisitions. We currently market our hearth products under the "Lennox", "Superior", "Marco", "Whitfield", and "Security Chimneys" brand names. We believe that our strong relationship with our dealers and our brand names will assist in selling into this market. Retail Service. With our recently initiated program of acquiring dealers in the U.S. and Canada, we have begun to provide installation, maintenance, repair and replacement services for heating and air conditioning systems directly to both residential and light commercial customers. Installation services include the installation of heating and air conditioning systems in new construction and the replacement of existing systems. Other services include preventative maintenance, emergency repairs and the replacement of parts associated with heating and air conditioning systems. We also sell a wide range of mechanical and electrical equipment, parts and supplies in connection with these services. 35 39 COMMERCIAL AIR CONDITIONING We manufacture and sell commercial air conditioning equipment in North America, Europe, Asia Pacific and South America. North America. In the North American commercial markets, our air conditioning equipment is used in applications such as low rise office buildings, restaurants, retail and supermarket centers, churches and schools. Our product offerings for these applications include rooftop units which range from two to 30 tons of cooling capacity and split system/air handler combinations which range from two to 20 tons. In North America, we sell unitary equipment as opposed to larger applied systems. Our newest rooftop unit, the L Series, was introduced in 1995 and has been well received by the national accounts market where it is sold to restaurants, mass merchandisers and other retail outlets. We believe that this product's success is attributable to its efficiency, design flexibility, low life cycle cost, ease of service and advanced control technology. International. We compete in the commercial air conditioning market in Europe through our ownership of 70% of Ets. Brancher and Ets. Brancher's operating subsidiaries, HCF S.A. and Friga-Bohn S.A. We have agreed to buy the remaining 30% interest in Ets. Brancher on March 31, 2000 for approximately $17 million. HCF manufactures and sells unitary products which range from two to 30 tons and applied systems which range up to 500 tons. HCF's products consist of chillers, air handlers, fan coils and large rooftop units and serve medium high-rise buildings, institutional applications and other field engineered applications. HCF manufactures its air conditioning products in several locations throughout Europe, including sites in the United Kingdom, France, Holland and Spain, and markets such products through various distribution channels in the foregoing countries and Italy, Germany, Belgium and the Czech Republic. We have been active in Australia for several years, primarily in the distribution of our residential and light commercial heating and air conditioning products manufactured in North America. In 1997, we acquired the assets of Alcair Industries, an Australian manufacturer of commercial heating and air conditioning products (packaged and split systems) ranging in size from two to 60 tons. This acquisition provided us with a manufacturing presence, doubled our revenues in Australia and added marketing, distribution and management strength to our operations in Australia. Through our 50% owned Fairco joint venture in Argentina, we manufacture split system heating and air conditioning products and a limited range of L Series commercial air conditioning products for sale in Argentina, Chile and the surrounding Mercosur trading zone, which includes Brazil, Argentina, Bolivia, Paraguay and Uruguay. COMMERCIAL REFRIGERATION North America. We are one of the leading manufacturers of commercial refrigeration products in North America. Our refrigeration products include chillers, condensing units, unit coolers, fluid coolers, air cooled condensers and air handlers. Our refrigeration products are sold for cold storage applications to preserve food and other perishables. These products are used by supermarkets, convenience stores, restaurants, warehouses and distribution centers. As part of our sale of commercial refrigeration products, we routinely provide application engineering for consulting engineers, contractors and others. Some of our larger commercial refrigeration projects have included the sale of custom designed systems for the Georgia Dome, Camden Yards, Ohio University, the Boston Museum of Fine Arts and Ericsson Stadium. International. Friga-Bohn manufactures and markets refrigeration products through manufacturing facilities and joint ventures located in France, Italy and Spain. Friga-Bohn's refrigeration products include small chillers, unit coolers, air cooled condensers, fluid coolers and refrigeration racks. These products are sold to distributors, installing contractors and original equipment manufacturers. We also own 50% of a joint venture in Mexico that produces unit coolers and condensing units of the same design and quality as those manufactured by us in the U.S. Since this venture produces a smaller range of products, the product line is complemented with imports from the U.S. which are sold through the joint venture's distribution network. Sales are made in Mexico to wholesalers, installing contractors and original 36 40 equipment manufacturers. As production volumes increase, there exists the potential to export some of the high labor content products from the joint venture into North America and Latin America. In the third quarter of 1998, we acquired a 79% interest in McQuay do Brasil S.A., a Brazilian company that manufactures condensing units and unit coolers. We believe this acquisition gives us the leading market share for commercial refrigeration products in Brazil. In the fourth quarter of 1998, we acquired the assets of Lovelock Luke Pty. Limited, a distributor of refrigeration and related equipment in Australia and New Zealand. This acquisition gives us an established commercial refrigeration business in Australia and New Zealand. HEAT TRANSFER We are one of the largest manufacturers of heat transfer coils in the U.S., Europe, Mexico and Brazil. These products are used primarily by original equipment manufacturers of residential and commercial air conditioning products, transportation air conditioning and refrigeration systems, and commercial refrigeration products. A portion of our original equipment manufacturer coils are produced for use in our residential and commercial HVACR products. We also produce private label replacement coils for use in other manufacturers' HVACR equipment. We believe that the engineering expertise of our sales force provides us with an advantage in designing and applying these products for our customers. Advanced computer software enables us to predict with a high degree of accuracy the performance of complete air conditioning and refrigeration systems. In addition to supplying the original equipment manufacturer market, we also produce replacement coils for large commercial air conditioning, heating and industrial processing systems. Many of these coils are specially designed for particular systems and in the event of a failure may need to be replaced quickly. We are the industry leader in this market and have designed our manufacturing processes and systems in North America so that we can deliver custom coils within 48 hours of receipt of an order. This premium service enables us to receive superior prices and generate attractive margins. We also design and manufacture the equipment and tooling necessary to produce coils. We use such equipment and tooling in our manufacturing facilities and sell it to third parties. Typically, there is a long lead time between the initial order and receipt for this type of equipment and tooling from third parties. Since we have the ability to quickly produce the equipment and tooling necessary to manufacture heat transfer products and systems, we can accelerate the international growth of our heat transfer products segment. For example, we were able to design, manufacture and deliver the equipment necessary to produce evaporator and condenser coils for our joint venture in Mexico in what we estimate was half the time than would otherwise have been required to obtain the equipment from third parties. Upon completion of our acquisition of Livernois, we will also supply heat transfer manufacturing equipment to the automotive industry. In addition to manufacturing heat transfer products in the North American market, we produce coils for the European market through a joint venture in the Czech Republic. Our joint venture in Mexico produces evaporator and condenser coils for use in that country and for export to the Caribbean and the U.S. Our Brazilian joint venture manufactures heat transfer coils that are sold to both HVACR manufacturers and automotive original equipment manufacturers in Brazil. MARKETING AND DISTRIBUTION We manage numerous distribution channels for our products in order to better penetrate the HVACR market. Generally, our products are sold through a combination of distributors, independent and company-owned dealers, wholesalers, manufacturers' representatives, original equipment manufacturers and national accounts. We have also established separate distribution networks in each country in which we conduct operations. We deploy dedicated sales forces across all our business segments and brands in a manner designed to maximize the ability of each sales force to service its particular distribution channel. To maximize enterprise-wide effectiveness, we have active cross-functional and cross-organizational teams working on issues such as pricing and coordinated approaches to product design and national account customers with 37 41 interests cutting across business segments. We have approximately 1,600 persons employed in sales and marketing positions and spent $50.2 million on advertising, promotions and related marketing activities in 1998. One example of the competitive strength of our marketing and distribution strategy is in the North American residential heating and air conditioning market, in which we use three distinctly different distribution approaches -- the one-step distribution system, the two-step distribution system and sales made directly to consumers through Lennox-owned dealers. We market and distribute our "Lennox" brand of heating and air conditioning products directly to approximately 6,000 dealers that install these products. We distribute our "Armstrong Air", "Air-Ease", "Concord" and "Magic-Pak" brands of residential heating and air conditioning products through the traditional two-step distribution process whereby we sell our products to distributors who, in turn, sell the products to a local installing dealer. Accordingly, by using multiple brands and distribution channels, we are able to better penetrate the North American residential heating and air conditioning market. In addition, we have begun to acquire or establish distributors in key strategic areas when a satisfactory relationship with an independent distributor is not available. We have initiated a program to acquire high quality dealers in metropolitan areas in the U.S. and Canada so we can provide heating and air conditioning products and services directly to consumers. We intend to start acquiring dealers in the U.S. by initially focusing on our existing "Lennox" dealers who are part of our one-step distribution system. Through the years, the "Lennox" brand has become synonymous with the "Dave Lennox" image, which is utilized in national television and print advertising as well as in numerous locally produced dealer ads, open houses and trade events, and is easily the best recognized advertising icon in the heating and air conditioning industry. We spent an aggregate of $40.1 million in advertising, promotions and related marketing activities in 1998 on the "Lennox" brand alone. MANUFACTURING We operate 15 manufacturing facilities in the U.S. and Canada and 19 outside the U.S. and Canada. These plants range from small manufacturing facilities to large 1,000,000 square foot facilities in Grenada, Mississippi and Marshalltown, Iowa. In our facilities most impacted by seasonal demand, we manufacture both heating and air conditioning products to smooth seasonal production demands and maintain a relatively stable labor force. We are generally able to hire temporary employees to meet changes in demand. Over the last several years, we have introduced concepts of "Demand Flow"(R) technology, cellular manufacturing, just-in-time inventory management and configure-to-order processes to reduce production cycle lead times to a week or as little as 48 hours in many of our manufacturing facilities, compared to lead times of 90 days or more before the introduction of such concepts. These processes enable us to deliver to our customers the product with the exact specifications and features they desire in a very short lead time while reducing inventory, inventory obsolescence and working capital. If these improvements had not occurred, along with improvements in accounts receivable and accounts payable management, we estimate that our investment in working capital would have been approximately $180 million higher at December 31, 1998. These improvements in manufacturing efficiency have also allowed us to produce more output with a smaller workforce and less factory space, and accordingly to consolidate our manufacturing facilities. Some of the recently acquired manufacturing facilities have not yet reached the levels of efficiency that have been achieved at our plants which we have owned for a longer time. However, we intend to bring our manufacturing and operating expertise to these plants. PURCHASING We rely on various suppliers to furnish the raw materials and components used in the manufacture of our products. To maximize our buying power in the marketplace, we utilize a "purchasing council" that consolidates purchases of our entire domestic requirements of particular items across all business segments. The purchasing council generally concentrates its purchases for a given material or component with one or two 38 42 suppliers, although we believe that there are alternative suppliers for all of our key raw material and component needs. Compressors, motors and controls constitute our most significant component purchases, while steel, copper and aluminum account for the bulk of our raw material purchases. Although most of the compressors used by us are purchased directly from major compressor manufacturers, we own a 24.5% interest in a joint venture to manufacture compressors in the one and one-half to seven horsepower range. We expect that this joint venture, which began limited production in April 1998, will be capable of providing us with a substantial portion of our compressor requirements in the residential air conditioning market after achieving full production levels, which is expected in 2001. We attempt to minimize the risk of price fluctuations in certain key components by entering into contracts, typically at the beginning of the year, which generally provide for fixed prices for our needs throughout the year. In instances where we are unable to pass on to our customers increases in the costs of copper and aluminum, we enter into forward contracts for the purchase of such materials. We have forward commitments for the substantial majority of our internal needs of aluminum through December 1999 and copper through December 2000. INFORMATION SYSTEMS Our North American operations are supported by enterprise business systems which support all core business processes. Enterprise business systems are designed to enhance the continuity of operations, ensure appropriate controls, and support timely and efficient decision making. Our largest operating divisions began installing the SAP enterprise business software system in 1996. We have substantially completed the implementation of SAP software and full implementation by all divisions converting to SAP is expected to be completed by the end of 1999. The SAP software system is designed to facilitate the flow of information and business processes across all business functions such as sales, manufacturing, distribution and financial accounting. TECHNOLOGY AND RESEARCH AND DEVELOPMENT We support an extensive research and development program focusing on the development of new products and improvements to our existing product lines. We spent an aggregate of $23.2 million, $25.4 million and $31.8 million on research and development during 1996, 1997 and 1998, respectively. As of December 31, 1998, we employed approximately 480 persons dedicated to research and development activities. We have a number of research and development facilities located around the world, including a limited number of "centers for excellence" that are responsible for the research and development of particular core competencies vital to our business, such as combustion technology, vapor compression, heat transfer and low temperature refrigeration. We use advanced, commercially available computer-aided design, computer-aided manufacturing, computational fluid dynamics and other sophisticated software not only to streamline the design and manufacturing processes, but also to give us the ability to run complex computer simulations on a product design before a working prototype is created. We operate a full line of metalworking equipment and advanced laboratories certified by applicable industry associations. PATENTS AND PROPRIETARY RIGHTS We hold numerous patents that relate to the design and use of our products. We consider these patents important, but no single patent is material to the overall conduct of our business. Our policy is to obtain and protect patents whenever such action would be beneficial to us. We own several trademarks that we consider important in the marketing of our products, including Lennox(R), Heatcraft(R), CompleteHeat(R), Raised Lance(R), Larkin(TM), Climate Control(TM), Chandler Refrigeration(R), Bohn(R), Advanced Distributor Products(R), Armstrong Air(TM), Air-Ease(R), Concord(R), Magic-Pak(R), Superior(TM), Marco(R), Whitfield(R), Security Chimneys(R), Janka(R), Alcair(TM) and Friga-Bohn(TM). We believe our rights in these trademarks are adequately protected. 39 43 COMPETITION Substantially all of the markets in which we participate are highly competitive. The most significant competitive factors facing us are product reliability, product performance, service and price, with the relative importance of these factors varying among our product lines. In addition, as we acquire more heating and air conditioning dealers, we will face increasing competition from independent dealers and dealers owned by consolidators and utility companies. Certain competitors may have greater financial and marketing resources than we have. Listed below are some of the companies that we view as our main manufacturing competitors in each segment we serve, with relevant brand names, when different than the company name, shown in parentheses. - North American residential -- United Technologies Corporation (Carrier); Goodman Manufacturing Company (Janitrol, Amana); American Standard Companies Inc. (Trane); York International Corporation; Hearth Technologies Inc. (Heatilator); and CFM Majestic, Inc. (Majestic). - Commercial air conditioning -- United Technologies Corporation (Carrier); American Standard Companies Inc. (Trane); York International Corporation; Daikin Industries, Ltd.; and McQuay International. - Commercial refrigeration -- United Technologies Corporation (Ardco Group); Tecumseh Products Co.; Copeland Corporation; and Hussmann International Inc. (Krack). - Heat transfer -- Modine Manufacturing Company and Super Radiator Coils. EMPLOYEES As of December 31, 1998, we employed approximately 11,700 employees, approximately 3,400 of which were represented by unions. The number of hourly workers we employ during the course of the year may vary in order to match our labor needs during periods of fluctuating demand. We believe that our relationships with our employees are generally good. Within the U.S., we have eight manufacturing facilities and five distribution centers, along with our North American Parts Center in Des Moines, Iowa, with collective bargaining agreements ranging from three to eight years in length. The five distribution centers are covered by a single contract that expires in 2001. With respect to our significant manufacturing facilities, two collective bargaining agreements expire in April 1999 -- Bellevue, Ohio and Union City, Tennessee -- and one expires in December 1999 -- Lynwood, California. Three collective bargaining agreements expire in 2000 -- Marshalltown, Iowa, Burlington, Washington and Atlanta, Georgia -- and one expires in 2002 -- Danville, Illinois. Outside of the U.S., we have 12 significant facilities that are represented by unions. The four agreements for HCF in France have no fixed expiration date. The agreements at our facilities in Toronto, Ontario and Laval, Quebec expire in April 1999 and December 1999, respectively, and the agreement at our facility in Burgos, Spain expires in 2000. We believe that our relationships with the unions representing our employees are generally good, and do not anticipate any material adverse consequences resulting from negotiations to renew these agreements. 40 44 PROPERTIES The following chart lists our major domestic and international manufacturing, distribution and office facilities and whether such facilities are owned or leased: DOMESTIC FACILITIES
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED -------- -------------------------------- ------------------ ------------ Richardson, TX World headquarters and offices; Lennox N/A Owned and Industries headquarters; 230,000 Leased square feet Bellevue, OH Armstrong headquarters, factory and Residential furnaces, residential and Owned and distribution center; 800,000 square light commercial air conditioners and Leased feet heat pumps Grenada, MS Heatcraft Heat Transfer Division Coils and copper tubing; evaporator Owned and headquarters and factory, 1,000,000 coils, gas-fired unit heaters and Leased square feet; Advanced Distributor residential air handlers; and custom Products factory, 300,000 square feet; order replacement coils commercial products factory, 217,000 square feet Stone Mountain, GA Heatcraft Refrigeration Products Commercial and industrial condensing Owned Division headquarters, R&D and units, packaged chillers and custom factory; 145,000 square feet refrigeration racks Marshalltown, IA Lennox Industries heating and air Residential heating and cooling Owned and conditioning products factory, products, gas furnaces, split-system Leased 1,000,000 square feet; distribution condensing units, split-system heat center, 300,000 square feet pumps and CompleteHeat Des Moines, IA Lennox Industries distribution center Central supplier of Lennox repair Leased and light manufacturing; 352,000 parts square feet Carrollton, TX Lennox Industries heating and air N/A Owned conditioning products development and research facility; 130,000 square feet Stuttgart, AR Lennox Industries light commercial Commercial rooftop equipment and Owned and heating and air conditioning factory; accessories Leased 500,000 square feet Union City, TN Superior Fireplace Company factory; Gas and wood burning fireplaces 294,690 square feet Lynwood, CA Marco Mfg. Inc. headquarters and Gas and wood burning fireplaces Leased factory; 200,000 square feet
INTERNATIONAL FACILITIES
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED -------- -------------------------------- ------------------ ------------ Genas, France Friga-Bohn headquarters and factory; Heat exchangers for refrigeration and * 16,000 square meters air conditioning; refrigeration products, condensers, fluid coolers, pressure vessels, liquid receivers and refrigeration components Mions, France HCF-Lennox headquarters and factories; Air cooled chillers, water cooled * 12,000 square meters chillers, reversible chillers and packaged boilers Burgos, Spain Lennox-Refac factory; 8,000 square Comfort air conditioning equipment, * meters packaged and split units (cooling or heat pump); small and medium capacity water cooled chillers Krunkel, Germany European headquarters and factories Process cooling systems * for HYFRA GmbH products; 6,000 square meters Prague, Czech Janka and Friga-Coil factories; 30,000 Air handling equipment; heat transfer * Republic square meters coils Sydney, Australia Lennox Australia Pty. Ltd. Rooftop packaged and split commercial Leased headquarters and factory; 20,000 air conditioners square feet San Jose dos McQuay do Brasil headquarters and Refrigeration condensing units, unit * Campos, Brazil factory; 160,000 square feet coolers and heat transfer coils Etobicoke, Canada Lennox-Canada factory, 212,000 square Multi-position gas furnaces, gas Owned feet fireplaces and commercial unit heaters
- --------------- * Facilities owned or leased by a joint venture in which we have an interest. 41 45 In addition to the properties described above and excluding dealer facilities, we lease over 60 facilities in the U.S. for use as sales offices and district warehouses and a limited number of additional facilities worldwide for use as sales and service offices and regional warehouses. We believe that our properties are in good condition and adequate for our requirements. We also believe that our principal plants are generally adequate to meet our production needs. REGULATION Our operations are subject to evolving and often increasingly stringent federal, state, local and international laws and regulations concerning the environment. Environmental laws that affect or could affect our domestic operations include, among others, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, any regulations promulgated under these acts and various other Federal, state and local laws and regulations governing environmental matters. We believe we are in substantial compliance with such existing environmental laws and regulations. Our non-U.S. operations are also subject to various environmental statutes and regulations. Generally, these statutes and regulations impose operational requirements that are similar to those imposed in the U.S. We believe we are in substantial compliance with applicable non-U.S. environmental statutes and regulations. Refrigerants. In the past decade, there has been increasing regulatory and political pressure to phase out the use of certain ozone depleting substances, including hydrochlorofluorocarbons, which are sometimes referred to as "HCFCs". This development is of particular importance to us and our competitors because of the common usage of HCFCs as refrigerants for air conditioning and refrigeration equipment. As discussed below, we do not believe that implementation of the phase out schedule for HCFCs contained in the current regulations will have a material adverse effect on our financial position or results of operations. We do believe, however, that there will likely be continued pressure by the international environmental community for the U.S. and other countries to accelerate the phase out schedule. We have been an active participant in the ongoing international dialogue on these issues and believe that we are well positioned to react to any changes in the regulatory landscape. In September 1987, the U.S. became a signatory to an international agreement titled the Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol requires its signatories to phase out HCFCs on an orderly basis. All countries in the developed world have become signatories to the Montreal Protocol. The manner in which these countries implement the Montreal Protocol and regulate HCFCs differs widely. The 1990 U.S. Clean Air Act amendments implement the Montreal Protocol by establishing a program to limit the production, importation and use of certain ozone depleting substances, including HCFCs currently used as refrigerants by us and our competitors. Under the Act and implementing regulations, all HCFCs must be phased out between 2010 and 2030. We believe that these regulations as currently in effect will not have a material adverse effect on our operations. It is not expected that the planned phase out of HCFCs will have a significant impact on the sales of products utilizing these refrigerants prior to the end of the decade. Nonetheless, as the supply of virgin and recycled HCFCs falls, it will be necessary to address the need to substitute permitted substances for HCFCs. Further, the U.S. is under pressure from the international environmental community to accelerate the current 2030 deadline for phase out of HCFCs. An accelerated phase out schedule could adversely affect our future financial results and the industry generally. We, in conjunction with major chemical manufacturers, are continually in the process of reviewing and addressing the potential impact of refrigerant regulations on our products. We believe that the combination of products that presently utilize HCFCs, and products in the field which can be retrofitted to alternate refrigerants, provide a complete line of commercial and industrial products. Therefore, we do not foresee any material adverse impact on our business or competitive position as a result of the Montreal Protocol, the 1990 Clean Air Act amendments or their implementing regulations. However, we believe that the implementation 42 46 of severe restrictions on the production, importation or use of refrigerants we employ in larger quantities or acceleration of the current phase out schedule could have such an impact on us and our competitors. We are subject to appliance efficiency regulations promulgated under the National Appliance Energy Conservation Act of 1987, as amended, and various state regulations concerning the energy efficiency of our products. We have developed and are developing products which comply with National Appliance Energy Conservation Act regulations, and do not believe that such regulations will have a material adverse effect on our business. The U.S. Department of Energy began in 1998 its review of national standards for comfort products covered under National Appliance Energy Conservation Act. It is anticipated that the National Appliance Energy Conservation Act regulations requiring manufacturers to phase in new higher efficiency products will not take effect prior to 2006. We believe we are well positioned to comply with any new standards that may be promulgated by the Department of Energy and do not foresee any adverse material impact from a National Appliance Energy Conservation Act standard change. Remediation Activity. In addition to affecting our ongoing operations, applicable environmental laws can impose obligations to remediate hazardous substances at our properties, at properties formerly owned or operated by us and at facilities to which we sent or send waste for treatment or disposal. We are currently involved in remediation activities at our facility in Grenada, Mississippi and at a formerly owned site in Ft. Worth, Texas. In addition, former hazardous waste management units at two of our facilities, Danville, Illinois and Wilmington, North Carolina, are currently in the process of being closed under the Resource Conservation and Recovery Act. The Resource Conservation and Recovery Act closure process can result in the need to conduct soil and/or groundwater remediation to address any on-site releases. The Grenada facility is subject to an administrative order issued by the Mississippi Department of Environmental Quality pursuant to which we will conduct groundwater remediation. We have established a $1.8 million reserve to cover costs of remediation at the Grenada facility and possible costs associated with the Resource Conservation and Recovery Act closure at the Danville facility. We also have installed and are operating a groundwater treatment system at our previously owned facility in Ft. Worth, Texas. We have established a reserve having a balance of approximately $200,000 to cover the projected $50,000 annual operating costs for ongoing treatment at the Ft. Worth site. Resource Conservation and Recovery Act closure activities at the Wilmington facility include an ongoing groundwater remediation project. This project is being conducted and funded by a prior owner of the facility, pursuant to an indemnification obligation under the contract pursuant to which we acquired the facility. We have no reason to believe that the prior owner will not continue to conduct and pay for the required remediation at the Wilmington facility. However, if the prior owner refused to meet its contractual obligations, we could be required to complete the remediation. In addition, we have from time to time received notices that we are a potentially responsible party along with other potentially responsible parties in Superfund proceedings for cleanup of hazardous substances at certain sites to which the potentially responsible parties are alleged to have sent waste. At present, our only active Superfund involvements are at the Granville Solvents Superfund Site located in Ohio and at the Envirochem Third Site in Illinois. Since 1994, we have spent an average of $49,000 per year for costs related to the Granville Solvents site and expect to incur similar costs with respect to the site over the next few years. Total estimated exposure costs at the Envirochem Third Site are approximately $30,000. Based on the facts presently known, we do not believe that environmental cleanup costs associated with either Superfund site will have a material adverse effect on our financial position or results of operations. Dealer operations. The heating and air conditioning dealers acquired in the U.S. and Canada will be subject to various federal, state and local laws and regulations, including, among others: - permitting and licensing requirements applicable to service technicians in their respective trades; - building, heating, ventilation, air conditioning, plumbing and electrical codes and zoning ordinances; - laws and regulations relating to consumer protection, including laws and regulations governing service contracts for residential services; and - laws and regulations relating to worker safety and protection of the environment. 43 47 A large number of state and local regulations governing the residential and commercial maintenance services trades require various permits and licenses to be held by individuals. In some cases, a required permit or license held by a single individual may be sufficient to authorize specified activities for all of our service technicians who work in the geographic area covered by the permit or license. LEGAL PROCEEDINGS We are involved in various claims and lawsuits incidental to our business. In the opinion of our management, these claims and suits in the aggregate will not have a material adverse effect on our business, financial condition or results of operations. 44 48 MANAGEMENT The directors and executive officers of our company, their present positions and their ages are as follows:
NAME AGE POSITION ---- --- -------- John W. Norris, Jr. ...................... 63 Chairman of the Board and Chief Executive Officer H. E. French.............................. 57 President and Chief Operating Officer, Heatcraft Inc. Robert E. Schjerven....................... 56 President and Chief Operating Officer, Lennox Industries Inc. Michael G. Schwartz....................... 40 President and Chief Operating Officer, Armstrong Air Conditioning Inc. Harry J. Ashenhurst....................... 50 Executive Vice President, Human Resources Scott J. Boxer............................ 48 Executive Vice President, Lennox Global Ltd. and President, European Operations Carl E. Edwards, Jr. ..................... 57 Executive Vice President, General Counsel and Secretary W. Lane Pennington........................ 43 Executive Vice President, Lennox Global Ltd. and President, Asia Pacific Operations Clyde W. Wyant............................ 60 Executive Vice President, Chief Financial Officer and Treasurer John J. Hubbuch........................... 56 Vice President, Controller and Chief Accounting Officer Linda G. Alvarado......................... 47 Director David H. Anderson......................... 58 Director Richard W. Booth.......................... 67 Director David V. Brown............................ 51 Director James J. Byrne............................ 63 Director Thomas B. Howard, Jr. .................... 70 Director John E. Major............................. 53 Director Donald E. Miller.......................... 68 Director Loraine B. Millman........................ 52 Director Robert W. Norris.......................... 61 Director Terry D. Stinson.......................... 57 Director Lynn B. Storey............................ 58 Director Richard L. Thompson....................... 59 Director
The following biographies describe the business experience of our executive officers and directors. John W. Norris, Jr. was elected Chairman of the Board of Directors of Lennox in 1991. He has served as a Director of Lennox since 1966. After joining Lennox in 1960, Mr. Norris held a variety of key positions including Vice President of Marketing, President of Lennox Industries (Canada) Ltd., and Corporate Senior Vice President. He became President of Lennox in 1977 and was appointed President and Chief Executive Officer of Lennox in 1980. Mr. Norris is on the Board of Directors of the Air-Conditioning & Refrigeration Institute of which he was Chairman in 1986. He is also an active Board member of the Gas Appliance Manufacturers Association, where he was Chairman from 1980 to 1981. He also serves as a Director of AmerUs Life Holdings, Inc. and Metroplex Regional Advisory Board of Chase Bank of Texas, NA. H. E. French is the President and Chief Operating Officer of Heatcraft Inc. Mr. French joined Lennox in 1989 as Vice President and General Manager of the Refrigeration Products division for Heatcraft Inc. In 1995 he was named President and Chief Operating Officer of Armstrong Air Conditioning Inc. Mr. French was appointed to his current role in 1997. Prior to joining Lennox, Mr. French spent 11 years in management with Wickes/Larkin, Inc. Robert E. Schjerven was named President and Chief Operating Officer of Lennox Industries Inc. in 1995. In 1986, he joined Lennox as Vice President of Marketing and Engineering for Heatcraft Inc. From 1988 to 1991 he held the position of Vice President and General Manager of that subsidiary. From 1991 to 1995 he 45 49 served as President and Chief Operating Officer of Armstrong Air Conditioning Inc. Mr. Schjerven spent the first 20 years of his career with the Trane Company and McQuay-Perfex Inc. Michael G. Schwartz became the President and Chief Operating Officer of Armstrong Air Conditioning Inc. in 1997. He joined Heatcraft in 1990 when Lennox acquired Bohn Heat Transfer Inc. and served as Director of Sales and Marketing, Original Equipment Manufacturer Products. Prior to his current appointment, he served as Vice President of Commercial Products for Heatcraft Inc. where his responsibilities included the development of Heatcraft's position in the A-Coil market. Mr. Schwartz began his career with Bohn Heat Transfer Inc. in 1981. Harry J. Ashenhurst was appointed Executive Vice President, Human Resources and Administration in 1994. He joined Lennox in 1989 as Vice President of Human Resources. Dr. Ashenhurst was named Executive Vice President, Human Resources for Lennox in 1990 and in 1994 moved to his current position and assumed responsibility for the Public Relations and Communications and Aviation departments. Prior to joining Lennox, he worked as an independent management consultant with the consulting firm of Roher, Hibler and Replogle. While at Roher, Hibler and Replogle, Dr. Ashenhurst was assigned to work as a corporate psychologist for Lennox. Scott J. Boxer joined Lennox in 1998 as Executive Vice President, Lennox Global Ltd. and President, European Operations. Prior to joining Lennox, Mr. Boxer spent 26 years with York International Corporation in various roles, most recently as President, Unitary Products Group Worldwide, where he reported directly to the Chairman of that company and was responsible for directing that company's residential and light commercial heating and air conditioning operations worldwide. Carl E. Edwards, Jr. joined Lennox in February 1992 as Vice President and General Counsel. He became the Secretary of Lennox in April 1992 and was also named Executive Vice President and General Counsel in December 1992. Prior to joining Lennox, he was Vice President, General Counsel and Secretary for Elcor Corporation. He also serves as a Director of Kentucky Electric Steel Inc. W. Lane Pennington was appointed to his current position of Executive Vice President, Lennox Global Ltd. and President, Asia Pacific Operations in 1998. He joined Lennox in 1997 as Vice President, Asia Pacific Operations. From 1988 until 1997, Mr. Pennington was with Hilti International Corp., where he most recently served as President, Hilti Asia Limited, based in Hong Kong. Clyde W. Wyant joined Lennox in 1990 and was appointed Executive Vice President, Chief Financial Officer and Treasurer, the position he still holds. Prior to joining Lennox, he served as Executive Vice President, Chief Financial Officer and Director of Purolator Products Co. (formerly Facet Enterprises, Inc.), from 1985 to 1990. In 1965, Mr. Wyant began his career with Helmerich & Payne Inc., where he last served as Vice President, Finance. John J. Hubbuch was named Vice President, Controller and Chief Accounting Officer of Lennox in 1998. Mr. Hubbuch joined Lennox in 1986 as the Division Controller for Heatcraft Inc. In 1989 he became Heatcraft's Group Controller. From 1982 to 1986, Mr. Hubbuch was the Division Controller for McQuay-Perfex Inc./SynderGeneral. In 1992 he became Corporate Controller of Lennox. Linda G. Alvarado has served as a Director of Lennox since 1987. She is President of Alvarado Construction, Inc. a general contracting firm specializing in commercial, government and industrial construction and environmental remediation projects. She currently serves on the Board of Directors of Cyprus Amax Minerals Company, US West Communications, Inc., Englehard Corporation and Pitney Bowes Inc., and is part owner of the Colorado Rockies Baseball Club. David H. Anderson has served as a Director of Lennox since 1973. Mr. Anderson currently serves as the Co-Executive Director of the Santa Barbara Museum of Natural History. He formerly had a private law practice specializing in land use and environmental law. Mr. Anderson also serves as legal counsel for a local land conservation organization in Santa Barbara County. He currently serves on the Boards of the California Nature Conservancy, the Land Trust for Santa Barbara County and the Santa Barbara Foundation. 46 50 Richard W. Booth has served as a Director of Lennox since 1966. Mr. Booth retired from Lennox in 1992 as Executive Vice President, Administration and Secretary, a position he had held since 1983. Mr. Booth held a variety of key positions after joining Lennox in 1954. He serves on the Board of Directors of Employers Mutual Casualty Company and is a member of the Board of Trustees of Grinnell College. David V. Brown has served as a Director of Lennox since 1989. Dr. Brown owns the Plantation Farm Camp, a working 500-acre ranch with livestock that provides learning in a farm setting for children. He is currently serving on the Strategic Planning Board of the Western Association of Independent Camps. James J. Byrne has served as a Director of Lennox since 1990. He has been a managing partner of Byrne Technology Partners, Ltd. since January 1996. Prior to his current role, he held a number of positions in the technology industry including President of Harris Adacom Corporation, Senior Vice President of United Technologies Corporation's Semiconductor Operation and President of North American group of Mohawk Data Sciences. Mr. Byrne began his career with General Electric. Mr. Byrne is a Director of STB Systems Inc. and ICARUS International, Inc. Thomas B. Howard, Jr. has served as a Director of Lennox since 1980. From 1989 to 1992, Mr. Howard served as Chairman and Chief Executive Officer of Beazer U.S.A. and as a Director of Beazer PLC (U.K.). From 1969 to 1989, Mr. Howard served Gifford-Hill & Company Inc. in various capacities most recently as its Chief Executive Officer. After Gifford-Hill was acquired by Beazer PLC (U.K.), Mr. Howard assumed the position of Chairman and Chief Executive Officer, a position he held until he retired in 1992. He is a member of the Board of Directors of Beazer Homes USA. John E. Major has served as a Director of Lennox since 1993. Mr. Major has been the Chairman, Chief Executive Officer and President of Wireless Knowledge, a QUALCOMM Incorporated and Microsoft joint venture, since November 1998. Previously he was Executive Vice President of QUALCOMM and President of its Wireless Infrastructure Division, and was responsible for managing and guiding the market potential for CDMA infrastructure products. Prior to joining QUALCOMM in 1997, Mr. Major served most recently as Senior Vice President and Staff Chief Technical Officer at Motorola, Inc. and Senior Vice President and General Manager for Motorola's Worldwide Systems Group of the Land Mobile Products Sector. Mr. Major currently serves on the Board of Directors of Littlefuse, Inc. and Verilink Corporation. Donald E. Miller has served as a Director of Lennox since 1987. Mr. Miller spent his 35 year career with The Gates Corporation. He retired as Vice Chairman of that company in 1996. From 1987 until 1994 he held the position of President and Chief Operating Officer of The Gates Corporation. Mr. Miller serves on the Board of Directors of Sentry Insurance Corporation, OEA, Inc. and Chateau Communities Inc., and is the President of the Board of Colorado School of Mines Foundation. Loraine B. Millman has served as a Director of Lennox since 1994. She is a social worker who is currently the Director of Treatment Services at Central Nassau Guidance and Counseling Services, Inc., a mental health clinic in Hicksville, New York where she has worked since 1983. Prior to that she worked in the field of education. Robert W. Norris has served as a Director of Lennox since 1967. Mr. Norris is recently retired from teaching. Mr. Norris joined Lennox in 1966 as manager of Lennox-Europe and in 1968 he became Assistant Works Manager in Columbus, Ohio, a position he held until 1972. From 1972 to 1979 he held various positions including assistant superintendent of Chapel Hills Public Schools, consultant with the International Management training for Educational Change in Oslo, Norway, and owner and manager of Provent AB. He serves as a Trustee of both Sunbridge College and WAMC Public Radio Station. Terry D. Stinson has served as a Director of Lennox since 1998. Mr. Stinson has been the Chairman and Chief Executive Officer of Bell Helicopter Textron Inc. since 1998 and was its President from 1996 to 1998. From 1991 to 1996, Mr. Stinson served as Group Vice President and Segment President of Textron Aerospace Systems and Components for Textron Inc. Prior to that position, he had been the President of Hamilton Standard Division of United Technologies Corporation since 1986. 47 51 Lynn B. Storey has served as a Director of Lennox since 1981. Ms. Storey is a community volunteer and fundraiser. At present she is co-chair for Community Leadership for Planned Parenthood for Monterey County. She served on the Board of Directors of Planned Parenthood Monterey/Mar Monte from 1990 to 1997. She also served on the Community Services District of Fallen Leaf Lake in California administering the development and financing of public lands. She is a past president of the Junior League of Monterey County and the Monterey County Medical Auxiliary and served on the Board of the National Council on Alcoholism for Monterey County. Richard L. Thompson has served as a Director of Lennox since 1993. In 1995, Mr. Thompson was named to his present position of Group President and member of the Executive Office of Caterpillar Inc. He joined Caterpillar in 1983 as Vice President, Customer Services. In 1990, he was appointed President of Solar Turbines Inc., a wholly owned subsidiary of Caterpillar. From 1990 to 1995, he held the role of Vice President of Caterpillar, with responsibility for its worldwide engine business. Previously, he had held the positions of Vice President of Marketing and Vice President and General Manager, Components Operations with RTE Corporation. John W. Norris, Jr., Richard W. Booth, Robert W. Norris, David H. Anderson, David V. Brown, Loraine B. Millman, Lynn B. Storey are all grandchildren of D.W. Norris. John W. Norris, Jr. and Robert W. Norris are siblings, as are Lynn B. Storey, Loraine B. Millman and David V. Brown. Both groups of siblings, as well as Richard W. Booth and David H. Anderson, are first cousins. INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES Our Board of Directors is divided into three classes of directors, with each class elected to a three-year term every third year and holding office until their successors are elected and qualified. The class whose term of office will expire at our 1999 Annual Meeting of Stockholders consists of David H. Anderson, James J. Byrne, Donald E. Miller, John W. Norris, Jr. and Lynn B. Storey. The class whose term of office will expire at our 2000 Annual Meeting of Stockholders consists of Linda G. Alvarado, Richard W. Booth, David V. Brown, Thomas B. Howard, Jr. and John E. Major. The class whose term of office will expire at our 2001 Annual Meeting of Stockholders consists of Robert W. Norris, Loraine B. Millman, Terry D. Stinson and Richard L. Thompson. Our Board of Directors has established an Audit Committee, Acquisition Committee, Board Operations Committee, Human Resource Committee, Compensation Committee and a Pension and Risk Management Committee. The Audit Committee is responsible for meeting with management and our independent accountants to determine the adequacy of internal controls and other financial reporting matters. The following directors currently serve on the Audit Committee: John E. Major (Chair), Linda G. Alvarado, Donald E. Miller, Loraine B. Millman and Terry D. Stinson. The Acquisition Committee is responsible for evaluating potential acquisitions and making recommendations with respect to proposed acquisitions. The following directors currently serve on the Acquisition Committee: Donald E. Miller (Chair), David H. Anderson, Thomas B. Howard, Jr., Robert W. Norris, Terry D. Stinson and Richard L. Thompson. The Board Operations Committee is responsible for making recommendations with respect to the election of directors and officers, the number of directors, and other matters pertaining to the operations of our Board of Directors. The following directors currently serve on the Board Operations Committee: Richard W. Booth (Chair), James J. Byrne, John E. Major, Robert W. Norris and Lynn B. Storey. The Human Resource Committee is responsible for succession planning, management development programs and other human resource matters. The following directors currently serve on the Human Resource Committee: James J. Byrne (Chair), Linda G. Alvarado, David V. Brown, Thomas B. Howard, Jr., John E. Major and Richard L. Thompson. The Compensation Committee is responsible for evaluating the performance of our Chief Executive Officer, making recommendations with respect to the salary of our Chief Executive Officer, approving the compensation of executive staff members, approving the compensation for non-employee directors and 48 52 committee members, approving incentive stock options for senior management, approving all employee benefit plan designs and other matters relating to the compensation of our directors, officers and employees. The following directors currently serve on the Compensation Committee: Richard L. Thompson (Chair), Linda G. Alvarado, James J. Byrne and Thomas B. Howard, Jr. The Pension and Risk Management Committee is responsible for overseeing the administration of our pension and profit sharing plans, overseeing matters relating to our insurance coverage, reviewing matters of legal liability and environmental issues, and other matters relating to risk management. The following directors currently serve on the Pension and Risk Management Committee: David H. Anderson (Chair), Richard W. Booth, David V. Brown, Donald E. Miller, Loraine B. Millman and Lynn B. Storey. COMPENSATION OF DIRECTORS In 1999, non-employee directors will receive an annual retainer of $21,000 in cash and $5,000 in common stock for board of directors and committee service, an annual retainer of $4,000 in cash for serving as a committee chair and a fee of $1,000, or $500 in the event of a telephonic meeting, in cash for attending each meeting day of the Board of Directors or any committee thereof. Board members may elect to receive the cash portion of their annual retainer in cash or shares of common stock. All directors receive reimbursement for reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors or any committee thereof. In addition, each non-employee director may receive, pursuant to our 1998 Incentive Plan, options to purchase shares of common stock at an exercise price equal to the fair market value of such shares at the date of grant. EXECUTIVE COMPENSATION The following table sets forth information on compensation earned in 1998 by our Chief Executive Officer and our four other most highly compensated executive officers, such individuals sometimes being referred to as the "Named Executive Officers". In the third quarter of 1998, we terminated the Lennox International Inc. Performance Share Plan in connection with the adoption of the 1998 Incentive Plan of Lennox International Inc. We terminated the Performance Share Plan to reduce potential earnings volatility associated with the application of variable price accounting rules to the provisions of the plan. The amounts in the LTIP Payouts column in the Summary Compensation Table below consists of the value of common stock issued to the Named Executive Officers in connection with the termination of the Performance Share Plan and in full settlement of our obligations under that plan. Performance awards are now granted under our 1998 Incentive Plan. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------------------------- AWARDS ------------------------- PAYOUTS ANNUAL SECURITIES ---------- COMPENSATION RESTRICTED UNDERLYING --------------------- STOCK OPTIONS/SARS LTIP ALL OTHER NAME SALARY BONUS(1) AWARDS(2) GRANTED PAYOUTS(3) COMPENSATION(4) ---- -------- ---------- ---------- ------------ ---------- --------------- John W. Norris, Jr....... $648,660 $1,130,003 $1,960,304 $2,043,909 $146,600 Robert L. Jenkins(5)..... 361,200 370,158 288,206 859,815 91,425 Robert E. Schjerven...... 335,400 323,562 739,038 750,994 86,656 H.E. French.............. 309,852 328,902 502,320 595,940 80,389 Clyde W. Wyant........... 291,300 348,639 516,762 718,883 67,645
- --------------- (1) Includes annual incentive payments for the respective year from two annual variable pay plans. (2) Represents performance share awards of the following number of shares of restricted common stock granted pursuant to the 1998 Incentive Plan in December 1998 multiplied by the stock price on the grant date, $ per share: Mr. Norris -- ; Mr. Jenkins -- ; Mr. Schjerven -- ; Mr. French -- ; and Mr. Wyant -- . Such shares represent all of such individual's holdings 49 53 of restricted common stock at December 31, 1998. For the Named Executive Officers, shares will vest at December 31, 1999, shares will vest at December 31, 2000 and the remainder will vest at December 31, 2001, in each case if performance targets are met. Shares which do not vest in any performance period due to failure to achieve such goals will vest in 2006, 2007 and 2008, respectively. Information with respect to performance share awards made pursuant to the 1998 Incentive Plan in December 1998 which do not vest unless certain performance goals are met is set forth in the table titled "Long-Term Incentive Plans -- Awards in Last Fiscal Year." (3) Represents awards of shares of common stock multiplied by the stock price on the award date, $ per share, in connection with the termination of the Performance Share Plan. (4) Composed of contributions by Lennox to the Lennox International Inc. Profit Sharing Retirement Plan and to the Lennox International Inc. Profit Sharing Restoration Plan and the dollar value of term life insurance premiums paid by us for the benefit of the Named Executive Officers. Contributions to the plans for the Named Executive Officers were as follows: Mr. Norris -- $139,730; Mr. Jenkins -- $86,223; Mr. Schjerven -- $81,369; Mr. French -- $73,833; and Mr. Wyant -- $62,619. (5) On December 31, 1998, Mr. Jenkins retired from his position as the Assistant to the Chairman of the Board -- Business Development. We maintain a pay-for-performance compensation philosophy to pay market-competitive base salaries, while also delivering variable pay which is directly linked to the achievement of performance measurements and to the performance and contribution of the individual. Executive compensation is composed of three primary components: base salary, variable pay (annual incentives and long-term incentives) and benefits and perquisites. In order to evaluate the competitiveness of our total compensation programs, we have periodically engaged Hewitt Associates LLC, a Human Resources consulting firm, to conduct market analyses of the compensation programs for executive level jobs within our organization. In doing so, we emphasize delivering competitive total compensation opportunities, while maintaining the flexibility to design individual compensation components to support critical business objectives. The following table provides information concerning stock options granted to the Named Executive Officers in 1998. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------------------- NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS/SARS UNDERLYING GRANTED TO GRANT DATE OPTIONS/SARS EMPLOYEES IN EXERCISE OR PRESENT NAME GRANTED FISCAL YEAR BASE PRICE EXPIRATION DATE VALUE(1) ---- ------------ ------------------ ----------- ----------------- ---------------- John W. Norris, Jr.... 16.7% December 11, 2008 $755,325 Robert L. Jenkins..... -- -- -- Robert E. Schjerven... 5.6 December 11, 2008 251,775 H. E. French.......... 4.1 December 11, 2008 184,635 Clyde W. Wyant........ 4.1 December 11, 2008 184,635
- --------------- (1) The grant date present values shown in the table were determined pursuant to the Black-Scholes option valuation model using the following assumptions: stock price volatility of 35.4% which represents an average volatility among general industry companies; expected option life of 10.0 years; dividend yield of 1.66%; risk free interest rate of 4.53%; Hewitt Associates Modified Derived Value: $ which includes the following additional assumptions: discounts for the probability of termination for death, disability, retirement and voluntary/involuntary terminations. 50 54 The following table sets forth for each of the Named Executive Officers the options exercised during 1998 and the number of options and the value of unexercised options held by the Named Executive Officers as of December 31, 1998. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ---------- ----------- ------------- ----------- ------------- John W. Norris, Jr......... -- $1,872,771 0 Robert L. Jenkins.......... $ 812,648 -- -- -- -- Robert E. Schjerven........ 1,042,300 -- -- 0 H. E. French............... 1,363,807 -- -- 0 Clyde W. Wyant............. 360,121 1,106,297 0
- --------------- (1) Calculated on the basis of the fair market value of the underlying securities as of December 31, 1998, $ per share, minus the exercise price of "in-the-money" options The following table provides certain information concerning performance share awards made under the 1998 Incentive Plan to the Named Executive Officers in 1998. The Named Executive Officers are awarded a number of shares of common stock subject to achievement of certain performance targets based on the average return on equity for a three year period. Information with respect to the portion of the award that becomes vested regardless of whether the performance goals are met is set forth under the Restricted Stock Awards column in the table titled "Summary Compensation Table." Set forth below is the maximum number of shares of common stock that may be payable to each of the Named Executive Officers that is subject to achievement of the performance goals. The actual number of shares awarded depends on the level of achievement of the performance objectives. LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
NUMBER OF SHARES, UNITS PERFORMANCE OR OTHER PERIOD NAME OR OTHER RIGHTS UNTIL MATURATION OR PAYOUT ---- ----------------------- --------------------------- John W. Norris, Jr...................... 3 years Robert L. Jenkins....................... 3 years Robert E. Schjerven..................... 3 years H. E. French............................ 3 years Clyde W. Wyant.......................... 3 years
1998 INCENTIVE PLAN GENERAL Our Board of Directors has adopted, and our stockholders have approved, the 1998 Incentive Plan. The 1998 Incentive Plan amends and restates the Lennox International Inc. 1994 Stock Option and Restricted Stock Plan. Any outstanding awards under the 1994 Stock Option and Restricted Stock Plan will remain outstanding. The objectives of the 1998 Incentive Plan are to attract and retain employees, to attract and retain qualified directors and to stimulate the active interest of such persons in our development and financial success. Awards provide participants with a proprietary interest in our growth and performance. The description set forth below represents a summary of the principal terms and conditions of the 1998 Incentive Plan. Awards to our employees or independent contractors under the 1998 Incentive Plan may be made in the form of grants of stock options, stock appreciation rights, restricted or non-restricted stock or units denominated in stock, cash awards, performance awards or any combination of the foregoing. Awards to non- employee directors under the 1998 Incentive Plan will be in the form of grants of stock options. 51 55 The 1998 Incentive Plan provides for awards to be made in respect of a maximum of shares of our common stock, of which shares will be available for awards to our employees and the remainder of which will be available for awards to non-employee directors. No participant under the 1998 Incentive Plan may be granted in any 12-month period awards consisting of stock options or stock appreciation rights for more than shares of common stock, stock awards for more than shares of common stock or cash awards in excess of $ . Shares of common stock which are the subject of awards that are forfeited or terminated or expire unexercised will again immediately become available for awards under the 1998 Incentive Plan. Insofar as the 1998 Incentive Plan relates to employee awards, our Compensation Committee will have the exclusive authority to administer the 1998 Incentive Plan and to take all actions which are specifically contemplated by the plan or are necessary or appropriate in connection with the administration thereof. The Compensation Committee may, in its discretion: - provide for the extension of the exercisability of an award; - accelerate the vesting or exercisability of an award to our employees; - eliminate or make less restrictive any restrictions contained in an award to our employees; - waive any restriction or other provision of the 1998 Incentive Plan or in any award to our employees; or - otherwise amend or modify an award to our employees in any manner that is either not adverse to the employee holding the award or consented to by such employee. EMPLOYEE AWARDS The Compensation Committee will determine the type or types of awards made under the 1998 Incentive Plan and will designate the employees who are to be recipients of such awards. Each award may be embodied in an agreement, which will contain such terms, conditions and limitations as are determined by the Compensation Committee. Awards to our employees may be granted singly, in combination or in tandem. Awards to our employees may also be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under the 1998 Incentive Plan or any other employee plan or program of Lennox, including any acquired entity. All or part of an award to our employees may be subject to conditions established by the Compensation Committee, which may include continuous service with Lennox, achievement of specific business objectives, increases in specified indices, attainment of specified growth rates and other comparable measurements of performance. The types of awards to our employees that may be made under the 1998 Incentive Plan are as follows: Options: Options are rights to purchase a specified number of shares of common stock at a specified price. An option granted pursuant to the 1998 Incentive Plan may consist of either an incentive stock option that complies with the requirements of Section 422 of the Internal Revenue Code of 1986, or a non-qualified stock option that does not comply with such requirements. Incentive stock options must have an exercise price per share that is not less than the fair market value of the common stock on the date of grant. To the extent that the aggregate fair market value, measured at the time of grant, of common stock subject to incentive stock options that first become exercisable by an employee in any one calendar year exceeds $100,000, such options shall be treated as non-qualified stock options and not as incentive stock options. Non-qualified stock options must have an exercise price per share that is not less than, but may exceed, the fair market value of the common stock on the date of grant. In either case, the exercise price must be paid in full at the time an option is exercised in cash or, if the employee so elects, by means of tendering common stock or surrendering another award. Stock Appreciation Rights: Stock appreciation rights are rights to receive a payment, in cash or common stock, equal to the excess of the fair market value or other specified valuation of a specified number of shares of common stock on the date the rights are exercised over a specified strike price. A stock appreciation right may be granted in tandem under the 1998 Incentive Plan to the holder of an option with respect to all or a portion of the shares of common stock subject to such option or may be granted separately. The terms, conditions and limitations applicable to any stock appreciation rights, including the term of any stock 52 56 appreciation rights and the date or dates upon which they become exercisable, will be determined by our Compensation Committee. Stock Awards: Stock awards consist of grants of restricted common stock or non-restricted common stock or units denominated in common stock. The terms, conditions and limitations applicable to any stock awards will be determined by our Compensation Committee. The Compensation Committee may remove any restrictions on stock awards, at its discretion. Without limiting the foregoing, rights to dividends or dividend equivalents may be extended to and made part of any stock award in the discretion of the Compensation Committee. Cash Awards: Cash awards consist of grants denominated in cash. The terms, conditions and limitations applicable to any cash awards will be determined by our Compensation Committee. Performance Awards: Performance awards consist of grants made to an employee subject to the attainment of one or more performance goals. A performance award will be paid, vested or otherwise deliverable solely upon the attainment of one or more pre-established, objective performance goals established by our Compensation Committee prior to the earlier of (a) 90 days after the commencement of the period of service to which the performance goals relate and (b) the elapse of 25% of the period of service, and in any event while the outcome is substantially uncertain. A performance goal may be based upon one or more business criteria that apply to the employee, one or more business units of Lennox or Lennox as a whole. The terms, conditions and limitations applicable to any performance awards will be determined by our Compensation Committee. DIRECTOR AWARDS Our Board of Directors will administer the 1998 Incentive Plan as it relates to awards to non-employee directors. The board will have the right to determine on an annual basis, or at any other time in its sole discretion, to award options which are non-qualified stock options to non-employee directors. Such options awarded shall provide that no more than shares of common stock be purchased in any year. All options awarded to directors shall have a term of 10 years and shall vest and become exercisable in increments of one-third on each of the three succeeding anniversaries after the date of grant. Unvested options awarded to directors shall be forfeited if a director resigns without the consent of the majority of our Board of Directors. OTHER PROVISIONS Our Board of Directors may amend, modify, suspend or terminate the 1998 Incentive Plan for the purpose of addressing any changes in legal requirements or for any other purpose permitted by law, except that: - no amendment that would impair the rights of any employee or non-employee director with respect to any award may be made without the consent of such employee or non-employee Director; and - no amendment requiring stockholder approval pursuant to any applicable legal requirements will be effective until such approval has been obtained. In the event of any subdivision or consolidation of outstanding shares of our common stock, declaration of a stock dividend payable in shares of our common stock or other stock split, the 1998 Incentive Plan provides for the Board of Directors to make appropriate adjustments to: - the number of shares of common stock reserved under the 1998 Incentive Plan; - the number of shares of common stock covered by outstanding awards in the form of common stock or units denominated in common stock; - the exercise or other price in respect of such awards; - the appropriate fair market value and other price determinations for awards in order to reflect such transactions; and 53 57 - the limitations set forth in the 1998 Incentive Plan regarding the number of awards which may be made to any employee in a given year. Furthermore, in the event of any other recapitalization or capital reorganization of Lennox, any consolidation or merger of Lennox with another corporation or entity, the adoption by Lennox of any plan of exchange affecting the common stock or any distribution to holders of common stock or securities or property, other than normal cash dividends or stock dividends, our Board of Directors will make appropriate adjustments to the amounts or other items referred to above to give effect to such transactions, but only to the extent necessary to maintain the proportionate interest of the holders of the awards and to preserve, without exceeding, the value thereof. RETIREMENT PLANS The Named Executive Officers participate in four Lennox-sponsored retirement plans. The plans are as follows: the Lennox International Inc. Pension Plan for Salaried Employees, the Lennox International Inc. Profit Sharing Retirement Plan, the Lennox International Inc. Supplemental Retirement Plan, and the Lennox International Inc. Profit Sharing Restoration Plan. The Supplemental Retirement Plan and the Profit Sharing Restoration Plan are non-qualified plans. We pay the full cost of all these plans. The Pension Plan for Salaried Employees is a floor offset plan. A target benefit is calculated using credited service and final average pay during the five highest consecutive years. The benefit is currently based on 1.00% of final average pay, plus .60% of final average pay above Social Security covered compensation, times the number of years of credited service, not to exceed 30 years. Employees vest after five years of service and may commence unreduced benefits at age 65. If certain age and service requirements are met, benefits may commence earlier on an actuarially reduced basis. At time of retirement, a participant may choose one of five optional forms of payment. The Supplemental Retirement Plan permits income above Internal Revenue Service limitations to be considered in determining final average pay, doubles the rate of benefit accrual, limits credited service to 15 years and permits early retirement on somewhat more favorable terms than the Pension Plan. The Profit Sharing Retirement Plan is a defined contribution plan. Profit sharing contributions, as determined by the Board of Directors, are credited annually to participants' accounts based on pay. Participants are fully vested after 6 years. The assets of the plan are employer directed. Distributions may occur at separation of employment and can be paid directly to the participant. The Restoration Plan permits accruals that otherwise could not occur because of Internal Revenue Service limitations on compensation. The estimates of annual retirement benefits shown in the following table are the targets established by the Supplemental Retirement Plan.
YEARS OF SERVICE FINAL AVERAGE --------------------------------------------------------------- EARNINGS(1) 5 10 15 20 25 30 ------------- -------- -------- -------- -------- -------- -------- $ 250,000..................... $ 35,896 $ 71,792 $107,688 $107,688 $107,688 $107,688 425,000.................... 63,896 127,792 191,688 191,688 191,688 191,688 600,000.................... 91,896 183,792 275,688 275,688 275,688 275,688 775,000.................... 119,896 239,792 359,688 359,688 359,688 359,688 950,000.................... 147,896 295,792 443,688 443,688 443,688 443,688 1,125,000.................... 175,896 351,792 527,688 527,688 527,688 527,688
- --------------- (1) Final Average Earnings are the average of the five highest consecutive years of includible earnings. Compensation for these purposes includes salary and bonuses, and excludes extraordinary compensation such as benefits from the 1998 Incentive Plan or its predecessor plans. Bonus numbers used in these calculations, as per plan requirements, are the bonuses actually paid in those years. In the Summary Compensation Table, the 1998 bonus reported is the bonus earned in 1998, but not paid until 1999. 54 58 As of December 31, 1998, the final average pay and the eligible years of credited service for each of the Named Executive Officers was as follows: Mr. Norris, $855,001 -- 38.25 years; Mr. Jenkins, $483,948 -- 14.00 years; Mr. Wyant, $402,391 -- 8.30 years; Mr. Schjerven, $411,416 -- 12.80 years; Mr. French, $340,666 -- 9.80 years. EMPLOYMENT AGREEMENTS We have entered into an employment agreement with each of the Named Executive Officers who are currently employees of Lennox. These employment agreements establish a specified duration or term of employment; the basis of compensation and assignments; and post-employment covenants covering confidential information, the diverting of employees, vendors and contractors and the solicitation of customers. These agreements also establish binding arbitration as the mechanism for resolving disputes and provide certain benefits and income in the event employment terminates under specified circumstances. The agreements commence on the date they are signed by both parties and remain in effect until December 31 of that year and thereafter for a series of one-year terms. On January 1 of each year after the end of the first term and for each year thereafter, the agreements automatically renew for an additional year, unless either party notifies the other, in writing, at least 30 days prior to such date, of a decision not to renew the agreement. If we terminate the employee prior to the expiration of the term of the agreement or if we do not renew the agreement for any reason other than for cause (as defined in the agreement), the employee will be entitled to receive monthly payments of the greater of the employee's base salary for the remainder of the agreement's term or three months of the employee's base salary in addition to any other compensation or benefits applicable to an employee at the employee's level. If we terminate the employee other than for cause, including our non-renewal of the agreement, and the employee agrees to execute a written general release of any and all possible claims against us existing at the time of termination, we will provide the employee with an enhanced severance package. That package includes payment of the employee's base monthly salary for a period of twenty-four months following the date of termination, a lump sum payment of $12,000 in lieu of perquisites lost, and forgiveness of COBRA premiums due for group health insurance coverage for up to eighteen months while the employee remains unemployed. If the employee remains unemployed at the end of eighteen months, the equivalent of the COBRA premium will be paid to the employee on a month to month basis for up to six additional months while the employee remains unemployed. Outplacement services are provided or, at the employee's election, a lump-sum payment of 10% of the employee's annual base salary will be made to the employee in lieu of those services. Additionally, the employee's beneficiary will receive a lump-sum death benefit equivalent to six months of the employee's base salary should the employee die while entitled to enhanced severance payments. CHANGE OF CONTROL EMPLOYMENT AGREEMENTS We have entered into a change of control employment agreement with each of the Named Executive Officers who are currently employees of Lennox. The change of control agreements provide for certain benefits under specified circumstances if the officer's employment is terminated following a change of control transaction involving Lennox. The change of control agreements are intended to provide protections to the officers that are not afforded by their existing employment agreements, but not to duplicate benefits provided thereunder. The term of the change of control agreements is generally two years from the date of a Potential Change of Control, as discussed below, or a Change of Control. If the officer remains employed at the conclusion of such term, the officer's existing employment agreement will continue to apply. The employment rights of the Named Executive Officers under the change of control agreements would be triggered by either a Change of Control or a Potential Change of Control. Following a Potential Change of Control, the term of the change of control agreement may terminate but the Change of Control Agreement will remain in force and a new term of the agreement will apply to any future Change of Control or Potential Change of Control, if either (a) our Board of Directors determines that a Change of Control is not likely or (b) the Named Executive 55 59 Officer, upon proper notice to us, elects to terminate his term of the change of control agreement as of any anniversary of the Potential Change of Control. A "Change of Control" generally includes the occurrence on or after the date of the offering of any of the following: (a) any person, other than certain exempt persons, including Lennox and its subsidiaries and employee benefit plans, becoming a beneficial owner of 35% or more of the shares of common stock or voting stock of Lennox then outstanding, including as a result of the offering; (b) a change in the identity of a majority of the persons serving as members of our Board of Directors, unless such change was approved by a majority of the incumbent members of our Board of Directors; (c) the approval by the stockholders of a reorganization, merger or consolidation in which: (1) existing stockholders would not own more than 65% of the common stock and voting stock of the resulting company; (2) a person, other than certain exempt persons, would own 35% or more of the common stock or voting stock of the resulting company; or (3) less than a majority of the board of the resulting company would consist of the then incumbent members of our Board of Directors; or (d) the approval by the stockholders of a liquidation or dissolution of Lennox, unless such liquidation or dissolution is part of a plan of liquidation or dissolution involving a sale to a company of which following such transaction: (1) more than 65% of the common stock and voting stock would be owned by existing stockholders; (2) no person (other than certain exempt persons) would own 35% or more of the common stock or voting stock of such company; and (3) at least a majority of the board of directors of such company would consist of the then incumbent members of our Board of Directors. A "Potential Change in Control" generally includes any of the following: - the commencement of a tender or exchange offer for voting stock that, if consummated, would result in a Change of Control; - Lennox entering into an agreement which, if consummated, would constitute a Change of Control; - the commencement of a contested election contest subject to certain proxy rules; or - the occurrence of any other event that our Board of Directors determines could result in a Change of Control. During the term of the change of control agreement, an officer's position, authority, duties and responsibilities may not be diminished, and all forms of compensation, including salary, bonus, regular salaried employee plan benefits, stock options, restricted stock and other awards, must continue on a basis no less favorable than at the beginning of the term of the change of control agreement and, in the case of certain benefits, must continue on a basis no less favorable in the aggregate than the most favorable application of such benefits to any of our employees. 56 60 If an officer terminates employment during the term of the change of control agreement for good reason, as defined in the change of control agreements, and we fail to honor the terms of the change of control agreement, we will pay the officer: - his then unpaid current salary and a pro rata portion of the highest bonus earned during the three preceding years, as well as previously deferred compensation and accrued vacation time; - a lump-sum benefit equal to the sum of three times the officer's annual base salary and three times the annual bonus (as both such terms are defined in the change of control agreements) he would have earned in the year of termination; - for purposes of our Supplemental Retirement Plan and our Profit Sharing Restoration Plan, three additional years added to both his service and age criteria; and - continued coverage under our employee welfare benefits plans for up to four and one-half years. In addition, all options, restricted stock and other compensatory awards held by the officer will immediately vest and become exercisable, and the term thereof will be extended for up to one year following termination of employment. The officer may also elect to cash out equity-based compensatory awards at the highest price per share paid by specified persons during the term of the change of control agreement or the six-month period prior to the beginning of the term of the change of control agreement. In the event of any contest concerning a change of control agreement in which the officer is successful, in whole or in part, on the merits, (a) we have no right of offset, (b) the officer is not required to mitigate damages, and (c) we agree to pay any legal fees incurred by the officer in connection with such contest. We also agree to pay all amounts owing to the officer during any period of dispute, subject only to the officer's agreement to repay any amounts to which he is determined not to be entitled. The change of control agreements provide for a tax gross-up in the event that certain excise taxes are applicable to payments made by us under a change of control agreement or otherwise. The change of control agreements require the officer to maintain the confidentiality of our information, and, for a period of 24 months following his termination of employment, to avoid any attempts to induce our employees to terminate their employment with us. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with our directors and certain of our executive officers. Under the terms of the indemnification agreements, we have generally agreed to indemnify, and advance expenses to, each indemnitee to the fullest extent permitted by applicable law on the date of the agreements and to such greater extent as applicable law may thereafter permit. In addition, the indemnification agreements contain specific provisions pursuant to which we have agreed to indemnify each indemnitee: - if such person is, by reason of his or her status as a director, nominee for director, officer, agent or fiduciary of ours or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise with which such person was serving at our request, any such status being referred to as a "Corporate Status," made or threatened to be made a party to any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation or other proceeding, other than a proceeding by or in the right of Lennox; - if such person is, by reason of his or her Corporate Status, made or threatened to be made a party to any proceeding brought by or in the right of Lennox to procure a judgment in its favor, except that no indemnification shall be made in respect of any claim, issue or matter in such proceeding as to which such indemnitee shall have been adjudged to be liable to Lennox if applicable law prohibits such indemnification, unless and only to the extent that a court shall otherwise determine; - against expenses actually and reasonably incurred by such person or on his or her behalf in connection with any proceeding to which such indemnitee was or is a party by reason of his or her Corporate Status and in which such indemnitee is successful, on the merits or otherwise; 57 61 - against expenses actually and reasonably incurred by such person or on his or her behalf in connection with a proceeding to the extent that such indemnitee is, by reason of his or her Corporate Status, a witness or otherwise participates in any proceeding at a time when such person is not a party in the proceeding; and - against expenses actually and reasonably incurred by such person in certain judicial adjudications of or awards in arbitration to enforce his or her rights under the indemnification agreements. In addition, under the terms of the indemnification agreements, we have agreed to pay all reasonable expenses incurred by or on behalf of an indemnitee in connection with any proceeding, whether brought by or in the right of Lennox or otherwise, in advance of any determination with respect to entitlement to indemnification and within 15 days after the receipt by us of a written request from such indemnitee for such payment. In the indemnification agreements, each indemnitee has agreed that he or she will reimburse and repay us for any expenses so advanced to the extent that it shall ultimately be determined that he or she is not entitled to be indemnified by us against such expenses. The indemnification agreements also include provisions that specify the procedures and presumptions which are to be employed to determine whether an indemnitee is entitled to indemnification thereunder. In some cases, the nature of the procedures specified in the indemnification agreements varies depending on whether we have undergone a change in control, as such term is defined in the indemnification agreements. 58 62 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 31, 1998 and as adjusted to reflect the offering by the following individuals: - each person known by us to own more than 5% of the outstanding shares of common stock; - each of our directors; - each Named Executive Officer; - all executive officers and directors as a group; and - each selling stockholder. All persons listed have an address in care of our principal executive offices and have sole voting and investment power with respect to their shares unless otherwise indicated. The information contained in this table with respect to beneficial ownership reflects "beneficial ownership" as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that were exercisable on December 31, 1998 or became exercisable within 60 days following December 31, 1998 are deemed outstanding. However, such shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person. To our knowledge and unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares listed as beneficially owned by such stockholder, subject to community property laws where applicable. Percentage of ownership is based on shares of common stock outstanding as of December 31, 1998 and shares of common stock outstanding after the completion of the offering assuming no exercise of the underwriters' over-allotment option. As of December 31, 1998, we had approximately beneficial holders of our common stock.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED BEFORE THE OFFERING AFTER THE OFFERING --------------------- SHARES TO BE SOLD --------------------- BENEFICIAL OWNER NUMBER PERCENTAGE IN THE OFFERING NUMBER PERCENTAGE ---------------- -------- ---------- ----------------- -------- ---------- John W. Norris, Jr.(1)............. 11.2% H. E. French....................... * Robert E. Schjerven................ * Robert L. Jenkins.................. * Clyde W. Wyant(2).................. * Linda G. Alvarado(3)............... * David H. Anderson(4)............... 12.4 Richard W. Booth(5)................ 14.5 David V. Brown(6).................. 3.7 James J. Byrne(7).................. * Thomas B. Howard, Jr.(8)........... * John E. Major(9)................... * Donald E. Miller(10)............... * Loraine B. Millman(11)............. 3.1 Robert W. Norris(12)............... 7.0 Terry D. Stinson................... -- Lynn B. Storey(13)................. 3.6 Richard L. Thompson(14)............ * All executive officers and directors as a group (23 persons)(15)..................... 56.7 A.O.C. Corporation(16)............. 7.6 Thomas W. Booth(17)................ 7.8
59 63 - --------------- * Less than 1% (1) Includes: (a) shares held by the Robert W. Norris Trust A of which John W. Norris, Jr. is a co-trustee; (b) shares held by the John W. Norris, Jr. Trust A of which John W. Norris, Jr. is a co-trustee; (c) shares held by the Megan E. Norris Trust A of which John W. Norris, Jr. is a co-trustee; (d) shares of the Robert W. Norris Irrevocable Descendants' Trust of which John W. Norris, Jr. is the trustee; and (e) shares subject to options. (2) Includes shares of common stock subject to options. (3) Includes: (a) shares held by Cimarron Holdings L.L.C. of which Linda G. Alvarado is the managing member; and (b) shares subject to options. (4) Includes: (a) shares held by the Leo E. Anderson Trust of which David H. Anderson is the trustee; (b) shares held by the Kristin H. Anderson Trust of which David H. Anderson is a co-trustee; (c) shares held by the David H. Anderson Trust of which David H. Anderson is the trustee; (d) shares held by the Betty Oakes Trust of which David H. Anderson is the trustee; (e) shares held by David H. Anderson's child; and (f) shares subject to options. (5) Includes: (a) shares held by the 1996 Anderson GST Exempt Trust of which Richard W. Booth is the trustee; (b) shares held by a trust for the benefit of Richard W. Booth of which Richard W. Booth is a co-trustee; (c) shares held by a trust for the benefit of Anne Zink of which Richard W. Booth is a co-trustee; and (d) shares subject to options. (6) Includes: (a) shares held by David V. Brown's children; and (b) shares subject to options. (7) Includes shares subject to options. (8) Includes: (a) shares held by the Howard Family Trust of which Thomas B. Howard, Jr. is a co-trustee; and (b) shares subject to options. (9) Includes shares subject to options. (10) Includes: (a) shares held by the Donald E. Miller Trust of which Donald E. Miller is a co-trustee; and (b) shares subject to options. (11) Includes shares subject to options. (12) Includes: (a) shares held by the Robert W. Norris Trust A of which Robert W. Norris is a co-trustee; (b) shares held by the John W. Norris, Jr. Trust A of which Robert W. Norris is a co-trustee; (c) shares held by the Robert W. Norris Revocable Trust of which Robert W. Norris is the trustee; (d) shares held by the Christine Marie Dammann 1991 Revocable Trust of which Robert W. Norris is the trustee; (e) shares held by the Stefan Robert Norris Revocable Trust of which Robert W. Norris is the trustee; and (f) shares held by the Nicholas W. Norris 1991 Revocable Trust of which Robert W. Norris is the trustee; and (g) shares subject to options. (13) Includes shares subject to options. (14) Includes shares subject to options. (15) Includes shares subject to options. (16) John W. Norris, Jr., David H. Anderson, Richard W. Booth and David V. Brown are members of the board of directors of A.O.C. Corporation. (17) Includes: (a) shares held by a trust for the benefit of Richard W. Booth of which Thomas W. Booth is a co-trustee; (b) shares held by the Thomas W. Booth Trust of which Thomas W. Booth is the trustee; and (c) shares held by Thomas W. Booth's children. 60 64 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS John W. Norris, Jr., our Chairman and Chief Executive Officer, and David H. Anderson, Richard W. Booth, David V. Brown, Loraine B. Millman, Robert W. Norris and Lynn B. Storey, each one of our directors, as well as certain of our stockholders, are members of AOC Land Investment, LLC. AOC Land Investment, LLC owns 70% of AOC Development II, LLC. AOC Development II, LLC is building a new office building and we have agreed to lease part of it for use in conjunction with our corporate headquarters. The lease will have a term of 25 years and the annual lease payments are expected to be approximately $2.1 million per year for the first five years. We believe that the terms of our lease with AOC Development II, LLC are at least as favorable as could be obtained from unaffiliated third parties. From time to time we have entered into Stock Disposition Agreements which allowed certain executives, directors and stockholders to borrow money and use our capital stock held by them as collateral. The Stock Disposition Agreements provided that in the event of a default on the underlying loan, we would do one of several things, including registering the capital stock under the Securities Act of 1933, as amended, finding a buyer to purchase the stock or purchasing the stock ourself. There were never any defaults under these agreements. Currently, there are Stock Disposition Agreements in existence covering shares of common stock. We will not enter into these type of agreements following consummation of the offering. The foregoing transactions were not the result of arms-length negotiations. Accordingly certain of the terms of these transactions may be more or less favorable to us than might have been obtained from unaffiliated third parties. We do not intend to enter into any future transactions in which our directors, executive officers or principal stockholders and their affiliates have a material interest unless such transactions are approved by a majority of the disinterested members of our Board of Directors and are on terms that are no less favorable to us than those that we could obtain from unaffiliated third parties. DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 200,000,000 shares of common stock and 25,000,000 shares of preferred stock, par value $.01 per share. Of the 200,000,000 shares of common stock authorized, are being offered in the offering, or shares if the underwriters' over-allotment option is exercised in full, and shares have been reserved for issuance pursuant to our 1998 Incentive Plan. See "Management -- 1998 Incentive Plan" for a description of the 1998 Incentive Plan. None of the preferred stock is outstanding. The following summary description of our capital stock is qualified by reference to our restated certificate of incorporation and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus forms a part. COMMON STOCK The holders of common stock are entitled to one vote per share on all matters to be voted on by stockholders. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of common stock present in person or represented by proxy, voting together as a single class, except as may be required by law and subject to any voting rights granted to holders of any preferred stock. However, the removal of a director from office, the approval and authorization of certain business combinations and amendments to certain provisions of our certificate of incorporation each require the approval of not less than 80% of the combined voting power of our outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. See "-- Certificate of Incorporation and Bylaw Provisions". The common stock does not have cumulative voting rights. Subject to the prior rights of the holders of any shares of our preferred stock, the holders of common stock shall be entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by our Board of Directors. On our liquidation, dissolution or winding up, after payment in full of the amounts required to be paid to holders of preferred stock, if any, all holders of common stock are entitled to share ratably in any assets available for distribution to holders of shares of common stock. 61 65 The outstanding shares of common stock are legally issued, fully paid and nonassessable. The common stock does not have any preemptive, subscription or conversion rights. Additional shares of authorized common stock may be issued, as authorized by our Board of Directors from time to time, without stockholder approval, except as may be required by applicable stock exchange requirements. PREFERRED STOCK As of the date of this prospectus, no shares of preferred stock are outstanding. Our Board of Directors may authorize the issuance of preferred stock in one or more series and may determine, with respect to any such series, the designations, powers, preferences and rights of such series, and the qualifications, limitations and restrictions thereof, including: - the designation of the series; - the consideration for which the shares of any such series are to be issued; - the rate or amount per annum, if any, at which holders of the shares of such series shall be entitled to receive dividends, the dates on which such dividends shall be payable, whether the dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall be cumulative; - the redemption rights and price or prices, if any, for shares of the series; - the amounts payable on and the preferences, if any, of shares of the series in the event of dissolution or upon distribution of our assets; - whether the shares of the series will be convertible into or exchangeable for other of our securities, and the price or prices or rate or rates at which conversion or exchange shall be exercised; - the terms and amounts of any sinking fund provided for the purchase or redemption of shares of any series; - the voting rights, if any, of the holders of shares of such series; and - such other preferences and rights, privileges and restrictions applicable to any such series as may be permitted by law. We believe that the ability of our Board of Directors to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions and in meeting other corporate needs that might arise. The authorized shares of preferred stock will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange on which our securities may be listed or traded. Although our Board of Directors has no intention at the present time of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. Our Board of Directors will make any determination to issue such shares based on its judgment as to our best interests and the best interests of our stockholders. Our Board of Directors, in so acting, could issue preferred stock having terms that could discourage a potential acquiror from making, without first negotiating with the Board of Directors, an acquisition attempt through which such acquiror may be able to change the composition of the Board of Directors, including a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. BUSINESS COMBINATION STATUTE As a corporation organized under the laws of the State of Delaware, we will be subject to Section 203 of the Delaware General Corporation Law, which restricts certain business combinations between us and an "interested stockholder" (in general, a stockholder owning 15% or more of our outstanding voting stock) or its 62 66 affiliates or associates for a period of three years following the time that the stockholder becomes an "interested stockholder." The restrictions do not apply if: - prior to an interested stockholder becoming such, our Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction which resulted in any person becoming an interested stockholder, such interested stockholder owns at least 85% of our voting stock outstanding at the time the transaction commenced, excluding shares owned by certain employee stock ownership plans and persons who are both directors and officers of Lennox; or - at or subsequent to the time an interested stockholder becomes such, the business combination is both approved by our Board of Directors and authorized at an annual or special meeting of our stockholders, not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock not owned by the interested stockholder. Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the stockholders may elect to exclude a corporation from the restrictions imposed thereunder. Our certificate of incorporation does not exclude us from the restrictions imposed under Section 203. It is anticipated that the provisions of Section 203 may encourage companies interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approves, prior to the date on which a stockholder becomes an interested stockholder, either the business combination or the transaction which results in the stockholder becoming an interested stockholder. CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS The summary set forth below describes certain provisions of our certificate of incorporation and bylaws. The summary is qualified in its entirety by reference to the provisions of our restated certificate of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus forms a part. Certain of the provisions of our certificate of incorporation and bylaws discussed below may have the effect, either alone or in combination with the provisions of Section 203 discussed above, of making more difficult or discouraging a tender offer, proxy contest or other takeover attempt that is opposed by our Board of Directors but that a stockholder might consider to be in such stockholder's best interest. Those provisions include: - restrictions on the rights of stockholders to remove directors; - prohibitions against stockholders calling a special meeting of stockholders or acting by unanimous written consent in lieu of a meeting; - requirements for advance notice of actions proposed by stockholders for consideration at meetings of the stockholders; and - restrictions on business combination transactions with "related persons." CLASSIFIED BOARD OF DIRECTORS; REMOVAL; NUMBER OF DIRECTORS; FILLING VACANCIES Our certificate of incorporation and bylaws provide that the Board of Directors shall be divided into three classes, designated Class I, Class II and Class III, with the classes to be as nearly equal in number as possible. The term of office of each class shall expire at the third annual meeting of stockholders for the election of directors following the election of such class. See "Management -- Information Regarding the Board of Directors and Committees" for a discussion of the directors in each class. Each director is to hold office until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. 63 67 Our bylaws provide that the number of directors will be fixed from time to time pursuant to a resolution adopted by the Board of Directors; provided that the number so fixed shall not be more than 15 nor less than three directors. Our bylaws also provide that any vacancies will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum. Accordingly, absent an amendment to the bylaws, the Board of Directors could prevent any stockholder from enlarging the Board of Directors and filling the new directorships with such stockholder's own nominees. Moreover, our certificate of incorporation and bylaws provide that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of our voting stock at a special meeting of stockholders called expressly for that purpose. The classification of directors could have the effect of making it more difficult for stockholders to change the composition of the Board of Directors. At least two annual meetings of stockholders, instead of one, are generally required to effect a change in a majority of the Board of Directors. Such a delay may help ensure that our directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the stockholders. The classification provisions will apply to every election of directors, however, regardless of whether a change in the composition of the Board of Directors would be beneficial to us and our stockholders and whether or not a majority of our stockholders believe that such a change would be desirable. The classification provisions could also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of us, even though such an attempt might be beneficial to us and our stockholders. The classification of the Board of Directors could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of our stock by purchasers whose objective is to take control of us and remove a majority of the Board of Directors, the classification of the Board of Directors could tend to reduce the likelihood of fluctuations in the market price of the common stock that might result from accumulations of large blocks. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of common stock at a higher market price than might otherwise be the case. NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS Our certificate of incorporation and bylaws provide that stockholder action can be taken only at an annual or special meeting of stockholders and stockholder action may not be taken by written consent in lieu of a meeting. Special meetings of stockholders can be called only by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors, or by the Chairman of the Board, Vice Chairman or the President. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by us. The provisions of our certificate of incorporation and bylaws prohibiting stockholder action by written consent and permitting special meetings to be called only by the Chairman, Vice Chairman or President, or at the request of a majority of the Board or Directors, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting. The provisions would also prevent the holders of a majority of our voting stock from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could not force stockholder consideration of a proposal over the opposition of the Chairman, Vice Chairman or President, or a majority of the Board of Directors, by calling a special meeting of stockholders prior to the time such parties believe such consideration to be appropriate. ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS Our bylaws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors or bring other business before an annual meeting of stockholders. The stockholder notice procedure provides that only persons who are nominated by, or at the direction of, the Board of Directors, or by a stockholder who has given timely written notice containing specified information to our Secretary prior to the meeting at which directors are to be elected, will be eligible for election as our directors. The stockholder notice procedure also provides that at an annual meeting only such 64 68 business may be conducted as has been brought before the meeting by, or at the direction of, the Chairman of the Board of Directors, or in the absence of the Chairman of the Board, the President, or by a stockholder who has given timely written notice containing specified information to our Secretary of such stockholder's intention to bring such business before such meeting. Under the stockholder notice procedure, for notice of stockholder nominations or proposals to be made at an annual meeting to be timely, such notice must be received by us not less than 60 days nor more than 90 days in advance of such meeting. For notice of stockholder nominations or proposals to be made at a special meeting of stockholders to be timely, such notice must be received by us not later than the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Notwithstanding the foregoing, in the event that less than 70 days notice or prior public disclosure of the date of the meeting of stockholders is given or made to the stockholders, to be timely, notice of a nomination or proposal delivered by the stockholder must be received by our Secretary not later than the close of business on the tenth day following the day on which notice of the date of the meeting of stockholders was mailed or such public disclosure was made to the stockholders. If the Board of Directors or, alternatively, the presiding officer at a meeting, in the case of a stockholder proposal, or the chairman of the meeting, in the case of a stockholder nomination to the Board of Directors, determines at or prior to the meeting that business was not brought before the meeting or a person was not nominated in accordance with the stockholder notice procedure, such business will not be conducted at such meeting, or such person will not be eligible for election as a director, as the case may be. By requiring advance notice of nominations by stockholders, the stockholder notice procedure will afford the Board of Directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, the stockholder notice procedure will also provide a more orderly procedure for conducting annual meetings of stockholders and, to the extent deemed necessary or desirable by the Board of Directors, will provide the Board of Directors with an opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although our bylaws do not give the Board of Directors any power to approve or disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders. FAIR PRICE PROVISION Our certificate of incorporation contains a "fair price" provision that applies to certain business combination transactions involving any person, entity or group that beneficially owns at least 10% of our aggregate voting stock -- such person, entity or group is sometimes referred to as a "related person". This provision requires the affirmative vote of the holders of not less than 80% of our voting stock to approve certain transactions between a related person and us or our subsidiaries, including: - any merger, consolidation or share exchange; - any sale, lease, exchange, mortgage, pledge, transfer or other disposition of our assets, or the assets of any of our subsidiaries having a fair market value of more than 10% of our total consolidated assets, or assets representing more than 10% of our earning power and our subsidiaries taken as a whole (a "Substantial Part"); - any sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with us or any of our subsidiaries of all or a Substantial Part of the assets of a related person; 65 69 - the issuance or transfer of any of our securities or any of our subsidiaries by us or any of our subsidiaries to a related person; - any reclassification of securities, recapitalization, or any other transaction involving us or any of our subsidiaries that would have the effect of increasing the voting power of a related person; - the adoption of a plan or proposal for our liquidation or dissolution proposed by or on behalf of a related person; - the acquisition by or on behalf of a related person of shares constituting a majority of our voting power; and - the entering into of any agreement, contract or other arrangement providing for any of the transactions described above. This voting requirement will not apply to certain transactions, including: (a) any transaction approved by a two-thirds vote of the continuing directors (as defined in our certificate of incorporation); or (b) any transaction in which: (1) the consideration to be received by the holders of common stock (other than the related person involved in the business combination) is not less in amount than the highest per share price paid by the related person in acquiring any of its holdings of common stock; and (2) if necessary, a proxy statement complying with the requirements of the Securities Exchange Act of 1934 shall have been mailed at least 30 days prior to any vote on such business combination to all of our stockholders for the purpose of soliciting stockholder approval of such business combination. This provision could have the effect of delaying or preventing a change in control of us in a transaction or series of transactions that did not satisfy the "fair price" criteria. LIABILITY OF DIRECTORS; INDEMNIFICATION Our certificate of incorporation provides that a director will not be personally liable for monetary damages to us or our stockholders for breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - for paying a dividend or approving a stock repurchase in violation of Section 174 of the Delaware General Corporation Law; or - for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of such provision shall not adversely affect any right or protection of a director existing under such provision for any act or omission occurring prior to such amendment or repeal. Our bylaws provide that each person who at any time serves or served as one of our directors or officers, or any person who, while one of our directors or officers, is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall be entitled to indemnification and the advancement of expenses from us, and to the fullest extent, permitted by Section 145 of the Delaware General Corporation Law or any successor statutory provision. We will indemnify any person who was or is a party to any threatened, pending or completed action, suit or proceeding because he or she is or was one of our directors or officers, or is or was serving at our request as a director or officer of another corporation, partnership or other enterprise. However, as provided in Section 145, this indemnification will only be provided 66 70 if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests. AMENDMENTS Our certificate of incorporation provides that we reserve the right to amend, alter, change, or repeal any provision contained in our certificate of incorporation, and all rights conferred to stockholders are granted subject to such reservation. The affirmative vote of holders of not less than 80% of our voting stock, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with or repeal certain provisions of our certificate of incorporation, including those provisions discussed in this section. In addition, the 80% vote described in the prior sentence shall not be required for any alteration, amendment, adoption of inconsistent provision or repeal of the "fair price" provision discussed under "-- Fair Price Provision" above which is recommended to the stockholders by two-thirds of the continuing directors of Lennox and such alteration, amendment, adoption of inconsistent provision or repeal shall require the vote, if any, required under the applicable provisions of the Delaware General Corporation Law and our certificate of incorporation. In addition, our certificate of incorporation provides that stockholders may only adopt, amend or repeal our bylaws by the affirmative vote of holders of not less than 80% of our voting stock, voting together as a single class. Our bylaws may be amended by our Board of Directors. RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY Our certificate of incorporation authorizes the Board of Directors to create and issue rights, warrants and options entitling the holders thereof to purchase from us shares of any class or classes of our capital stock or other securities or property upon such terms and conditions as the Board of Directors may deem advisable. LISTING Application will be made to list the common stock on the New York Stock Exchange under the symbol "LII". TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is ChaseMellon Shareholder Services, L.L.C. 67 71 SHARES ELIGIBLE FOR FUTURE SALE Prior to the offering, there has been no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. Upon completion of the offering, we will have shares of common stock issued and outstanding, or shares if the underwriters' over-allotment option is exercised in full. Of these shares, the shares of common stock to be sold in the offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, except that shares purchased by an "affiliate" of ours (as that term is defined in Rule 144 under the Securities Act of 1933, as amended) will be subject to the resale limitations of Rule 144. The remaining shares of common stock outstanding will be "restricted securities" as that term is defined by Rule 144. In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed after the later of the date on which "restricted" shares were acquired from us or the date on which they were acquired from an "affiliate," then the holder of such shares, including an affiliate, is entitled to sell a number of shares within any three-month period that does not exceed the greater of: - one percent of the then outstanding shares of the common stock; or - the average weekly reported volume of trading of the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning Lennox. Affiliates may sell shares not constituting "restricted" shares in accordance with the foregoing volume limitations and other requirements but without regard to the one-year period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date on which "restricted" shares were acquired from us and the date on which they were acquired from an affiliate, a holder of such shares who is not an affiliate at the time of the sale and has not been an affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. The foregoing description of Rule 144 is not intended to be a complete description thereof. Sales of significant amounts of the common stock, or the perception that such sales could occur, could have an adverse impact on the market price of the common stock. We, our directors and executive officers, the selling stockholders and certain other stockholders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, such person will not, during the period ending 180 days after the date of this prospectus: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise; provided, however, that any such person or entity shall be permitted to make a bona fide gift of shares of common stock during such period if such person or entity delivers to Morgan Stanley & Co. Incorporated an agreement substantially similar to the above executed by the donee. The restrictions described in the previous paragraph do not apply to - the sale of the shares of common stock to the underwriters; - transactions by any person other than Lennox relating to shares of common stock or other securities acquired in open market transactions after completion of the offering; or - the issuance or sale of shares of common stock pursuant to our stock option plans existing on the date of consummation of the offering. 68 72 CERTAIN FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS The following is a summary of certain material U.S. federal income and estate tax consequences expected to result under current law from the purchase, ownership and taxable disposition of common stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is defined as a person or entity other than: (a) a citizen or resident of the U.S.; (b) a corporation, partnership or other entity created or organized in or under the laws of the U.S. or of any state thereof; (c) an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or (d) a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust. This summary deals only with purchasers of common stock who hold common stock as capital assets and does not address all of the U.S. federal income and estate tax considerations that may be relevant to a Non-U.S. Holder in light of its particular circumstances or to Non-U.S. Holders that may be subject to special treatment under U.S. federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions, brokers, dealers in securities, regulated investment companies, common trust funds, or persons that hold common stock as part of a hedge, conversion or constructive sale transaction, straddle or other risk reduction transaction. Furthermore, this summary does not discuss any aspects of state, local or foreign taxation. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations, judicial opinions, published positions of the U.S. Internal Revenue Service and other applicable authorities, all of which are subject to change, possibly with retroactive effect. Each prospective purchaser of common stock is advised to consult its tax advisor with respect to the tax consequences of acquiring, holding and disposing of common stock. DIVIDENDS Dividends paid to a Non-U.S. Holder of common stock generally will be subject to withholding of U.S. federal income tax at a 30 percent rate (or such lower rate as may be specified by an applicable income tax treaty) unless the dividends are effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the U.S. (and, if an income tax treaty applies, such dividends are attributable to a U.S. permanent establishment of the Non-U.S. Holder) and the Non-U.S. Holder provides the payor with proper documentation (generally I.R.S. Form 4224 or any successor form), in which case the dividends will be taxed at ordinary U.S. federal income tax rates and will not be subject to the withholding tax described above. If the Non-U.S. Holder is a corporation, such effectively connected income may also be subject to an additional "branch profits tax" which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) of the Non-U.S. corporation's "effectively connected earnings and profits," subject to certain adjustments. SALE OR DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of any gain recognized on the sale or other taxable disposition of common stock unless: - the gain is effectively connected with a trade or business of the Non-U.S. Holder in the U.S.; - in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, the holder is present in the U.S. for 183 or more days in the taxable year of the disposition and either (a) the individual has a "tax home" for U.S. federal income tax purposes in the U.S. or (b) the gain is attributable to an office or other fixed place of business maintained by the individual in the U.S.; - the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. federal income tax law applicable to certain U.S. expatriates; or 69 73 - Lennox is or has been during certain periods preceding the disposition a U.S. real property holding corporation and either (a) the common stock ceases to be "regularly traded on an established securities market" for U.S. federal income tax purposes or (b) the Non-U.S. Holder has held, directly or indirectly, at any time during the five-year period ending on the date of disposition (or, if shorter, the Non-U.S. Holder's holding period), more than 5 percent of all of Lennox's outstanding common stock. Lennox is not, and does not anticipate becoming, a U.S. real property holding corporation. BACKUP WITHHOLDING AND INFORMATION REPORTING Lennox must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the amount, if any, of tax withheld with respect to such dividends. This information may also be made available to the tax authorities in the Non-U.S. Holder's country of residence. U.S. backup withholding (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the U.S. information reporting requirements) generally will not apply to dividends paid to Non-U.S. Holders if such dividends are subject to the 30% withholding discussed above (or that are not so subject because a tax treaty applies that reduces or eliminates such 30% withholding). In the case of dividends which are not described in the preceding sentence, backup withholding would still not apply (a) under current law, if such dividends are paid before January 1, 2000 to a Non-U.S. Holder at an address outside the U.S. or (b) under recently promulgated final U.S. Treasury regulations which are to become effective as of January 1, 2000, if certain certification procedures (or, in the case of payments made outside the U.S. with respect to an offshore account, certain documentary evidence procedures) are satisfied. Upon the sale or other taxable disposition of common stock by a Non-U.S. Holder to or through a U.S. office of a broker, the broker must backup withhold at a rate of 31 percent and report the sale to the IRS, unless the holder certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. Upon the sale or other taxable disposition of common stock by a Non-U.S. Holder to or through the foreign office of a U.S. broker, or a foreign broker with certain types of relationships to the U.S., the broker must report the sale to the IRS (but, prior to January 1, 2000, is not required to backup withhold) unless the broker has documentary evidence in its files that the seller is a Non-U.S. Holder and certain other conditions are met, or the holder otherwise establishes an exemption. A sale or other taxable disposition of common stock by a Non-U.S. Holder to or through the foreign office of a foreign broker that does not have certain types of relationships to the U.S. is generally not subject to either information reporting or backup withholding. Backup withholding is not an additional U.S. federal income tax. Amounts withheld under the backup withholding rules are generally allowable as a refund or credit against such Non-U.S. Holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS. FEDERAL ESTATE TAXES Common stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the U.S. at the time of death will be included in such individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. 70 74 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the U.S. underwriters named below, for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation and Warburg Dillon Read LLC are acting as U.S. representatives, and the international underwriters named below, for whom Morgan Stanley & Co. International Limited, Credit Suisse First Boston (Europe) Limited and UBS AG, acting through its division Warburg Dillon Read, are acting as international representatives, have severally agreed to purchase, and Lennox and the selling stockholders have agreed to sell to them, severally, the respective number of shares of common stock set forth opposite the names of such underwriters below:
NUMBER OF NAME SHARES ---- --------- U.S. Underwriters: Morgan Stanley & Co. Incorporated......................... Credit Suisse First Boston Corporation.................... Warburg Dillon Read LLC, a subsidiary of UBS AG........... Subtotal.......................................... -------- International Underwriters: Morgan Stanley & Co. International Limited................ Credit Suisse First Boston (Europe) Limited............... UBS AG, acting through its division Warburg Dillon Read... Subtotal.......................................... -------- Total............................................. ========
The U.S. underwriters and the international underwriters are collectively referred to as the "underwriters", and the U.S. representatives and the international representatives are collectively referred to as the "representatives". The underwriters are offering the shares subject to their acceptance of the shares from us and the selling stockholders and subject to prior sale. The Underwriting Agreement provides that the 71 75 obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of our common stock offered hereby, other than those covered by the U.S. underwriters' over-allotment option described below, if any such shares are taken. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. underwriter has represented and agreed that, with certain exceptions: - it is not purchasing any shares (as defined herein) for the account of anyone other than a U.S. or Canadian Person (as defined herein); and - it has not offered or sold, and will not offer or sell, directly or indirectly, any shares or distribute any prospectus relating to the shares outside the U.S. or Canada or to anyone other than a U.S. or Canadian Person. Pursuant to the Agreement between U.S. and International Underwriters, each international underwriter has represented and agreed that, with certain exceptions: - it is not purchasing any shares for the account of any U.S. or Canadian Person; and - it has not offered or sold, and will not offer or sell, directly or indirectly, any shares or distribute any prospectus relating to the shares in the U.S. or Canada or to any U.S. or Canadian Person. With respect to any underwriter that is a U.S. underwriter and an international underwriter, the foregoing representations and agreements made by it in its capacity as a U.S. underwriter apply only to it in its capacity as a U.S. underwriter and made by it in its capacity as an international underwriter apply only to it in its capacity as an international underwriter. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement between U.S. and International Underwriters. As used herein, "U.S. or Canadian Person" means any national or resident of the U.S. or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the U.S. or Canada or of any political subdivision thereof (other than a branch located outside the U.S. and Canada of any U.S. or Canadian Person), and includes any U.S. or Canadian branch of a person who is otherwise not a U.S. or Canadian Person. All shares of common stock to be purchased by the Underwriters under the Underwriting Agreement are referred to herein as the "shares". Pursuant to the Agreement between U.S. and International Underwriters, sales may be made between the U.S. underwriters and international underwriters of any number of shares as may be mutually agreed. The per share price of any shares so sold shall be the public offering price set forth on the cover page hereof, in U.S. dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer or sale of shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each U.S. underwriter has further agreed to send to any dealer who purchases from it any of the shares a notice stating in substance that, by purchasing such shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such shares a notice containing substantially the same statement as is contained in this sentence. 72 76 Pursuant to the Agreement between U.S. and International Underwriters, each international underwriter has represented and agreed that: - it has not offered or sold and, prior to the date six months after the closing date for the sale of the shares to the international underwriters, will not offer or sell, any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments, as principal or agent, for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; - it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom; and - it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the offering of the shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom such document may otherwise lawfully be issued or passed on. Pursuant to the Agreement between U.S. and International Underwriters, each international underwriter has further represented that it has not offered or sold, and has agreed not to offer or sell, directly or indirectly, in Japan or to or for the account of any resident thereof, any of the shares acquired in connection with the distribution contemplated hereby, except for offers or sales to Japanese international underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each international underwriter has further agreed to send to any dealer who purchases from it any of the shares a notice stating in substance that, by purchasing such shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, any of such shares, directly or indirectly, in Japan or to or for the account of any resident thereof except for offers or sales to Japanese international underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law, and that such dealer will send to any other dealer to whom it sells any of such shares a notice containing substantially the same statement as is contained in this sentence. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. Lennox has granted to the U.S. underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered hereby. To the extent such option is exercised, each U.S. underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of common stock as the number set forth next to such U.S. underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all U.S. underwriters in the preceding table. If the U.S. underwriters' option is exercised in full, the total price to the public for this offering would be $ , the total underwriters' discounts and commissions would be $ and the total proceeds to Lennox would be $ . At the request of Lennox, the underwriters have reserved for sale, at the initial public offering price, up to shares offered hereby for directors, officers, employees, business associates and related persons of Lennox. The number of shares of common stock available for sale to the general public will be reduced to the extent such 73 77 persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. The underwriters have informed Lennox that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. Application will be made to list the common stock on the New York Stock Exchange under the symbol "LII." Each of Lennox, its directors and executive officers, the selling stockholders and certain other stockholders has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not, during the period ending 180 days after the date of this prospectus: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise; provided, however, that any such person or entity shall be permitted to make a bona fide gift of shares of common stock during such period if such person or entity delivers to Morgan Stanley & Co. Incorporated an agreement substantially similar to the above executed by the donee. The restrictions described in the previous paragraph do not apply to: - the sale of the shares to the underwriters; - transactions by any person other than Lennox relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering; or - the issuance or sale of shares of common stock pursuant to Lennox stock option plans existing on the date of consummation of the offering. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may agree to sell, or allot, more shares than the shares of common stock Lennox has agreed to sell to them. This over-allotment would create a short position in the common stock for the underwriters' account. To cover any over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. The underwriters have reserved the right to reclaim selling concessions in order to encourage underwriters and dealers to distribute the common stock for investment, rather than for short-term profit taking. Increasing the proportion of the offering held for investment may reduce the supply of common stock available for short-term trading. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. Lennox, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. An affiliate of Credit Suisse First Boston Corporation was a participant bank in Lennox's revolving credit facility which expired in June 1998. Such affiliate currently has issued approximately $20 million in letters of credit on behalf of Lennox, all but $1 million of which expired in December 1998. Such affiliate has received customary banking fees for such services. In addition, Warburg Dillon Read LLC has provided certain 74 78 investment banking services and has acted as placement agent for Lennox's private placements of debt securities in 1993 and 1998, for which services they received customary fees in connection therewith. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiations between Lennox and the U.S. representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of Lennox and its industry in general, sales, earnings and certain other financial operating information of Lennox in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of Lennox. The estimated initial public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Baker & Botts, L.L.P., Dallas, Texas. Certain legal matters in connection with the sale of the common stock offered hereby will be passed upon for the underwriters by Fulbright & Jaworski L.L.P., Houston, Texas. EXPERTS Our financial statements and schedule as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to Lennox and the common stock, reference is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other documents filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration statement, including the exhibits and any schedules thereto. As a result of the offering, we will become subject to the full informational requirements of the Securities Exchange Act of 1934, as amended. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We intend to furnish our shareholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. 75 79 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE ---- ANNUAL FINANCIAL STATEMENTS OF LENNOX INTERNATIONAL INC. Report of Independent Public Accountants.................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998................................................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1996, 1997 and 1998....................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998........... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998....................... F-6 Notes to Consolidated Financial Statements................ F-7
F-1 80 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Lennox International Inc.: We have audited the accompanying consolidated balance sheets of Lennox International Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lennox International Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, February 18, 1999 F-2 81 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
AS OF DECEMBER 31, --------------------- 1997 1998 -------- ---------- CURRENT ASSETS: Cash and cash equivalents................................. $147,802 $ 28,389 Accounts and notes receivable, net........................ 273,229 318,858 Inventories............................................... 183,077 274,679 Deferred income taxes..................................... 51,137 37,426 Other assets.............................................. 15,260 36,183 -------- ---------- Total current assets.............................. 670,505 695,535 INVESTMENTS IN JOINT VENTURES............................... 14,803 17,261 PROPERTY, PLANT, AND EQUIPMENT, net......................... 215,333 255,125 GOODWILL, net............................................... 42,620 155,290 OTHER ASSETS................................................ 27,631 29,741 -------- ---------- TOTAL ASSETS...................................... $970,892 $1,152,952 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt........................................... $ 6,021 $ 56,070 Current maturities of long-term debt...................... 8,926 18,778 Accounts payable.......................................... 104,679 149,824 Accrued expenses.......................................... 210,668 207,040 Income taxes payable...................................... 4,320 534 -------- ---------- Total current liabilities......................... 334,614 432,246 LONG-TERM DEBT.............................................. 183,583 242,593 DEFERRED INCOME TAXES....................................... 2,690 11,628 POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS................ 17,288 16,511 OTHER LIABILITIES........................................... 92,471 60,845 -------- ---------- Total liabilities................................. 630,646 763,823 -------- ---------- MINORITY INTEREST........................................... 14,768 12,689 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding............ -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 1,042,648 shares and 1,077,180 shares issued and outstanding for 1997 and 1998, respectively........................................... 10 11 Additional paid-in capital................................ 19,594 33,233 Retained earnings......................................... 309,610 350,851 Currency translation adjustments.......................... (3,736) (7,655) -------- ---------- Total stockholders' equity........................ 325,478 376,440 -------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $970,892 $1,152,952 ======== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 82 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- NET SALES................................................ $1,364,546 $1,444,442 $1,821,836 COST OF GOODS SOLD....................................... 961,696 1,005,913 1,245,623 ---------- ---------- ---------- Gross profit................................... 402,850 438,529 576,213 OPERATING EXPENSES: Selling, general and administrative.................... 298,049 326,280 461,143 Other operating expense, net........................... 4,213 7,488 8,467 Product inspection charge.............................. -- 140,000 -- ---------- ---------- ---------- Income (loss) from operations.................. 100,588 (35,239) 106,603 INTEREST EXPENSE, net.................................... 13,417 8,515 16,184 OTHER.................................................... (943) 1,955 1,602 MINORITY INTEREST........................................ -- (666) (869) ---------- ---------- ---------- Income (loss) before income taxes.............. 88,114 (45,043) 89,686 PROVISION (BENEFIT) FOR INCOME TAXES..................... 33,388 (11,493) 37,161 ---------- ---------- ---------- Net income (loss).............................. $ 54,726 $ (33,550) $ 52,525 ========== ========== ========== EARNINGS (LOSS) PER SHARE: Basic.................................................. $ 53.60 $ (32.64) $ 49.65 Diluted................................................ $ 52.52 $ (32.64) $ 48.50
The accompanying notes are an integral part of these consolidated financial statements. F-4 83 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ---------------------- SHARES ADDITIONAL CURRENCY TOTAL ISSUED AND PAID-IN RETAINED TRANSLATION STOCKHOLDERS' COMPREHENSIVE OUTSTANDING AMOUNT CAPITAL EARNINGS ADJUSTMENTS EQUITY INCOME ----------- -------- ---------- -------- ----------- ------------- ------------- BALANCE AT DECEMBER 31, 1995....... 998,665 $ 10 $ 4,078 $313,044 $(1,819) $315,313 $ -- Net income....................... -- -- -- 54,726 -- 54,726 54,726 Dividends, $8.66 per share....... -- -- -- (8,845) -- (8,845) -- Stock dividend -- 2%............. 19,991 -- 6,097 (6,097) -- -- -- Foreign currency translation adjustments.................... -- -- -- -- (156) (156) (156) Common stock repurchased......... (4,177) -- (1,460) -- -- (1,460) -- Common stock issued.............. 6,816 -- 1,886 -- -- 1,886 -- -------- Comprehensive income............. -- -- -- -- -- -- 54,570 --------- -------- ------- -------- ------- -------- ======== BALANCE AT DECEMBER 31, 1996....... 1,021,295 10 10,601 352,828 (1,975) 361,464 -- Net loss......................... -- -- -- (33,550) -- (33,550) (33,550) Dividends, $9.38 per share....... -- -- -- (9,668) -- (9,668) -- Foreign currency translation adjustments.................... -- -- -- -- (1,761) (1,761) (1,761) Common stock repurchased......... (11,180) -- (4,892) -- -- (4,892) -- Common stock issued.............. 32,533 -- 13,885 -- -- 13,885 -- -------- Comprehensive income (loss)...... -- -- -- -- -- -- (35,311) --------- -------- ------- -------- ------- -------- ======== BALANCE AT DECEMBER 31, 1997....... 1,042,648 10 19,594 309,610 (3,736) 325,478 -- Net income....................... -- -- -- 52,525 -- 52,525 52,525 Dividends, $10.62 per share...... -- -- -- (11,284) -- (11,284) -- Foreign currency translation adjustments.................... -- -- -- -- (3,919) (3,919) (3,919) Common stock repurchased......... (15,321) -- (8,510) -- -- (8,510) -- Common stock issued.............. 49,853 1 22,149 -- -- 22,150 -- -------- Comprehensive income............. -- -- -- -- -- -- $ 48,606 --------- -------- ------- -------- ------- -------- ======== BALANCE AT DECEMBER 31, 1998....... 1,077,180 $ 11 $33,233 $350,851 $(7,655) $376,440 ========= ======== ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 84 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1997 1998 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 54,726 $(33,550) $ 52,525 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest.................................... -- (666) (869) Joint venture losses................................. 1,118 1,782 3,111 Depreciation and amortization........................ 34,149 33,430 43,545 Loss (gain) on disposal of equipment................. 1,315 (251) 570 Deferred income taxes................................ (5,103) (42,195) 26,424 Other................................................ (962) 2,112 (130) Changes in assets and liabilities, net of effects of acquisitions: Accounts and notes receivable........................ 13,269 (25,878) (20,567) Inventories.......................................... 28,539 17,258 (52,445) Other current assets................................. (3,239) 3,622 (4,739) Accounts payable..................................... (3,018) (4,774) 29,851 Accrued expenses..................................... 38,774 64,400 (17,040) Income taxes payable and receivable.................. 4,166 (2,361) (18,610) Long-term warranty, deferred income and other liabilities....................................... (4,890) 45,557 (36,662) -------- -------- --------- Net cash provided by operating activities......... 158,844 58,486 4,964 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the disposal of property, plant and equipment.............................................. 547 4,205 538 Purchases of property, plant and equipment................ (31,903) (34,581) (52,435) Investments in joint ventures............................. (23,395) (3,735) (458) Acquisitions, net of cash acquired........................ -- (10,527) (160,063) Proceeds from the sale of businesses...................... 17,633 -- -- -------- -------- --------- Net cash used in investing activities............. (37,118) (44,638) (212,418) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings..................................... -- (3,732) 36,724 Repayments of long-term debt.............................. (34,588) (5,712) (12,499) Long-term borrowings...................................... -- 5,572 75,044 Sales of common stock..................................... 630 729 9,607 Repurchases of common stock............................... (1,460) (4,892) (8,510) Cash dividends paid....................................... (8,560) (9,312) (10,820) -------- -------- --------- Net cash provided by (used in) financing activities...................................... (43,978) (17,347) 89,546 -------- -------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 77,748 (3,499) (117,908) EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS....... 318 (576) (1,505) CASH AND CASH EQUIVALENTS, beginning of year................ 73,811 151,877 147,802 -------- -------- --------- CASH AND CASH EQUIVALENTS, end of year...................... $151,877 $147,802 $ 28,389 ======== ======== ========= Supplementary disclosures of cash flow information: Cash paid during the year for: Interest............................................... $ 18,481 $ 15,016 $ 20,351 ======== ======== ========= Income taxes........................................... $ 34,198 $ 33,938 $ 29,347 ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 85 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1. NATURE OF OPERATIONS: Lennox International Inc. and subsidiaries (the "Company"), a Delaware corporation, is a global designer, manufacturer, and marketer of a broad range of products for the heating, ventilation, air conditioning, and refrigeration ("HVACR") markets. The Company participates in four reportable business segments of the HVACR industry. The first is North American residential heating, air conditioning and hearth products in which the Company manufactures and markets a full line of these products for the residential replacement and new construction markets in North America. The second reportable segment is the global commercial air conditioning market in which the Company manufactures and sells rooftop products and applied systems for commercial applications. The third is the global commercial refrigeration market which consists of unit coolers, condensing units and other commercial refrigeration products. The fourth reportable segment is heat transfer products in which the Company designs, manufactures and sells evaporator and condenser coils, copper tubing, and related equipment to original equipment manufacturers ("OEMs") and other specialty purchasers on a global basis. See Note 4 for financial information regarding the Company's reportable segments. The Company sells its products to numerous types of customers, including distributors, installing dealers, national accounts and OEMs. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Lennox International Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated. Investments in joint ventures where the Company has a 50% or less ownership interest are being accounted for using the equity method of accounting. As discussed in Note 7, the Company increased its ownership in Ets. Brancher from 50% to 70% in September 1997. As a result, the Company assumed control of the venture and began consolidating the financial position and results of operations in the fourth quarter of 1997. Previously, the Company used the equity method of accounting for its investment in this entity. CASH EQUIVALENTS The Company considers all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash equivalents consist of investment grade securities and are stated at cost which approximates fair value. The Company earned interest income of $4.8 million, $6.4 million and $4.5 million for the years ended December 31, 1996, 1997 and 1998, respectively, which is included in interest expense, net on the accompanying consolidated statements of income. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable have been shown net of an allowance for doubtful accounts of $16.9 million and $18.5 million as of December 31, 1997 and 1998, respectively. The Company has no significant credit risk concentration among its diversified customer base. INVENTORIES Inventory costs include applicable material, labor, depreciation, and plant overhead. Inventories of $125.5 million and $169.6 million in 1997 and 1998, respectively, are valued at the lower of cost or market using the last-in, first-out (LIFO) cost method. The remaining portion of the inventory is valued at the lower of cost or market with cost being determined on the first-in, first-out (FIFO) basis. F-7 86 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Expenditures for renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to expense as incurred. Gains and losses resulting from the dispositions of property, plant and equipment are included in other operating expense. Depreciation is computed using the straight-line method over the following estimated useful lives: Land and improvements....................................... 10 to 20 years Buildings and improvements.................................. 15 to 39 years Machinery and equipment..................................... 3 to 10 years
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets have been recorded based on their fair value at the date of acquisition and are being amortized on a straight-line basis over periods generally ranging from thirty to forty years. As of December 31, 1997 and 1998, accumulated amortization was $26.5 million and $34.4 million, respectively. Goodwill and other long-lived assets are periodically reviewed for impairment by comparing the carrying value of the assets to the estimated undiscounted future cash flows associated with them. If such evaluations indicated that the future undiscounted cash flows of certain long-lived assets were not sufficient to recover the carrying value of such assets, the assets would be adjusted to their fair values. As a result of these periodic reviews, there have been no adjustments to the carrying value of long-lived assets in 1996, 1997 and 1998. PRODUCT WARRANTIES A liability for estimated warranty expense is established by a charge against operations at the time products are sold. The subsequent costs incurred for warranty claims serve to reduce the product warranty liability. The actual warranty costs the Company will ultimately pay could differ materially from this estimate. Total liabilities for estimated warranty expense are $155.7 million and $83.2 million as of December 31, 1997 and 1998, respectively, and are included in the following captions on the accompanying consolidated balance sheets (in thousands):
DECEMBER 31, ------------------ 1997 1998 -------- ------- Current accrued expenses................................. $ 94,042 $48,467 Other non-current liabilities............................ 61,617 34,707 -------- ------- $155,659 $83,174 ======== =======
Liabilities for estimated warranty expense as of December 31, 1997 and 1998, include approximately $113.4 million and $27.3 million, respectively, in remaining estimated liabilities associated with a product inspection program initiated in 1997 (see Note 3). INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. F-8 87 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. REVENUE RECOGNITION Sales are recorded when products are shipped or when services are rendered. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed as incurred. The Company expended approximately $23.2 million, $25.4 million, and $33.3 million for the years ended December 31, 1996, 1997, and 1998, respectively, for research and product development activities. Research and development costs are included in selling, general and administrative expense on the accompanying consolidated statements of income. ADVERTISING Production costs of commercials and programming are charged to operations in the period first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred. Advertising expense was $36.4 million, $37.9 million, and $50.2 million for the years ended December 31, 1996, 1997, and 1998, respectively. TRANSLATION OF FOREIGN CURRENCIES All assets and liabilities of foreign subsidiaries and joint ventures are translated into United States dollars using rates of exchange in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates during the respective years. The unrealized translation gains and losses are accumulated in a separate component of stockholders' equity. Transaction gains (losses) included in the accompanying statements of income were $943,000, $(1,955,000), and $(1,602,000) for the years ended December 31, 1996, 1997, and 1998, respectively. FOREIGN CURRENCY CONTRACTS The Company has entered into foreign currency exchange contracts to hedge its investment in Ets. Brancher S.A. (see Note 7) and not to engage in currency speculation. These contracts do not subject the Company to risk from exchange rate movements because the gains or losses on the contracts offset the losses or gains, respectively, on the assets and liabilities of the subsidiary. As of December 31, 1998, the Company had 165.5 million French francs (approximately $30.0 million) outstanding under these contracts. These contracts require the Company to exchange French francs for U.S. dollars at maturity (May 2003), at rates agreed to at inception of the contracts. If the counterparty to the exchange contracts does not fulfill their obligations to deliver the contracted currencies, the Company could be at risk for any currency related fluctuations. The gains and losses associated with these contracts, net of tax, are recorded as a component of currency translation adjustments on the accompanying 1996, 1997 and 1998 consolidated statements of stockholders' equity. The Company from time to time enters into foreign currency exchange contracts to hedge receivables from its foreign subsidiaries, and not to engage in currency speculation. These contracts do not subject the Company to risk from exchange rate movements because the gains or losses on the contracts offset losses or gains, respectively, on the receivables being hedged. As of December 31, 1998, the Company had obligations to deliver $33.2 million of various foreign currencies within the next three months, for which the counterparties to the contracts will pay fixed contract amounts. F-9 88 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PURCHASE COMMITMENTS The Company has contracts with various suppliers to purchase copper and aluminum for use in its manufacturing processes. These contracts, which vary from one to thirty-six months, cover fixed quantities at fixed and floating prices. As of December 31, 1998, the Company had forward commitments for delivery through December 31, 1999, for approximately 9.4 million pounds of aluminum and 8.5 million pounds of copper. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. PRODUCT INSPECTION CHARGE During 1997, the Company recorded a pre-tax charge of $140.0 million to provide for projected expenses of the product inspection program related to its Pulse furnace. The Company has offered the owners of Pulse furnaces installed between 1982 and 1990 a subsidized inspection and a free carbon monoxide detector. The inspection includes a severe pressure test to determine the serviceability of the heat exchanger. If the heat exchanger does not pass the test, the Company will either replace the heat exchanger or offer a new furnace and subsidize the labor costs for installation. The cost required for the program depends on the number of furnaces located, the percentage of those located that do not pass the pressure test, and the replacement option chosen by the homeowner. As of December 31, 1998, the Company had incurred approximately $112.7 million in costs related to the product inspection program. Consequently, there is a current liability of $27.3 million recorded on the accompanying consolidated balance sheet as of December 31, 1998, to accrue for the estimated remaining costs of the program. The product inspection program ends in June 1999 and the Company believes its current liability of $27.3 million is adequate to cover the remaining costs of the program. 4. REPORTABLE BUSINESS SEGMENTS: As of December 31, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, which requires disclosure of business segment data in accordance with the "management approach." The management approach is based on the way segments are organized within the Company for making operating decisions and assessing performance. The Company's business operations are organized within the following four reportable business segments as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Net Sales North American residential............. $ 857,131 $ 865,147 $1,013,747 Commercial air conditioning............ 228,935 278,837 392,053 Commercial refrigeration............... 135,566 154,247 237,264 Heat transfer*......................... 142,914 146,211 178,772 ---------- ---------- ---------- $1,364,546 $1,444,442 $1,821,836 ========== ========== ==========
- --------------- * The Heat transfer segment had intersegment sales of $34,911, $23,571, and $32,307 in 1996, 1997, and 1998, respectively. F-10 89 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income (Loss) from Operations North American residential............. $ 99,658 $ (47,516)* $ 123,426 Commercial air conditioning............ (9,477) 4,521 (6,579) Commercial refrigeration............... 13,717 15,407 20,383 Heat transfer.......................... 17,311 16,857 12,700 Corporate and other.................... (20,621) (24,508) (43,327) ---------- ---------- ---------- $ 100,588 $ (35,239) $ 106,603 ========== ========== ==========
- --------------- * Includes a $140.0 million charge related to a product inspection program (see Note 3).
AS OF DECEMBER 31, --------------------- 1997 1998 -------- ---------- Identifiable Assets North American residential.......................... $330,864 $ 528,660 Commercial air conditioning......................... 175,748 198,982 Commercial refrigeration............................ 146,118 194,601 Heat transfer....................................... 69,272 88,633 Corporate and other................................. 248,890 142,076 -------- ---------- $970,892 $1,152,952 ======== ==========
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1996 1997 1998 --------- --------- --------- Capital Expenditures North American residential.................... $18,561 $12,914 $14,942 Commercial air conditioning................... 2,577 5,677 6,180 Commercial refrigeration...................... 3,779 6,798 7,367 Heat transfer................................. 6,453 6,907 12,136 Corporate and other........................... 533 2,285 11,810 ------- ------- ------- $31,903 $34,581 $52,435 ======= ======= ======= Depreciation and Amortization North American residential.................... $15,170 $14,892 $15,437 Commercial air conditioning................... 4,447 4,048 5,802 Commercial refrigeration...................... 6,428 6,390 9,376 Heat transfer................................. 3,963 3,991 5,912 Corporate and other........................... 4,141 4,109 7,018 ------- ------- ------- $34,149 $33,430 $43,545 ======= ======= =======
The following table sets forth certain financial information relating to the Company's operations by geographic area (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Net Sales to External Customers United States and Canada............... $1,336,013 $1,368,063 $1,577,296 International.......................... 28,533 76,379 244,540 ---------- ---------- ---------- Total net sales to external customers.................... $1,364,546 $1,444,442 $1,821,836 ========== ========== ==========
F-11 90 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31, ------------------- 1997 1998 -------- -------- Long-Lived Assets United States and Canada.............................. $253,196 $371,361 International......................................... 47,191 86,056 -------- -------- Total long-lived assets....................... $300,387 $457,417 ======== ========
5. INVENTORIES: Components of inventories are as follows (in thousands):
AS OF DECEMBER 31, ------------------- 1997 1998 -------- -------- Finished goods.......................................... $116,052 $177,490 Repair parts............................................ 37,248 31,674 Work in process......................................... 15,755 15,574 Raw materials........................................... 70,223 102,876 -------- -------- 239,278 372,614 Reduction for last-in, first-out........................ 56,201 52,935 -------- -------- $183,077 $274,679 ======== ========
6. PROPERTY, PLANT AND EQUIPMENT: Components of property, plant and equipment are as follows (in thousands):
AS OF DECEMBER 31, --------------------- 1997 1998 --------- --------- Land and improvements................................. $ 15,305 $ 24,959 Buildings and improvements............................ 145,039 156,488 Machinery and equipment............................... 325,392 404,848 --------- --------- Total....................................... 485,736 586,295 Less -- accumulated depreciation...................... (270,403) (331,170) --------- --------- Property, plant and equipment, net.................... $ 215,333 $ 255,125 ========= =========
7. INVESTMENTS IN JOINT VENTURES AND SUBSIDIARIES: ALLIANCE In 1994, the Company acquired a 50% interest in a joint venture, Alliance Compressors, with American Standard Inc.'s Trane subsidiary ("Trane") to develop, manufacture, and market both reciprocating and scroll compressor products. In December 1996, Alliance Compressors was restructured to admit a new partner, Copeland Corporation, and to focus solely on the development, manufacturing, and marketing of scroll compressors. In connection with the restructuring, the net assets associated with the reciprocating compressor business were distributed equally to the Company and Trane. The Company subsequently sold its share of the reciprocating compressor net assets to Trane. In addition, the Company and Trane sold portions of their interests in Alliance Compressors to Copeland Corporation. As a result, Alliance Compressors is now owned 51% by Copeland Corporation, 24.5% by the Company, and 24.5% by Trane. During 1996, the Company recognized a pretax gain of $4.6 million as a result of the restructuring, which is included in other operating expense, net on the F-12 91 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accompanying 1996 consolidated statement of income. The Company's investment in Alliance Compressors at December 31, 1998, is $6.1 million and is being accounted for using the equity method of accounting. ETS. BRANCHER In May 1996, the Company's subsidiary, Lennox Global Ltd., acquired a 50% interest in HCF-Lennox, a manufacturer of air conditioning and refrigeration equipment. In addition to acquiring an interest in HCF-Lennox, the Company increased its ownership of an existing joint venture, Friga-Bohn, from 20% to 50%. The aggregate purchase price for these acquisitions was approximately $22 million in cash. The aggregate purchase price exceeded the Company's interests in the underlying equity in the ventures at the date of acquisition. As a result, the Company recorded goodwill of approximately $2.9 million, which is being amortized on a straight-line basis over a 30-year period. Effective September 30, 1997, Lennox Global Ltd. acquired an additional 20% interest in HCF-Lennox and Friga-Bohn, and a 70% interest in certain real properties. In conjunction with the purchase, the stock of HCF-Lennox and Friga-Bohn was combined into an existing holding company, Ets. Brancher S.A. As of December 31, 1997, Lennox Global Ltd. owns 70% of the stock of Ets. Brancher S.A. The aggregate purchase price for this acquisition was $18.4 million, of which $10 million was in cash and $8.4 million was in Company stock. The acquisition was accounted for in accordance with the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets and liabilities based upon their estimated fair values at the date of acquisition. As a result, the Company recorded additional goodwill of approximately $6.4 million, which is being amortized on a straight-line basis over a 30-year period. The Company obtained control of Ets. Brancher S.A. on September 30, 1997, and, accordingly, began consolidating the financial position and operating results of the subsidiary. The 30% interest in Ets. Brancher S.A. not owned by the Company is reflected as minority interest on the accompanying consolidated balance sheets and statements of income. The following table presents the pro forma results as if the Company's 70% interest in Ets. Brancher had been consolidated beginning January 1, 1996 (in thousands, except per share data).
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 ---------- ---------- Net sales............................................ $1,576,418 $1,588,985 Net income (loss).................................... 54,605 (33,381) Basic earnings per share............................. 53.48 (32.47) Diluted earnings per share........................... 52.40 (32.47)
CANADIAN DEALERS In the fourth quarter of 1998, the Company's Lennox Industries (Canada) Ltd. subsidiary, which is included in the North American residential segment, purchased for cash fourteen dealers (the "Dealers") in Canada that had been independent retail outlets of the Company's products. The aggregate purchase price of the Dealers was $22.9 million in cash. These acquisitions were accounted for in accordance with the purchase method of accounting. The purchase price of each Dealer has been allocated to the assets and liabilities of the Dealers, and the excess of $19.0 million has been allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The results of operations of the Dealers, including sales of $8.2 million and net income of $139,000, have been fully consolidated with those of the Company since the dates of acquisition. F-13 92 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) HEARTH COMPANIES During June and July 1998, the Company's Hearth Products Inc. subsidiary, which is included in the North American residential segment, purchased substantially all of the assets and certain liabilities of Superior Fireplace Co. and all of the outstanding stock of Marco Manufacturing Inc. and Pyro Industries Inc. The aggregate purchase price for these acquisitions was $102.9 million, of which $99.1 million was in cash and $3.8 million was in the form of a note payable. These acquisitions were accounted for in accordance with the purchase method of accounting. Accordingly, the aggregate purchase price has been allocated to assets totaling $131.5 million and to liabilities totaling $28.6 million of the acquired companies based upon the fair value of those assets and liabilities. As a result, the Company recorded goodwill of approximately $73.8 million which is being amortized on a straight-line basis over 40 years. The results of operations of the acquired Hearth companies, including sales of $68.6 million and net income of $1.9 million, have been fully consolidated with those of the Company since the dates of acquisition. MCQUAY DO BRASIL During August 1998, the Company's Lennox Global Ltd. subsidiary purchased 84% of the outstanding stock of McQuay do Brasil, a Brazilian company engaged in the manufacture and sale of refrigeration, automotive air conditioning equipment, and heat transfer products. The purchase price of $20.5 million in cash has been allocated to the acquired assets and liabilities based upon the fair value of those assets and liabilities, and the excess of $11.3 million has been allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The results of operations of McQuay do Brasil have been consolidated with those of the Company since the date of acquisition. 8. LONG-TERM DEBT AND LINES OF CREDIT: Long-term debt at December 31 consists of the following (in thousands):
1997 1998 -------- -------- 6.73% promissory notes, payable $11,111 annually 2000 through 2008.......................................... $100,000 $100,000 9.69% promissory notes, payable $4,900 annually 1998 through 2002 and $5,000 in 2003....................... 29,500 24,600 5.75% promissory note, payable in 1999.................. 1,596 951 5.84% promissory note, payable in 2000.................. 2,146 2,275 4.80% promissory note, payable annually through 2004.... 1,197 1,119 6.50% promissory note, payable annually 1999 through 2005.................................................. 1,334 1,382 5.50% promissory note, payable annually through 2004.... -- 639 6.50% promissory note, payable annually through 2003.... -- 371 9.53% promissory notes, payable $10,000 in 1999, $8,000 in 2000, and $3,000 in 2001........................... 21,000 21,000 7.06% promissory note, payable $10,000 annually in 2004 and 2005.............................................. 20,000 20,000 6.56% promissory note, payable in 2005.................. -- 25,000 6.75% promissory note, payable in 2008.................. -- 50,000 11.10% mortgage note, payable semiannually through 2000.................................................. 8,306 7,547 Texas Housing Opportunity Fund, Ltd. note, payable in 1999.................................................. 205 109 Capitalized lease obligations and other................. 7,225 6,378 -------- -------- 192,509 261,371 Less current maturities................................. 8,926 18,778 -------- -------- $183,583 $242,593 ======== ========
F-14 93 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1998, the aggregate amounts of required payments on long-term debt are as follows (in thousands): 1999........................................................ $ 18,778 2000........................................................ 35,354 2001........................................................ 20,712 2002........................................................ 17,534 2003........................................................ 17,424 Thereafter.................................................. 151,569 -------- $261,371 ========
The Company has bank lines of credit aggregating $164 million, of which $56 million was outstanding at December 31, 1998. Included in the bank lines is a $135 million revolving credit facility. The revolving credit facility provides for both "standby loans" and "offered rate loans." Standby loans are made ratably by all lenders under the revolving credit facility, while offered rate loans are, subject to the terms and conditions of the credit facility, separately negotiated between the Company and one or more members of the lending syndicate. Standby loans bear interest at a rate equal to either (a) the London Interbank Offered Rate plus a margin equal to 0.150% to 0.405% depending on the ratio of debt to total capitalization, or (b) the greater of (1) the Federal Funds Effective Rate plus 0.5%, and (2) the Prime Rate. Offered rate loans bear interest at a fixed rate negotiated with the lender or lenders making such loans. Under the revolving credit facility, the Company is obligated to pay certain fees, including (a) a quarterly facility fee to each lender under the credit facility equal to a percentage, varying from 0.100% to 0.220% (depending on the ratio of debt to total capitalization), of each lender's total commitment, whether used or unused, under the revolving credit facility and (b) certain administrative fees to the administrative agent and documentation agent under the revolving credit facility. The revolving credit facility will expire on July 13, 2001, unless earlier terminated pursuant to its terms and conditions. The unsecured promissory note agreements and lines of credit provide for restrictions with respect to additional borrowings, maintenance of minimum working capital and payment of dividends. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair values of the Company's financial instruments approximate their respective carrying amounts at December 31, 1998, except as follows (in thousands):
FAIR VALUE ------------------ CARRYING INTEREST AMOUNT AMOUNT RATE -------- ------- -------- 9.69% promissory notes............................ $24,600 $26,601 6.75% 9.53% promissory notes............................ 21,000 21,923 6.75% 11.10% mortgage note.............................. 7,547 7,739 9.00%
The fair values presented above are based on the amount of future cash flows associated with each instrument, discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The fair values are estimates as of December 31, 1998, and are not necessarily indicative of amounts for which the Company could settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments. F-15 94 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES: The income tax provision (benefit) consisted of the following (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1997 1998 --------- ---------- --------- Current -- Federal...................................... $33,615 $ 24,673 $15,820 State........................................ 3,950 790 944 Foreign...................................... 926 5,239 (6,027) ------- -------- ------- Total current........................ 38,491 30,702 10,737 ------- -------- ------- Deferred -- Federal...................................... (5,135) (31,144) 30,946 State........................................ 32 (1,917) 2,237 Foreign...................................... -- (9,134) (6,759) ------- -------- ------- Total deferred....................... (5,103) (42,195) 26,424 ------- -------- ------- Total income tax provision (benefit).......................... $33,388 $(11,493) $37,161 ======= ======== =======
The difference between the income tax provision (benefit) computed at the statutory federal income tax rate and the financial statement provision (benefit) for taxes is summarized as follows (in thousands):
1996 1997 1998 ------- -------- ------- Provision (benefit) at the U.S. statutory rate of 35%....................................... $30,840 $(15,765) $31,390 Increase (reduction) in tax expense resulting from -- State income tax, net of federal income tax benefit...................................... 2,437 (350) 705 Foreign losses not providing a current benefit...................................... -- 1,044 3,572 Other.......................................... (111) 3,578 1,494 ------- -------- ------- Total income tax provision (benefit).......................... $33,388 $(11,493) $37,161 ======= ======== =======
Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial reporting basis and are reflected as current or noncurrent depending on the timing of the expected realization. The deferred tax provision (benefit) for the periods shown represents the effect of changes in the amounts of temporary differences during those periods. F-16 95 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets (liabilities), as determined under the provisions of SFAS No. 109, "Accounting for Income Taxes," were comprised of the following at December 31 (in thousands):
1997 1998 -------- -------- Gross deferred tax assets -- Warranties............................................ $ 60,421 $ 28,281 Foreign operating losses.............................. 14,537 12,652 Postretirement and pension benefits................... 7,799 7,852 Inventory reserves.................................... 4,907 6,383 Receivable allowance.................................. 3,420 3,950 Other................................................. 3,518 9,253 -------- -------- Total deferred tax assets..................... 94,602 68,371 Valuation allowance........................... (14,543) (12,652) -------- -------- Net deferred tax assets....................... 80,059 55,719 -------- -------- Gross deferred tax liabilities -- Depreciation.......................................... (19,241) (17,999) Intangibles........................................... (1,873) (1,674) Other................................................. (10,498) (10,248) -------- -------- Total deferred tax liabilities................ (31,612) (29,921) -------- -------- Net deferred tax asset.................................. $ 48,447 $ 25,798 ======== ========
The Company has net foreign operating loss carryforwards, mainly in Europe, which expire at various dates in the future. All such loss carryforwards have a full valuation allowance. The net change in the deferred tax asset valuation reserve for the year ended December 31, 1998, was a decrease of $1,891. The decrease is a result of operating loss carryforwards which have expired. No provision has been made for income taxes which may become payable upon distribution of the foreign subsidiaries' earnings since management considers substantially all of these earnings permanently invested. As of December 31, 1998, the unrecorded deferred tax liability related to the undistributed earnings of the Company's foreign subsidiaries was insignificant. 11. CURRENT ACCRUED EXPENSES: Significant components of current accrued expenses are as follows (in thousands):
DECEMBER 31, ------------------- 1997 1998 -------- -------- Accrued product inspection charge....................... $ 71,956 $ 27,336 Accrued wages........................................... 46,685 52,915 Accrued warranties...................................... 22,086 21,131 Other................................................... 69,941 105,658 -------- -------- Total current accrued expenses................ $210,668 $207,040 ======== ========
12. EMPLOYEE BENEFIT PLANS: PROFIT SHARING PLANS The Company maintains noncontributory profit sharing plans for its salaried employees. These plans are discretionary as the Company's contributions are determined annually by the Board of Directors. Provisions F-17 96 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for contributions to the plans amounted to $12.0 million, $11.5 million, and $13.6 million in 1996, 1997, and 1998, respectively. 401(k) PLAN The Company provides a 401(k) plan to substantially all eligible hourly and salary employees of the Company, as defined. Participants may contribute up to 12% of their compensation to a 401(k) plan under Internal Revenue Code Section 401(k). LONG-TERM INCENTIVE PLAN The Company provided a long-term incentive plan, the Lennox International Inc. Performance Share Plan (the "Performance Plan") to certain employees. During 1998, the Company terminated the Performance Plan. Under the Performance Plan, participants earned shares of the Company's common stock in accordance with a discretionary formula established by the Board of Directors based on the Company's performance over a three-year period. The value of the shares earned was determined using an independent appraisal. Under the Performance Plan 2,009 shares, 7,243 shares, and 5,293 shares earned in fiscal 1995, 1996, and 1997, respectively, were issued in 1996, 1997, and 1998, respectively. During 1998, 10,878 shares were earned and issued in the same year. Compensation expense recognized under the Performance Plan was $1,900,000, $2,259,616, and $6,876,335 for the years ended December 31, 1996, 1997, and 1998, respectively, based on the fair value of the shares earned. EMPLOYEE BENEFITS TRUST The Company also has an Employee Benefits Trust (the "Trust") to provide eligible employees of the Company, as defined, with certain medical benefits. Trust contributions are made by the Company as defined by the Trust agreement. PENSION AND POSTRETIREMENT BENEFIT PLANS The Company has domestic and foreign pension plans covering substantially all employees. The Company makes annual contributions to the plans equal to or greater than the statutory required minimum. The Company also maintains an unfunded postretirement benefit plan which provides certain medical and life insurance benefits to eligible employees. The pension plans are accounted for under provisions of SFAS No. 87, "Employers' Accounting for Pensions." The postretirement benefit plan is accounted for under the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The following table sets forth amounts recognized in the Company's financial statements and the plans' funded status (in thousands):
PENSION BENEFITS OTHER BENEFITS ------------------- ------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Change in benefit obligation -- Benefit obligation at beginning of year.............................. $113,942 $119,835 $ 15,679 $ 16,055 Service cost......................... 3,439 3,875 457 494 Interest cost........................ 8,411 9,128 1,166 1,128 Plan participants' contributions..... 304 189 1,274 1,452 Amendments........................... 93 2,132 -- -- Actuarial (gain)/loss................ 993 7,471 40 (449) Exchange rate changes................ -- 83 -- -- Benefits paid........................ (7,347) (7,892) (2,561) (2,382) -------- -------- -------- -------- Benefit obligation at end of year.... $119,835 $134,821 $ 16,055 $ 16,298 ======== ======== ======== ========
F-18 97 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ------------------- ------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Changes in plan assets -- Fair value of plan assets at beginning of year................. $112,588 $131,376 $ -- $ -- Actual return on plan assets......... 21,510 17,466 -- -- Employer contribution................ 4,610 3,792 1,287 930 Plan participants' contributions..... 304 189 1,274 1,452 Expenses............................. (664) (549) (79) (34) Benefits paid........................ (6,972) (7,405) (2,482) (2,348) -------- -------- -------- -------- Fair value of plan assets at end of year.............................. 131,376 144,869 -- -- -------- -------- -------- -------- Funded status.......................... 11,541 10,048 (16,055) (16,298) Unrecognized actuarial (gain)/loss... (16,151) (14,420) (2,158) (1,311) Unrecognized prior service cost...... 747 641 -- -- Unrecognized net obligation/(asset)................ 6,248 7,420 (520) (347) -------- -------- -------- -------- Net amount recognized................ $ 2,385 $ 3,689 $(18,733) $(17,956) ======== ======== ======== ======== Amounts recognized in the consolidated balance sheets consist of -- Prepaid benefit cost................. $ 13,588 $ 13,303 $ -- $ -- Accrued benefit liability............ (12,742) (12,540) (18,733) (17,956) Intangible assets.................... 1,539 2,926 -- -- -------- -------- -------- -------- Net amount recognized................ $ 2,385 $ 3,689 $(18,733) $(17,956) ======== ======== ======== ======== Weighted-average assumptions as of December 31 -- Discount rate........................ 7.50% 7.25% 7.50% 7.25% Expected return on plan assets....... 9.50 9.50 -- -- Rate of compensation increase........ 4.00 4.00 -- --
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually to 5.0% by 2003 and remain at that level thereafter.
PENSION BENEFITS OTHER BENEFITS ---------------------------- -------------------------- 1996 1997 1998 1996 1997 1998 ------- ------- -------- ------ ------- ------- (IN THOUSANDS) (IN THOUSANDS) Components of net periodic benefit cost -- Service cost.............. $ 3,344 $ 3,439 $ 3,875 $ 268 $ 457 $ 494 Interest cost............. 8,153 8,411 9,128 1,161 1,166 1,128 Expected return on plan assets................. (8,655) (9,844) (10,931) -- -- -- Amortization of prior service cost........... 716 716 880 (173) (173) (173) Recognized actuarial loss................... -- -- -- (961) (1,129) (1,297) ------- ------- -------- ------ ------- ------- Net periodic benefit cost................... $ 3,558 $ 2,722 $ 2,952 $ 295 $ 321 $ 152 ======= ======= ======== ====== ======= =======
F-19 98 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The benefit obligation and fair value of plan assets for the pension plans with benefit obligations in excess of plan assets were approximately $10,770,000 and $0, respectively, as of December 31, 1997, and $12,478,000 and $3,607,000, respectively, as of December 31, 1998. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE -------------- -------------- Effect on total of service and interest cost components...................................... $ 230 $ (187) Effect on the post-retirement benefit obligation...................................... 1,882 (1,605)
13. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company has various leases relating principally to the use of operating facilities. Rent expense for 1996, 1997 and 1998 was approximately $18.6 million, $23.2 million and $28.2 million, respectively. The approximate minimum commitments under all noncancelable leases at December 31, 1998, are as follows (in thousands): 1999........................................................ $ 22,244 2000........................................................ 18,825 2001........................................................ 13,241 2002........................................................ 10,977 2003........................................................ 10,049 Thereafter.................................................. 33,386 -------- $108,722 ========
LITIGATION The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse effect on the Company's business, financial condition or results of operations. 14. STOCK-BASED COMPENSATION PLAN: The Company has a Stock Option and Restricted Stock Plan, which was amended in September 1998 (the "1998 Incentive Plan"). The 1998 Incentive Plan is accounted for under APB Opinion No. 25, under which no compensation cost has been recognized. If the 1998 Incentive Plan had been accounted for under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) would have been adjusted to the following pro forma amounts (in thousands, except per share data):
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1997 1998 ------- -------- ------- Net income (loss): As reported............. $54,726 $(33,550) $52,525 Pro forma............... 52,557 (35,595) 52,525 Basic earnings (loss) per share: As reported............. $ 53.60 $ (32.64) $ 49.65 Pro forma............... 51.48 (34.63) 49.65 Diluted earnings (loss) per share: As reported............. $ 52.52 $ (32.64) $ 48.50 Pro forma............... 50.44 (34.63) $ 48.50
F-20 99 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Because the method of accounting under SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Under the 1998 Incentive Plan, the Company is authorized to issue options for 248,987 shares of common stock. As of December 31, 1998, options for 165,529 shares of common stock have been granted and options for 24,892 shares have been cancelled or repurchased. Consequently, as of December 31, 1998, there are options for 108,350 shares available for grant. Under the 1998 Incentive Plan, the option exercise price equals the stock's fair value on the date of grant. 1998 Incentive Plan options granted prior to 1998 vest on the date of grant. 1998 Incentive Plan options granted in 1998 vest over three years. All 1998 Incentive Plan options expire after ten years. The Plan's status is as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------- 1996 1997 1998 ----------------- ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------- -------- ------- -------- Outstanding at beginning of year............................ 67,204 $237.35 92,099 $297.55 115,828 $334.33 Granted........................... 28,675 430.50 26,570 458.04 32,450 622.84 Exercised......................... (3,680) 235.29 (2,141) 253.02 (31,751) 298.20 Forfeited......................... (100) 253.35 (700) 439.35 (1,434) 285.11 ------ ------- ------- ------- ------- ------- Outstanding at end of year........ 92,099 $297.55 115,828 $334.33 115,093 $426.30 ====== ======= ======= ======= ======= ======= Exercisable at end of year........ 92,099 $297.55 115,828 $334.33 82,943 $426.30 ====== ======= ======= ======= ======= ======= Fair value of options granted..... $127.48 $124.15 $192.49 ======= ======= =======
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING -------------------------------------------------------------- NUMBER WEIGHTED-AVERAGE RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE(YEARS) EXERCISE PRICE --------------- ----------------- ----------------------- ---------------- $240.28 to $248.38 40,534 6 $245.71 $436.01 to $458.82 42,409 7 448.74 $514.55 to $627.90 32,150 9.5 624.37 ------- --- ------- 115,093 8 $426.30 ======= === =======
As of December 31, 1998, options to purchase 40,534 shares of common stock with exercise prices ranging from $240.28 to $248.38 and options to purchase 42,409 shares of common stock with exercise prices ranging from $436.01 to $458.82 were exercisable. The fair value of each option is estimated on the date of grant based on a risk-free interest rate of 6%, expected life of ten years, and an expected dividend yield of 2% in 1996, 1997 and 1998. 15. EARNINGS PER SHARE: Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of shares and the number of equivalent shares assumed F-21 100 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outstanding, if dilutive, under the Company's stock-based compensation plans. Diluted earnings per share are computed as follows (in thousands, except per share data):
1996 1997 1998 ------- -------- ------- Net income (loss).............................. $54,726 $(33,550) $52,525 ======= ======== ======= Weighted average shares outstanding............ 1,021 1,028 1,058 Effect of assumed exercise of options.......... 21 -- 25 ------- -------- ------- Weighted average shares outstanding, as adjusted.................................. 1,042 1,028 1,083 ------- -------- ------- Diluted earnings (loss) per share.............. $ 52.52 $ (32.64) $ 48.50 ======= ======== =======
Options to purchase 27,400 shares of common stock at $439.25 per share, 115,828 shares of common stock at prices ranging from $169.49 per share to $458.82 per share and 31,450 shares of common stock at $627.90 per share were outstanding for the years ended December 31, 1996, 1997, and 1998, respectively, but were not included in the diluted earnings per share calculation because the assumed exercise of such options would have been antidilutive. 16. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts (collectively referred to as derivatives) and for hedging activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not believe that the adoption of this pronouncement will have a significant impact on the Company's financial statements. 17. RELATED PARTY TRANSACTIONS John W. Norris, Jr., the Company's Chairman and Chief Executive Officer, and David H. Anderson, Richard W. Booth, David V. Brown, Loraine B. Millman, Robert W. Norris and Lynn B. Storey, directors of the Company, as well as certain stockholders, are members of AOC Land Investment, LLC. AOC Land Investment, LLC owns 70% of AOC Development II, LLC. AOC Development II, LLC is building a new office building and the Company has agreed to lease part of it for use in conjunction with the Company's corporate headquarters. The lease will have a term of 25 years and the annual lease payments are expected to be approximately $2.1 million per year for the first five years. The Company believes that the terms of the lease with AOC Development II, LLC are at least as favorable as could be obtained from unaffiliated third parties. 18. SUBSEQUENT EVENTS (UNAUDITED): The Company is filing a registration statement for an initial public offering of its common stock, the proceeds of which will be used for general corporate purposes, including regularly scheduled debt payments and for any possible future acquisitions. Subsequent to year-end, the Company's Lennox Industries (Canada) Ltd. subsidiary completed the acquisition of eleven dealers in Canada that had been independent retail outlets of the Company's products. The aggregate cash purchase price of these entities was $43.8 million. On March 16, 1999, the Company entered into a term loan agreement with a bank pursuant to which the Company may borrow up to $115 million. On March 22, 1999, the Company borrowed $40 million at LIBOR plus 1% (6.0%). The Company is required to use the net proceeds from the initial public offering to repay any amounts outstanding under the term loan agreement. The term loan agreement expires on December 31, 1999. F-22 101 [LENNOX INTERNATIONAL INC. LOGO] STRENGTH THROUGH BRANDS AND PEOPLE [Inside of back cover] [Graphics depicting pictures of employees of the Company] [LENNOX LOGO] [HEARTH PRODUCTS INC. LOGO] [MARCO LOGO] [SUPERIOR, THE FIREPLACE COMPANY LOGO] [WHITFIELD HEARTH PRODUCTS LOGO] [AIR-EASE LOGO] [ARMSTRONG LOGO] [MAGIC-PAK LOGO] [HEATCRAFT LOGO] [ADVANCED DISTRIBUTOR PRODUCTS LOGO] [ALCAIR LOGO] [APPLIED PRODUCTS LOGO] [BOHN LOGO] [CHANDLER REFRIGERATION LOGO] [CLIMATE CONTROL LOGO] [CONCORD LOGO] [FRIGA-BOHN LOGO] [LARKIN LOGO]
102 [LENNOX LOGO] 103 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [ALTERNATE COVER PAGE FOR INTERNATIONAL PROSPECTUS] PROSPECTUS (Subject to Completion) Issued April 6, 1999 Shares [LENNOX INTERNATIONAL INC. LOGO] COMMON STOCK ------------------------ LENNOX INTERNATIONAL INC. IS OFFERING SHARES OF COMMON STOCK AND THE SELLING STOCKHOLDERS ARE OFFERING SHARES OF COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR THE COMMON STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------ APPLICATION WILL BE MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "LII." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 9. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS LENNOX STOCKHOLDERS -------- ------------- ----------- ------------ Per Share................. $ $ $ $ Total..................... $ $ $ $
------------------------ The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Lennox International Inc. has granted the U.S. underwriters the right to purchase up to an additional shares of common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON WARBURG DILLON READ , 1999 104 PART II INFORMATION NOT REQUIRED IN PROSPECTUS All capitalized terms used and not defined in Part II of this Registration Statement shall have the meanings assigned to them in the prospectus which forms a part of this Registration Statement. ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of estimated expenses incurred by Lennox in connection with the issuance and distribution of the securities being registered pursuant to this Registration Statement, other than underwriting discounts and commissions.
AMOUNT ------ Securities Act registration fee............................. $2,780 NASD filing fee............................................. 1,500 Blue sky qualification fees and expenses.................... * Printing and engraving fees and expenses.................... * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Transfer agent and registrar fees and expenses.............. * New York Stock Exchange listing fee......................... * Miscellaneous............................................... * ------ Total............................................. $ ======
- --------------- * To be completed by amendment. All of the foregoing estimated costs, expenses and fees will be borne by Lennox. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. DELAWARE GENERAL CORPORATION LAW Section 145(a) of the Delaware General Corporation Law (the "DGCL") provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Section 145(b) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the II-1 105 adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Section 145(c) of the DGCL provides that to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 145(a) and (b), or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 145(d) of the DGCL provides that any indemnification under Section 145(a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 145(a) and (b). Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. Section 145(e) of the DGCL provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in Section 145. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. Section 145(f) of the DGCL provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. Section 145(g) of the DGCL provides that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under Section 145. Section 102(b)(7) of the DGCL provides that the liability of a director may not be limited or eliminated for the breach of such director's duty of loyalty to the corporation or its stockholders, for such director's intentional acts or omissions not in good faith, for such director's concurrence in or vote for an unlawful payment of a dividend or unlawful stock purchase or redemption or for any improper personal benefit derived by the director from any transaction. RESTATED CERTIFICATE OF INCORPORATION Article Eighth of Lennox's restated certificate of incorporation provides that a director of Lennox shall not be liable to Lennox or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended. Any repeal or modification of Article Eighth shall not adversely affect any right or protection of a director of Lennox existing thereunder with respect to any act or omission occurring prior to such repeal or modification. II-2 106 BYLAWS Article VI of Lennox's bylaws provides that each person who at any time shall serve or shall have served as a director or officer of Lennox, or any person who, while a director or officer of Lennox, is or was serving at the request of Lennox as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall be entitled to (a) indemnification and (b) the advancement of expenses incurred by such person from Lennox as, and to the fullest extent, permitted by Section 145 of the DGCL or any successor statutory provision, as from time to time amended. Lennox may indemnify any other person, to the same extent and subject to the same limitations specified in the immediately preceding sentence, by reason of the fact that such other person is or was an employee or agent of Lennox or another corporation, partnership, joint venture, trust or other enterprise. The indemnification and advancement of expenses provided by, or granted pursuant to, Article VI shall not be deemed exclusive of any other rights to which any person seeking indemnification or advancement of expenses may be entitled under any bylaw of Lennox, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. All rights to indemnification under Article VI shall be deemed to be provided by a contract between Lennox and the director, officer, employee or agent who served in such capacity at any time while the bylaws of Lennox and other relevant provisions of the DGCL and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. Without limiting the provisions of Article VI, Lennox is authorized from time to time, without further action by the stockholders of Lennox, to enter into agreements with any director or officer of Lennox providing such rights of indemnification as Lennox may deem appropriate, up to the maximum extent permitted by law. Any agreement entered into by Lennox with a director may be authorized by the other directors, and such authorization shall not be invalid on the basis that similar agreements may have been or may thereafter be entered into with other directors. Lennox may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of Lennox, or is or was serving at the request of Lennox as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not Lennox would have the power to indemnify such person against such liability under the applicable provisions of Article VI or the DGCL. UNDERWRITING AGREEMENT The Underwriting Agreement, the form of which is filed as Exhibit 1.1 to this Registration Statement, provides for the indemnification of the directors and officers of Lennox against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). The above discussion of the restated certificate, bylaws and Underwriting Agreement, and Section 145 of the DGCL is not intended to be exhaustive and is respectively qualified in its entirety by the restated certificate, bylaws, Underwriting Agreement and such statute. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Pursuant to the several Note Purchase Agreements, dated as of April 3, 1998, by and among Lennox International Inc. and The Prudential Insurance Company of America, Teachers Insurance and Annuity Association of America, Connecticut General Life Insurance Company, Connecticut General Life Insurance Company on Behalf of One or More Separate Accounts, CIGNA Property and Casualty Insurance Company and U.S. Private Placement Fund, United of Omaha Life Insurance Company and Companion Life Insurance Company (collectively, the "Note Purchasers"), Lennox sold an aggregate of $25,000,000 of its 6.56% Senior Notes due April 3, 2005, and an aggregate of $50,000,000 of its 6.75% Senior Notes due April 3, 2008 to the Note Purchasers at the purchase price of 100% of the principal amount thereof in reliance upon the exemption from the registration requirements of the Securities Act set forth in Section 4(2) thereof. II-3 107 Between April 1, 1996 and April 6, 1999, Lennox sold the following securities pursuant to its various benefit programs: (a) 39,153 shares of common stock issued upon the exercise of options granted to directors and employees of Lennox pursuant to Lennox's benefit programs and (b) 399 shares of common stock to directors of Lennox. The exercise prices of the options referred to in clause (a) ranged from $130.71 to $469.59 per share. The sale prices of shares referred to in clause (b) ranged from $266.65 to $702.12 per share. Lennox issued the securities referred to in clauses (a) and (b) above in reliance upon the exemption from the registration requirements of the Securities Act set forth in Section 4(2) and Regulation 701 thereof. During the same three-year period, Lennox sold 2,886 shares of common stock to certain existing stockholders of Lennox at sales prices ranging from $299.01 per share to $707.12 per share in reliance upon the exemption from the registration requirements of the Securities Act set forth in Section 4(2) thereof. In November 1997, Lennox issued 2,500 shares of common stock to Ray Strong, an individual, in connection with the purchase of a 50% interest in Strong LGL International, L.L.C. The value allocated to such shares of common stock was approximately $1.2 million. In addition, in September 1997, Lennox issued 19,133 shares of common stock to Jean Jacques Brancher, an individual, or his designated assigns, in connection with Lennox's acquisition of an additional 20% interest in the Ets. Brancher joint venture. The value allocated to such shares of common stock was approximately $8.3 million. The shares issued in both of the foregoing transactions were issued in reliance upon the exemption from the registration requirements of the Securities Act set forth in Section 4(2) thereof. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1* -- Form of Underwriting Agreement. 3.1 -- Restated Certificate of Incorporation of Lennox. 3.2 -- Amended and Restated Bylaws of Lennox. 4.1* -- Specimen Stock Certificate for the Common Stock, par value $.01 per share, of Lennox. 5.1* -- Opinion of Baker & Botts, L.L.P. regarding legality of securities being registered. 10.1 -- Agreement of Assumption and Restatement, dated as of December 1, 1991 between Lennox and identified Noteholders relating to Lennox's 9.53% Series F Promissory Notes due 2001 and 9.69% Promissory Notes due 2003. 10.2 -- Note Purchase Agreement, dated as of December 1, 1993, between Lennox and identified Noteholders relating to Lennox's 6.73% Senior Promissory Notes due 2008. 10.3 -- Note Purchase Agreement, dated as of July 6, 1995, between Lennox and Teachers Insurance and Annuity Association of America relating to Lennox's 7.06% Senior Promissory Notes due 2005. 10.4 -- Note Purchase Agreement, dated as of April 3, 1998, between Lennox and identified Noteholders relating to Lennox's 6.56% Senior Notes due 2005 and 6.75% Senior Notes due 2008. 10.5 -- Note Amendment Agreement, dated as of April 3, 1998, between Lennox and identified Noteholders relating to Lennox's 9.53% Senior Promissory Notes due 2001, 9.69% Senior Promissory Notes due 2003, 7.06% Senior Promissory Notes due 2005 and 6.73% Senior Promissory Notes due 2008. 10.6 -- Revolving Credit Facility Agreement, dated as of July 13, 1998, among Lennox, identified Lenders, Chase Bank of Texas, N.A., as Administrative Agent, and Wachovia Bank, N.A., as Documentation Agent.
II-4 108
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.7 -- Advance Term Credit Agreement, dated as of March 16, 1999, among Lennox, Chase Bank of Texas, National Association, as Administrative Agent, and Wachovia Bank, N.A., as Documentation Agent. 10.8 -- 1998 Incentive Plan of Lennox International Inc. 10.9 -- Lennox International Inc. Profit Sharing Restoration Plan. 10.10 -- Lennox International Inc. Supplemental Executive Retirement Plan. 10.11 -- Letter of Intent, dated as of June 23, 1998, between Jean-Jacques Brancher and Lennox Global Ltd. 10.12* -- First Amendment to the Amended and Restated Venture Agreement, dated as of December 27, 1997, between Ets. Brancher S.A. and Lennox Global Ltd. 10.13* -- Amended and Restated Venture Agreement, dated as of November 10, 1997, by and among Lennox Global Ltd., Lennox International Inc., Ets. Brancher S.A. and Fibel S.A. 10.14* -- Shareholder Restructure Agreement, dated as of September 30, 1997, by and among Jean Jacques Brancher, Ets. Brancher S.A., AFIBRAL S.A., Parifri S.A. and Lennox International Inc. 10.15 -- Form of Indemnification Agreement entered into between Lennox and certain executive officers and directors. 10.16 -- Form of Employment Agreement entered into between Lennox and certain executive officers. 10.17 -- Form of Change of Control Employment Agreement entered into between Lennox and certain executive officers. 21.1 -- Subsidiaries of Lennox. 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Baker & Botts, L.L.P. (included in the opinion filed as Exhibit 5.1 to this Registration Statement). 24.1 -- Powers of Attorney (included in the signature pages of this Registration Statement). 27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment (b) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts and Reserves and report of Arthur Andersen LLP thereon. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense II-5 109 of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant also undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 110 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Richardson, State of Texas, on April 6, 1999. LENNOX INTERNATIONAL INC. By: /s/ JOHN W. NORRIS, JR. ---------------------------------- John W. Norris, Jr. Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Lennox International Inc., a Delaware corporation, which is filing a Registration Statement on Form S-1 with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, as amended (the "Securities Act"), hereby constitutes and appoints John W. Norris, Jr., Carl E. Edwards and Clyde W. Wyant, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, and in any and all capacities, to sign and file (i) any and all amendments (including post-effective amendments) to this Registration Statement, with all exhibits thereto, and other documents in connection therewith, and (ii) a registration statement, and any and all amendments thereto, relating to the offering covered hereby filed pursuant to Rule 462(b) under the Securities Act, with the Securities and Exchange Commission, it being understood that said attorneys-in-fact and agents, and each of them, shall have full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person and that each of the undersigned hereby ratifies and confirms all that said attorneys-in-fact as agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN W. NORRIS, JR. Chairman of the Board and Chief April 6, 1999 - ----------------------------------------------------- Executive Officer (Principal John W. Norris, Jr. Executive Officer) /s/ CLYDE W. WYANT Executive Vice President, Chief April 6, 1999 - ----------------------------------------------------- Financial Officer and Clyde W. Wyant Treasurer (Principal Financial Officer) /s/ JOHN J. HUBBUCH Vice President, Controller and April 6, 1999 - ----------------------------------------------------- Chief Accounting Officer John J. Hubbuch (Principal Accounting Officer) /s/ LINDA G. ALVARADO Director April 6, 1999 - ----------------------------------------------------- Linda G. Alvarado /s/ DAVID H. ANDERSON Director April 6, 1999 - ----------------------------------------------------- David H. Anderson
II-7 111
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID V. BROWN Director April 6, 1999 - ----------------------------------------------------- David V. Brown /s/ RICHARD W. BOOTH Director April 6, 1999 - ----------------------------------------------------- Richard W. Booth /s/ JAMES J. BYRNE Director April 6, 1999 - ----------------------------------------------------- James J. Byrne /s/ THOMAS B. HOWARD, JR. Director April 6, 1999 - ----------------------------------------------------- Thomas B. Howard, Jr. /s/ JOHN E. MAJOR Director April 6, 1999 - ----------------------------------------------------- John E. Major /s/ DONALD E. MILLER Director April 6, 1999 - ----------------------------------------------------- Donald E. Miller Director - ----------------------------------------------------- Loraine B. Millman Director - ----------------------------------------------------- Robert W. Norris /s/ TERRY D. STINSON Director April 6, 1999 - ----------------------------------------------------- Terry D. Stinson Director - ----------------------------------------------------- Lynn B. Storey /s/ RICHARD L. THOMPSON Director April 6, 1999 - ----------------------------------------------------- Richard L. Thompson
II-8 112 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To: The Stockholders and Board of Directors of Lennox International Inc. We have audited in accordance with generally accepted auditing standards the consolidated financial statements of Lennox International Inc. and subsidiaries included in this registration statement on Form S-1 and have issued our report thereon dated February 18, 1999. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II, Valuation and Qualifying Accounts and Reserves, is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Dallas, Texas February 18, 1999 S-1 113 LENNOX INTERNATIONAL INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COST AND AT END OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR ---------- ---------- ------------- ------- (IN THOUSANDS) 1996: Allowance for doubtful accounts................ $ 9,611 $7,041 $(4,537) $12,115 1997: Allowance for doubtful accounts................ $12,115 $8,997 $(4,164) $16,948 1998: Allowance for doubtful accounts................ $16,948 $6,224 $(4,647) $18,525
- --------------- (1) Uncollectable accounts charged off, net of recoveries. S-2 114 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1* -- Form of Underwriting Agreement. 3.1 -- Restated Certificate of Incorporation of Lennox. 3.2 -- Amended and Restated Bylaws of Lennox. 4.1* -- Specimen Stock Certificate for the Common Stock, par value $.01 per share, of Lennox. 5.1* -- Opinion of Baker & Botts, L.L.P. regarding legality of securities being registered. 10.1 -- Agreement of Assumption and Restatement, dated as of December 1, 1991 between Lennox and identified Noteholders relating to Lennox's 9.53% Series F Promissory Notes due 2001 and 9.69% Promissory Notes due 2003. 10.2 -- Note Purchase Agreement, dated as of December 1, 1993, between Lennox and identified Noteholders relating to Lennox's 6.73% Senior Promissory Notes due 2008. 10.3 -- Note Purchase Agreement, dated as of July 6, 1995, between Lennox and Teachers Insurance and Annuity Association of America relating to Lennox's 7.06% Senior Promissory Notes due 2005. 10.4 -- Note Purchase Agreement, dated as of April 3, 1998, between Lennox and identified Noteholders relating to Lennox's 6.56% Senior Notes due 2005 and 6.75% Senior Notes due 2008. 10.5 -- Note Amendment Agreement, dated as of April 3, 1998, between Lennox and identified Noteholders relating to Lennox's 9.53% Senior Promissory Notes due 2001, 9.69% Senior Promissory Notes due 2003, 7.06% Senior Promissory Notes due 2005 and 6.73% Senior Promissory Notes due 2008. 10.6 -- Revolving Credit Facility Agreement, dated as of July 13, 1998, among Lennox, identified Lenders, Chase Bank of Texas, N.A., as administrative agent, and Wachovia Bank, N.A., as documentation agent. 10.7 -- Advance Term Credit Agreement, dated as of March 16, 1999, among Lennox, Chase Bank of Texas, National Association, as Administrative Agent, and Wachovia Bank, N.A., as Documentation Agent. 10.8 -- 1998 Incentive Plan of Lennox International Inc. 10.9 -- Lennox International Inc. Profit Sharing Restoration Plan. 10.10 -- Lennox International Inc. Supplemental Executive Retirement Plan. 10.11 -- Letter of Intent, dated as of June 23, 1998, between Jean-Jacques Brancher and Lennox Global Ltd. 10.12* -- First Amendment to the Amended and Restated Venture Agreement, dated as of December 27, 1997, between Ets. Brancher S.A. and Lennox Global Ltd. 10.13* -- Amended and Restated Venture Agreement, dated as of November 10, 1997, by and among Lennox Global Ltd., Lennox International Inc., Ets. Brancher S.A. and Fibel S.A. 10.14* -- Shareholder Restructure Agreement, dated as of September 30, 1997, by and among Jean Jacques Brancher, Ets. Brancher S.A., AFIBRAL S.A., Parifri S.A. and Lennox International Inc. 10.15 -- Form of Indemnification Agreement entered into between Lennox and certain executive officers and directors. 10.16 -- Form of Employment Agreement entered into between Lennox and certain executive officers.
115
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.17 -- Form of Change of Control Employment Agreement entered into between Lennox and certain executive officers. 21.1 -- Subsidiaries of Lennox. 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Baker & Botts, L.L.P. (included in the opinion filed as Exhibit 5.1 to this Registration Statement). 24.1 -- Powers of Attorney (included in the signature pages of this Registration Statement). 27.1 -- Financial Data Schedule.
- --------------- * To be filed by amendment
   1
                                                                     EXHIBIT 3.1

                      RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                            LENNOX INTERNATIONAL INC.

         Lennox International Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:

         1. The name of the corporation is Lennox International Inc. The
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on August 13, 1991.

         2. Pursuant to Sections 242 and 245 of the General Corporation Law of
Delaware, this Restated Certificate of Incorporation restates and integrates and
amends the provisions of the Restated Certificate of Incorporation of the
corporation.

         3. The text of the Restated Certificate of Incorporation is hereby
restated and amended to read in its entirety as follows:

         FIRST: The name of the corporation (the "Corporation") is Lennox
International Inc.

         SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle 19801. The name of its registered agent at such address is The
Corporation Trust Company.

         THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware ("DGCL").

         FOURTH:

         (a) The total number of shares of stock that the Corporation shall have
authority to issue is Two Hundred Twenty-Five Million (225,000,000) consisting
of Two Hundred Million (200,000,000) shares of Common Stock, par value one cent
($.01) per share, and Twenty-Five Million (25,000,000) shares of Preferred
Stock, par value one cent ($.01) per share.

         (b) The designations, voting powers, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions of the above classes of stock are as follows:

                  (1) Subject to the limitations hereinafter contained and to
         the requirements of the laws of the State of Delaware, authority is
         hereby vested in the Board of Directors of the corporation to issue
         from time to time said Twenty-Five Million (25,000,000) shares of


                                        1

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         Preferred Stock in one or more series, with such voting powers, full or
         limited, or no voting powers, and such designations, preferences and
         relative, participating, optional or other special rights, and
         qualifications, limitations or restrictions thereof, as shall be stated
         in the resolution or resolutions providing for the issuance of such
         stock adopted by the Board of Directors. Without limiting the
         generality of the foregoing, in the resolution or resolutions providing
         for the issuance of such shares of each particular series of Preferred
         Stock, subject to the limitations hereinafter contained and to the
         requirements of the laws of the State of Delaware, the Board of
         Directors is also expressly authorized:

                           (i)      to fix the distinctive serial designation of
                  the shares of any such series;

                           (ii)     to fix the consideration for which the 
                  shares of any such series are to be issued;

                           (iii) to fix the rate or amount per annum, if any, at
                  which the holders of the shares of any such series shall be
                  entitled to receive dividends, the dates on which such
                  dividends shall be payable, whether the dividends shall be
                  cumulative or noncumulative, and if cumulative, to fix the
                  date or dates from which such dividends shall be cumulative;

                           (iv) to fix the price or prices at which, the times
                  during which, and the other terms, if any, upon which the
                  shares of any such series may be redeemed;

                           (v) to fix the rights, if any, which the holders of
                  shares of any such series have in the event of dissolution or
                  upon distribution of the assets of the Corporation;

                           (vi) to determine whether the shares of any such
                  series shall be made convertible into or exchangeable for
                  other securities of the Corporation, including shares of the
                  Common Stock of the Corporation or shares of any other series
                  of the Preferred Stock of the Corporation, now or hereafter
                  authorized, or any new class of preferred stock of the
                  Corporation hereafter authorized, the price or prices or the
                  rate or rates at which conversion or exchange may be made, and
                  the terms and conditions upon which any such conversion right
                  or exchange right shall be exercised;

                           (vii) to determine whether a sinking fund shall be
                  provided for the purchase or redemption of shares of any
                  series and, if so, to fix the terms and amount or amounts of
                  such sinking fund;

                           (viii) to determine whether the shares of any such
                  series shall have voting rights, and, if so, to fix the voting
                  rights of the shares of such series; and

                           (ix) to fix such other preferences and rights,
                  privileges and restrictions applicable to any such series as
                  may be permitted by law.


                                        2

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                  (2) Subject to the prior rights of the holders of any shares
         of Preferred Stock, the holders of the Common Stock shall be entitled
         to receive, to the extent permitted by law, such dividends as may be
         declared from time to time by the Board of Directors.

                  (3) In the event of any voluntary or involuntary liquidation,
         dissolution, distribution of assets or winding up of the Corporation,
         after the holders of the Preferred Stock then outstanding, if any,
         shall have received the full preferential amounts to which such holders
         may be entitled upon such voluntary or involuntary liquidation,
         dissolution, distribution of assets or winding up, the holders of
         Common Stock shall be entitled, to the exclusion of such holders of the
         Preferred Stock then outstanding, to receive all the remaining assets
         of the Corporation of whatever kind available for distribution to
         stockholders, ratably in proportion to the number of shares of Common
         Stock held by them respectively. A consolidation, merger or
         reorganization of the Corporation with any other corporation or
         corporations, or a sale of all or substantially all of the assets of
         the Corporation, shall not be considered a dissolution, liquidation or
         winding up of the Corporation within the meaning of the immediately
         preceding sentence.

                  (4) Except as may otherwise be required by law, the Bylaws of
         the corporation or this Certificate of Incorporation, each holder of
         Common Stock shall be entitled to one vote for each share of Common
         Stock held of record in the name of such stockholder on all matters
         voted upon by the stockholders, including the election of directors.

         FIFTH: The Corporation is to have perpetual existence.

         SIXTH:

         (a) Except as may be otherwise provided by law or in this Certificate
of Incorporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. The following provisions are
inserted for the management of the business and for the conduct of the affairs
of the Corporation and for the purpose of creating, defining, limiting and
regulating the powers of the Corporation and its directors and stockholders:

                  (1) The number of directors of the Corporation shall be fixed
         from time to time by, or in the manner provided in, the Bylaws of the
         Corporation.

                  (2) Elections of directors need not be by written ballot
         except to the extent provided in the Bylaws of the Corporation.

                  (3) In furtherance and not in limitation of the powers
         conferred by the laws of the State of Delaware, the Board of Directors
         of the Corporation is expressly authorized:


                                        3

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                           (i) to adopt, amend or repeal the Bylaws of the
                  Corporation, subject to this Certificate of Incorporation and
                  the power of the stockholders, at the time entitled to vote,
                  to alter, amend or repeal Bylaws made by the Board of
                  Directors;

                           (ii) to authorize and issue obligations of the
                  Corporation, secured or unsecured, and to include therein such
                  provisions as to redemption, conversion or other terms thereof
                  as the Board of Directors in its sole discretion may
                  determine, and to authorize the mortgaging or pledging, as
                  security therefor, of any property of the Corporation, real or
                  personal, including after-acquired property;

                           (iii) to determine whether any, and if any, what
                  part, of the net prof its of the Corporation or of its surplus
                  shall be declared in dividends and paid to the stockholders,
                  and to direct and determine the use and disposition of such
                  net profits or such surplus; and

                           (iv) from time to time, without the vote or assent of
                  the stockholders, to issue additional shares of authorized
                  Common Stock.

         In addition to the powers and authorities herein or by law expressly
conferred upon it, the Board of Directors may exercise all such powers and do
all such acts and things as may be exercised or done by the Corporation,
subject, nevertheless, to the provisions of the laws of the State of Delaware,
of this Certificate of Incorporation and of the Bylaws of the Corporation.

         (b) The Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III, as nearly equal in number as the
then total number of directors constituting the whole Board permits. If the
number of directors is changed, any increase or decrease shall be apportioned by
the Board of Directors among the three classes so that the number in each class
shall be as nearly equal as possible. The term of office of each class shall
expire at the third annual meeting of stockholders for election of directors
following the election of such class, except that the initial term of office of
the Class I directors shall expire at the annual meeting of stockholders in
1996, the initial term of office of the Class II directors shall expire at the
annual meeting of stockholders in 1997 and the initial term of office of the
Class III directors shall expire at the annual meeting of stockholders in 1998.
At each annual meeting of the stockholders of the Corporation, the successors of
the class of directors whose term expires at such meeting shall be elected to
hold office for a term expiring as of the third succeeding annual meeting.

         (c) A director may be removed from office only for cause and by the
affirmative vote of the holders of not less than eighty percent (80%) of all the
outstanding shares of stock of the Corporation entitled to vote generally in the
election of directors at a special meeting of stockholders called expressly for
that purpose.

         SEVENTH: All preemptive rights of shareholders are hereby denied, so
that no shares of capital stock of the Corporation of any class whether now or
hereafter authorized and no other


                                        4

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security of the Corporation shall carry with it and no holder or owner of any
share or shares of capital stock of the Corporation of any class whether now or
hereafter authorized or of any other security of the Corporation shall have any
preferential or preemptive right to acquire additional shares of capital stock
of the Corporation of any class whether now or hereafter authorized or of any
other security of the Corporation.

         All cumulative voting rights are hereby denied, so that none of the
capital stock of the Corporation of any class whether now or hereafter
authorized or of any other security of the Corporation shall carry with it and
no holder or owner of any share or shares of capital stock of the Corporation of
any class whether now or hereafter authorized or of any other security of the
Corporation shall have any right to cumulative voting in the election of
directors or for any other purpose.

         EIGHTH: A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the DGCL as the same exists or may
hereafter be amended. Any repeal or modification of this ARTICLE EIGHTH shall
not adversely affect any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to such
repeal or modification.

         NINTH: Except as otherwise provided in this Certificate of
Incorporation, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by consent in writing
by such stockholders. A special meeting of stockholders may be called only by
the Board of Directors pursuant to a resolution adopted by the affirmative vote
of a majority of the entire Board of Directors or by the Chairman of the Board
of Directors, a Vice Chairman of the Board of Directors or the President. The
stockholders of the Corporation shall have the power to adopt, amend or repeal
the Bylaws of the Corporation at any annual or special meeting by the
affirmative vote of holders of not less than eighty percent (80%) of the
combined voting power of the outstanding shares of stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.

         TENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may


                                        5

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be, agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.

         ELEVENTH:

         (a) The affirmative vote of the holders of not less than eighty percent
(80%) of the voting power of the Corporation shall be required for the approval
or authorization of any "Business Combination" (as hereinafter defined);
provided, however, that the eighty percent (80%) voting requirement shall not be
applicable, and the provisions of Delaware law and of this Certificate of
Incorporation relating to the percentage of stockholder approval, if any, shall
apply to any such Business Combination if:

                  (1) The Continuing Directors (as hereinafter defined) of the
         Corporation by a two-thirds vote have expressly approved the Business
         Combination either in advance of or subsequent to the acquisition of
         outstanding shares of Common Stock of the Corporation that caused the
         Related Person (as hereinafter defined) involved in the Business
         Combination to become a Related Person; or

                  (2) If (A) the aggregate amount of the cash and the fair
         market value of the property, securities or other consideration to be
         received in the Business Combination by holders of the Common Stock of
         the Corporation, other than the Related Person involved in the Business
         Combination, is not less than the "Highest Per Share Price" (as
         hereinafter defined) (with appropriate adjustments for
         recapitalizations, reclassifications, stock splits, reverse stock
         splits and stock dividends) paid by the Related Person in acquiring any
         of its holdings of the Corporation's Common Stock, all as determined by
         two-thirds of the Continuing Directors; and (B) if necessary, a proxy
         statement complying with the requirements of the Securities Exchange
         Act of 1934, as amended, shall have been mailed at least thirty (30)
         days prior to any vote on the Business Combination, to all stockholders
         of the Corporation for the purpose of soliciting stockholder approval
         of the Business Combination. The proxy statement shall contain at the
         front thereof, in a prominent place, the position of the Continuing
         Directors as to the advisability (or inadvisability) of the Business
         Combination and, if deemed appropriate by two-thirds of the Continuing
         Directors, the opinion of an investment banking firm selected by
         two-thirds of the Continuing Directors as to the fairness of the terms
         of the Business combination, from the point of view of the holders of
         the outstanding shares of capital stock of the Corporation other than
         the Related Person involved in the Business Combination.

         (b) For purposes of this ARTICLE ELEVENTH:


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                  (1) The term "Business Combination" shall mean (A) any merger,
         consolidation or share exchange of the Corporation or any of its
         subsidiaries into or with a Related Person, in each case irrespective
         of which corporation or company is the surviving entity; (B) any sale,
         lease, exchange, mortgage, pledge, transfer or other disposition to or
         with a Related Person (in a single transaction or a series of related
         transactions) of all or a Substantial Part (as hereinafter defined) of
         the assets of the Corporation (including without limitation any
         securities of a subsidiary of the Corporation) or a Substantial Part of
         the assets of any of its subsidiaries; (C) any sale, lease, exchange,
         mortgage, pledge, transfer or other disposition to or with the
         Corporation or to or with any of its subsidiaries (in a single
         transaction or series of related transactions) of all or a Substantial
         Part of the assets of a Related Person; (D) the issuance or transfer of
         any securities of the Corporation or any of its subsidiaries by the
         Corporation or any of its subsidiaries to a Related Person (other than
         an issuance or transfer of securities which is effected on a pro rata
         basis to all stockholders of the Corporation); (E) any reclassification
         of securities (including any reverse stock split), recapitalization, or
         any other transaction involving the Corporation or any of its
         subsidiaries, that would have the effect of increasing the voting power
         of a Related Person; (F) the adoption of any plan or proposal for the
         liquidation or dissolution of the Corporation proposed by or on behalf
         of a Related Person; (G) the acquisition by or on behalf of a Related
         Person of shares constituting a majority of the voting power of the
         Corporation; and (H) the entering into of any agreement, contract or
         other arrangement providing for any of the transactions described in
         this definition of Business combination.

                  (2) The term "Related Person" shall mean any individual,
         corporation, partnership or other person or entity, other than the
         Corporation or any of its subsidiaries or any benefit plan or trust (or
         any trustee thereof), which, as of the record date for the
         determination of stockholders entitled to notice of and to vote on any
         Business Combination, or immediately prior to the consummation of such
         transaction, together with its "Affiliates" and "Associates" (each as
         defined in Rule 12b-2 of the Regulations under the Securities Exchange
         Act of 1934 as in effect at the date of the adoption of this ARTICLE
         ELEVENTH by the stockholders of the Corporation (collectively and as so
         in effect, the "Exchange Act")), are "Beneficial Owners" (as defined in
         Rule 13d-3 of the Exchange Act) in the aggregate of 10% or more of the
         outstanding shares of Common Stock of the Corporation, and any
         Affiliate or Associate of any such individual, corporation, partnership
         or other person or entity. Notwithstanding the definition of
         "Beneficial Owners" in this subparagraph 2, any Common Stock of the
         Corporation that any Related Person has the right to acquire pursuant
         to any agreement, or upon exercise of conversion rights, warrants or
         options, or otherwise, shall be deemed beneficially owned by the
         Related Person.

                  (3) The term "Substantial Part" shall mean more than 10% of
         the fair market value, as determined by two-thirds of the continuing
         Directors, of the total consolidated assets, or assets representing
         more than 10% of the earning power, of the Corporation and its
         subsidiaries taken as a whole, as of the end of its most recent fiscal
         year ending prior to the time the determination is being made.


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                  (4) In the event of a Business Combination in which the
         Corporation is the surviving corporation, the term "other consideration
         to be received" shall include, without limitation, Common Stock or
         other capital stock of the Corporation retained by stockholders of the
         Corporation other than Related Persons or parties to such Business
         Combination.

                  (5) The term "Continuing Directors" shall mean a director who
         either (i) was a member of the Board of Directors of the Corporation
         immediately prior to the time that the Related Person involved in a
         Business Combination became a Related Person, or (ii) was designated
         (before his or her initial election as a director) as a Continuing
         Director by two-thirds of the then Continuing Directors.

                  (6) A Related Person shall be deemed to have acquired a share
         of the Common Stock of the Corporation at the time when such Related
         Person became the Beneficial Owner thereof. With respect to the shares
         owned by Affiliates, Associates or other person whose ownership is
         attributed to a Related Person under the foregoing definition of
         Related Person, the price paid for said shares shall be deemed to be
         the higher of (i) the price paid upon the acquisition thereof by the
         Affiliate, Associate or other person, or (ii) the market price of the
         shares in question at the time when the Related Person became the
         Beneficial Owner thereof.

                  (7) The term "Highest Per Share Price" shall mean the highest
         price determined by two-thirds of the Continuing Directors to have been
         paid at any time by the Related Person for any share or shares of
         Common Stock. In determining the Highest Per Share Price, all purchases
         by the Related Person shall be taken into account regardless of whether
         the shares were purchased before or after the Related Person became a
         Related Person. The Highest Per Share Price shall include any brokerage
         commission, transfer taxes and soliciting dealers' fees paid by the
         Related Person with respect to the shares of Common Stock of the
         Corporation acquired by the Related Person.

         TWELFTH: To the extent not prohibited by law, the Corporation by action
of its Board of Directors may purchase shares of any class of stock issued by it
from any holder or holders thereof.

         THIRTEENTH: The Corporation by action of its Board of Directors may
create and issue, from time to time, whether or not in connection with the
issuance and sale of any shares of stock or other securities of the Corporation,
rights, warrants and options entitling the holders thereof to purchase from the
Corporation shares of any class or classes of its capital stock or other
securities or property of the Corporation, or shares or other securities or
property of any successor in interest of the Corporation, at such times, in such
amounts, to such persons, for such consideration, if any, and upon such other
terms and conditions as the Board of Directors may deem advisable.

         FOURTEENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation; provided, however,
that notwithstanding anything contained in the Certificate of


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Incorporation to the contrary, the affirmative vote of holders of not less than
eighty percent (80%) of the combined voting power of the outstanding shares of
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to alter, amend,
adopt any provision inconsistent with or repeal ARTICLE SIXTH, ARTICLE SEVENTH,
ARTICLE EIGHTH, ARTICLE NINTH, ARTICLE ELEVENTH or this ARTICLE FOURTEENTH;
provided, further, that such eighty percent (80%) vote shall not be required for
any such alteration, amendment, adoption of any provision inconsistent with or
repeal of ARTICLE ELEVENTH which is recommended to stockholders by two-thirds of
the Continuing Directors and such alteration, amendment, adoption of
inconsistent provision or repeal shall require the vote, if any, required under
the applicable provisions of the DGCL and this Certificate of Incorporation.

         FIFTEENTH: No sale, assignment, transfer or other disposition of shares
of Common Stock of the Corporation by any stockholder, whether voluntary or by
operation of law or by gift or otherwise, shall be effective unless and until
there is compliance with the following terms and conditions of this ARTICLE
FIFTEENTH:

         (a) Any stockholder who desires to sell all or any part of such
stockholder's shares of Common Stock of the Corporation pursuant to a bona fide
offer to purchase such shares from a third party, including, without limitation,
another stockholder of the Corporation, shall, as a condition precedent to such
stockholder's right to do so, by notice in writing delivered to the Chairman of
the Board of the Corporation at the Corporation's principal executive offices,
inform the Corporation of such stockholder's intention to sell all or any part
of such stockholder's shares of Common Stock and the identity of the third party
to whom, and the terms pursuant to which, such shares are proposed to be sold,
and shall by such notice offer the shares that such stockholder desires to sell
for sale to the Corporation at the price per share at which, and the terms
pursuant to which, such stockholder proposes to sell such shares to such third
party. The Corporation shall have a period of fifteen (15) days after such
notice is received by it within which to indicate its election to exercise its
right to purchase, at such price and on such terms, all or any portion of such
shares. The Corporation may elect by notice in writing to such stockholder given
within such fifteen (15)-day period to purchase all or any portion of such
shares, and the shares selected by the Corporation for purchase must be sold at
such price and on such terms and transferred to the Corporation by such
stockholder. Delivery of such shares and payment therefor shall be made at the
principal executive offices of the Corporation within ten (10) days after notice
of the election to purchase is given by the Corporation to such stockholder. Any
of such shares offered by such stockholder to the Corporation and not selected
for purchase by the Corporation may then be sold by such stockholder to such
third party at a price and upon terms no more favorable than those set forth in
the notice of offer delivered to the Corporation; provided, however, that any
such sale must be completed within fortyfive (45) days after the date such
notice of offer was received by the Corporation; and provided further that such
third party shall receive and hold such shares subject to all the terms and
conditions of this ARTICLE FIFTEENTH. If such sale to such third party is not
completed within such fortyfive (45)-day period, such stockholder shall continue
to hold such shares subject to all the terms and conditions of this ARTICLE
FIFTEENTH and may not consummate a sale without again complying with the
provisions of this paragraph (a). Notwithstanding the foregoing provisions of
this paragraph


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(a), if the purchase price (or any portion thereof) of the shares proposed to be
sold by such stockholder to such third party consists of a consideration other
than cash, then the purchase price payable by the Corporation under this
paragraph (a) for any shares proposed to be sold for such noncash consideration
which are selected for purchase by the Corporation shall be a cash purchase
price per share in an amount equal to the Applicable Market Value (as defined in
paragraph (d) of this ARTICLE FIFTEENTH) of the Common Stock as of the date the
notice of offer relating to such shares was received by the Corporation.

         (b) The terms and conditions of this ARTICLE FIFTEENTH shall not apply
to any disposition by any stockholder of all or any part of such stockholder's
shares of Common Stock of the Corporation by will or pursuant to the laws of
descent and distribution, or by gift, to or for the benefit of such
stockholder's spouse, father, mother or adopted or natural lineal descendants
(and if such transfer is in trust, the trustee, upon termination of the trust,
may transfer such shares to such beneficial owner); provided, however, that the
transferee of such shares shall receive and hold such shares subject to all the
terms and conditions of this ARTICLE FIFTEENTH.

         (c) Dispositions by stockholders of shares of Common Stock of the
Corporation other than as provided for under paragraphs (a) and (b) of this
ARTICLE FIFTEENTH, whether voluntary or by operation of law or by gift or
otherwise, shall be subject to a right of first refusal in favor of the
corporation, which right of first refusal shall entitle the Corporation to
purchase, in accordance with the procedures specified in paragraph (a) of this
ARTICLE FIFTEENTH (including without limitation the delivery to the Corporation
of a notice of offer), all or any portion of the shares that are the subject of
such disposition; provided, however, that the purchase price payable by the
Corporation for any shares selected for purchase by the Corporation pursuant to
the exercise by it of such right of first refusal shall be a cash purchase price
per share in an amount equal to the Applicable Market Value of the Common Stock
as of the date the notice of offer relating to such shares was received by the
Corporation. The transferee of any such shares not so selected for purchase by
the Corporation shall receive and hold such shares subject to all the terms and
conditions of this ARTICLE FIFTEENTH.

         (d) As used in this ARTICLE FIFTEENTH, the term "Applicable Market
Value" shall mean the fair market value of a share of Common Stock of the
Corporation as most recently fixed and determined (prior to the date of the
event giving rise to the use and application of such term) by independent
consultants to the Corporation selected and appointed by the Board of Directors
of the Corporation for the purpose of ascertaining Applicable Market Value. Such
independent consultants shall fix and determine the fair market value of a share
of Common Stock of the Corporation on a quarterly basis following the end of
each calendar quarter. In ascertaining such value, such consultants shall
consider the latest available financial statements and financial information of
the Corporation, projections and internal information relating to the
Corporation prepared by its management and furnished to such consultants for the
purpose of their analysis, publicly available information concerning other
companies and the trading markets for certain other companies' securities and
all other information such consultants believe relevant to their inquiry. The
value of a share of Common Stock shall be discounted to reflect, as and to the
extent deemed appropriate by


                                       10

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the independent consultants, the minority nature of any individual's
shareholding and the lack of a public market for the Common Stock and consequent
illiquidity.

         (e) The restrictions on transfer set forth in this ARTICLE FIFTEENTH
shall terminate and be of no further force or effect in the event the Common
Stock of the Corporation becomes publicly traded on an established securities
market. Nothing contained in this ARTICLE FIFTEENTH shall be deemed to limit the
scope or effect of any other restrictions on transfer which may be imposed on
shares of Common Stock of the Corporation pursuant to the terms of any employee
benefit plan, arrangement or program of the Corporation or any of its
subsidiaries or any agreement between the Corporation and an employee of the
Corporation or any of its subsidiaries.

         4. This Restated Certificate of Incorporation shall become effective at
the close of business, Dallas, Texas time, on the day on which it shall be filed
in the office of the Secretary of State of the State of Delaware.


                                       11
   1
                                                                     EXHIBIT 3.2

                           AMENDED AND RESTATED BYLAWS

                                       OF

                            LENNOX INTERNATIONAL INC.
                            (A Delaware Corporation)

                                      as of
                               September 11, 1998


                                   ARTICLE I.

                                     OFFICES

         Section 1. Registered Office. The registered office of Lennox
International Inc. (the "Corporation") in the State of Delaware shall be at
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, and the registered agent in charge thereof shall be The
Corporation Trust Company.

         Section 2. Other Offices. The Corporation may also have an office or
offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board of Directors may from time to time
determine or the business of the Corporation may require.


                                   ARTICLE II.

                            MEETINGS OF STOCKHOLDERS

         Section 1. Place of Meeting. All meetings of the stockholders shall be
held at the principal executive offices of the Corporation or at such other
places, either within or without the State of Delaware, as may from time to time
be fixed by the Board of Directors, the Chairman of the Board or the President.

         Section 2. Annual Meetings. The annual meetings of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on such date and at such time and
place as may from time to time be established by the Board of Directors, the
Chairman of the Board or the President.

         Section 3. Special Meetings. Except as otherwise required by law,
special meetings of the stockholders for any purpose or purposes may be called
only by (i) the Board of Directors, (ii) the Chairman of the Board or (iii) the
President. Only such business as is specified in the notice of any special
meeting of the stockholders shall come before such meeting.



   2



         Section 4. Notice of Meetings. Except as otherwise provided in this
Section 4 or by law, written notice of each meeting of the stockholders, whether
annual or special, shall be given, either by personal delivery or by mail, not
less than ten nor more than sixty days before the date of the meeting to each
stockholder of record entitled to notice of the meeting, unless the meeting is
called for the purpose of acting on an agreement of merger or consolidation
involving the Corporation or for the purpose of authorizing the sale, lease or
exchange of all or substantially all of the property and assets of the
Corporation, in which case the notice of the meeting shall be given at least
twenty days prior to the date of the meeting. If mailed, such notice shall be
deemed given when deposited in the United States mail, postage prepaid, directed
to the stockholder at such stockholder's address as it appears on the records of
the Corporation. Each such notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall waive notice thereof as
provided in Article X of these Bylaws. Notice of adjournment of a meeting of
stockholders need not be given if the time and place to which it is adjourned
are announced at such meeting, unless the adjournment is for more than thirty
days or, after adjournment, a new record date is fixed for the adjourned
meeting.

         Whenever notice is required to be given by these Bylaws or by law to
any stockholder to whom (i) notice of two consecutive annual meetings of the
stockholders, and all notices of meetings to such person during the period
between such two consecutive annual meetings, or (ii) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a twelve-month period, have been mailed addressed to such person at such
person's address as shown on the records of the Corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the Corporation a written notice
setting forth such person's then current address, the requirement that notice be
given to such person shall be reinstated.

         Section 5. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation or these Bylaws, the holders of a majority of the
outstanding shares of stock of each class entitled to be voted, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business at any meeting of the stockholders. For purposes of the foregoing, two
or more classes or series of stock shall be considered a single class if the
holders thereof are entitled to vote together as a single class at the meeting.
The stockholders present or represented at a duly organized meeting may continue
to transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. Shares of the Corporation's own
capital stock belonging on the record date for the meeting to the Corporation or
to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including, but not limited to, its own stock, held by
it in a fiduciary capacity.


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         Section 6. Adjournments. In the absence of a quorum, the holders of a
majority of the shares of stock entitled to be voted at the meeting, present in
person or represented by proxy, may adjourn the meeting from time to time. At
any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally called.

         Section 7. Order of Business. At each meeting of the stockholders, the
Chairman of the Board, or in the absence of the Chairman of the Board, the
President, shall act as chairman. The order of business at each such meeting
shall be as determined by the chairman of the meeting. The chairman of the
meeting shall have the right and authority to prescribe such rules, regulations
and procedures and to do all such acts and things as are necessary or desirable
for the proper conduct of the meeting, including, without limitation, the
establishment of procedures for the maintenance of order and safety, limitations
on the time allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.

         Section 8. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who has charge of the stock ledger of the
Corporation to prepare and make, at least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in such stockholder's name. Such list shall be
produced and kept available at the times and places required by law.

         Section 9. Voting. Except as otherwise provided by law or in the
Certificate of Incorporation, each stockholder of record shall be entitled at
each meeting of the stockholders to one vote for each share of stock which has
voting power upon the matter in question, registered in such stockholder's name
on the books of the Corporation:

                  (a) on the date fixed pursuant to Section 6 of Article VII of
         these Bylaws as the record date for the determination of stockholders
         entitled to notice of and to vote at such meeting; or

                  (b) if no such record date shall have been so fixed, then at
         the close of business on the day next preceding the date on which
         notice of such meeting is given, or, if notice is waived, at the close
         of business on the day next preceding the day on which the meeting is
         held.

         Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for such stockholder by a proxy
signed by such stockholder or such stockholder's attorney-in-fact or by any
other means which constitutes a valid grant of a proxy under the General
Corporation Law of the State of Delaware. Any such proxy relating to a meeting
of stockholders shall be delivered to the secretary of such meeting at or prior
to the time designated for holding such meeting but, in any event, not later
than the time designated in the order of business for so delivering such
proxies. No such proxy shall be voted or acted upon after three years from


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its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or another duly executed proxy bearing a later date
than the original proxy with the Secretary of the Corporation.

         At each meeting of the stockholders, all corporate actions, other than
the election of directors, to be taken by vote of the stockholders (except as
otherwise required by law or the Certificate of Incorporation or these Bylaws)
shall be authorized by a majority of the outstanding shares of all classes of
stock entitled to vote thereon, present in person or represented by proxy;
provided that (except as otherwise required by law or by the Certificate of
Incorporation) the Board of Directors may require a larger vote upon any
election or question. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of the directors.

         Unless required by law or determined by the chairman of the meeting to
be advisable, the vote on any matter, including the election of directors, need
not be by written ballot. In the case of a vote by written ballot, each ballot
shall be signed by the stockholder voting, or by such stockholder's proxy, and
shall state the number of shares voted.

         Section 10. Inspectors. Except as otherwise provided by law, either the
Board of Directors or, in the absence of a designation of inspectors by the
Board, the chairman of any meeting of stockholders may, in its or such person's
discretion, appoint one or more inspectors to act at any meeting of
stockholders. Such inspectors shall perform such duties as shall be specified by
the Board or the chairman of the meeting. Inspectors need not be stockholders.
No director or nominee for the office of director shall be appointed such an
inspector.

         Section 11. Action Without a Meeting. Except as otherwise provided in
the Certificate of Incorporation, any action required by law to be taken at any
annual or special meeting of the stockholders, or any action which may be taken
at any annual or special meeting of the stockholders, may not be effected by
consent in writing in lieu of a meeting by such stockholders.

         Section 12. Notice of Stockholder Business. At a meeting of the
stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been properly brought before the meeting. To
be properly brought before a meeting, business or a proposal must (a) be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors or the persons calling the meeting as
herein provided, (b) otherwise be properly brought before the meeting by or at
the direction of the Board of Directors or (c) otherwise (i) be properly
requested to be brought before the meeting by a stockholder of record entitled
to vote in the election of directors generally, and (ii) constitute a proper
subject to be brought before such meeting.


                                        4

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         For business or a proposal to be properly brought before a meeting of
stockholders, any stockholder who intends to bring any matter (other than the
election of directors) before a meeting of stockholders and is entitled to vote
on such matter must deliver written notice of such stockholder's intent to bring
such matter before the meeting of stockholders, either by personal delivery or
by United States mail, postage prepaid, to the Secretary of the Corporation.
Such notice must be received by the Secretary: (i) with respect to an annual
meeting of stockholders, not less than sixty days nor more than ninety days in
advance of such meeting; and (ii) with respect to any special meeting of
stockholders, not later than the close of business on the tenth day following
the date on which notice of such meeting is first given to stockholders;
provided, however, that in the event that less than seventy (70) days notice or
prior public disclosure of the date of the annual meeting of stockholders is
given or made to the stockholders, to be timely, notice of a proposal delivered
by the stockholder must be received by the Secretary not later than the close of
business on the tenth day following the day on which notice of the date of the
annual meeting of stockholders was mailed or such public disclosure was made to
the stockholders.

         A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting of stockholders (a)
a brief description of the business or proposal desired to be brought before the
meeting and the reasons for conducting such business at the meeting, (b) the
name and address, as they appear on the Corporation's books, of the stockholder
proposing such business and any other stockholders known to be supporting the
proposal, (c) the class or classes of stock and number of shares of such class
or classes of stock which are beneficially owned by the proposing stockholder on
the date of the stockholder notice, and (d) any material interest of the
proposing stockholder in such business.

         No business shall be conducted at a meeting of stockholders except in
accordance with the procedures set forth in this Section 12. The Board of
Directors may reject any stockholder proposal submitted for consideration at a
meeting of stockholders which is not made in accordance with the terms of this
Section 12 or which is not a proper subject for stockholder action in accordance
with provisions of applicable law. Alternatively, if the Board of Directors
fails to consider the validity of any such stockholder proposal, the presiding
officer of a meeting shall, if the facts warrant, determine and declare to the
meeting that (i) the business proposed to be brought before the meeting is not a
proper subject therefor and/or (ii) such business was not properly brought
before the meeting in accordance with the provisions hereof, and if he should so
determine, he shall declare to the meeting that (i) the business proposed to be
brought before the meeting is not a proper subject therefor and/or (ii) such
business was not properly brought before the meeting and shall not be
transacted. The Board of Directors or, as the case may be, the presiding officer
of the meeting shall have absolute authority to decide questions of compliance
with the foregoing procedures and the Board of Directors' or, as the case may
be, the presiding officer's ruling thereon shall be final and conclusive. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of stockholders of reports of officers, directors and committees
of the Board of Directors, but, in connection with such reports, no new business
shall be acted upon at such meeting unless stated, filed and received as herein
provided.


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                                  ARTICLE III.

                               BOARD OF DIRECTORS

         Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate of Incorporation of the
Corporation directed or required to be exercised or done by the stockholders.

         Section 2. Number, Qualifications and Election. The exact number of
directors which shall constitute the whole Board shall be fixed from time to
time by resolution of the Board of Directors; provided, however, that the number
so fixed shall not be less than three nor more than fifteen; and provided
further that no decrease in the number of directors constituting the Board shall
have the effect of shortening the term of any incumbent director.

         Each director shall be at least twenty-one years of age. No person
shall be qualified for election or appointment as a director who, on or before
the date set for election or appointment, has attained seventy or more years of
age. Directors need not be stockholders of the Corporation.

         The Board of Directors is specifically authorized to divide the Board
into three classes, as authorized by the Delaware General Corporation Law and
the Certificate of Incorporation, designated Class I, Class II and Class III, as
nearly equal in number as the then total number of directors constituting the
whole Board permits. The term of office of each class shall expire at the third
annual meeting of stockholders for election of directors following the election
of such class, except that the initial term of office of the Class I directors
shall expire at the annual meeting of stockholders in 1996, the initial term of
office of the Class II directors shall expire at the annual meeting of
stockholders in 1997 and the initial term of office of the Class III directors
shall expire at the annual meeting of stockholders in 1998. At each annual
meeting of stockholders, directors of the class whose term then expires shall be
elected for a full term of three (3) years to succeed the directors of such
class so that the term of office of the directors of one class shall expire in
each year.


         In any election of directors, the persons receiving a plurality of the
votes cast, up to the number of directors to be elected in such election, shall
be deemed elected. The stockholders of the Corporation are expressly prohibited
from cumulating their votes in any election of directors of the Corporation.
Each director shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.

         Section 3. Notification of Nominations. Except for directors elected
pursuant to the provisions of Section 13 of this Article III, only individuals
nominated for election to the Board of Directors pursuant to and in accordance
with the provisions of this Section 3 may be elected to and may serve upon the
Board of Directors of the Corporation. Nominations for the election of directors
may be made by the Board of Directors or by any stockholder entitled to vote in
the election of


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directors generally. Subject to the foregoing, only a stockholder of record
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at a meeting of stockholders and only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation and has been received
by the Secretary: (i) with respect to an election to be held at an annual
meeting of stockholders, not less than sixty days nor more than ninety days in
advance of such meeting; and (ii) with respect to an election to be held at a
special meeting of stockholders for the election of directors, not later than
the close of business on the tenth day following the date on which notice of
such meeting is first given to stockholders; provided, however, that in the
event that less than seventy (70) days' notice or prior public disclosure of the
date of the meeting of stockholders is given or made to stockholders, to be
timely, notice of a nomination delivered by such stockholder must be received by
the Secretary not later than the close of business on the tenth day following
the day on which notice of the date of the meeting of stockholders was mailed or
such public disclosure was made to the stockholders.

         Each such notice shall set forth:

                  (a) the name, age, business address and residence address, and
         the principal occupation or employment of any nominee proposed in such
         notice;

                  (b) the name and address of the stockholder or stockholders
         giving the notice as the same appears in the Corporation's stock
         ledger;

                  (c) a representation that each nominating stockholder is a
         holder of record of stock of the Corporation entitled to vote at such
         meeting and intends to appear in person or by proxy at the meeting to
         nominate the person or persons specified in the notice, and the number
         of shares of stock of the Corporation which are beneficially owned by
         such stockholder and by any such person or persons;

                  (d) a description of all arrangements or understandings
         between the stockholder and each nominee and any other person or
         persons (naming such person or persons) pursuant to which the
         nomination or nominations are to be made by the stockholder; and

                  (e) such other information regarding each nominee proposed by
         such stockholder as would be required to be included in a proxy
         statement filed pursuant to the proxy rules of the Securities and
         Exchange Commission soliciting proxies for the election of such
         nominee, had the Corporation been subject to such proxy rules and had
         the nominee been nominated, or intended to be nominated, by the Board
         of Directors.

         At the request of the Board of Directors, any person nominated for
election as a director shall furnish to the Secretary the information required
by this Section 3 to be set forth in a stockholder's notice of nomination which
pertains to the nominee.


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         To be effective, each notice of intent to make a nomination given
hereunder shall be accompanied by the written consent of each nominee to serve
as a director of the Corporation if elected.

         The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if he should so determine,
he shall declare to the meeting that such nomination was not properly brought
before the meeting and shall not be considered. The chairman of a meeting of
stockholders shall have absolute authority to decide questions of compliance
with the foregoing procedures and such chairman's ruling thereon shall be final
and conclusive.

         Section 4. Quorum and Manner of Acting. Except as otherwise provided by
law or in Article IV of these Bylaws, (i) a majority of the entire Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board and (ii) the vote of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board unless the
Certificate of Incorporation or these Bylaws require a vote of a greater number.
In the absence of a quorum, a majority of the directors present may adjourn the
meeting to another time and place. At any adjourned meeting at which a quorum is
present, any business that might have been transacted at the meeting as
originally called may be transacted.

         Section 5. Place of Meeting. The Board of Directors may hold its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time determine or as shall be specified or fixed in the
respective notices or waivers of notice thereof.

         Section 6. Annual Meetings. The first meeting of each newly elected
Board of Directors shall be held for the purpose of organization and the
transaction of any other business, without notice, immediately following the
annual meeting of stockholders, and at the same place, unless such time or place
shall be changed by the Board.

         Section 7. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board shall from time to time by
resolution determine. If any day fixed for a regular meeting shall be a legal
holiday under the laws of the place where the meeting is to be held, the meeting
that would otherwise be held on that day shall be held at the same hour on the
next succeeding business day.

         Section 8. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board or the President or
by any two or more directors.

         Section 9. Notice of Meetings. Notice of annual and regular meetings of
the Board of Directors or of any adjourned meeting thereof need not be given.
Notice of each special meeting of the Board shall be mailed to each director,
addressed to such director at such director's residence or usual place of
business, not later than the third day before the day on which the meeting is to
be held or shall be sent to such director at such place by facsimile
transmission, telegram or telex or be given


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personally or by telephone, not later than the day before the meeting is to be
held, but notice need not be given to any director who shall waive notice
thereof as provided in Article X of these Bylaws. Every such notice shall state
the time and place but need not state the purpose of the meeting.

         Section 10. Participation in Meeting by Means of Communication
Equipment. Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, any one or more members of the Board of Directors or any committee
thereof may participate in any meeting of the Board or of any such committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation shall constitute presence in person at such meeting.

         Section 11. Action Without a Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
of any such committee consent thereto in writing and the writing or writings are
filed with the minutes of proceedings of the Board or of such committee.

         Section 12. Resignations; Removal. Any director of the Corporation may
at any time resign by giving written notice to the Board of Directors, the
Chairman of the Board, the President or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein or, if the time be
not specified, upon delivery thereof; and unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
A director may be removed from office only for cause and by the affirmative vote
of the holders of not less than eighty percent (80%) of all the outstanding
shares of stock of the Corporation entitled to vote generally in the election of
directors at a special meeting of stockholders called expressly for that
purpose.

         Section 13. Vacancies. Unless otherwise provided in the Certificate of
Incorporation or these Bylaws, vacancies on the Board of Directors and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, though
less than a quorum, or by a sole remaining director, and the directors so chosen
shall hold office until the next annual election of the class for which such
directors shall have been chosen, and until their successors are duly elected
and shall qualify, unless sooner displaced. If there are no directors in office
then an election of directors may be held in the manner provided by the
statutes.

         Section 14. Compensation. Each director who shall not at the time also
be a salaried officer or employee of the Corporation or any of its subsidiaries
(an "outside director"), in consideration of such person serving as a director,
shall be entitled to receive from the Corporation such amount per annum and such
fees for attendance at meetings of the Board of Directors or of committees of
the Board, or both, as the Board shall from time to time determine. In addition,
each outside director shall be entitled to receive from the Corporation
reimbursement for the reasonable expenses incurred by such person in connection
with the performance of such person's duties as a director. Nothing


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contained in this Section 14 shall preclude any director from serving the
Corporation or any of its subsidiaries in any other capacity and receiving
compensation therefor.

         Section 15. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because such person's or
persons' votes are counted for such purpose, if: (i) the material facts as to
such person's relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
such person's relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.


                                   ARTICLE IV.

                         EXECUTIVE AND OTHER COMMITTEES

         Section 1. Executive Committee. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate annually two or
more of its members to constitute members or alternate members of an Executive
Committee, which Committee shall have and may exercise, between meetings of the
Board, all the powers and authority of the Board in the management of the
business and affairs of the Corporation, including, if such Committee is so
empowered and authorized by resolution adopted by a majority of the whole Board,
the power and authority to declare a dividend and to authorize the issuance of
stock, and may authorize the seal of the Corporation to be affixed to all papers
that may require it, except that the Executive Committee shall not have such
power or authority in reference to:

                  (a) amending the Certificate of Incorporation of the  
         Corporation;

                  (b) adopting an agreement of merger or consolidation involving
         the Corporation;

                  (c) recommending to the stockholders the sale, lease or
         exchange of all or substantially all of the property and assets of the
         Corporation;


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                  (d) recommending to the stockholders a dissolution of the
         Corporation or a revocation of a dissolution;

                  (e) adopting, amending or repealing any bylaw of the 
         Corporation;

                  (f) filling vacancies on the Board of Directors or any
         committee of the Board, including the Executive Committee; or

                  (g) amending or repealing any resolution of the Board of
         Directors which by its terms may be amended or repealed only by the
         Board.

The Board shall have the power at any time to change the membership of the
Executive Committee, to fill all vacancies in it and to discharge it, either
with or without cause.

         Section 2. Other Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate from among its members one or
more other committees, each of which shall, except as otherwise prescribed by
law, have such authority of the Board as may be specified in the resolution of
the Board designating such committee. A majority of all members of such
committee may determine its action and fix the time and place of its meetings,
unless the Board shall otherwise provide. The Board shall have the power at any
time to change the membership of, to fill all vacancies in and to discharge any
such committee, either with or without cause.

         Section 3. Procedure, Meetings, Quorum. Regular meetings of the
Executive Committee or any other committee of the Board of Directors, of which
no notice shall be necessary, may be held at such times and places as shall be
fixed by resolution adopted by a majority of the members thereof. Special
meetings of the Executive Committee or any other committee of the Board shall be
called at the request of any member thereof. Notice of each special meeting of
the Executive Committee or any other committee of the Board shall be sent by
mail, facsimile transmission, telegram, telex or telephone, or be delivered
personally, to each member thereof not later than the day before the day on
which the meeting is to be held, but notice need not be given to any member who
shall waive notice thereof as provided in Article X of these Bylaws. Any special
meeting of the Executive Committee or any other committee of the Board shall be
a legal meeting without any notice thereof having been given if all the members
thereof shall be present thereat. Notice of any adjourned meeting of the
Executive Committee or any other committee of the Board need not be given. The
Executive Committee or any other committee of the Board may adopt such rules and
regulations not inconsistent with the provisions of law, the Certificate of
Incorporation of the Corporation or these Bylaws for the conduct of its meetings
as the Executive Committee or such other committee deems proper. A majority of
the Executive Committee or any other committee of the Board shall constitute a
quorum for the transaction of business at any meeting, and the vote of a
majority of the members thereof present at any meeting at which a quorum is
present shall be the act of such committee. The Executive Committee and any
other committee of the Board shall keep written minutes of its proceedings and
shall report on such proceedings to the Board.


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                                   ARTICLE V.

                                    OFFICERS

         Section 1. Number, Term of Office. The officers of the Corporation
shall be elected by the Board of Directors and shall be a Chairman of the Board,
a President, one or more Vice Presidents as may be determined from time to time
by the Board (and in the case of each such Vice President, with such descriptive
title, if any, including that of Executive Vice President, as the Board shall
deem appropriate), a Treasurer, a Secretary and such other officers or agents
with such titles and such duties as the Board of Directors may from time to time
determine, each to have such authority, functions or duties as in these Bylaws
provided or as the Board may from time to time determine, and each to hold
office for such term as may be prescribed by the Board and until such person's
successor shall have been elected and shall qualify, or until such person's
death or resignation, or until such person's removal in the manner hereinafter
provided. The Chairman of the Board shall be elected from among the directors.
One person may hold the offices and perform the duties of any two or more of
said officers; provided, however, that no officer shall execute, acknowledge or
verify any instrument in more than one capacity if such instrument is required
by law, the Certificate of Incorporation of the Corporation or these Bylaws to
be executed, acknowledged or verified by two or more officers. The Board may
from time to time authorize any officer to appoint and remove any such other
officers and agents and to prescribe their powers and duties.

         Section 2. Removal. Any officer may be removed, either with or without
cause, by the Board of Directors at any meeting thereof, or, except in the case
of any officer elected by the Board, by any committee or superior officer upon
whom such power may be conferred by the Board.

         Section 3. Resignation. Any officer may at any time resign by giving
written notice to the Board of Directors, the Chairman of the Board, the
President or the Secretary of the Corporation. Any such resignation shall take
effect at the date of delivery of such notice or at any later date specified
therein, and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.

         Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these Bylaws for election to such
office.

         Section 5. Chairman of the Board. The Chairman of the Board shall have
general supervision and direction of the business and affairs of the
Corporation, subject to the control of the Board of Directors. The Chairman of
the Board shall, if present, preside at meetings of the stockholders, meetings
of the Board and meetings of the Executive Committee. The Chairman of the Board
shall perform such other duties as the Board or the Executive Committee may from
time to time determine. The Chairman of the Board may sign and execute in the
name of the Corporation deeds, mortgages, bonds, contracts or other instruments
authorized by the Board or any committee thereof empowered to authorize the
same.


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         Section 6. President. The President shall, if present and in the
absence of the Chairman of the Board, preside at meetings of the stockholders,
meetings of the Board and meetings of the Executive Committee. The President
shall counsel with and advise the Chairman of the Board and perform such other
duties as the Board, the Executive Committee or the Chairman of the Board may
from time to time determine. The President may sign and execute in the name of
the Corporation deeds, mortgages, bonds, contracts or other instruments
authorized by the Board or any committee thereof empowered to authorize the
same.

         Section 7. Vice Presidents. Each Vice President shall have such powers
and duties as shall be prescribed by the Chairman of the Board, the President or
the Board of Directors. Any Vice President may sign and execute in the name of
the Corporation deeds, mortgages, bonds, contracts or other instruments
authorized by the Board or any committee thereof empowered to authorize the
same.

         Section 8. Treasurer. The Treasurer shall perform all duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to the Treasurer by the Chairman of the Board, the President or the
Board of Directors. The Board may require the Treasurer to give security for the
faithful performance of such person's duties.

         Section 9. Secretary. It shall be the duty of the Secretary to act as
secretary at all meetings of the Board of Directors, of the Executive Committee
and of the stockholders and to record the proceedings of such meetings in a book
or books kept for that purpose; the Secretary shall see that all notices
required to be given by the Corporation are duly given and served; the Secretary
shall be custodian of the seal of the Corporation (if one is adopted) and shall
affix the seal or cause it to be affixed to all certificates of stock of the
Corporation (unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and to all documents, the execution of which
on behalf of the Corporation under its seal is duly authorized in accordance
with the provisions of these Bylaws; the Secretary shall have charge of the
stock ledger books and also of the other books, records and papers of the
Corporation and shall see that the reports, statements and other documents
required by law are properly kept and filed; and the Secretary shall in general
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to such person by the Chairman of the Board,
the President or the Board of Directors.

         Section 10. Assistant Treasurers and Assistant Secretaries. If elected,
the Assistant Treasurers and Assistant Secretaries shall perform such duties as
shall be assigned to them by the Treasurer and Secretary, respectively, or by
the Chairman of the Board, the President or the Board of Directors. The Board
may require any Assistant Treasurer to give security for the faithful
performance of such person's duties.



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                                   ARTICLE VI.

                                 INDEMNIFICATION

         Section 1. General. Each person who at any time shall serve or shall
have served as a Director or officer of the Corporation, or any person who,
while a director or officer of the Corporation, is or was serving at the request
of the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, shall be entitled to (a)
indemnification and (b) the advancement of expenses incurred by such person from
the Corporation as, and to the fullest extent, permitted by Section 145 of the
General Corporation Law of the State of Delaware or any successor statutory
provision, as from time to time amended. The Corporation may indemnify any other
person, to the same extent and subject to the same limitations specified in the
immediately preceding sentence, by reason of the fact that such other person is
or was an employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise. The foregoing right of
indemnification and advancement of expenses provided shall not be deemed
exclusive of any other rights to which any person seeking indemnification or
advancement of expenses may be entitled under any agreement, vote of
stockholders or disinterested directors of the Corporation or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office. All rights to indemnification under this
Article shall be deemed to be provided by a contract between the Corporation and
the director, officer, employee or agent who served in such capacity at any time
while this Article and other relevant provisions of the General Corporation Law
of the State of Delaware and other applicable law, if any, are in effect. Any
repeal or modification thereof shall not affect any rights or obligations then
existing. Without limiting the provisions of this Article, the Corporation is
authorized from time to time, without further action by the stockholders of the
Corporation, to enter into agreements with any director or officer of the
Corporation providing such rights of indemnification as the Corporation may deem
appropriate, up to the maximum extent permitted by law. Any agreement entered
into by the Corporation with a director may be authorized by the other
directors, and such authorization shall not be invalid on the basis that similar
agreements may have been or may thereafter be entered into with other directors.

         Section 2. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the Corporation would have had the power to indemnify such person against
such liability under the applicable provisions of this Article VI or the General
Corporation Law of the State of Delaware.


                                  ARTICLE VII.

                                  CAPITAL STOCK

         Section 1. Certificates For Shares. Certificates representing shares of
stock of the Corporation, whenever authorized by the Board of Directors, shall
be in such form as shall be approved by the Board. The certificates representing
shares of stock shall be signed by, or in the


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name of, the Corporation by the Chairman of the Board or the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation (if one has been adopted), which may be by a facsimile thereof. Any
or all such signatures may be facsimiles. Although any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon a
certificate ceases to be such officer, transfer agent or registrar before such
certificate is issued, it may nevertheless be issued by the Corporation with the
same effect as if such officer, transfer agent or registrar were still such at
the date of issue.

         The stock ledger and blank share certificates shall be kept by the
Secretary or a transfer agent or by a registrar or by any other officer or agent
designated by the Board.

         Section 2. Transfer of Shares. Transfer of shares of stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof, or by such holder's attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary of the Corporation or a
transfer agent for such stock, if any, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. The person in whose
name shares stand on the books of the Corporation shall be deemed the owner
thereof for all purposes as regards the Corporation; provided, however, that
whenever any transfer of shares shall be made for collateral security and not
absolutely, and written notice thereof shall be given to the Secretary or to
such transfer agent, such fact shall be stated in the entry of the transfer. No
transfer of shares shall be valid as against the Corporation, its stockholders
and creditors for any purpose until it shall have been entered in the stock
records of the Corporation by an entry showing from and to whom transferred.

         Section 3. Address of Stockholders. Each stockholder shall designate to
the Secretary or transfer agent of the Corporation an address at which notices
of meetings and all other corporate notices may be served or mailed to such
person, and, if any stockholder shall fail to designate such address, corporate
notices may be served upon such person by mail directed to such person at such
person's post office address, if any, as the same appears on the share record
books of the Corporation or at such person's last known post office address.

         Section 4. Lost, Destroyed and Mutilated Certificates. The holder of
any share of stock of the Corporation shall immediately notify the Corporation
of any loss, theft, destruction or mutilation of the certificate therefor; the
Corporation may issue to such holder a new certificate or certificates for
shares, upon the surrender of the mutilated certificate or, in the case of loss,
theft or destruction of the certificate, upon satisfactory proof of such loss,
theft or destruction; and the Board of Directors, or a committee designated
thereby, may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such person's legal representative, to give the Corporation a
bond in such sum and with such surety or sureties as it may direct to indemnify
the Corporation and said transfer agents and registrars against any claim that
may be made on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.


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         Section 5. Regulations. The Board of Directors may make such additional
rules and regulations as it may deem expedient concerning the issue and transfer
of certificates representing shares of stock of the Corporation and may make
such rules and take such action as it may deem expedient concerning the issue of
certificates in lieu of certificates claimed to have been lost, stolen,
destroyed or mutilated.

         Section 6. Fixing Record Date for Determination of Stockholders of
Record. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which record date shall not be more than sixty nor
less than ten days before the date of such meeting. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.

         In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or entitled to exercise any rights in respect of any change, conversion
or exchange of stock, or for the purpose of any other lawful action, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board adopts the resolution relating thereto.


                                  ARTICLE VIII.

                                      SEAL

         The Board of Directors may provide a corporate seal, which, if adopted,
shall be in the form of a circle and shall bear the full name of the Corporation
and the words "Corporate Seal Delaware" or such other words or figures as the
Board of Directors may approve and adopt. The seal may be used by causing it or
a facsimile thereof to be impressed or affixed or in any other manner
reproduced.


                                   ARTICLE IX.

                                   FISCAL YEAR

         The twelve-month period ending at midnight on December 31 in each year
shall be the fiscal year of the Corporation.


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                                   ARTICLE X.

                                WAIVER OF NOTICE

         Whenever any notice whatsoever is required to be given by these Bylaws,
by the Certificate of Incorporation of the Corporation or by law, the person
entitled thereto may, either before or after the meeting or other matter in
respect of which such notice is to be given, waive such notice in writing, which
writing shall be filed with or entered upon the records of the meeting or the
records kept with respect to such other matter, as the case may be, and in such
event such notice need not be given to such person and such waiver shall be
deemed equivalent to notice. Neither the business to be transacted at, nor the
purpose of, any meeting of the stockholders, the Board of Directors or any
committee of the Board need be specified in any waiver of notice of such
meeting. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.


                                   ARTICLE XI.

                                   AMENDMENTS

         To the extent permitted by law and the Certificate of Incorporation,
these Bylaws may be altered, amended or repealed or new bylaws may be adopted by
the Board of Directors at any annual, regular or special meeting of the Board.


                                  ARTICLE XII.

                                  MISCELLANEOUS

         Section 1. Execution of Documents. The Board of Directors or any
committee thereof shall designate the officers, employees and agents of the
Corporation who shall have power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, notes, checks, drafts and other orders for the
payment of money and other documents for and in the name of the Corporation and
may authorize such officers, employees and agents to delegate such power
(including authority to redelegate) by written instrument to other officers,
employees or agents of the Corporation. Such delegation may be by resolution or
otherwise and the authority granted shall be general or confined to specific
matters, all as the Board or such committee may determine. In the absence of
such designation referred to in the first sentence of this Section 1, the
officers of the Corporation shall have such power so referred to, to the extent
incident to the normal performance of their duties.

         Section 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board of Directors or any


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committee thereof or any officer of the Corporation to whom power in that
respect shall have been delegated by the Board or any such committee shall
select.

         Section 3. Checks. All checks, drafts and other orders for the payment
of money out of the funds of the Corporation, and all notes or other evidence of
indebtedness of the Corporation, shall be signed on behalf of the Corporation in
such manner as shall from time to time be determined by resolution of the Board
of Directors or of any committee thereof. In the absence of such resolution
referred to in the immediately preceding sentence, the officers of the
Corporation shall have such power so referred to, to the extent incident to the
normal performance of their duties.

         Section 4. Proxies in Respect of Stock or Other Securities of Other
Corporations. The Board of Directors or any committee thereof shall designate
the officers of the Corporation who shall have authority from time to time to
appoint an agent or agents of the Corporation to exercise in the name and on
behalf of the Corporation the powers and rights that the Corporation may have as
the holder of stock or other securities in any other corporation, and to vote or
consent in respect of such stock or securities; such designated officers may
instruct the person or persons so appointed as to the manner of exercising such
powers and rights; and such designated officers may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal, or otherwise, such written proxies, powers of attorney or other
instruments as they may deem necessary or proper in order that the Corporation
may exercise its said powers and rights. In the absence of such designation
referred to in the first sentence of this Section 4, the officers of the
Corporation shall have such power so referred to, to the extent incident to the
normal performance of their duties.


                                       18
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                                                                   EXHIBIT 10.1


                                                                  Execution Form





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                           LENNOX INTERNATIONAL INC.



                            _______________________



                    AGREEMENT OF ASSUMPTION AND RESTATEMENT



                          Dated as of December 1, 1991



                            _______________________


                 9.55% Series B Senior Promissory Notes due 1996
                11.05% Series C Senior Promissory Notes due 1997
                 9.60% Series D Senior Promissory Notes due 1998
                10.15% Series E Senior Promissory Notes due 1998
                 9.53% Series F Senior Promissory Notes due 2001
                 9.50% Series G Senior Promissory Notes due 2001
                 9.69% Series H Senior Promissory Notes due 2003



================================================================================

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                               TABLE OF CONTENTS

Page ---- SECTION 1. ASSUMPTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1. Description of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2. Assumption of Notes and Amendment of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.4. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.5. Investment Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2. REPRESENTATIONS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1. Organization and Authority of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.3. Incorporation, Good Standing and Ownership of Shares of Subsidiaries . . . . . . . . . . . . . . . . . 10 2.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.5. Compliance with Other Instruments of the Company and Subsidiaries; No Dividend Restriction . . . . . . 12 2.6. Governmental Authorizations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.7. Litigation; Observance of Statutes, Regulations and Orders . . . . . . . . . . . . . . . . . . . . . . 13 2.8. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.9. Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.10. Licenses, Permits, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.11. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.12. No Public Offering by the Company; No Fees Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.13. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.14. Use of Proceeds; Margin Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.15. Existing Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.16. Existing Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.17. Foreign Assets Control Regulations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.18. Status Under Certain Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.19. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.20. Representations in Existing Note Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 3. CONDITIONS OF CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.1. Proceedings Satisfactory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.2. Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.3. Representations True, etc.; Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.4. Legality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.5. Absence of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.6. Other Agreements, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.7. Private Placement Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.8. Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.9. Prepayment of Industries 9.05% Promissory Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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Page ---- 3.10. Bank Credit Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.11. Fees Payable at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 4. PREPAYMENT, PAYMENT AND PURCHASE OF THE SUBSTITUTE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1. Mandatory Prepayments of the Substitute Notes; Payment at Maturity . . . . . . . . . . . . . . . . . . 21 4.2. Optional Prepayment of the Substitute Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.3. Special Purchase of Substitute Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.4. Notice of Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.5. Allocation of Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.6. Surrender of Substitute Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.7. Purchase of Substitute Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.8. Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 5. FINANCIAL STATEMENTS AND INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 6. INSPECTION OF PROPERTIES AND BOOKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 7. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.1. Payment of Principal, Premium and Interest; Maintenance of Books and Reserves . . . . . . . . . . . . 36 7.2. Payment of Taxes; Corporate Existence; Maintenance of Properties; Compliance with Laws . . . . . . . . 36 7.3. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.4. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.5. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 7.6. Dividends and Other Restricted Payments; Restricted Investments . . . . . . . . . . . . . . . . . . . 40 7.7. Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.8. Maintenance of Certain Financial Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.9. Subsidiary Stock and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.10. Consolidation, Merger or Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.11. Issuance of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 7.12. Purchase of Substitute Notes Upon Change of Control. . . . . . . . . . . . . . . . . . . . . . . . . . 46 7.13. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.14. Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.15. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.16. Limitation on Dividend Restrictions, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 8. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 8.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 8.2. Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 9. EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
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Page ---- 9.1. Events of Default Defined; Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . . . 62 9.2. Suits for Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 9.3. Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 9.4. Remedies Not Waived . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 10. REGISTRATION, TRANSFER AND EXCHANGE OF SUBSTITUTE NOTES . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 11. LOST, ETC. NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 12. AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 13. HOME OFFICE PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 14. LIABILITIES OF THE HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 15. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 16. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 16.1. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 16.2. Reliance on and Survival of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 16.3. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 16.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 16.5. Substitution of Your Wholly-Owned Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 16.6. LAW GOVERNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 16.7. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 16.8. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 16.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 16.10. Limitation on Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 16.11. Interpretation of Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SCHEDULE I -- Names and Addresses of Noteholders EXHIBITS A-1 to A-7 -- Forms of Substitute Notes EXHIBIT B -- Subsidiaries EXHIBIT C -- Debt EXHIBIT D -- Investments EXHIBIT E -- Form of Opinion of Company's Counsel EXHIBIT F -- Form of Subordination Provisions -iii- 5 LENNOX INTERNATIONAL INC. 2100 Lake Park Boulevard Richardson, Texas 75080 AGREEMENT OF ASSUMPTION AND RESTATEMENT New York, New York as of December 1, 1991 To the Noteholder Identified on the Signature Page at the End of this Agreement: Ladies and Gentlemen: LENNOX INTERNATIONAL INC., a Delaware corporation and successor by merger to Lennox International Inc., an Iowa corporation (together with any successor or transferee which becomes such in the manner specified in Section 7.10, the "Company"), hereby agrees with you as follows: SECTION 1. ASSUMPTION OF NOTES. 1.1. Description of Transaction. Pursuant to the several separate Existing Note Purchase Agreements described below, Lennox Industries Inc., an Iowa corporation ("Industries"), Heatcraft, Inc., a Mississippi corporation ("Heatcraft"), and Armstrong Air Conditioning Inc., an Ohio corporation ("Armstrong" and, together with Heatcraft and Industries and any successor to any of them, the "Issuing Subsidiaries"), each a direct wholly-owned subsidiary of the Company, as applicable, issued and sold to one or more of the institutional purchasers named on Schedule I hereto the following promissory notes (collectively referred to herein as the "Existing Notes"): (i) Heatcraft Inc.'s 9.55% Promissory Notes due December 1, 1996 originally issued in the aggregate principal amount of $14,000,000 (of which $10,000,000 is outstanding on the date hereof); (ii) Lennox Industries Inc.'s 11.05% Promissory Notes due December 1, 1997 originally issued in the aggregate principal amount of $25,000,000 (all of which is outstanding on the date hereof); (iii) Lennox Industries Inc.'s 9.60% Senior Promissory Notes due December 1, 1998 originally issued in the aggregate principal amount of $35,000,000 (all of which is outstanding on the date hereof); 6 (iv) Heatcraft Inc.'s 10.15% Promissory Notes due December 1, 1998 originally issued in the aggregate principal amount of $10,000,000 (all of which is outstanding on the date hereof); (v) Lennox Industries Inc.'s 9.53% Senior Promissory Notes due December 1, 2001 originally issued in the aggregate principal amount of $21,000,000 (all of which is outstanding on the date hereof); (vi) Armstrong Air Conditioning Inc.'s 9.50% Senior Promissory Notes due December 1, 2001 originally issued in the aggregate principal amount of $31,000,000 (all of which is outstanding on the date hereof); and (vii) Heatcraft Inc.'s 9.69% Promissory Notes due December 1, 2003 originally issued in the aggregate principal amount of $54,000,000 (all of which is outstanding on the date hereof). The Existing Notes held by each institutional purchaser named on Schedule I hereto remain outstanding on the date hereof in the principal amounts set forth opposite such purchaser's name in Column B of said Schedule I. Each Existing Note was issued and sold pursuant to one of the following note purchase agreements or, in the case of the Existing Notes described in the foregoing clauses (iii), (v), (vi) and (vii), simultaneously executed note purchase agreements identical to all other note purchase agreements under which the Existing Notes bearing the same interest rate were issued, except for the signature of the purchaser at the end thereof (each separate note purchase agreement described below being referred to herein as an "Existing Note Purchase Agreement"): (i) Note Purchase Agreement, dated as of November 1, 1985, between Industries and Teachers Insurance and Annuity Association of America; (ii) Note Purchase Agreement, dated as of November 1, 1986, between Heatcraft and Teachers Insurance and Annuity Association of America; (iii) Note Purchase Agreements, each dated as of December 1, 1988, between Industries and The Travelers Insurance Company, The Charter Oak Fire Insurance Company and Teachers Insurance and Annuity Association of America, respectively; (iv) Note Purchase Agreement, dated as of September 29, 1988, between Heatcraft and Teachers Insurance and Annuity Association of America; -2- 7 (v) Note Purchase Agreements, each dated as of February 28, 1990, between Heatcraft and Teachers Insurance and Annuity Association of America, Connecticut General Life Insurance Company and INA Life Insurance Company of New York, respectively; (vi) Note Purchase Agreements, each dated as of October 19, 1989, between Armstrong and The Travelers Insurance Company, The Travelers Life Insurance Company, The Phoenix Insurance Company, The Travelers Indemnity Company, Teachers Insurance and Annuity Association of America and Tandem Insurance Group, Inc., respectively; and (vii) Note Purchase Agreements, each dated as of February 28, 1990, between Industries and Teachers Insurance and Annuity Association of America, Connecticut General Life Insurance Company and INA Life Insurance Company of New York, respectively. The Company wishes to (a) assume the outstanding indebtedness of the Issuing Subsidiaries evidenced by the Existing Notes and (b) consolidate the various covenants applicable to one or more members of the group comprised of the Company and its consolidated subsidiaries contained in the Existing Note Purchase Agreements into this Agreement and the Other Agreements, with such changes in and additions to such covenants as the Holders may agree to. To accomplish that end, the Company proposes, on the Effective Date referred to in Section 1.3 below, and subject to the terms and conditions hereof, to assume the obligations of the Issuing Subsidiaries evidenced by the Existing Notes and, as obligor under the Existing Notes, to amend and restate the Existing Note Purchase Agreements to be and to read in their entirety as set forth in this Agreement. The Holders, as holders of the Existing Notes, have, subject to the terms and conditions hereof, consented to such assumption of the Existing Notes and such amendment and restatement of the Existing Note Purchase Agreements. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned thereto in Section 8. Unless otherwise specified, any reference in this Agreement to a particular section or other subdivision, or a particular schedule or exhibit, shall be considered a reference to that section or other subdivision of, or to that schedule or exhibit to, this Agreement. 1.2. Assumption of Notes and Amendment of Agreements. The Company hereby (i) assumes, effective as of the Effective Date, as its direct and primary obligation, the outstanding indebtedness of the Issuing Subsidiaries evidenced by the Existing Notes and all rights, obligations -3- 8 and duties of the Issuing Subsidiaries thereunder and under the related Existing Note Purchase Agreements, and agrees, from and after the Effective Date, to duly and punctually perform and observe all of the obligations, undertakings, covenants and conditions to be kept, performed or observed by "the Company" under each Existing Note and each Existing Note Purchase Agreement, in each case to the same extent and with the same force and effect as if the Company had originally been named "the Company" under the Existing Notes and the Existing Note Purchase Agreements and (ii) amends and restates, effective from and after the Effective Date, each Existing Note Purchase Agreement to be and to read in its entirety as set forth in this Agreement, such that the covenants and obligations of "the Company" under the Existing Note Purchase Agreements shall thereafter be the covenants and obligations of the Company as set forth in this Agreement. You hereby consent, subject to the terms and conditions hereof, to the assumption of the Existing Notes described in the foregoing clause (i), the concurrent release of the Issuing Subsidiaries from their obligations to you under the applicable Existing Notes and Existing Note Purchase Agreements and the amendment and restatement of the Existing Note Purchase Agreements described in the foregoing clause (ii). 1.3. Effective Date. The closing of the effectiveness of the assumption by the Company of the Existing Notes and the Existing Note Purchase Agreements and the amendment and restatement of the Existing Note Purchase Agreements described in Section 1.2 shall be held commencing at 10:00 A.M., New York City time, on December __, 1991 (the "Effective Date"), at the offices of Breed, Abbott & Morgan, Citicorp Center, 153 East 53rd Street, New York, New York 10022. On the Effective Date (a) the assumption provided for in clause (i) of Section 1.2, the amendment and restatement of the Existing Note Purchase Agreements provided for in clause (ii) of Section 1.2 and the consent and release provided for in the last sentence of Section 1.2 shall become effective without further action on the part of the Company or the Holders, and (b) you shall make appropriate notations on each Existing Note held by you to reflect the assumption thereof by the Company, your release of the applicable Issuing Subsidiary and the amendment and restatement of the Existing Note Purchase Agreement under which such Existing Note was issued, provided that, upon your request, the Company will deliver to you, at the Company's expense, a new Note or Notes in the form of the Substitute Notes described in Section 1.4 below dated December 1, 1991 reflecting such assumption, against delivery by you to the Company of the corresponding Existing Note or Notes. Immediately upon receipt of an Existing Note, the Company shall cancel such Existing Note and will not thereafter under any circumstances reissue, transfer or -4- 9 otherwise dispose of such Existing Note or permit any reissue, transfer or other disposition of such Existing Note, or any interest therein. If on the Effective Date the Company shall fail to tender to you upon your request, the Substitute Notes, as provided in this Section 1.3, or any of the conditions specified in Section 3 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights you may have by reason of such failure or nonfulfillment, and the Existing Note Purchase Agreements and the Existing Notes shall remain in full force and effect, with no assumption of the Existing Notes and no amendment of or modification to any of the terms of the Existing Note Purchase Agreements. The Company represents and warrants that contemporaneously herewith it is entering into eight separate Agreements of Assumption and Restatement (the "Other Agreements") identical with this Agreement (except for the signature of the holder at the end thereof) with the other institutional holders (the "Other Holders") named in Schedule I, providing for the commitment by the Company to assume the Existing Notes held by the Other Holders as shown opposite their names in Column B of said Schedule I and to amend and restate the Existing Note Purchase Agreements to which the Other Holders are a party. This Agreement and the Other Agreements are to be separate agreements and the assumption of the Existing Notes held by you and the Other Holders are to be separate and several transactions. You and the Other Holders are herein sometimes collectively referred to as the "Holders," and this Agreement and the Other Agreements are herein sometimes collectively referred to as the "Agreements". 1.4. Authorization. Each Issuing Subsidiary duly authorized at the time of issuance thereof the issue and sale of the Existing Notes issued and sold by it pursuant to the Existing Note Purchase Agreement or Agreements to which it is a party. The Company has duly authorized (a) the assumption by the Company, as its direct and primary obligation, of the outstanding indebtedness of the Issuing Subsidiaries evidenced by the Existing Notes and all rights, obligations and duties of the Issuing Subsidiaries thereunder and under the Existing Note Purchase Agreements; (b) the amendment and restatement of each Existing Note Purchase Agreement, to be and read in its entirety as set forth in this Agreement; and (c) upon the assumption of the Existing Notes and the request of the applicable Holder or Holders thereof, the delivery by the Company to you of the Substitute Notes in substitution for the Existing Notes. Each Substitute Note shall be in the same aggregate principal amount and have the same interest rate and maturity date as the corresponding Existing Note, as set -5- 10 forth below, provided that for convenience of reference, the Substitute Notes shall include a series designation as follows: (a) the 9.55% Series B Senior Promissory Notes due December 1, 1996 in the aggregate principal amount of $10,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and the Other Agreements, the "Series B Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 9.55% per annum (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year, and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, if any, and interest at the rate of 10.55% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series B Note, on demand, and (ii) mature and be due and payable as to the entire remaining unpaid principal amount thereof on December 1, 1996; (b) the 11.05% Series C Senior Promissory Notes due December 1, 1997 in the aggregate principal amount of $25,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and the Other Agreements, the "Series C Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 11.05% per annum (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, if any, and interest at the rate of 12.05% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series C Note, on demand, and (ii) mature and be payable as to the entire remaining unpaid principal amount thereof on December 1, 1997; (c) the 9.60% Series D Senior Promissory Notes due December 1, 1998 in the aggregate principal amount of $35,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and -6- 11 the Other Agreements, the "Series D Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 9.60% per annum (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, if any, and interest at the rate of 10.60% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series D Note, on demand, and (ii) mature and be payable as to the entire remaining unpaid principal amount thereof on December 1, 1998; (d) the 10.15% Series E Senior Promissory Notes due December 1, 1998 in the aggregate principal amount of $10,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and the Other Agreements, the "Series E Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 10.15% per annum (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year, and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, if any, and interest at the rate of 11.15% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series E Note, on demand, and (ii) mature and be due and payable as to the entire remaining unpaid principal amount thereof on December 1, 1998; (e) the 9.53% Series F Senior Promissory Notes due December 1, 2001 in the aggregate principal amount of $21,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and the Other Agreements, the "Series F Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 9.53% per annum (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year, and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, -7- 12 if any, and interest at the rate of 10.53% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series F Note, on demand, and (ii) mature and be payable as to the entire remaining unpaid principal amount thereof on December 1, 2001; (f) the 9.50% Series G Senior Promissory Notes due December 1, 2001 in the aggregate principal amount of $31,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and the Other Agreements, the "Series G Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 9.50% per annum (computed on the basis of a 360- day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year, and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, if any, and interest at the rate of 10.50% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series G Note, on demand, and (ii) mature and be payable as to the entire remaining unpaid principal amount thereof on December 1, 2001; and (g) the 9.69% Series H Senior Promissory Notes due December 1, 2003 in the aggregate principal amount of $54,000,000 (together with all notes issued in substitution or exchange therefor in accordance with the terms of this Agreement and the Other Agreements, the "Series H Notes") each of which shall (i) bear interest on the unpaid principal amount thereof at the rate of 9.69% per annum (computed on the basis of a 360- day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year, and with interest on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) any overdue premium, if any, and interest at the rate of 10.69% per annum until paid, such overdue interest (if any) to be payable semiannually as aforesaid or, at the option of the registered holder of such Series H Note, on demand, and (ii) mature and be payable as to the entire remaining unpaid principal amount thereof on December 1, 2003. The Series B Notes, Series C Notes, Series D Notes, Series E Notes, Series F Notes, Series G Notes and Series H Notes shall be substantially in the forms of Exhibits A-1 through A-7, respectively, and are referred to -8- 13 herein collectively together with, from and after the Effective Date, any Existing Notes not delivered for substitution pursuant to the proviso in Section 1.3, as the "Substitute Notes" and separately as a "Series" of Substitute Notes. 1.5. Investment Representation. You represent to the Company that on the Effective Date you will accept the Substitute Notes, if any, being delivered to you for your own account for investment and not with a view to the distribution or sale of the Substitute Notes, subject, however, to any requirement of law that the disposition of your property be at all times within your control and without prejudice to your right to sell or otherwise dispose of all or any part of the Substitute Notes held by you pursuant to an effective registration under the Securities Act or under an exemption from such registration available under the Securities Act. SECTION 2. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to you that: 2.1. Organization and Authority of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own or hold under lease the property it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver the Agreements and the Substitute Notes and to perform the provisions hereof and thereof. The Company has, by all necessary corporate action (no action of shareholders of the Company being required by law, by its charter or by-laws, or otherwise), duly authorized the execution and delivery of this Agreement, the Other Agreements and the Substitute Notes and the performance of its obligations under this Agreement (including, without limitation, the assumption of the Existing Notes, the amendment and restatement of the Existing Note Purchase Agreements and the delivery of the Substitute Notes) and the Substitute Notes. The merger of Lennox International Inc., an Iowa corporation, into the Company was completed in compliance with all applicable laws on October 11, 1991, such merger qualifies as a reorganization under Section 368(a)(1)(F) of the Code and the Company has succeeded to all the assets and liabilities of such Iowa corporation. The Company is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification and in which the failure so to qualify would materially affect adversely the business, operations or properties of the Company, or of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform the Agreements and discharge its obligations on the Substitute Notes. -9- 14 2.2. Disclosure. Neither this Agreement, the financial statements referred to in Section 2.4 nor any other document, instrument or certificate delivered to you by or on behalf of the Company in connection with the transactions contemplated by the Agreements contains any untrue statement of a material fact, or omits to state any fact necessary to make the statements contained herein or therein (taken as a whole) not misleading. The Company does not know of any fact (other than matters of a general economic nature) which materially affects adversely or, so far as the Company can reasonably now foresee, will materially affect adversely, the business, operations or properties of the Company, or of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform the Agreements and discharge its obligations on the Substitute Notes. 2.3. Incorporation, Good Standing and Ownership of Shares of Subsidiaries. Annexed hereto as Exhibit B is a complete and correct list of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its incorporation, the jurisdictions in which substantial operating assets are located and the percentage of shares of each class outstanding owned by the Company and each other Subsidiary and specifying whether such Subsidiary is designated a Restricted Subsidiary. All of the outstanding shares of each of said Subsidiaries shown in Exhibit B as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned beneficially and of record by the Company or another Subsidiary free and clear of any Lien. No Subsidiary owns any shares of the Company. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification and in which the failure so to qualify would materially affect adversely the business, operations or properties of the Company or of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform the Agreements and discharge its obligations on the Substitute Notes. Each Subsidiary has all requisite power and authority to own or hold under lease the property it purports to own or hold under lease and to transact the business it transacts and proposes to transact. There are no outstanding rights, options, warrants, conversion rights or agreements for the purchase or acquisition -10- 15 from the Company or any Subsidiary of any shares of capital stock of any such Subsidiary. 2.4. Financial Statements. The Company has delivered to you copies of (a) the audited balance sheets of each of the Company, Heatcraft and Industries as at December 31 in each of the years 1986, 1987, 1988, 1989 and 1990 and the related statements of income, stockholders' equity and changes in financial position for the annual periods ended December 31, 1986 and the related statements of income, stockholders' equity and cash flows for the annual periods ended December 31, 1987, 1988, 1989 and 1990, accompanied by the reports thereon by Coopers & Lybrand, independent certified public accountants of the Company, Heatcraft and Industries; (b) the audited balance sheets of Armstrong as at December 31 in each of the years 1989 and 1990 and the related statements of income, stockholders' equity and cash flows for the annual periods then ended accompanied by the reports thereon by Coopers & Lybrand, independent certified public accountants of Armstrong; (c) the unaudited balance sheets of each Issuing Subsidiary as at March 31 and June 30, 1991, and the related unaudited statements of income, retained earnings and cash flows for the quarterly periods ended on said dates; (d) the unaudited consolidated and consolidating balance sheets of the Company and its Subsidiaries as at March 31, June 30 and September 30, 1991 and the related unaudited consolidated and consolidating statements of income for the quarters then ended; (e) the Company's Long-Term Debt Repayment Schedule (Present Debt) as of December 31, 1990; and (f) the management letter submitted to the Company by Cooper's & Lybrand in connection with the audit of the Company for the fiscal year ended December 31, 1990. All the above-mentioned financial statements (including in each case the related schedules and notes) are correct and complete and fairly present the financial -11- 16 position of the entities to which they relate as of the respective dates of said balance sheets and the results of their operations for the respective periods covered by said statements of income, stockholders' equity, cash flows and changes in financial position (subject, in the case of the unaudited financial statements, to year-end adjustments) and have been prepared in accordance with GAAP consistently applied throughout the periods involved, except as set forth in the notes thereto. There are no material liabilities, contingent or otherwise, of the Company or any Subsidiary (of any type required by GAAP to be reflected in a consolidated balance sheet of the Company and its Subsidiaries or the footnotes thereto) as of December 31, 1990 not reflected in the consolidated balance sheet of the Company and its Subsidiaries as of said date described in paragraph (a) of this Section 2.4 (or the footnotes thereto). Since December 31, 1990 there have been no changes in the assets, liabilities or financial position of the Company or any Issuing Subsidiary from that set forth in the audited balance sheets of the Company or such Issuing Subsidiary as of said date, other than (i) expenses of approximately $14,000,000 accrued in connection with the functional reorganization of Industries and the closing of the Fort Worth Plant, (ii) the purchase on July 2, 1991 by Lennox Industries Limited of Environheat Ltd. and (iii) changes in the ordinary course of business which have not, either individually or in the aggregate, been materially adverse to the Company or such Issuing Subsidiary. 2.5. Compliance with Other Instruments of the Company and Subsidiaries; No Dividend Restriction. The consummation of the transactions contemplated by this Agreement and the performance of the terms and provisions of the Agreements and the Substitute Notes will not result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, license, bank loan or credit agreement, lease, corporate charter, by-law, or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties is or may be bound or affected, or violate any existing law, governmental rule or regulation or any Order of any court, arbitrator or Governmental Body applicable to the Company or any Subsidiary. Neither the Company nor any Subsidiary is a party to or bound by any instrument or agreement which contains any restriction on the incurrence by the Company of any Debt other than (i) the Agreements, (ii) the Existing Note Purchase Agreements and (iii) the Revolving Credit Agreement dated as of December 4, 1991, among the Company, the banks named therein and The Northern Trust Company, as agent, under each of which the Company is permitted to maintain outstanding the Debt -12- 17 evidenced by the Substitute Notes. No Restricted Subsidiary is bound by or subject to any contract (other than the Existing Note Purchase Agreements) or charter or by-law provision limiting the amount of, or otherwise imposing restrictions on the declaration, payment or setting aside of funds for the making of, dividends or other distributions in respect of the capital stock of such Restricted Subsidiary to the Company or another Restricted Subsidiary. 2.6. Governmental Authorizations, etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Body or any other Person (including any trustee or holder of any indebtedness, obligation or other securities of the Company or any of its Subsidiaries) is required for the validity of the execution and delivery or for the performance by the Company of the Agreements or the Substitute Notes or the assumption by the Company of the Existing Notes or the discharge by the Company of its obligations under the Agreements and the Substitute Notes. 2.7. Litigation; Observance of Statutes, Regulations and Orders. There are no actions, suits or proceedings (including, without limitation, actions, suits or proceedings under any statute or other law relating to environmental protection or occupational health and safety practices) pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Body (except actions, suits or proceedings of the character normally incident to the kind of business conducted by the Company or any Subsidiary which (a) do not question the validity or legality of this Agreement or the Substitute Notes or any action taken or to be taken pursuant hereto or thereto and (b) in the aggregate, if adversely determined, would not materially affect adversely the business, operations or properties of the Company, or of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform the Agreements or discharge its obligations on the Substitute Notes). Neither the Company nor any Subsidiary is in default under any Order of any court, arbitrator or Governmental Body which default could have a materially adverse effect on the Company or on the Company and its Subsidiaries taken as a whole; and neither the Company nor any Subsidiary is subject to or a party to any Order of any court or Governmental Body arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade or unfair competition, or environmental protection or occupational health and safety practices, or similar matters. -13- 18 As used in this Agreement, the term "Governmental Body" includes any Federal, State, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign; and the term "Order" includes any order, writ, injunction, decree, judgment, award, determination, direction or demand. 2.8. Taxes. The Company and its Subsidiaries have filed all federal tax returns required to have been filed by them and all tax returns which are required to have been filed in each jurisdiction in which they are qualified to do business, as aforesaid, and have paid all taxes shown to be due and payable on such returns and all other material taxes and assessments payable by them, to the extent the same have become due and payable and before they have become delinquent, except for any taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has set aside on its books reserves (segregated to the extent required by GAAP) deemed by it to be adequate. The Company does not know of any proposed material tax assessment against the Company or any Subsidiary, and in the opinion of the Company all tax liabilities are adequately provided for on the books of the Company and its Subsidiaries. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service (or the applicable statute of limitations has run) and such liabilities have been paid for all fiscal years up to and including the fiscal year ended December 31, 1985. The federal income tax returns of the Company and its Subsidiaries for the years 1986 and 1987 are currently being audited by the Internal Revenue Service and certain adjustments may be proposed by the Internal Revenue Service which, if made, will not either in any one case or in the aggregate be in the opinion of the Company materially adverse to the assets, liabilities or financial condition of the Company and its Subsidiaries, taken as a whole. 2.9. Title to Property. The Company and its Restricted Subsidiaries have good title to their respective real properties and other properties as reflected in the most recent audited consolidated balance sheet of the Company and its Subsidiaries referred to in Section 2.4(a) or purported to have been acquired by the Company or such Restricted Subsidiary after said date, except as sold or otherwise disposed of in the ordinary course of business, subject to no title defects which would not be acceptable in accordance with good business practice to similar companies engaged in a similar business. Except as permitted by Section 7.5, all properties of the Company and each Restricted Subsidiary are free and clear of all Liens. -14- 19 2.10. Licenses, Permits, etc. The Company and its Subsidiaries possess all licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names, or rights thereto, required to conduct their respective businesses substantially as now conducted and as currently proposed to be conducted, without known conflict with the rights of others. 2.11. Compliance with ERISA. No employee benefit plan established or maintained by the Company or by any Commonly Controlled Entity or to which the Company or any Commonly Controlled Entity is required to make contributions, which is subject to Part 3 of Subtitle B of Title 1 of ERISA, or Section 412 of the Code, had, as of the last day of the most recent fiscal year of such plan heretofore ended, an accumulated funding deficiency (as such term is defined in Section 302 of ERISA or Section 412 of the Code). Except as set forth in the audited consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended December 31, 1990 referred to in Section 2.4(a), the present value of all accrued benefits under each such employee benefit plan (based on those assumptions used to fund such plan, which assumptions are reasonable) did not, as of such date exceed the then current value of the assets of such plan allocable to such benefits. The amount by which the aggregate vested benefit obligations for the qualified pension plans of the Company and its Subsidiaries, determined as of the end of the fiscal year ended December 31, 1990, exceed the aggregate fair value of the assets of such plans determined as of the end of such fiscal year, is less than $3,000,000. No liability to the Pension Benefit Guaranty Corporation (other than required insurance premiums, all of which, to the extent due and payable, have been paid) has been incurred with respect to any such plan and there has not been any reportable event within the meaning of ERISA, or any other event or condition, which presents a material risk of termination of any such plan by the Pension Benefit Guaranty Corporation. To the knowledge of the Company after reasonable investigation, neither the Department of Labor, the Internal Revenue Service nor any other Governmental Body has determined that any such plan or any trust created thereunder, or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as defined in Section 4975 of the Code) with respect to any such plan that could subject any such plan, trust, trustee, administrator, the Company or any Commonly Controlled Entity to any material tax or penalty on prohibited transactions imposed under said Section 4975 or Section 502(i) of ERISA, and the Company is not aware of any facts that would constitute such a prohibited transaction. Neither the execution, delivery or performance by the Company of the Agreements nor the delivery by the Company of the Substitute Notes nor the assumption by the Company of -15- 20 the Existing Notes will involve any prohibited transaction (as so defined). The representation by the Company in the immediately preceding sentence is made in reliance upon and subject to the accuracy of your representation, if any, contained in Section 1.4 of each Existing Note Purchase Agreement to which you are a party and the representation by the Company in the immediately preceding sentence is expressly conditioned thereupon. Neither the Company nor any Commonly Controlled Entity is making or accruing, or has made or accrued, an obligation to make contributions to any Multiemployer Plan. For purposes hereof, (i) "Commonly Controlled Entity" shall mean any trade or business, whether or not incorporated, which is under common control with the Company (within the meaning of Section 414(b) or (c) of the Code); and (ii) "Multiemployer Plan" shall mean a "multiemployer plan," as defined in Section 4001(a)(3) of ERISA. 2.12. No Public Offering by the Company; No Fees Paid. Neither the Company nor Dillon, Read & Co. Inc. (the only Person authorized by the Company to act on its behalf in connection with the assumption by the Company of the Existing Notes and the amendment of the Existing Note Purchase Agreements) has offered the Substitute Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than you, the Other Holders and The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company and Equitable General Insurance Company. Neither the Company nor anyone acting on its behalf has taken, or will take, any action which would subject the assumption of the Existing Notes or the delivery of the Substitute Notes by the Company as contemplated by the Agreements, to Section 5 of the Securities Act. As used in this Section 2.12, the term "Substitute Notes" shall mean the Substitute Notes to be executed and delivered under the Agreements and any similar security or securities. The Company has not paid, nor agreed to pay, to Dillon, Read & Co. Inc. or to any other Person (including, without limitation, the Other Holders) any fee or other compensation (other than for reimbursement for out-of-pocket expenses, if any) in connection with the assumption by the Company of the Existing Notes, the amendment of the Existing Note Purchase Agreements or the restructuring of any other debt of the Company and its Subsidiaries. 2.13. Solvency. The Company is, and upon giving effect to the assumption of the Existing Notes will be, a "solvent institution," as said term is used in Section 1405(c) of the New York Insurance Law, whose "obligations are not in default as to principal or interest," as said terms are used in said Section 1405(c). -16- 21 2.14. Use of Proceeds; Margin Regulations. No part of the proceeds from the sale of the Existing Notes was used, directly or indirectly, by the Company or any Subsidiary for the purpose of purchasing or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 CFR 207, as amended), or for the purpose of purchasing or carrying or trading in any securities under such circumstances as to involve the Company or any Subsidiary in a violation of Regulation X of said Board (12 CFR 224, as amended) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220, as amended). The assets of the Company and its Subsidiaries do not consist to the extent of 25% or more of margin stock, and the Company has no present intention of acquiring margin stock to the extent of 25% or more of its assets, and in no event under any circumstances during the term of the Agreements will 25% or more of the assets of the Company and its Subsidiaries consist of margin stock. As used in this Section, the term "margin stock" shall have the meaning assigned to it in the aforesaid Regulation G. 2.15. Existing Debt. Annexed hereto as Exhibit C is a complete and correct list of all secured and unsecured Debt of the Company and its Restricted Subsidiaries as of the date hereof, showing as to each item of such Debt the obligor, the aggregate principal amount outstanding on the date specified in Exhibit C, the final maturity date of such Debt, and a brief description of any security therefor. With respect to each item of Debt of the Company listed in Exhibit C, the Company has delivered to your special counsel named in Section 3.2 a true and complete copy of each instrument evidencing any such Debt in excess of $100,000 or pursuant to which any such Debt in excess of $100,000 was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. Neither the Company nor any Subsidiary is in default in the performance or observance of any of the terms, covenants or conditions contained in any of said instruments and neither the Company nor any Restricted Subsidiary is in default with respect to any Debt listed in Exhibit C, and no event has occurred and is continuing which, with notice or the lapse of time or both, would become such a default. 2.16. Existing Investments. Annexed hereto as Exhibit D is a complete and correct list of Investments of the Company and its Restricted Subsidiaries as of the date specified in Exhibit D, other than Investments of the character specified in Subsection (a) of the definition of "Restricted Investment" set forth in Section 8.1. -17- 22 2.17. Foreign Assets Control Regulations, etc. Neither the Company nor any of its Subsidiaries is a "national" of any foreign country designated in the Foreign Assets Control Regulations, the Transaction Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the Cuban Assets Control Regulations, the Nicaraguan Trade Control Regulations or the Libyan Sanctions Regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended). None of the proceeds of the sale of the Existing Notes under the Existing Note Purchase Agreements has been or will be used, directly or indirectly, for the purpose of engaging in any transaction which violates any of said Regulations or which violates the Foreign Funds Control Regulations or the Transaction Control Regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended), or any regulation or ruling issued thereunder. 2.18. Status Under Certain Statutes. The Company is not an "investment company" or a Person directly or indirectly "controlled" by or "acting on behalf of" an investment company within the meaning of the Investment Company Act of 1940, as amended. The Company is not a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 2.19. Environmental Matters. (a) The Company and its Subsidiaries currently are in compliance with all applicable Environmental Laws except to the extent failure to comply has not had and will not have a material adverse effect on the Company or the Company and its Subsidiaries, taken as a whole. (b) Neither the Company nor any Subsidiary has any knowledge of any events, conditions or circumstances that could reasonably be expected to give rise to any liability on the part of the Company or any Subsidiary based on or related to (i) a violation of any Environmental Law or (ii) the presence on, in, under or above the Company Premises of any Hazardous Substance, other than any such liabilities referred to in this Subdivision (b) that will not have, either in any one case or in the aggregate, a material adverse effect on the Company or the Company and its Subsidiaries, taken as a whole. 2.20. Representations in Existing Note Purchase Agreements. The representations and warranties of the Issuing Subsidiaries contained in the Existing Note Purchase Agreements or otherwise made in writing by or on behalf of the Issuing Subsidiaries pursuant to the Existing Note Purchase Agreements were true on and as of the date first made. -18- 23 SECTION 3. CONDITIONS OF CLOSING. Your obligation to consent to the assumption of the Existing Notes, the release of the Issuing Subsidiaries and the amendment and restatement of the Existing Note Purchase Agreements as provided in Section 1.2 shall be subject to the conditions hereinafter set forth: 3.1. Proceedings Satisfactory. All proceedings taken in connection with the assumption by the Company of the Existing Notes, the amendment and restatement of the Existing Note Purchase Agreements, the delivery of the Substitute Notes and the consummation of the transactions contemplated hereby and all documents and papers relating thereto shall be satisfactory to you and your special counsel, and you and your special counsel shall have received copies of such documents and papers, all in form and substance satisfactory to you and your special counsel, as you or they may reasonably request in connection therewith. 3.2. Opinions of Counsel. You shall have received opinions, each dated the Effective Date, addressed to you and satisfactory in form, scope and substance to you from (a) Anne W. Wooten, Esq., Corporate Counsel of the Company, substantially in the form of Exhibit E and covering such other matters as you or your special counsel may reasonably request, and (b) Breed, Abbott & Morgan, your special counsel in connection with the transactions contemplated by this Agreement, covering such matters as you may reasonably request. 3.3. Representations True, etc.; Officers' Certificate. All representations and warranties of the Company contained in this Agreement or otherwise made in writing by or on behalf of the Company in connection with the transactions contemplated hereby shall (except as affected by the consummation of such transactions) be true on and as of the Effective Date with the same effect as though such representations and warranties had been made on and as of the Effective Date; the Company shall have performed all agreements on its part required to be performed under the Agreements on or prior to the Effective Date; no Default or Event of Default under this Agreement nor any Default or Event of Default (under and as defined in the Existing Note Purchase Agreements) shall have occurred and be continuing; since the date of the most recent audited balance sheets referred to in Section 2.4, neither the Company nor any Subsidiary shall have consolidated with, merged into, or sold, leased or otherwise disposed of its properties as an entirety or substantially as an entirety to -19- 24 any Person (other than the merger of the Company and Lennox International Inc., an Iowa corporation, described in Section 2.1); and you shall have received a certificate signed by the Chief Executive Officer, a Vice President or the Treasurer of the Company and by the Secretary or an Assistant Secretary of the Company, dated the Effective Date, certifying to the effects specified in this Section. 3.4. Legality. On the Effective Date the Substitute Notes to be delivered to you hereunder shall be a legal investment for you under the laws of each jurisdiction to which you may be subject, without resort to any basket provision of said laws such as New York Insurance Law Section 1405(a)(8), and you shall have received such certificates or other evidence as you may reasonably request demonstrating the legality of such investment under such laws. 3.5. Absence of Certain Events. There shall not have occurred any material adverse change in the assets, liabilities, business, operations, properties or condition (financial or otherwise) of the Company or of the Company and its Subsidiaries, taken as a whole, from that reflected in the most recent audited financial statements referred to in Section 2.4, copies of which shall have been delivered to you. 3.6. Other Agreements, etc. The Other Agreements shall have been duly entered into and become effective. 3.7. Private Placement Number. Each Series of Substitute Notes shall have been assigned a private placement number by Standard and Poor's CUSIP Service Bureau. 3.8. Ratings. On or prior to the Effective Date, the Substitute Notes shall have been rated "2" or better by the National Association of Insurance Commissioners and satisfactory evidence of such rating shall have been delivered to you and your special counsel. 3.9. Prepayment of Industries 9.05% Promissory Notes. Industries shall have prepaid in full its 9.05% Promissory Notes due December 1, 1992, and you shall have received evidence satisfactory to you of such prepayment. 3.10. Bank Credit Agreement. On or prior to the Effective Date the Company shall have entered into an unsecured revolving credit facility with one or more commercial banks, in form and substance satisfactory to you and your special counsel, pursuant to which the Company shall be entitled to borrow not more than $80,000,000, a true and complete copy of which shall have been delivered to you and your special counsel. -20- 25 3.11. Fees Payable at Closing. Your special counsel shall have received the legal fees and expenses required to be paid or reimbursed by the Company, as provided in Section 16.1, in connection with their preparation and review of the Agreements and documents and papers relating thereto and negotiations and other matters in connection therewith, and for which the Company shall have received invoices on or prior to the second Business Day preceding the Effective Date. SECTION 4. PREPAYMENT, PAYMENT AND PURCHASE OF THE SUBSTITUTE NOTES. 4.1. Mandatory Prepayments of the Substitute Notes; Payment at Maturity. The provisions of the Substitute Notes with respect to mandatory prepayment shall be identical to the provisions with respect to mandatory prepayment of the Existing Notes, as follows: (a) Series B Notes. On December 1, 1992 and on each December 1 thereafter to and including December 1, 1995 (so long as any of the Series B Notes shall be outstanding), the Company will prepay $2,000,000 in aggregate principal amount of the Series B Notes (or, if less, the unpaid balance thereof). On December 1, 1996, the Company will in any event pay the entire remaining unpaid principal amount of the Series B Notes together with all interest accrued thereon. (b) Series C Notes. On December 1, 1993 and on each December 1 thereafter to and including December 1, 1996 (so long as any of the Series C Notes shall be outstanding), the Company will prepay $5,000,000 in aggregate principal amount of the Series C Notes (or, if less, the unpaid balance thereof). On December 1, 1997, the Company will in any event pay the entire remaining unpaid principal amount of the Series C Notes together with all interest accrued thereon. (c) Series D Notes. On December 1, 1993 and on each December 1 thereafter to and including December 1, 1997 (so long as any of the Series D Notes shall be outstanding), the Company will prepay $5,000,000 in aggregate principal amount of the Series D Notes (or, if less, the unpaid balance thereof). On December 1, 1998, the Company will in any event pay the entire remaining unpaid principal amount of the Series D Notes together with all interest accrued thereon. -21- 26 (d) Series E Notes. On December 1, 1992 and on each December 1 thereafter to and including December 1, 1997 (so long as any of the Series E Notes shall be outstanding), the Company will prepay $1,428,571 in aggregate principal amount of the Series E Notes (or, if less, the unpaid balance thereof). On December 1, 1998, the Company will in any event pay the entire remaining unpaid principal amount of the Series E Notes together with all interest accrued thereon. (e) Series F Notes. The Company will, on December 1, 1999, prepay $10,000,000 in aggregate principal amount of the Series F Notes (or, if less, the unpaid balance thereof) and on December 1, 2000, prepay $8,000,000 in aggregate principal amount of the Series F Notes (or, if less, the unpaid balance thereof). On December 1, 2001, the Company will in any event pay the entire remaining unpaid principal amount of the Series F Notes together with all interest accrued thereon. (f) Series G Notes. On December 1, 1994 and on each December 1 thereafter to and including December 1, 2000 (so long as any of the Series G Notes shall be outstanding), the Company will prepay $3,875,000 in aggregate principal amount of the Series G Notes (or, if less, the unpaid balance thereof). On December 1, 2001, the Company will in any event pay the entire remaining unpaid principal amount of the Series G Notes together with all interest accrued thereon. (g) Series H Notes. On December 1, 1993 and on each December 1 thereafter to and including December 1, 2002 (so long as any of the Series H Notes shall be outstanding), the Company will prepay $4,900,000 aggregate principal amount of the Series H Notes (or, if less, the unpaid balance thereof. On December 1, 2003, the Company will in any event pay the entire remaining unpaid principal amount of the Series H Notes together with all interest accrued thereon. (h) Adjustment of Mandatory Prepayments, etc. Notwithstanding paragraphs (a) through (g) to the contrary, if any Substitute Note or Notes (but less than all the Substitute Notes) of a Series shall be purchased pursuant to Section 7.12, then the aggregate principal amount of the Substitute Notes of such Series required to be prepaid on any December 1 thereafter pursuant to this Section 4.1 shall be reduced to that amount which bears the same relation to the amount of such prepayment specified to be made on such December 1 (or such lower amount to which such required prepayment shall have theretofore been reduced in accordance with this paragraph (h)) as the aggregate principal amount of the Substitute Notes of such Series outstanding immediately -22- 27 following said purchase pursuant to Section 7.12 bears to the aggregate principal amount of the Substitute Notes of such Series outstanding immediately prior to said purchase pursuant to Section 7.12. The Company covenants and agrees that it will, in the event of any reduction pursuant to this paragraph (h), promptly after the purchase giving rise to such reduction give to each holder of a Substitute Note or Notes of the Series affected written notice thereof, specifying in each such case the amounts of the respective mandatory prepayments due thereafter in respect of each Substitute Note held by such holder (giving effect to such reduction) and containing calculations demonstrating the method by which such reduction was effected. Each prepayment pursuant to this Section 4.1 shall be at 100% of the principal amount so to be prepaid, together with accrued interest thereon to the date of such prepayment, without premium. 4.2. Optional Prepayment of the Substitute Notes. The provisions of the Substitute Notes with respect to optional prepayment shall be identical to the provisions with respect to optional prepayment of the Existing Notes, as follows: (a) Series B Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may (i) on any December 1 fixed for a mandatory prepayment of Series B Notes pursuant to Section 4.1(a), prepay an aggregate principal amount of the Series B Notes equal to the amount of such mandatory principal prepayment, or any lesser aggregate principal amount constituting a multiple of $100,000, in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date of such prepayment, without premium; provided, however, that (A) the aggregate principal amount of the Series B Notes which may be prepaid in all prepayments pursuant to this Subsection shall not exceed $2,800,000 and (B) the privilege of the Company to make prepayments pursuant to this Subsection shall be non-cumulative, so that failure to exercise the same in whole or in part on any such December 1 shall not entitle the Company to increase the amount which may be prepaid on any subsequent December 1 in accordance with this Subsection (i); and (ii) on or after December 1, 1993, prepay the Series B Notes as a whole, or from time to time in part (in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus a premium equal to the applicable percentage of the principal amount so to be prepaid, determined as follows: -23- 28
If Prepaid During 12-Month Period Applicable Beginning December 1 Percentage -------------------- ---------- 1993 2.1222% 1994 1.0611% 1995 0%
(b) Series C Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may (i) on any December 1 fixed for a mandatory prepayment of Series C Notes pursuant to Section 4.1(b), prepay an aggregate principal amount of the Series C Notes equal to the amount of such mandatory principal prepayment, or any lesser aggregate principal amount constituting a multiple of $100,000, in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date of such prepayment and without premium, which privilege shall be non-cumulative; provided, however, that the aggregate principal amount of the Series C Notes which may be prepaid in all prepayments pursuant to this Subsection shall not exceed $6,250,000; and (ii) on or after December 1, 1993, prepay the Series C Notes as a whole, or from time to time in part (in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus a premium equal to the applicable percentage of the principal amount so to be prepaid, determined as follows:
If Prepaid During 12 Month Period Applicable Beginning December 1 Percentage -------------------- ---------- 1993 3.0136% 1994 2.0091% 1995 1.0045% 1996 0%
(c) Series D Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may (i) on any December 1 fixed for a mandatory prepayment of Series D Notes pursuant to Section 4.1(c), prepay an aggregate principal amount of the Series D Notes equal to the amount of such mandatory -24- 29 principal prepayment, or any lesser aggregate principal amount constituting a multiple of $100,000, in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date of such prepayment and without premium; provided, however, that (A) the aggregate principal amount of the Series D Notes which may be prepaid in all prepayments pursuant to this Subsection shall not exceed $8,750,000 and (B) the privilege of the Company to make prepayments pursuant to this Subsection shall be non-cumulative so that failure to exercise the same in whole or in part on any such December 1 shall not increase the amount which may be prepaid on any subsequent December 1 in accordance with this Subsection; and (ii) on or after December 2, 1996, prepay the Series D Notes as a whole, or from time to time in part (in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus a prepayment premium equal to the applicable percentage of the principal amount so to be prepaid, determined as follows:
If Prepaid During 12-Month Period Applicable Beginning December 2 Percentage -------------------- ---------- 1996 1.0667% 1997 0%
(d) Series E Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may (i) on any December 1 fixed for a mandatory prepayment of Series E Notes pursuant to Section 4.1(d), prepay an aggregate principal amount of the Series E Notes equal to the amount of such mandatory principal prepayment, or any lesser aggregate principal amount constituting a multiple of $100,000, in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date of such prepayment, without premium; provided, however, that (A) the aggregate principal amount of the Series E Notes which may be prepaid in all prepayments pursuant to this Subsection shall not exceed $2,000,000 and (B) the privilege of the Company to make prepayments pursuant to this Subsection shall be non-cumulative so that failure to exercise the same in whole or in part on any such December 1, shall not entitle the Company to increase the amount which may be prepaid on any subsequent December 1 in accordance with this Subsection; and -25- 30 (ii) on or after December 1, 1995, prepay the Series E Notes as a whole, or from time to time in part (in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus a premium equal to the applicable percentage of the principal amount so to be prepaid, determined as follows:
If Prepaid During 12-Month Period Applicable Beginning December 1 Percentage -------------------- ---------- 1995 2.2556% 1996 1.1278% 1997 0%
(e) Series F Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may, on or after August 2, 2000, prepay the Series F Notes as a whole, or from time to time in part (in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus, in the case of any such prepayment made on or after August 2, 2000 and prior to December 2, 2000, a prepayment premium equal to 0.866% of the principal amount so to be prepaid. (f) Series G Notes. Upon notice given as provided in Section 4.4, the Company, at is option, may (i) on any December 1 fixed for a mandatory prepayment of Series G Notes pursuant to Section 4.1(f), prepay an aggregate amount of Series G Notes equal to the amount of such mandatory prepayment or any lesser aggregate principal amount constituting an integral multiple of $100,000, in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date of such prepayment and without premium; provided, however, that (A) the aggregate principal amount of the Series G Notes which may be prepaid in all prepayments pursuant to this Subsection shall not exceed $7,750,000 and (B) the privilege of the Company to make prepayments pursuant to this Subsection shall be non-cumulative so that failure to exercise the same in whole or in part on any such December 1 shall not increase the amount which may be prepaid on any subsequent December 1 in accordance with this Subsection; and (ii) on or after December 2, 1996, prepay the Series G Notes as a whole, or from time to time in part (in integral multiples of $100,000), in each case at -26- 31 the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus a prepayment premium equal to the applicable percentage of the principal amount so to be prepaid, determined as follows:
If Prepaid During 12-Month Period Applicable Beginning December 2 Percentage -------------------- ---------- 1996 3.4546% 1997 2.5909% 1998 1.7273% 1999 0.8636% 2000 0%
(g) Series H Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may, on or after December 2, 1999, prepay the Series H Notes as a whole, or from time to time in part (in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment, plus a premium equal to the applicable percentage of the principal amount so to be prepaid, determined as follows:
If Prepaid During 12-Month Period Applicable Beginning December 2 Percentage -------------------- ---------- 1999 2.235% 2000 1.490% 2001 0.745% 2002 0%
(h) Mandatory Prepayments Not Affected; etc. No prepayment of less than all the Substitute Notes of any Series pursuant to this Section 4.2 shall relieve the Company of its obligation to make (nor shall it reduce the amount of) the prepayments of principal on the Substitute Notes of such Series required by Section 4.1. Each partial prepayment made pursuant to this Section 4.2 shall be allocated as provided in Section 4.5. 4.3. Special Purchase of Substitute Notes. The Company shall be required to purchase Substitute Notes of each holder thereof which shall have replied affirmatively to an offer to purchase the same given as contemplated by Section 7.12, such purchase to be made at the price and on the date and otherwise as provided in Section 7.12. -27- 32 4.4. Notice of Prepayment. The Company shall call the Substitute Notes of any Series for prepayment pursuant to Section 4.2 by giving written notice thereof to each holder of an outstanding Substitute Note of such Series, which notice shall be given not less than 30 nor more than 60 days prior to the date fixed for such prepayment in such notice and shall specify the amount so to be prepaid, together with the premium (if any) to be paid thereon and the date fixed for such prepayment. Each such notice of prepayment shall be accompanied by a certificate of an authorized financial officer of the Company stating the facts showing compliance with the provisions of Section 4.2. Upon the giving of notice of any prepayment as provided in this Section 4.4, the Company will prepay on the date therein fixed for prepayment the principal amount of the Substitute Notes of the Series so to be prepaid as specified in such notice, together with interest accrued thereon to such date fixed for prepayment, plus the applicable premium (if any). 4.5. Allocation of Prepayments. In the event of any prepayment pursuant to Section 4.1 or 4.2 of less than all of the outstanding Substitute Notes of any Series, the Company will allocate the principal amount so to be prepaid (but only in units of $1,000) among the Substitute Notes of such Series in proportion, as nearly as may be, to the respective principal amounts thereof not theretofore called for prepayment. 4.6. Surrender of Substitute Notes. Any Substitute Note paid or prepaid in full shall thereafter be surrendered to the Company upon its written request therefor and canceled and not reissued. 4.7. Purchase of Substitute Notes. The Company will not, and will not permit any Affiliate to, acquire directly or indirectly by purchase or prepayment or otherwise any of the outstanding Substitute Notes except by way of payment, prepayment or purchase in accordance with the provisions of the Substitute Notes and the Agreements. 4.8. Maturity. In the case of each prepayment of Substitute Notes, whether required or optional, the principal amount of each Substitute Note to be prepaid shall become due and payable on the date fixed for such prepayment together with interest accrued on such principal amount to such date and the applicable prepayment premium, if any. SECTION 5. FINANCIAL STATEMENTS AND INFORMATION. The Company will furnish to you and to any of your Affiliates, so long as you or such Affiliate shall hold any of the Substitute Notes, and (upon request) to each other Qualified Institutional Holder of any Substitute Notes, in duplicate: -28- 33 (a) as soon as available and in any event within 45 days after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, (i) copies of a consolidated and consolidating balance sheet of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries as of the end of such accounting period and of the related consolidated and consolidating statements of income and stockholder's equity and cash flows of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries for the portion of the fiscal year ended with the last day of such quarterly accounting period, all in reasonable detail and stating, in the case of such consolidated statements, in comparative form the respective figures for the corresponding date and period in the previous fiscal year, and certified by the principal financial officer of the Company, in the case of such consolidated statements, as having been prepared in accordance with GAAP and as presenting fairly the information contained therein, subject to year-end and audit adjustments and, in the case of such consolidating statements, as being fairly stated in all material respects in relation to the consolidated financial statements for such period as a whole, subject to year-end and audit adjustments, (ii) a written statement of such financial officer of the Company setting forth computations in reasonable detail showing, as of the date of such balance sheet, (A) the ratio of Current Assets to Current Liabilities, (B) the amount of Net Worth and Total Capitalization, (C) the maximum amount of additional Debt and Restricted Debt which the Company could have incurred under Section 7.4 and the outstanding amount of Debt and Restricted Debt of the Company and each Restricted Subsidiary and (D) the amount available for Restricted Payments and Restricted Investments in compliance with Section 7.6, and -29- 34 (iii) a written discussion and analysis by management of the financial condition and results of operations of the line of business conducted by each Issuing Subsidiary and its Subsidiaries for such accounting period; (b) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, (i) copies of a consolidated and consolidating balance sheet of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries as of the end of such fiscal year and of the related consolidated and consolidating statements of income and stockholder's equity and cash flows of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries for such fiscal year, all in reasonable detail and stating in comparative form the respective figures as of the end of and for the previous fiscal year, accompanied, in the case of such consolidated statements, by an unqualified report thereon of Coopers & Lybrand, or other independent certified public accountants of recognized national standing selected by the Company (which report shall contain a statement to the effect that such consolidated financial statements present fairly the financial position of the corporation or corporations being reported upon as at the dates indicated and the results of operations and cash flows of such corporation or corporations for the periods indicated and have been prepared in accordance with GAAP applied on a basis consistent with prior years (except for changes in application in which such accountants concur and which are noted in such financial statements) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards at the time in effect, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances) and, in the case of such consolidating statements, either certified by the principal financial officer of the Company as fairly stating, or accompanied by a report thereon by such accountants containing a statement to the effect that -30- 35 such consolidating financial statements fairly state, the financial position of the corporations being reported on in all material respects in relation to the consolidated financial statements for the periods indicated as a whole, (ii) a written statement of the accountants referred to in Clause (i) above (A) setting forth computations in reasonable detail showing, as of the date of such balance sheet, (1) the ratio of Current Assets to Current Liabilities, (2) the amount of Net Worth and Total Capitalization, (3) the maximum amount of additional Debt and Restricted Debt which the Company could have incurred under Section 7.4 and the outstanding amount of Debt and Restricted Debt of the Company and each Restricted Subsidiary, and (4) the amount available for Restricted Payments and Restricted Investments in compliance with Section 7.6, and (B) stating that in making the examination necessary for their report on such financial statements they obtained no knowledge of any default by the Company in the observance of any of the covenants contained in Section 7 or, if such accountants shall have obtained knowledge of any such default, specifying all such defaults and the nature and status, and (iii) a written discussion and analysis by management of the financial condition and results of operations of the line of business conducted by each Issuing Subsidiary and its Subsidiaries for such accounting period; (c) concurrently with the financial statements for each quarterly accounting period and for each fiscal year of the Company furnished pursuant to Subsections (a) and (b) of this Section, (i) a certificate signed by the President or a Vice President and by the Treasurer of the Company stating that, based upon such examination or investigation and -31- 36 review of the Agreements as in the opinion of the signers is necessary to enable the signers to express an informed opinion with respect thereto, to the best knowledge of said signers, the Company is not and has not during such period been in default in the performance or observance of any of the terms, covenants or conditions hereof, or, if the Company shall be or shall have been in default, specifying all such defaults, and the nature and period of existence thereof, and what action the Company has taken, is taking or proposes to take with respect thereto; provided that it shall not be necessary for any such certificate to be signed by more than one of the officers of the Company listed in this Subsection (c)(i) if the officer so signing shall have been approved for that purpose in writing by the holder or holders of not less than 66-2/3% in aggregate principal amount of all the Substitute Notes outstanding and Mr. Clyde Wyant, Executive Vice President, Chief Financial Officer and Treasurer of the Company is hereby approved by you for such purpose, (ii) a written statement of the principal financial officer of the Company setting forth computations showing in reasonable detail (A) the aggregate book value of property of the Company and its Restricted Subsidiaries subject to sale-leaseback transactions permitted by Section 7.7, and (B) the book value of assets of the Company and its Restricted Subsidiaries sold since the Effective Date and since the first day of such fiscal year, and (iii) a written statement of the principal financial officer of the Company that, to the best of his knowledge after due inquiry, except as otherwise disclosed in writing to you, there is no litigation (including derivative actions), arbitration proceeding or governmental proceeding pending to which the Company or any Subsidiary is a party, or with respect to the Company or any Subsidiary or their respective properties, which has a significant possibility of -32- 37 materially and adversely affecting the business, operations, properties or condition of the Company or of the Company and its Subsidiaries taken as a whole; (d) promptly after the same are available and in any event within 15 days thereafter (if the Company or any Subsidiary shall have become registered under Section 12 of the Exchange Act) copies of all such proxy statements, financial statements and reports as the Company or such Subsidiary shall send or make available generally to any of its security holders and copies of all regular and periodic reports and of all registration statements (other than on Form S-8 or a similar form) which the Company or such Subsidiary may file with the Commission or with any securities exchange; (e) within 15 days after the end of each fiscal month, a complete copy of any written agreements entered into by the Company during such fiscal month amending, modifying, waiving or supplementing any financial covenant set forth in an agreement or instrument evidencing Debt of the Company in an aggregate unpaid principal amount of $10,000,000 or more (together with a copy of the agreement or instrument so amended, modified, waived or supplemented if not previously furnished by the Company), provided, that if the Company shall be a party to any agreement providing a holder of Debt of the Company with greater rights with respect to delivery of amendments, modifications, waivers or supplements to agreements or instruments of the Company evidencing Debt than are provided to you above in this paragraph (e), the Company shall give prompt written notice of such fact to each holder of a Substitute Note, each such holder shall be entitled to the benefit of such greater rights and this Agreement shall be deemed modified to the extent required to provide such greater rights; (f) promptly upon any officer of the Company (i) obtaining knowledge of any condition or event which constitutes a Default or an Event of Default, or becoming aware that the holder of any Substitute Note has given any written notice expressly asserting the occurrence of a Default or Event of Default, a statement by the principal financial officer of the Company specifying in reasonable detail the nature and period of -33- 38 existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto, or (ii) becoming aware that the holder of any Substitute Note has taken any other action with respect to a claimed Default or Event of Default or that any holder of any Debt referred to in Section 9.1(d) has given any notice to the Company or any Restricted Subsidiary or taken any other action with respect to a claimed default under or in respect of any such Debt or with respect to the occurrence or existence of any event or condition of the type referred to in Section 9.1(e) or 9.1(f), a statement by the principal financial officer of the Company specifying in reasonable detail the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto, provided, that if the Company shall be a party to any agreement providing a holder of Debt of the Company with greater rights with respect to notices of the events described above in this paragraph (f) than are provided to you above in this paragraph (f) or in Section 9.1(c) with respect to this paragraph (f), the Company shall give prompt written notice of such fact to each holder of a Substitute Note, each such holder shall be entitled to the benefit of such greater rights and this Agreement shall be deemed modified to the extent required to provide such greater rights; (g) promptly upon receipt thereof (and in any event within five Business Days thereafter), copies of the management letter submitted to the Company by its independent public accountants in connection with the annual audit of the Company and its Subsidiaries made by such accountants for the fiscal year ended December 31, 1991; (h) promptly upon entering into any agreement or instrument evidencing Debt of the Company or any Restricted Subsidiary (other than any agreement providing for automatic modification thereof in substantially the same form as Section 9.1(d) of this Agreement) which provides that the holder of any such Debt may declare such Debt to be due and payable prior to the scheduled maturity thereof as a result of the occurrence of any default in the performance of any term or condition contained in the agreement or instrument evidencing any other Debt of the Company or any Restricted Subsidiary (regardless of whether such other Debt shall have been declared due and -34- 39 payable prior to the stated maturity thereof), written notice to such effect, making reference in such notice to Section 9.1(d) of this Agreement; and (i) such other information, including financial statements and computations relating to the performance of the provisions of this Agreement and the affairs of the Company, as may from time to time be reasonably requested by you or your Affiliates or a Qualified Institutional Holder. The Company will keep at its principal executive office true copies of the Agreements (as from time to time in effect), and cause the same to be available for inspection at said office during normal business hours by any holder of a Substitute Note or any prospective purchaser of a Substitute Note designated by a holder thereof. SECTION 6. INSPECTION OF PROPERTIES AND BOOKS. (a) So long as you or your nominee or any other Qualified Institutional Holder holds any of the Substitute Notes, your or such Qualified Institutional Holder's representatives shall have the right to visit and inspect any of the properties of the Company and its Restricted Subsidiaries in the presence of an officer of the Company, to examine the books of account and records of the Company and its Restricted Subsidiaries, to make copies and extracts therefrom, to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries with, and to be advised as to the same by, its officers and (in the presence of an officer of the Company) key employees, and its independent public accountants, all at such times and intervals as you or such other Qualified Institutional Holder may reasonably desire. The Company will likewise afford your and such Qualified Institutional Holder's representatives the opportunity to obtain any information, to the extent the Company or any Restricted Subsidiary possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy of any of the representations and warranties made by the Company hereunder. (b) You agree, and (by its acceptance of any Substitute Note) each other holder of Substitute Notes shall be deemed to have agreed, to hold in confidence all information furnished pursuant to the Agreements and relating to the Company or any of its Subsidiaries which was designated in writing as "confidential" at the time the same was furnished, provided, however, that you or such other holder may disclose any information, irrespective of whether -35- 40 or not such information shall have been designated as "confidential", (i) to actual or prospective purchasers of the Substitute Notes or any participations therein, (ii) to prospective assignees pursuant to Section 16.3, (iii) pursuant to or in connection with any action, suit or proceeding by, or any statute, rule or regulation of, any Governmental Body, (iv) pursuant to any Order of any court, arbitrator or Governmental Body or as otherwise required by law, (v) to your auditors, to the extent required in the course of their audit, to your counsel or to the National Association of Insurance Commissioners or similar associations or authorities, or (vi) to the extent necessary in the enforcement of your rights hereunder and under the Substitute Notes during the continuance of a Default or Event of Default; and the Company, for itself and on behalf of its Subsidiaries, expressly consents to the disclosure of any such information to any of such Persons (and under any such circumstances) contemplated in this Section; provided, further, however, that any Person to whom any such information shall be disclosed pursuant to Clause (i) or (ii) of this Subsection shall agree with you or such other holder of Substitute Notes to likewise be bound by and subject to the provisions of this Section. (c) Anything herein to the contrary notwithstanding, neither the Company nor any of its Subsidiaries shall have any obligations to disclose pursuant hereto any engineering, scientific, or other technical data without significance to your analysis of the financial position of the Company and its Subsidiaries. SECTION 7. COVENANTS. The Company covenants and agrees that from the date of the Agreements to the Effective Date and thereafter so long as any Substitute Note shall be outstanding: 7.1. Payment of Principal, Premium and Interest; Maintenance of Books and Reserves. The Company will duly and punctually pay the principal of, premium (if any) and interest on the Substitute Notes in accordance with the terms of the Substitute Notes and the Agreements. The Company will, and will cause each of its Restricted Subsidiaries to, keep proper books of record and account and set aside appropriate reserves, all in accordance with GAAP. 7.2. Payment of Taxes; Corporate Existence; Maintenance of Properties; Compliance with Laws. The Company will, and will cause each of its Subsidiaries to, (a) subject to Section 7.10, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and its licenses, rights (charter and statutory) -36- 41 and franchises to the extent the same are material and the termination thereof would be adverse to the Company, or to the Company and its Restricted Subsidiaries taken as a whole, or to the ability of the Company to perform the Agreements and discharge its obligations on the Substitute Notes; and the Company will maintain its principal office at a location in the United States of America where notices, presentations and demands in respect of this Agreement and the Substitute Notes may be made upon it and will notify, in writing, each holder of a Substitute Note of any change of location of such office and such office shall be maintained at 2100 Lake Park Boulevard, Richardson, Texas, 75080, until such time as the Company shall so notify the holders of the Substitute Notes of any such change; (b) pay and discharge or cause to be paid and discharged all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its property, real, personal or mixed, or upon any part thereof, when due, as well as all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon its property; provided, however, that neither the Company nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings, and if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (c) maintain and keep, or cause to be maintained and kept, all material properties used or useful in the business of the Company and its Subsidiaries in good repair, working order and condition, and from time to time make or cause to be made all repairs, renewals, replacements and improvements which are necessary in connection with the proper and advantageous conduct of such business; and (d) use its best efforts to comply in all material respects with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, any governmental agency, in respect of the conduct of its business and the ownership of its properties (including, without limitation, applicable statutes, regulations and orders relating to equal employment opportunities), except such as are being contested in good faith by appropriate proceedings. -37- 42 7.3. Insurance. The Company will insure and keep insured, and will cause each of its Subsidiaries to insure and keep insured, with financially sound and reputable insurers, so much of their respective properties, and such insurance shall be of such type and in such amounts (and with such deductibles), as similarly situated manufacturing companies in accordance with good business practice customarily insure properties of a similar character against loss by fire and from other causes. In addition, the Company will, and will cause each Subsidiary to, maintain public liability insurance with financially sound and reputable insurers or maintain a program of self-insurance covering claims for personal injury, death or property damage suffered by others upon or in or about any premises occupied by it or occurring as a result of its ownership, maintenance or operation of any automobiles, trucks or other vehicles, aircraft or other facilities or as a result of the use of products manufactured, constructed or sold by it or services rendered by it, in such amounts (and with such deductibles) as such insurance is usually maintained by companies engaged in a similar business and as is in accordance with good business practice, provided that the aggregate annual amount of such self-insurance maintained by the Company and its Subsidiaries shall not on any date exceed 5% of Net Worth as at the end of the most recently completed fiscal quarter. 7.4. Debt. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, create, assume, incur, agree to purchase or repurchase or provide funds in respect of, or otherwise become or be directly or indirectly liable in respect of, by way of Guarantee or otherwise, any Debt, except that, subject in any event to the last paragraph of this Section 7.4: (a) the Company may remain liable in respect of the Debt evidenced by the Substitute Notes; (b) the applicable Restricted Subsidiaries may remain liable in respect of the Debt described as items C(4) and E(1) in Exhibit C, but may not extend, renew, refund or refinance any thereof except as otherwise permitted by another provision of this Section 7.4, provided that on the Effective Date the Debt evidenced by the Existing Notes shall be assumed by the Company as provided in Section 1.2; -38- 43 (c) any Restricted Subsidiary may become and remain liable in respect of unsecured Debt of such Restricted Subsidiary owing to the Company or a Wholly-owned Restricted Subsidiary, and the Company may become and remain liable in respect of Subordinated Debt owing to a Wholly-owned Restricted Subsidiary; and (d) the Company and any Restricted Subsidiary may become and remain liable in respect of additional Debt if on the date (the "Incurrence Date") on which the Company or such Restricted Subsidiary proposes to incur any such Debt, and after giving effect to such incurrence and the substantially concurrent incurrence of any other Debt and to the substantially concurrent retirement of any other Debt and to the application of the proceeds of all such Debt, Total Debt shall not exceed 55% of Total Capitalization; provided, however, that nothing in this Section 7.4(d) shall permit the Company or any Restricted Subsidiary to incur any Restricted Debt on any Incurrence Date unless, after giving effect to any such incurrence and to the substantially concurrent incurrence of any other Restricted Debt and to the substantially concurrent retirement of any Restricted Debt and to the application of the proceeds of all such Restricted Debt, the Restricted Debt Amount shall not exceed 10% of Total Capitalization. For all purposes of this Section 7.4, (i) any Person becoming a Restricted Subsidiary after the date of this Agreement shall be deemed to have incurred all of its then outstanding Debt at the time it becomes a Restricted Subsidiary and (ii) in the event the Company or any Restricted Subsidiary shall extend, renew, refund or refinance any Debt, the Company or such Restricted Subsidiary shall be deemed to have incurred such Debt at the time of such extension, renewal, refunding or refinancing. The Company will not in any event incur or permit to exist any Debt of the Company to a Restricted Subsidiary other than Subordinated Debt owing to a Wholly-owned Restricted Subsidiary. 7.5. Liens. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, create, assume, incur or suffer to be created, assumed or incurred or to exist any Lien in respect of any property of any character owned by the Company or any Restricted Subsidiary (whether such property is held on the date hereof or hereafter acquired), except, subject in any event to the last paragraph of this Section 7.5 and to Subsection (d) of Section 7.4: -39- 44 (a) Liens representing (i) Liens for taxes or assessments or other governmental charges or levies, either not yet due and payable or to the extent that nonpayment thereof shall be permitted by the proviso to Section 7.2(b), (ii) Liens created by or resulting from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings diligently pursued, and (iii) other Liens consisting of minor title defects affecting real property or which are otherwise incidental to the normal conduct of the business of the Company and its Restricted Subsidiaries or the ownership of their respective properties which do not secure Debt and which do not in the aggregate materially impair the use of such property in the operation of the business of the Company, or of the Company and its Restricted Subsidiaries taken as a whole, or materially impair the value of such property for the purposes of such business; (b) Liens existing on the date of this Agreement specified in Exhibit C and securing the item or items of Debt indicated thereon; provided that the principal amount of the Debt secured by such Liens shall not be increased, or refinanced or refunded except as permitted under Section 7.4; (c) Liens on assets of any Restricted Subsidiary securing Debt or other obligations of such Restricted Subsidiary owing to the Company or to a Wholly-owned Restricted Subsidiary; and (d) Liens in addition to those permitted by the preceding clauses (a), (b) and (c) if, immediately after giving effect to the creation thereof, the Company shall be entitled to incur at least $1 of additional Debt constituting Restricted Debt under the proviso to Section 7.4(d). For all purposes of this Section 7.5, any refunding or refinancing of any Lien by the Company or any Restricted Subsidiary shall be deemed to be an incurrence of such Lien at the time of such refunding or refinancing, and any Lien existing on any property or assets at the time it -40- 45 or the Person owning it is acquired by the Company or any Restricted Subsidiary shall be deemed to have been created at the time of such acquisition. In the event that any property or assets of the Company or any Restricted Subsidiary shall become or be subject to a Lien not permitted by the foregoing clauses (a) through (d) of this Section 7.5, the Company shall make or cause to be made effective provision satisfactory to the holders of the outstanding Substitute Notes whereby the Substitute Notes will be secured equally and ratably with all other obligations secured thereby, and in any event, the Substitute Notes shall have the benefit, to the full extent that (and with such priority as) the holders thereof may be entitled under applicable law, of an equitable Lien on such property or asset; provided, however, that any Lien created, assumed, incurred or suffered to exist in violation of this Section 7.5 shall constitute an Event of Default whether or not the Company shall have made effective provision to secure the Substitute Notes equally and ratably with any such other obligations or the holders of Substitute Notes shall be entitled to such equal and ratable security or any such equitable Lien. 7.6. Dividends and Other Restricted Payments; Restricted Investments. The Company will not directly or indirectly (i) declare or pay any dividend, or make any distribution, on the Company's shares of any class, other than dividends or distributions payable in common shares of the Company, or (ii) make any other Restricted Payment, and the Company will not make and will not permit any Restricted Subsidiary to make any Restricted Investment, unless, on the date of declaration in the case of any proposed dividend and on the date of payment or distribution in the case of any proposed Restricted Payment (including any dividend) or Restricted Investment (the "Computation Date"), and after giving effect thereto, (a) the aggregate amount of all Restricted Payments made during the period (taken as one accounting period) commencing on January 1, 1991 and ending on and including the Computation Date (the "Computation Period"), and of all Restricted Investments made during the Computation Period and outstanding on the Computation Date, shall not exceed an amount equal to the sum of (i) $45,000,000, plus (ii) 85% of the aggregate amount of Consolidated Net Income for each full fiscal year in the Computation Period for which Consolidated Net Income is positive, minus -41- 46 (iii) 100% of the aggregate amount of Consolidated Net Income for each full fiscal year in the Computation Period for which there is a deficit, plus 85% (or, in the case of a deficit, minus 100%) of Consolidated Net Income for any period in the Computation Period not included in Clause (ii) or (iii) above; (b) no Event of Default or Default shall have occurred and be continuing; and (c) the Company shall be entitled to incur at least $1 of additional Debt under Section 7.4(d). The Company will not declare any dividend (other than dividends payable solely in shares of its common stock) on any shares of any class of its stock which is payable more than 90 days after the date of declaration thereof. For purposes of this Section 7.6, Investments owned by any Person or for which it is obligated at the time it becomes a Restricted Subsidiary shall be deemed to be made at the time such Person becomes a Restricted Subsidiary. Notwithstanding any other provision of this Section 7.6 to the contrary, the Company may, at any time or from time to time, reacquire up to an aggregate amount of $15,000,000 of shares of its common stock in transactions qualifying as distributions under Section 303 of the Code if but only if (i) such acquisitions are at prices not exceeding the fair market value of the shares so acquired, in each case as determined in good faith by a resolution of the Board, and (ii) no Event of Default or Default shall have occurred and be continuing. The amount of said dividends shall not be subject to the limitations of this Section 7.6 or included in any future computations pursuant to this Section 7.6. 7.7. Sales and Leasebacks. The Company will not and will not permit any Restricted Subsidiary to, as part of the same transaction or series of related transactions, sell or otherwise transfer to any Person or Persons any item or items of property, whether now owned or hereafter acquired, having a book value in any one case or in the aggregate for all such property so transferred from and including the date hereof through the date of such transfer of $20,000,000 or more if the Company or such Restricted Subsidiary shall then or thereafter, as part of the same transaction or series of related transactions, rent or lease as lessee, or similarly acquire the right to possession or use of such property, or one or more properties which it intends to use for the same -42- 47 purpose or purposes as such property, provided that the Company will not and will not permit any Restricted Subsidiary to enter into any transaction otherwise permitted by this Section 7.7 if the sale or other disposition of the property of the Company or a Restricted Subsidiary being transferred in such transaction would not at the time be permitted under Section 7.10. 7.8. Maintenance of Certain Financial Conditions. The Company will not permit: (a) Current Assets as at the end of any fiscal quarter of the Company to be less than 150% of Current Liabilities as at end of such fiscal quarter; (b) Net Worth as at the last day of any fiscal quarter of the Company to be less than the Minimum Amount for such fiscal quarter. For purposes of this Section 7.8(b), the "Minimum Amount" shall be (i) for the fiscal quarter ended December 31, 1991, $230,000,000, and (ii) for each fiscal quarter thereafter, the sum of the Minimum Amount for the immediately preceding fiscal quarter plus 15% (or 0% in the case of a deficit) of Consolidated Net Income for such immediately preceding fiscal quarter; or (c) the aggregate vested benefit obligations for the qualified pension plans of the Company and its Subsidiaries, determined in each fiscal year by the Company's actuaries in the ordinary course of business, to exceed the aggregate fair value of the assets of such plans, also determined in each fiscal year by the Company's actuaries in the ordinary course of business, by more than $3,000,000. For purposes of paragraph (c) of this Section 7.8, obligations and assets of pension plans of the Company and its Subsidiaries shall be determined as of the end of each fiscal year in accordance with Statement No. 87 of the Financial Accounting Standards Board. 7.9. Subsidiary Stock and Debt. The Company will not: (a) directly or indirectly sell, assign, pledge or otherwise transfer or dispose of any Debt of, or claim against, or any shares of stock or similar interests or other securities of (or warrants, rights or options to acquire stock or -43- 48 similar interests or other securities of), any Restricted Subsidiary, except to a Wholly-owned Restricted Subsidiary and except as directors' qualifying shares if required by applicable law; (b) permit any Restricted Subsidiary directly or indirectly to sell, assign, pledge or otherwise transfer or dispose of any Debt of, or claim against, or any shares of stock or similar interests or other securities of (or warrants, rights or options to acquire stock or similar interests or other securities of), any other Restricted Subsidiary, except to the Company or a Wholly-owned Restricted Subsidiary and except as directors' qualifying shares if required by applicable law; (c) permit any Restricted Subsidiary to have outstanding any shares of preferred stock other than shares of preferred stock which are owned by the Company or a Wholly-owned Restricted Subsidiary; or (d) permit any Restricted Subsidiary directly or indirectly to issue or sell any shares of its stock or similar interests or other securities (or warrants, rights or options to acquire stock or similar interests or other securities) except to the Company or a Wholly-owned Restricted Subsidiary or as directors' qualifying shares if required by applicable law; provided, however, that all stock or similar interests or other securities (or warrants, rights or options to acquire stock or similar interests or other securities) of any Restricted Subsidiary other than an Issuing Subsidiary may be simultaneously sold as an entirety for a cash consideration at least equal to the fair value thereof (as determined in good faith by a resolution of the Board) at the time of such sale, if (A) such Restricted Subsidiary being sold does not at the time own any Debt or stock or similar interests or other securities of (or warrants, rights or options to acquire stock or similar interests or other securities of) the Company or of any other Restricted Subsidiary which is not also being simultaneously sold as an entirety as permitted by this Section 7.9 or Section 7.10, (B) the assets of such Restricted Subsidiary being sold represented by the equity interests to be so transferred are such that the sale of such assets would be permitted by Section 7.10 (in which case such transaction shall be considered and deemed a disposition of assets for the purposes of Section 7.10), and (C) immediately after the consummation of such transaction, (x) the Company shall then be permitted to incur $1.00 of -44- 49 additional Debt pursuant to Section 7.4(d), and (y) no condition or event shall exist which constitutes a Default or an Event of Default. 7.10. Consolidation, Merger or Disposition of Assets. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, consolidate or merge with, or sell, lease or otherwise dispose of any of its assets to, any Person, except, subject (to the extent hereinafter provided) to the last paragraph of this Section 7.10: (a) the Company may consolidate or merge with any other corporation, provided that the Company shall be the continuing or surviving corporation and, after giving effect to any such consolidation or merger, no Change of Control shall have occurred; (b) any Restricted Subsidiary may consolidate or merge with, and any Restricted Subsidiary may sell, lease or otherwise dispose of its assets to, the Company or a Wholly-owned Restricted Subsidiary; (c) the Company may consolidate with or merge into, or sell, lease or otherwise dispose of its assets as an entirety or substantially as an entirety to, any solvent corporation, but only if (i) such corporation (A) is duly organized and validly existing in good standing under the laws of the United States of America or a state thereof and (B) expressly assumes, pursuant to a written agreement satisfactory in form, scope and substance to the holders of the Substitute Notes, the due and punctual payment of the principal of, premium (if any) and interest on the Substitute Notes according to their tenor, and the due and punctual performance and observance of the obligations of the Company under the Agreements and the Substitute Notes, an executed counterpart of which agreement shall have been furnished to each holder of a Substitute Note together with a favorable opinion of counsel satisfactory to each such holder covering such matters relating to such corporation, such assumption and such agreement as such holder may reasonably request, and -45- 50 (ii) in the case of any such transaction which would involve or result in a Change of Control, the Company shall have offered to purchase all Substitute Notes held by each holder thereof pursuant to Section 7.12 and, not later than the time of consummation of such transaction, shall have purchased, in compliance with Section 7.12, the full amount of all Substitute Notes of each holder thereof which shall have accepted such offer; (d) the Company and any Restricted Subsidiary may sell, lease or otherwise dispose of any of its assets in the ordinary course of business; (e) Industries may sell the Fort Worth Plant and Heatcraft may sell the Wilmington Plant for a consideration at least equal to the fair market value thereof (as determined in good faith by the Board); and (f) the Company and any Restricted Subsidiary may sell, lease or otherwise dispose of any of its assets (other than in the ordinary course of its business) for a consideration at least equal to the fair market value thereof (as determined in good faith by the Board) at the time of such sale or other disposition, provided that the assets so sold on any date, when taken together with all assets theretofore sold by the Company and its Restricted Subsidiaries (including all deemed dispositions of assets pursuant to Section 7.9 and all assets sold in connection with sale-leaseback transactions permitted under Section 7.7), (i) during the fiscal year in which such date occurs, (A) shall not have contributed more than 15% of Consolidated Operating Income for the immediately preceding fiscal year and (B) shall not have a book value exceeding 15% of the book value of consolidated total assets of the Company and its Restricted Subsidiaries as at the end of the immediately preceding fiscal year, and (ii) during the period from and including the date hereof through the date of such disposition, shall not have a book value exceeding 30% of the book value of consolidated total assets of the Company and its Restricted Subsidiaries as at the end of the immediately preceding fiscal year. Immediately after any consolidation, merger or other disposition under Subsection (a), (b), (c), (e) or (f) of this Section 7.10, (1) no Event of Default or Default -46- 51 shall have occurred and be continuing, and (2) the Company (which term, for the purpose of this sentence, shall not include the corporation that originally executed this Agreement if any other Person has become the Company pursuant to any assumption described in Subsection (c) of this Section 7.10) shall be entitled to incur at least $1 of additional Debt under Section 7.4(d). No disposition under Subsection (c) of this Section 7.10 shall release the corporation that originally executed this Agreement from its liability as obligor on the Substitute Notes. 7.11. Issuance of Stock. The Company will not (either directly or indirectly by the issuance of rights or options for, or securities convertible into, such shares) issue, sell or otherwise dispose of any shares of any class of its capital stock (other than directors' qualifying shares, if required by applicable law) if any Change of Control shall thereby occur, unless the Company shall have offered to purchase the Substitute Notes pursuant to Section 7.12. 7.12. Purchase of Substitute Notes Upon Change of Control. At least 15 Business Days (or, in the case of any transaction permitted by Section 7.10 or 7.11 resulting in a Change of Control, at least 45 days) and not more than 90 days prior to the occurrence of any Change of Control, the Company shall give written notice thereof to each holder of an outstanding Substitute Note in the manner and to the address specified for notices pursuant to this Section 7.12 for such holder in Schedule I or as otherwise specified by such holder in writing to the Company. Such notice shall contain (i) an offer by the Company to purchase, on the date of such Change of Control or, if such notice shall be delivered less than 35 days prior to the date of such Change of Control, on the date 35 days after the date of such notice (the "Purchase Date"), all Substitute Notes held by each such holder at a price equal to 100% of the principal amount thereof, together with interest accrued thereon to the Purchase Date, plus a premium equal to the Special Premium, (ii) the estimated respective amounts of accrued interest and the Special Premium payable to such holder in respect of such purchase, showing in each case in reasonable detail the calculation thereof and, with respect to the estimated Special Premium, the Reference Rate used in such calculation and (iii) the Company's estimate of the date on which such Change of Control shall occur. Said offer shall be deemed to lapse as to any such holder which has not replied affirmatively thereto in writing within 35 days of the giving of such notice. As soon as practicable (and in any event at least 24 hours) prior to such Change of Control, the Company shall give written confirmation of the date thereof to each such holder which has affirmatively replied to the notice given pursuant to the first sentence -47- 52 of this Section 7.12. In the event that the Company shall purchase any Substitute Notes pursuant to this Section 7.12, the same shall thereafter be canceled and not reissued and shall not be deemed "outstanding" for any purpose of this Agreement. For the purposes of this Section 7.12, a "Change of Control" shall be deemed to occur if any New Owner shall acquire beneficial ownership of shares in the Company having Voting Rights pertaining thereto which would allow such New Owner to elect more members of the Board than could be elected by the exercise of all Voting Rights pertaining to shares in the Company then owned beneficially by the Norris Family. As used in this Section 7.12: (i) "Voting Rights" pertaining to shares of a corporation means the rights to cast votes for the election of directors of such corporation in ordinary circumstances (without consideration of voting rights which exist only in the event of contingencies). (ii) "Norris Family" means all persons who are lineal descendants of D.W. Norris (by birth or adoption), all spouses of such descendants, all estates of such descendants or spouses which are in the course of administration, all trusts for the benefit of such descendants or spouses, and all corporations or other entities in which, directly or indirectly, such descendants or spouses (either alone or in conjunction with other such descendants or spouses) have the right, whether by ownership of stock or other equity interests or otherwise, to direct the management and policies of such corporations or other entities (each such person, spouse, estate, trust, corporation or entity being referred to herein as a "member" of the Norris Family). In addition, so long as any employee stock ownership plan exercises its Voting Rights in the same manner as members of the Norris Family (exclusive of employee stock ownership plans) who have a majority of the Voting Rights exercised by all such members of the Norris Family, such employee stock ownership plan shall be deemed a member of the Norris Family. (iii) "New Owner" means any person (other than a member of the Norris Family), or any syndicate or group of persons (exclusive of all members of the Norris Family) which would be deemed a "person" for the purposes of Section 13(d) of the Exchange Act, who directly or indirectly acquires shares in the Company. -48- 53 Notwithstanding anything in this Section 7.12 to the contrary, if an Event of Default exists following a Change of Control and the Substitute Notes are accelerated pursuant to the provisions of Section 9.1, the holders of the Substitute Notes shall be entitled to receive the Special Premium relating to such accelerated amount as provided in Section 9.1. 7.13. Transactions with Affiliates. The Company will not and will not permit any Restricted Subsidiary to engage in any material transaction with an Affiliate on terms less favorable to the Company or such Restricted Subsidiary than would have been obtainable at the time from any Person which is not an Affiliate in arm's-length dealing provided, that the foregoing restrictions shall not apply to any transaction between the Company and a Wholly-owned Restricted Subsidiary or between a Wholly-owned Restricted Subsidiary and another Wholly-owned Restricted Subsidiary. 7.14. Change in Business. The Company will not either directly or by or through a Subsidiary make or permit any substantial change in the nature of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement except for such changes as are natural extensions of the heating, cooling, refrigeration, copper tube manufacturing and electronics businesses. 7.15. Environmental Matters. (a) The Company will and will cause each of its Subsidiaries to comply in all material respects with all applicable Environmental Laws if, individually or in the aggregate, failure to comply therewith could reasonably be expected to have a material adverse effect on the Company or the Company and its Subsidiaries, taken as a whole. (b) The Company will not and will not permit any of its Subsidiaries to cause or allow any Hazardous Substance to be present at any time on, in, under or above any real property or any part thereof in which the Company or any Subsidiary has a direct interest (including without limitation ownership thereof or any arrangement for the lease, rental or other use thereof, or the retention of any mortgage or security interest therein or thereon), except in a manner and to an extent that is in compliance in all material respects with all applicable Environmental Laws and that will not have a material adverse effect on the Company or the Company and its Subsidiaries, taken as a whole. -49- 54 7.16. Limitation on Dividend Restrictions, etc. The Company will not permit any Restricted Subsidiary to enter into, adopt, create or otherwise be or become bound by or subject to any contract or charter or by-law provision limiting the amount of, or otherwise imposing restrictions on the declaration, payment or setting aside of funds for the making of, dividends or other distributions in respect of the capital stock of such Restricted Subsidiary to the Company or another Restricted Subsidiary. SECTION 8. DEFINITIONS. 8.1. Definitions. Except as otherwise specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used in this Agreement and such terms shall include the singular as well as the plural: "Affiliate" of any specified Person shall mean any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "After-Tax Basis" shall have the meaning specified in Section 15(c). "Agreements" shall have the meaning specified in Section 1.3. "Armstrong" shall have the meaning specified in Section 1.1. "Board" shall mean (i) in the case of determinations of value under Section 7.10, the board of directors of the Restricted Subsidiary which owns the relevant assets and (ii) in all other cases, either the board of directors of the Company or any duly authorized committee of that board. "Business Day" shall mean a day other than a Saturday or Sunday or a day on which banks are required or authorized to close in New York, New York, or Dallas, Texas. "Capital Lease" shall mean any lease of property which in accordance with GAAP should be capitalized on the lessee's balance sheet; and "Capital Lease Obligation" shall mean the amount of the liability under a Capital Lease which is or should be so capitalized in accordance with GAAP. -50- 55 "Change of Control" shall have the meaning specified in Section 7.12. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute thereto, together with the rules and regulations issued thereunder, in each case as in effect from time to time. "Commission" shall mean the Securities and Exchange Commission and any other similar or successor agency of the Federal Government administering the Securities Act. "Commonly Controlled Entity" shall have the meaning specified in Section 2.11. "Company" shall have the meaning specified in the introductory paragraph. "Company Premises" shall mean real property in which the Company or any Person which has at any time been or hereafter becomes a Subsidiary of the Company at any time has or ever had any direct interest, including, without limitation, ownership thereof, or any arrangement for the lease, rental or other use thereof, or the retention or claim of any mortgage or security interest therein or thereon. "Computation Date" shall have the meaning specified in Section 7.6. "Computation Period" shall have the meaning specified in Section 7.6. "Consolidated Net Income" for any period shall mean the Net Income of the Company and its Restricted Subsidiaries for such period consolidated in accordance with GAAP. "Consolidated Operating Income" for any period shall mean Consolidated Net Income for such period plus the net amount deducted during such period in determining the amount thereof in respect of interest expense (including the interest equivalent in respect of Capital Lease Obligations) and taxes imposed on or measured by income or excess profits. "Current Assets" shall mean the current assets of the Company and its Restricted Subsidiaries determined in accordance with GAAP on a consolidated basis after eliminating all intercompany items. -51- 56 "Current Liabilities" shall mean the current liabilities of the Company and its Restricted Subsidiaries determined in accordance with GAAP on a consolidated basis after eliminating all intercompany items and after excluding current liabilities consisting of current maturities of long-term debt. "Debt" as applied to any Person (without duplication) shall mean all obligations of such Person for borrowed money (whether short or long-term and whether or not represented by bonds, debentures, notes, drafts or other similar instruments) and any notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, and in any event shall include (a) any obligation owed for all or any part of the purchase price of property or other assets or for the cost of the property or other assets constructed or of improvements, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business, (b) any obligation of another Person of a type described in clause (a), (c) or (d) of this definition which is secured by any Lien on or payable out of the proceeds of production from property owned or held by such Person, even though such Person has not assumed or become liable for the payment of such obligation, (c) any Capital Lease Obligation of such Person, (d) any Guarantee by such Person of or with respect to Debt of another Person, and (e) all preferred stock issued by such Person which is redeemable, or for which mandatory sinking fund payments are due, at any time on or before December 1, 2003. The Debt of the Company shall in any event include (without duplication) all Debt of the Company to a Subsidiary. The amount of Debt and assets of any Person shall not be affected by deposits, trust arrangements or similar arrangements which, in accordance with GAAP, extinguish debt for which such Person remains legally liable. "Default" shall mean any default or other event which, with notice or the lapse of time or both, would constitute an Event of Default. "Effective Date" shall have the meaning specified in Section 1.3. "Environmental Laws" shall mean any past, present or future Federal, state, local or foreign statutory or common law, or any regulation, code, plan, order, decree, judgment, permit, grant, franchise, concession, restriction, agreement or injunction issued, entered, promulgated or approved thereunder, relating to (a) the environment or human health or safety, including, without limitation, any law relating to emissions, discharges, releases or threatened -52- 57 releases of Hazardous Substances into the environment (including, without limitation, air, surface water, groundwater or land), or (b) the manufacture, generation, refining, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport, arranging for transport, or handling of Hazardous Substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Events of Default" shall have the meaning specified in Section 9.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Existing Notes" shall have the meaning specified in Section 1.1. "Existing Note Purchase Agreements" shall have the meaning specified in Section 1.1. "Fort Worth Plant" shall mean the real and personal property of Industries located at the corner of Airport Freeway and Maxine, Fort Worth, Texas. "GAAP" shall mean generally accepted accounting principles as in effect at the time of application to the provisions hereof, provided that for all purposes of this Agreement it is understood and agreed that the Company shall account for its Unrestricted Subsidiaries on the equity method. "Governmental Body" shall have the meaning specified in Section 2.7. "Guarantee" of or by any Person shall mean any guarantee or other contingent liability, direct or indirect, with respect to any Debt of another Person, through an agreement or otherwise, including, without limitation, (a) any endorsement (otherwise than for collection or deposit in the ordinary course of business) or discount with recourse or undertaking substantially equivalent to or having similar economic effect of a guarantee with respect to any such Debt, (b) any contingent obligations of such Person in respect of letters of credit, letter of credit facilities, bankers' acceptance facilities or similar credit facilities (excluding in any event obligations in respect of (1) trade or commercial letters of credit given in the ordinary course of business and (2) stand-by letters of credit given to support obligations other than Debt obligations) and (c) any -53- 58 agreement (1) to purchase, or to advance or supply funds for the payment or purchase of, any such Debt, (2) to purchase, sell or lease property, products, materials or supplies, or transportation or services, primarily for the purpose of enabling such other Person to pay the Debt or to ensure the owner thereof against loss regardless of the delivery or non-delivery of the property, products, materials or supplies or transportation or services, or (3) to make any loan, advance, capital contribution or other investment in such other Person to assure a minimum equity, working capital or other balance sheet condition for any date, or to provide funds for the payment of any liability, dividend or stock liquidation payment, or otherwise to supply funds to or in any manner invest in such other Person. The amount of any Guarantee shall (subject to any limitation contained therein) be equal to the outstanding principal amount of the Debt guaranteed. "Hazardous Substance" shall mean any contaminant, pollutant or toxic or hazardous substance, and any substance that is defined or listed as a hazardous, toxic or dangerous substance under any Environmental Law or that is otherwise regulated or prohibited under any Environmental Law as a hazardous, toxic or dangerous substance. "Heatcraft" shall have the meaning specified in Section 1.1. "Holders" shall have the meaning specified in Section 1.3. "Industries" shall have the meaning specified in Section 1.1. "Investment" shall mean any investment in any Person made by stock purchase, capital contribution, loan, advance or otherwise, provided that the amount of any such investment in any Person shall be computed in accordance with GAAP. Investments shall not on any date include notes receivable accepted by the Company or any Restricted Subsidiary in settlement of trade accounts receivable of non-Affiliates so long as the allowance for doubtful accounts of the Company and its Restricted Subsidiaries includes the excess, if any, of (a) the aggregate principal amount of all such notes on such date over (b) 5% of the sum of (i) the aggregate principal amount of all such notes plus (ii) all trade accounts receivable of the Company and its Restricted Subsidiaries on such date, before allowances for doubtful accounts. "Issuing Subsidiary" shall have the meaning specified in Section 1.1. -54- 59 "Lien" shall mean, as to any Person, any mortgage, lien, pledge, adverse claim, charge, other encumbrance in favor of any vendor, lessor, lender or other secured party in or on, or any interest or title of any such vendor, lessor, lender or other secured party under any conditional sale or other title retention agreement or Capital Lease with respect to, any property or asset of such Person, or the signing or filing of a financing statement with respect to property owned by such Person which names such Person as debtor, or the signing of any security agreement authorizing any other party as the secured party thereunder to file any such financing statement. "Multiemployer Plan" shall have the meaning specified in Section 2.11. "Net Income" of any Person for any period shall mean the net income (or net loss) of such Person for such period, determined in accordance with GAAP, excluding (a) the proceeds of any life insurance policy; (b) any gain arising from (1) the sale or other disposition of any assets (other than current assets) to the extent that the aggregate amount of gains exceeds the aggregate amount of losses from the sale, abandonment or other disposition of assets (other than current assets), (2) any write-up of assets, or (3) the acquisition by such Person of its outstanding Debt securities; (c) any amount representing the interest of such Person in the undistributed earnings of any other Person; (d) any earnings of any other Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or a Restricted Subsidiary and any earnings, prior to the date of acquisition, of any other Person acquired in any other manner; and (e) any deferred credit (or amortization of a deferred credit) arising from the acquisition of any Person. "Net Worth" shall mean, as of any date of determination thereof, the total stockholders' equity of the Company and its Subsidiaries determined in accordance with GAAP on a consolidated basis, provided that if the portion of total stockholders' equity attributable to Unrestricted Subsidiaries exceeds 15% of total stockholders' equity, Net Worth shall be reduced by the amount of such excess. -55- 60 "New Owner" shall have the meaning specified in Section 7.12. "Norris Family" shall have the meaning specified in Section 7.12. "Note Register" shall have the meaning specified in Section 10. "Order" shall have the meaning specified in Section 2.7. "Other Agreements" shall have the meaning specified in Section 1.3. "Other Holders" shall have the meaning specified in Section 1.3. "outstanding" shall refer, when used with reference to the Substitute Notes of any Series as of a particular time, to all Substitute Notes of such Series theretofore issued or delivered as provided in the Agreements, except (i) Substitute Notes of such Series theretofore reported as lost, stolen, damaged or destroyed, or surrendered for transfer, exchange or replacement, in respect of which replacement Substitute Notes have been issued, (ii) Substitute Notes of such Series theretofore paid in full, and (iii) Substitute Notes of such Series theretofore canceled by the Company; and except that, for the purpose of determining whether holders of the requisite principal amount of Substitute Notes have made or concurred in any waiver, consent, approval, notice or other communication under the Agreements, Substitute Notes owned by the Company or any Affiliate thereof shall not be deemed to be outstanding. "Person" shall include an individual, a corporation, an association, a partnership, a trust or estate, a government, foreign or domestic, and any agency or political subdivision thereof, or any other entity. "Purchase Date" shall have the meaning specified in Section 7.12. "Qualified Institutional Holder" shall mean any holder which is an institutional investor (a) which holds at the time in question at least $3,000,000 in aggregate principal amount of Substitute Notes or any lesser principal amount thereof constituting at least 20% of the aggregate principal amount of Substitute Notes then outstanding or (b) -56- 61 which purchases from a Holder 100% of the Substitute Notes of a Series held by such Holder (after giving effect to any reduction in principal resulting from a prepayment of Substitute Notes). "Restricted Debt" shall mean any of (i) Debt (including, without limitation, Capital Lease Obligations, purchase money obligations and industrial revenue bonds) of the Company or a Restricted Subsidiary which is secured by a Lien not otherwise permitted under clause (a), (b) or (c) of Section 7.5; or (ii) Debt of a Restricted Subsidiary owing to any Person other than the Company or a Wholly-owned Restricted Subsidiary. "Restricted Debt Amount" shall mean as of any date of determination, the sum (without duplication) of the aggregate principal amount outstanding of all Restricted Debt. "Restricted Investment" shall mean any Investment by the Company or any Restricted Subsidiary other than (a) any Investment in (1) a marketable obligation, maturing within two years after acquisition thereof, issued or guaranteed by the United States of America or an instrumentality or agency thereof, and entitled to the full faith and credit of the United States of America, (2) a demand deposit account with, or a certificate of deposit or other obligation, maturing within one year after acquisition thereof, either fully insured by the Federal Deposit Insurance Corporation (or any successor Federal agency) or issued by a national or state bank or trust company having capital, surplus and undivided profits of at least $250,000,000, and having (or being the wholly-owned subsidiary of a holding company having) a credit rating in respect of its short-term obligations of A-2 or higher from Standard & Poor's Corporation or P-2 or higher from Moody's Investors Service, Inc., (3) open market commercial paper, maturing within 270 days after acquisition thereof, having a credit rating of A-2 or higher from Standard & Poor's Corporation or P-2 or higher from Moody's Investors Service, Inc. and (4) a demand deposit account either fully insured by the Federal Deposit Insurance Corporation (or any successor Federal Agency) or with a national or state bank or trust company having capital, surplus and undivided profits of at least $100,000,000, if such demand deposit account is required to conduct operations of the Company or any Restricted Subsidiary in the -57- 62 same local area in which such bank or trust company is located and the aggregate amount of Investments in all such demand deposit accounts permitted by this clause (4) does not exceed 1% of Net Worth; (b) any Investment existing on the date hereof, as set forth in Exhibit D hereto, including any extensions or renewals of any such Investment; (c) any Investment hereafter acquired in exchange for, or out of the net cash proceeds from the substantially concurrent sale of, common shares of the Company; (d) Investments in (i) shares of adjustable rate or floating rate preferred stock, variable rate notes or other Debt or equity issues of business corporations, or (ii) Debt issues of municipalities, the Issuers of which Investments described in this subsection (d) shall in any case have a credit rating in respect of their long-term obligations of A- or higher from Standard & Poor's Corporation or A3 or higher from Moody's Investors Service, Inc., provided (i) that the aggregate outstanding amount of Investments which shall at any time not constitute Restricted Investments pursuant to this Subsection (d) of the definition of Restricted Investments shall not exceed one-third of the then aggregate outstanding amount of all Investments of the Company and its Restricted Subsidiaries at such time (disregarding for this purpose Investments in Restricted Subsidiaries or joint ventures), and (ii) the aggregate outstanding amount of Investments issued by a single issuer which shall at any time not constitute Restricted Investments pursuant to this Subsection (d) shall not exceed $5,000,000; and (e) any Investment by the Company or any Restricted Subsidiary in any Restricted Subsidiary or any Person which simultaneously therewith becomes a Restricted Subsidiary. For the purposes of this definition, the outstanding amount of any Investment shall be the amount originally actually invested, net of any return of capital, and disregarding any appreciation or decline in value, or write-up, write-down or write-off, of the Investment concerned. -58- 63 "Restricted Payment," in respect of the Company, shall mean (a) the declaration of any dividend on, or the incurrence of any liability to make any other payment or distribution in respect of, shares of the Company of any class (other than one payable solely in its common shares); and (b) any payment or distribution on account of the purchase, redemption or other retirement of any shares of the Company of any class, or of any warrant, option or other right to acquire such shares, or any other payment or distribution (other than pursuant to a dividend theretofore declared or liability theretofore incurred as specified in the foregoing Subsection (a)), made in respect thereof, either directly or indirectly except a purchase, redemption or other retirement of shares of the Company out of the net cash proceeds from the substantially concurrent sale of common shares of the Company. The amount of any Restricted Payment in property shall be deemed to be the greater of its fair value (as determined by the Board) or its net book value. "Restricted Subsidiary" shall mean any Subsidiary of the Company which (a) is listed as a Restricted Subsidiary on Exhibit B or (b) is organized under the laws of, and conducts substantially all of its business and maintains substantially all of its property and assets within, the continental United States of America or any state thereof. Once a Subsidiary is or becomes a Restricted Subsidiary it may not thereafter become an Unrestricted Subsidiary. "Securities Act" shall mean the Securities Act of 1933, and any similar or successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Series" shall have the meaning specified in Section 1.4. "Series B Notes" shall have the meaning specified in Section 1.4. "Series C Notes" shall have the meaning specified in Section 1.4. -59- 64 "Series D Notes" shall have the meaning specified in Section 1.4. "Series E Notes" shall have the meaning specified in Section 1.4. "Series F Notes" shall have the meaning specified in Section 1.4. "Series G Notes" shall have the meaning specified in Section 1.4. "Series H Notes" shall have the meaning specified in Section 1.4. "Special Premium" shall mean, with respect to any purchase of the principal amount of Notes of any Series pursuant to Section 7.12 or any acceleration of the principal amount of any Substitute Note of any Series pursuant to Section 9.1 (such purchased or accelerated principal amount being hereinafter referred to as the "Prepaid Principal"), as at any date of determination, an amount equal to the greater of (i) zero and (ii) the excess of: A. the sum of the respective present values as of the date such Special Premium becomes due and payable of: (1) each prepayment of principal (if any) required to be made with respect to such Prepaid Principal pursuant to Section 4.1 with respect to such Prepaid Principal during the Discount Period, (2) the payment of principal balance required to be made at final maturity with respect to such Prepaid Principal, and (3) each payment of interest which would be required to be paid during such Discount Period with respect to such Prepaid Principal from time to time outstanding, determined, in the case of each such required prepayment, principal payment at final maturity and interest payment, by discounting the amount thereof (on a semiannual basis) from the date fixed therefor back to the date of payment of such Special Premium at the Reference Rate (assuming for such purpose that all such payments and prepayments of principal and payments of interest with respect to such Prepaid Principal were made -60- 65 when due pursuant to the terms of the Agreements and the Substitute Notes of such Series, and that no other payment or prepayment with respect to such Prepaid Principal was made), over B. the amount of such Prepaid Principal. For purposes of the foregoing definition of Special Premium, (1) "Discount Period" shall mean the period beginning on the date of such payment of Special Premium and ending on the stated final maturity of the Substitute Notes of the accelerated or purchased Series; and (2) "Reference Rate" shall mean a per annum rate determined by adding 0.50% to the annual yield for United States Treasury securities having a term to maturity equal to the Weighted Average Life to Maturity of the accelerated or purchased Series of Substitute Notes, as determined by reference to Federal Reserve Statistical Release H.15(519) ("Release H.15") published most recently prior to the third day preceding the date of such payment, or, if Release H.15 is no longer published, such annual yield as determined, at the Company's expense, by an independent investment banking firm acceptable to the Company and the holders of Substitute Notes of such Series; provided that, if there shall be no actual United States Treasury security having a term to maturity equal to such Weighted Average Life to Maturity of such Series of Substitute Notes, the annual yield for a United States Treasury security deemed to have such a term to maturity shall be interpolated on a basis consistent with the annual yields of other United States Treasury securities as determined by reference to Release H.15, or (if Release H.15 is no longer published) as determined at the Company's expense by such an independent investment banking firm. "Subordinated Debt" of any Person shall mean Debt of such Person which is expressly made subordinate and junior in right of payment to the Substitute Notes pursuant to terms contained in the instrument or agreement evidencing such Debt substantially in the form of Exhibit F. "Subsidiary" shall mean any corporation of which the Company and/or one or more of its Subsidiaries own more than 50% of the outstanding stock having by its terms ordinary voting power to elect a majority of the board of directors of such corporation, irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, and, except as otherwise expressly indicated herein, references to Subsidiaries shall refer to Subsidiaries of the Company. -61- 66 "Substitute Notes" shall have the meaning specified in Section 1.4. "Taxes" shall have the meaning specified in Section 15(d). "this Agreement" shall mean this Agreement of Assumption and Restatement (together with the Schedules and Exhibits hereto), as from time to time amended, modified or supplemented in accordance with its terms. "Total Capitalization" shall mean the sum of Net Worth and Total Debt. "Total Debt" shall mean, as at any date of determination, the aggregate amount (without duplication) of Debt of the Company and its Restricted Subsidiaries outstanding on such date, consolidated in accordance with GAAP after eliminating all intercompany items. Total Debt of the Company shall not in any event include Subordinated Debt of the Company to a Wholly-owned Restricted Subsidiary or Debt of a Wholly-owned Restricted Subsidiary to the Company or to another Wholly-owned Restricted Subsidiary. "Unrestricted Subsidiary" shall mean any Subsidiary other than a Restricted Subsidiary. "Voting Rights" shall have the meaning specified in Section 7.12. "Weighted Average Life to Maturity" as applied to any indebtedness at any date, shall mean the number of years (or portions of years) obtained by dividing (a) the then outstanding principal amount of such indebtedness into (b) the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the date on which such payment is to be made. "Wholly-owned Restricted Subsidiary" shall mean any Restricted Subsidiary, all of the equity securities (or all of the equity securities other than directors' qualifying shares) of which are owned by the Company or another Wholly-owned Restricted Subsidiary. "Wilmington Plant" shall mean the real and personal property of Heatcraft located at 602 Sunnyvale Drive, Wilmington, North Carolina. -62- 67 8.2. Accounting Terms. (a) All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP, all computations made pursuant to this Agreement shall be made in accordance with GAAP, and all balance sheets and other financial statements shall be prepared in accordance with GAAP. Any reference herein, or in any document delivered in connection herewith, to financial statements of the Company at a date prior to the merger referred to in Section 2.1 shall be deemed references to the financial statements of Lennox International Inc., an Iowa corporation. (b) If any changes in accounting principles from those used in the preparation of the most recent audited historical financial statements delivered to you prior to the Effective Date are hereafter required or permitted by the rules, regulations, pronouncements and opinions of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) and are adopted by the Company with the agreement of its independent certified public accountants and such changes result or could result (for any present or future period) in a change in the method of calculation of any of the financial covenants, standards or terms in or relating to such covenants, the parties hereto agree to enter into discussions with a view to amending such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the financial condition of the Company and its Subsidiaries shall be the same after such changes as if such changes had not been made, provided, that no change in GAAP that would affect or could affect (for any present or future period) the method of calculation of any of said financial covenants, standards or terms shall be given effect in such calculations until such provisions are amended, in a manner satisfactory to the Company and the holders of the Substitute Notes, to so reflect such change to GAAP. SECTION 9. EVENTS OF DEFAULT; REMEDIES. 9.1. Events of Default Defined; Acceleration of Maturity. If any of the following events (herein called "Events of Default") shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or by operation of law or otherwise), that is to say: (a) default shall be made in the due and punctual payment of all or any part of the principal of, or premium (if any) on, any Substitute Note when and as the same shall become due and payable, whether at stated maturity, by acceleration, by notice of prepayment or otherwise; -63- 68 (b) default shall be made in the due and punctual payment of any interest on any Substitute Note when and as such interest shall become due and payable, and such default shall have continued for a period of three Business Days; (c) (i) default shall be made in the performance or observance of any covenant, agreement or condition contained in Section 5(f)(i), any of Sections 7.4 through (and including) Section 7.10, Section 7.12 or Section 7.15; or (ii) default shall be made in the performance or observance of any other covenant, agreement or condition contained in the Agreements or the Substitute Notes not specified in Section 9.1(a) or Section 9.1 (b) or in the immediately preceding clause (i) of this Section 9.1(c) and such default shall have continued for a period of 30 days; (d) any event shall occur or any condition shall exist in respect of any Debt of the Company or any Restricted Subsidiary (other than the Substitute Notes) in an aggregate unpaid principal amount of $1,000,000 or more, or under any agreement securing or relating to any of such Debt, the effect of which is to cause or to permit the acceleration of the maturity of such Debt, or any such Debt shall not have been paid at the final maturity date thereof (as renewed or extended if such Debt shall have been renewed or extended) (provided that the words "or to permit" contained in the seventh line of this Section 9.1(d) shall be omitted from this Section 9.1(d) and of no effect at any time that and so long as neither the Company nor any Restricted Subsidiary shall any longer be a party to any agreement (other than this Agreement, the Other Agreements and any other agreement providing for automatic modification thereof in substantially the same form as this Section 9.1(d)) providing that the holder of any Debt of the Company or any Restricted Subsidiary may declare such Debt to be due and payable prior to the scheduled maturity thereof as a result of the occurrence of any default in the performance of any term or condition contained in the agreement or instrument evidencing any other Debt of the Company or any Restricted Subsidiary and further providing for such declaration regardless of whether such other Debt shall have been declared due and payable prior to the stated maturity thereof); -64- 69 (e) the Company or any Restricted Subsidiary shall (1) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (2) be generally unable to pay its debts as such debts become due, (3) make a general assignment for the benefit of its creditors, (4) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (5) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors' rights generally, (6) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under such Bankruptcy Code, (7) take any action under the laws of its jurisdiction of incorporation analogous to any of the foregoing, or (8) take any corporate action for the purpose of effecting any of the foregoing; (f) a proceeding or case shall be commenced, without the application or consent of the Company or any Restricted Subsidiary in any court of competent jurisdiction, seeking (1) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (3) similar relief in respect of it, under any law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 90 days; or an order for relief shall be entered in an involuntary case under such Bankruptcy Code, against the Company or any Restricted Subsidiary; or action under the laws of the jurisdiction of incorporation of the Company or any Restricted Subsidiary analogous to any of the foregoing shall be taken with respect to the Company or any Restricted Subsidiary and shall continue unstayed and in effect for any period of 90 consecutive days; (g) final judgment for the payment of money shall be rendered by a court of competent jurisdiction against the Company or any Restricted Subsidiary and the Company or any Restricted Subsidiary shall not discharge the same or provide -65- 70 for its discharge in accordance with its terms, or procure a stay of execution thereof within 60 days from the date of entry thereof and within said period of 60 days, or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, and such judgment together with all other such judgments shall exceed in the aggregate U.S. $1,000,000 (or the equivalent amount of any other currency); or (h) any representation or warranty made by (i) the Company in this Agreement or in any certificate or other instrument delivered hereunder or pursuant hereto or in connection with any provision hereof or (ii) any Issuing Subsidiary in any Existing Note Purchase Agreement to which it is a party or in any certificate or other instrument delivered thereunder or pursuant thereto or in connection with any provision thereof shall prove to be false or incorrect or breached in any material respect on the date as of which made; then (i) upon the occurrence of any Event of Default described in Subsection (e) or (f) with respect to the Company, the unpaid principal amount of all Substitute Notes, together with the interest accrued thereon which shall be deemed matured, shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Company, or (ii) during the continuance of any other Event of Default, the holder or holders of at least 66-2/3% of the unpaid principal amount of all of the Substitute Notes at the time outstanding may, by written notice to the Company, declare the unpaid principal amount of all Substitute Notes to be, and the same shall forthwith become due and payable, together with the interest accrued thereon which shall be deemed matured, plus (to the full extent permitted by applicable law) a premium equal to the Special Premium (determined with respect to such principal amount of Substitute Notes as of the date of such declaration, separately for each Series thereof), provided that, during the existence of an Event of Default described in Subsection (a) or (b) with respect to any Substitute Note, the holder of such Substitute Note may, by written notice to the Company, declare such Substitute Note to be, and the same shall forthwith become, due and payable, together with the interest accrued thereon which shall be deemed matured plus (to the full extent permitted by applicable law) a premium equal to the Special Premium determined as of the date of such declaration. If any holder of any Substitute Note shall exercise the option -66- 71 specified in the proviso to the preceding sentence, the Company will forthwith give written notice thereof to the holders of all other outstanding Substitute Notes of each Series and each such holder may (whether or not such notice is given or received), by written notice to the Company, declare the principal of all Substitute Notes held by it to be, and the same shall forthwith become, due and payable, together with the interest accrued thereon which shall be deemed matured. The provisions of this Section 9.1 are subject, however, to the condition that if, at any time after any Substitute Note shall have so become due and payable and prior to the entry of any final judgment for the payment of any monies due on the Substitute Notes or pursuant to the Agreements, the Company shall pay all arrears of interest on the Substitute Notes and all payments on account of the principal of and premium (if any) on the Substitute Notes which shall have become due otherwise than by acceleration (with interest on such principal, premium (if any) and, to the extent permitted by law, on overdue payments of interest, at the rate specified in the Substitute Notes) and all Events of Default (other than nonpayment of principal of and accrued interest on Substitute Notes due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 12, then, and in every such case, the holder or holders of at least 80% in unpaid principal amount of all of the Substitute Notes at the time outstanding, by written notice to the Company, may rescind and annul any such acceleration and its consequences; but no such action shall affect any subsequent Default or Event of Default or impair any right consequent thereon. 9.2. Suits for Enforcement. If any Event of Default shall have occurred and be continuing, the holder of any Substitute Note may proceed to protect and enforce its rights, either by suit in equity or by action at law, or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement, or the holder of any Substitute Note may proceed to enforce the payment of all sums due upon such Substitute Note or to enforce any other legal or equitable right of the holder of such Substitute Note. The Company covenants that, if it shall default in the making of any payment due under any Substitute Note or in the performance or observance of any agreement contained in this Agreement, it will pay to the holder thereof such further amounts, to the extent lawful, as shall be sufficient to pay the costs and expenses of collection or of otherwise enforcing such holder's rights, including reasonable counsel fees. -67- 72 9.3. Remedies Cumulative. No remedy herein conferred upon you or the holder of any Substitute Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 9.4. Remedies Not Waived. No course of dealing between the Company and you or the holder of any Substitute Note and no delay or failure in exercising any rights hereunder or under any Substitute Note in respect thereof shall operate as a waiver of any of your rights or the rights of any holder of such Substitute Note. SECTION 10. REGISTRATION, TRANSFER AND EXCHANGE OF SUBSTITUTE NOTES. The Company will keep at its address for notices under Section 16.4 a register (herein sometimes referred to as the "Note Register"), in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), it will provide for the registration and registration of transfer of the Substitute Notes of each Series. Whenever any Substitute Note or Notes shall be surrendered either at such address for notices of the Company or at the place of payment named in the Substitute Notes, for transfer or exchange, accompanied (if so required by the Company) by an appropriate written instrument of transfer duly executed by the registered holder of such Substitute Note or his attorney duly authorized in writing, the Company will execute and deliver in exchange therefor a Substitute Note or Notes, as may be requested by such holder, of the same Series and in the same aggregate unpaid principal amount as the aggregate unpaid principal amount of the Substitute Note or Notes so surrendered. Any Substitute Note issued in exchange for any other Substitute Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Substitute Note so exchanged or transferred, and neither gain nor loss of interest shall result from any such transfer or exchange. Any transfer tax relating to such transaction shall be paid by the holder requesting the exchange. The Company and any agent of the Company may treat the Person in whose name any Substitute Note is registered as the owner of such Note for the purpose of receiving payment of the principal of and premium (if any) and interest on such Substitute Note and for all other purposes whatsoever, whether or not such Substitute Note be overdue. -68- 73 SECTION 11. LOST, ETC. NOTES. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Substitute Note, and (in case of loss, theft or destruction) of indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Substitute Note, if mutilated, the Company will deliver in lieu of such Substitute Note a Substitute Note of the same Series in a like unpaid principal amount, dated as of the date to which interest has been paid thereon. Notwithstanding the foregoing provisions of this Section, if any Substitute Note of which you or any other institutional holder having a net worth of at least $50,000,000 is the owner is lost, stolen or destroyed, then the affidavit of your or such holder's Treasurer or Assistant Treasurer (or other responsible officials), setting forth the circumstances with respect to such loss, theft or destruction, shall be accepted as satisfactory evidence thereof, and no indemnity shall be required as a condition to the execution and delivery by the Company of a Substitute Note in lieu of such Substitute Note (or as a condition to the payment thereof, if due and payable) other than your or such holder's unsecured written agreement to indemnify the Company. SECTION 12. AMENDMENT AND WAIVER. (a) Any term, covenant, agreement or condition of the Agreements or of the Substitute Notes may, with the consent of the Company, be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by one or more substantially concurrent written instruments signed by the holder or holders of at least 66-2/3% in aggregate unpaid principal amount of all Substitute Notes at the time outstanding, provided, however, that (i) no such amendment or waiver shall (A) reduce the rate or extend the time of payment of interest on any of the Substitute Notes, without the consent of the holder of each Substitute Note so affected, or (B) modify any of the provisions of the Agreements or of the Substitute Notes with respect to the payment or prepayment thereof (including without limitation Section 7.12, the definition of the term "Special Premium" and any other related definitions), or extend -69- 74 the scheduled maturity of the Substitute Notes, or reduce the percentage of holders of Substitute Notes required to approve any such amendment or effectuate any such waiver, without the consent of the holders of all the Substitute Notes then outstanding, and (ii) no such waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. (b) Any amendment or waiver pursuant to Subsection (a) of this Section 12 shall (except as provided in Clause (a)(i)(A)) apply equally to all the holders of the Substitute Notes amended or waived and shall be binding upon them, upon each future holder of any Substitute Note and upon the Company, in each case whether or not a notation thereof shall have been placed on any Substitute Note. (c) The Company will not agree in writing to any amendment, modification or waiver of any of the provisions of the Agreements or the Substitute Notes unless each holder of Substitute Notes (irrespective of the amount of Substitute Notes then owned by it) shall be informed thereof by the Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. The Company will not, and will not permit any of its Subsidiaries or Affiliates to, offer or pay any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of Substitute Notes in order to obtain such holder's consent to any amendment, modification or waiver of any term or provision of the Agreements, or the Substitute Notes or any annulment or rescission of acceleration pursuant to Section 9.1, unless such remuneration or inducement is concurrently paid on the same terms proportionately to each holder of Substitute Notes then outstanding regardless of whether or not such holder consents to such waiver, amendment, annulment or rescission. SECTION 13. HOME OFFICE PAYMENT. Notwithstanding anything to the contrary in this Agreement or the Substitute Notes, so long as you or any nominee designated by you shall be the holder of any Substitute Note, the Company shall punctually pay all amounts which become due and payable on such Substitute Note to you by 11:00 a.m., New York City time, at your address and in the manner set forth in Schedule I hereto, or at such other place within the United States and in such other manner as you may designate by notice to the Company, without presentation or surrender of such Substitute Note. You agree that prior to the sale, -70- 75 transfer or other disposition of any such Substitute Note, you will make notation thereon of the portion of the principal amount paid or prepaid and the date to which interest has been paid thereon, or surrender the same in exchange for a Substitute Note or Notes aggregating the same principal amount as the unpaid principal amount of the Substitute Note so surrendered. The Company shall enter into an agreement similar to that contained in the first sentence of this Section 13 with any other institutional investor (or nominee thereof) who shall hold any of the Substitute Notes and who shall make with the Company an agreement similar to that contained in the second sentence of this Section. SECTION 14. LIABILITIES OF THE HOLDERS. Neither this Agreement nor any disposition of any of the Substitute Notes shall be deemed to create any liability or obligation on your part or that of any other holder of any Substitute Note of any Series to enforce any provision hereof or of any of the Substitute Notes of any other Series for the benefit or on behalf of any other Person who may be the holder of any Substitute Note. SECTION 15. TAXES. (a) The Company will pay all taxes (including interest and penalties) which may be payable in respect of the execution and delivery of this Agreement or of the execution and delivery (but not the transfer) of any of the Substitute Notes or of any amendment of, or waiver or consent under or with respect to, the Agreements or of any of the Substitute Notes and will save you and all subsequent holders of the Substitute Notes harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax. The obligations of the Company under this Section 15 shall survive the payment of the Substitute Notes. (b) In the event the assumption and amendment and restatement of the Existing Note Purchase Agreements or the delivery of the Substitute Notes to you as described herein are determined to result in any taxable income to you and such determination results in additional Taxes (as hereinafter defined) being due from you, the Company hereby agrees to indemnify you, and to hold you harmless, on an After-Tax Basis, from and against any and all such additional Taxes. You will pay to the Company an amount which, after deduction of all federal, state and local tax savings realized by you as a result of any payment made pursuant to this sentence, shall equal the federal, state and local tax savings realized by you as a result of the adjustments giving rise to such Taxes, promptly as and when the same are realized; provided, however, that such payment shall not exceed the sum of all prior payments made by the Company to you pursuant to this Section 15(b) reduced by all prior payments -71- 76 made by you to the Company pursuant to this sentence; and provided, further, that no payment shall be made to the Company pursuant to this sentence if an Event of Default shall have occurred and be continuing or prior to such time as all amounts theretofore required and then due and payable to you hereunder or under the Substitute Notes shall have been paid in full. Any payment due to you from the Company under this Section 15 shall be payable within 5 days after receipt of written demand therefor or, in the case of Taxes being contested pursuant to Section 15(c), within 5 days after the final resolution of such contest. In the event you receive a refund of any Taxes previously paid to you by the Company, you shall promptly pay to the Company the amount of such refund, together with any interest received thereon; provided, however, that such payment shall not be made to the Company if an Event of Default shall have occurred and be continuing or prior to such time as all amounts theretofore required and then due and payable to you hereunder or under the Substitute Notes shall have been paid in full. For purposes of this Section 15(b), any tax savings in respect of which a payment is due to the Company shall be deemed to be realized upon the first to occur of (i) a reduction in your federal, state or local taxes resulting from the adjustments giving rise to Taxes as reflected in a final return filed for the applicable period, (ii) the receipt of an increased federal, state or local tax refund or credit resulting from the adjustments giving rise to Taxes or (iii) an increase in a net operating loss or capital loss or net operating loss or capital loss carryover for federal, state or local tax purposes resulting from the adjustments giving rise to Taxes. For purposes of determining the tax savings attributable to an increase in a net operating loss or capital loss or net operating loss or capital loss carryover, the amount of the increase shall be multiplied by the highest applicable marginal federal, state or local income tax rate in effect for the period of such reduction. The determination as to whether any tax savings with respect to which a payment may be due to the Company under this Section 15(b) are realized and the timing and amount thereof shall be made by you in your sole good faith discretion (it being understood that the Company shall have no right to inspect or examine any tax returns or other records or documents relating to your tax situation). (c) If any written claim shall be made against you or if any proceeding shall be commenced against you (including a written notice of such proceeding) for any Taxes, or if you shall determine that any Taxes may be payable, you shall promptly notify the Company in writing and shall not take any action with respect to such claim, proceeding or Tax without the consent of the Company for 15 days after receipt of such notice by the Company; provided, however, that if you are required by law or regulation to -72- 77 take action with respect to any such claim, proceeding or Tax prior to the end of such 15-day period, you shall, in such notice, so inform the Company, and shall not take any action with respect to such claim, proceeding or Tax without the consent of the Company before the date on which you are required to take action. If, within 30 days after receipt of such notice (or such shorter period referred to in the preceding sentence), the Company shall request in writing that you contest the imposition of such Taxes, you shall, at the Company's expense (including, without limitation, all costs, expenses and reasonable attorneys' and accountants' fees and disbursements) in good faith, contest (including, without limitation, by pursuit of appeals) the validity, applicability or amount of such Taxes by, in your sole discretion, (i) resisting payment thereof, (ii) not paying the same except under protest, if protest shall be necessary and proper, or (iii) if payment shall be made, using reasonable efforts to obtain a refund thereof or credit therefor in appropriate administrative and judicial proceedings; provided, however, that you shall not be required to contest the imposition of any Tax unless (x) the Company shall have agreed to pay all reasonable costs and expenses that you may incur in connection with contesting such claim (including, without limitation, all costs, expenses, reasonable legal and accounting fees and disbursements) and (y) if such contest shall involve payment of the claim, the Company shall advance to you the amount thereof, plus interest, penalties and additions to tax with respect thereto, on an interest-free basis and with no additional net after-tax cost to you. Notwithstanding the foregoing, in no event will you be required to contest the imposition of any Tax unless: (i) no Event of Default shall have occurred and be continuing; (ii) the Company shall have acknowledged in writing its obligation to indemnify you for such Taxes in the event the contest is unsuccessful; (iii) you shall have received an opinion of your independent tax counsel, at the Company's sole expense, to the effect that a meritorious basis exists for contesting such claim or, in the event of an appeal, it is more likely than not that such adverse determination would be reversed or substantially modified in a manner favorable to the taxpayer (and provided that no appeal shall be required to the United States Supreme Court); and (iv) the amount of such claim alone, or if the subject matter thereof shall be of a continuing or recurring nature, when aggregated with identical potential claims asserted against you shall be in excess of $125,000. You shall consult in good faith with the Company regarding the conduct of any contest by you. Notwithstanding anything contained in Section 15, you will not be required to contest the imposition of any Taxes if you shall waive your right to indemnity under this Section 15 with respect to such Taxes and shall pay to the Company any amount previously paid or advanced by the Company pursuant to this Section 15 (by way -73- 78 of indemnification or advance for the payment of any Taxes) with respect to such Taxes. Notwithstanding anything contained in this Section 15 to the contrary, you shall not be required to contest any claim if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely pursuant to the contest provisions of this Section 15 unless there shall have been a change in law (including, without limitation, amendments to statutes or regulations, administrative rulings and court decisions) enacted, promulgated or decided after such claim shall have been so previously decided, and you shall have received an opinion of your independent tax counsel furnished at the Company's sole expense, to the effect that as a result of such change in the law it is more likely than not that you will prevail in the contest of such claim. (d) For purposes of this Section 15: (i) "Taxes" shall mean the sum of, without duplication, (A) the amount of the federal, state and local taxes paid by you relating to the transactions contemplated by this Agreement; (B) the reduction of your net operating loss or capital loss or net operating or capital loss carryover for federal, state or local tax purposes relating to the transactions contemplated by this Agreement multiplied by the highest applicable marginal federal, state or local income tax rate in effect for the period of such reduction; (C) the amount of any federal, state or local tax refund or credit to which you would otherwise be entitled and which is offset or reduced as a result of the transactions contemplated by this Agreement; (D) the amount of any interest, penalties or other additions to tax paid by you as a result of the transactions contemplated by this Agreement; and (E) the amount of any interest to which you would have been entitled with respect to any refund described in clause (C) above had such amount not been offset as a result of the transactions contemplated by this Agreement. "After-Tax Basis", when referring to any indemnity payment due to you hereunder, shall mean that amount which, after reducing such amount by all federal, state and local taxes attributable to the inclusion by you of such amount in gross income, and after giving effect to any federal, state and local tax savings attributable to any deductions (including any increase in a net operating or capital loss carryover deduction) arising from your payment of any Taxes with respect to which such indemnity payment is being made (such taxes or tax savings, as the case may be, to be calculated at the highest applicable marginal income tax rate in effect for each applicable jurisdiction for the period in which such indemnity payment is made and after taking into account the deduction attributable to the imposition of state and local income taxes imposed on the inclusion of such amount in gross income) is equal to the Taxes with respect to which such indemnity payment is being made. Any factual assumptions, tax rate assumptions or -74- 79 assumptions relating to the appropriate tax treatment of a particular item (including assumptions as to timing) will be made by you in your sole good faith discretion (it being understood that the Company shall have no right to inspect or examine any tax returns or other records or documents relating to your tax situation). At the request of the Company, the accuracy of the calculation of any amount or amounts payable by the Company or you under Section 15(b) shall be verified, at the Company's sole expense, by an independent "big six" public accounting firm selected by you and reasonably satisfactory to the Company, and such verification shall be binding on the Company and you. The Company agrees that it shall have no right to review or otherwise have access to any information or any tax or financial data used by such independent public accountants, all such information and data to be treated by such independent public accountants as confidential. SECTION 16. MISCELLANEOUS. 16.1. Expenses. Whether or not the transactions contemplated hereby are consummated, the Company shall: (a) pay the reasonable fees and disbursements of your special counsel and of any local counsel for any services rendered in connection with such transactions or in connection with any actual or proposed amendment, waiver or consent (whether or not the same becomes effective) with respect to this Agreement or the Substitute Notes, and all other reasonable expenses in connection therewith (including, without limitation, document production expenses and expenses incurred in connection with obtaining a private placement number from Standard and Poor's CUSIP Service Bureau); (b) reimburse you for your reasonable out-of-pocket expenses in connection with such transactions, amendments, waivers or consents (whether or not the same becomes effective), and any items of the character referred to in clause (a) which shall have been paid by you, and pay the cost of transmitting Substitute Notes (insured to your satisfaction) to your principal office upon the issuance thereof; and (c) pay, and save you and each subsequent holder of any Substitute Note harmless from and against, any and all liability and loss with respect to or resulting from the non-payment or delayed payment of any and all placement fees and other liability which the Company may be or become obligated to pay any agent or finder in connection with such transactions. The obligations of the Company under this Section 16.1 shall survive payment of the Substitute Notes. 16.2. Reliance on and Survival of Representations. All agreements, representations and warranties of the Company herein and in any certificates or other instruments delivered pursuant to this Agreement shall (a) be deemed to be material and to have been relied upon by -75- 80 you, notwithstanding any investigation heretofore or hereafter made by you or on your behalf, and (b) survive the execution and delivery of this Agreement and the delivery of the Substitute Notes to you, and shall continue in effect so long as any Substitute Note is outstanding and thereafter as provided in Sections 15 and 16.1. 16.3. Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of the respective parties hereto shall bind and inure to the benefit of their respective successors and assigns, except that, in the case of a successor to the Company by consolidation or merger or a transferee of its assets, this Agreement shall inure to the benefit of such successor or transferee only if it becomes such in accordance with Section 7.10; provided, however, that you shall not be obligated to accept the assumption of the Existing Notes held by you on the Effective Date by any Person other than the existing Lennox International Inc., a Delaware corporation. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of the Substitute Notes, and shall be enforceable by any such holder, whether or not an express assignment to such holder of rights under this Agreement has been made by you or your successor or assign, provided, however, that the benefit of Sections 5, 6, 11 (as to satisfactory indemnity) and 13 shall be limited as provided therein. 16.4. Notices. All notices, opinions and other communications provided for in this Agreement shall be in writing and delivered or mailed, first class postage prepaid, addressed (a) if to the Company, at the address set forth at the head of this Agreement (marked for the attention of the Executive Vice President, Chief Financial Officer and Treasurer), or at such other address as the Company may hereafter designate by notice to you and to each other holder of any Substitute Note at the time outstanding, or (b) if to you, at your address as set forth in Schedule I hereto or at such other address as you may hereafter designate by notice to the Company, or (c) if to any other holder of any Substitute Note, at the address of such holder as it appears on the Note Register. 16.5. Substitution of Your Wholly-Owned Subsidiary. You shall have the right to substitute one of your wholly-owned subsidiaries as the holder of any of the Substitute Notes to be delivered to you hereunder, by written notice delivered to the Company, which notice shall be signed by you and such subsidiary, shall contain such subsidiary's agreement to be bound by this Agreement and shall contain a confirmation by such subsidiary of the accuracy with respect to it of the representations contained in Section 1.5, provided that such confirmation may contain -76- 81 a statement to the effect that such subsidiary shall at all times have the right to transfer the Substitute Notes being delivered to it to you. The Company agrees that, upon receipt of any such notice, whenever the word "you" is used in this Agreement (other than this Section) such word shall be deemed to refer to such subsidiary in lieu of you. In the event that such subsidiary is so substituted hereunder and thereafter transfers its Substitute Notes or any portion thereof to you, upon receipt by the Company of notice of such transfer, whenever the word "you" is used in this Agreement (other than in this Section) such word shall be deemed to refer to such subsidiary only to the extent it retains any portion of the Substitute Notes, and shall be deemed to refer to you to the extent you own all or any portion of the Substitute Notes, and you and such subsidiary to such extents shall each have all the rights of an original holder of Substitute Notes under this Agreement. 16.6. LAW GOVERNING. THIS AGREEMENT AND THE SUBSTITUTE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16.7. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms hereof. 16.8. Entire Agreement. This Agreement embodies the entire agreement and understanding between you and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. 16.9. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 16.10. Limitation on Interest. No provision of the Agreements or of any Substitute Note shall require the payment or permit the collection of interest in excess of the maximum which is permitted by applicable law. If any such excess interest is provided for herein or in the Other Agreements or shall be adjudicated to be so provided for, then the Company shall not be obligated to pay such interest in excess of the maximum permitted by applicable law, and the holders of the Substitute Notes shall have no right to demand or receive payment of any such excess interest, any other provisions in the Agreements or in any Substitute Note to the contrary notwithstanding. To the extent that the Company is permitted by law to waive any such applicable law limiting the payment or collection of interest, it hereby does so. -77- 82 16.11. Interpretation of Disclosures. In connection with the representations, warranties and certifications made by the Company pursuant to this Agreement, the Company is required to make certain disclosures to you with respect to possible or contingent losses and liabilities. The Company shall be free to make disclosures to you in addition to those required under this Agreement, and the making of any disclosure by the Company pursuant to this Agreement shall not constitute an admission by the Company that any such possible or contingent loss or liability actually exists or is owed. If you are in agreement with the foregoing, please sign the form of acceptance in the space provided below whereupon this Agreement shall become a binding agreement between you and the Company. Very truly yours, LENNOX INTERNATIONAL INC. By /s/ Clyde Wyant ------------------------------------ Title: Executive Vice President, Chief Financial Officer and Treasurer The foregoing Agreement is hereby accepted as of the date first above written: [TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA* By/s/ Roderic L. Eaton --------------------------------- Title:]Managing Director - Private Placements [CONNECTICUT GENERAL LIFE INSURANCE COMPANY* By CIGNA Investments, Inc. By /s/ James G. Schelling ------------------------------- Title:]Managing Director - ------------- * NOTE: Each purchaser will execute a separate agreement. -78- 83 [INA LIFE INSURANCE COMPANY OF NEW YORK* By CIGNA Investments, Inc. By /s/ James G. Schelling ------------------------------- Title:] Managing Director [TANDEM INSURANCE GROUP, INC.* By /s/ David M. Dunford ------------------------------- Title:] Senior Vice President [THE TRAVELERS INSURANCE COMPANY* By /s/ Jordan M. Stitzer ------------------------------- Title:] Second Vice President [THE CHARTER OAK FIRE INSURANCE COMPANY* By /s/ Jordan M. Stitzer ------------------------------- Title:] Second Vice President [THE TRAVELERS LIFE AND ANNUITY COMPANY* By /s/ Jordan M. Stitzer ------------------------------- Title:] Second Vice President [THE PHOENIX INSURANCE COMPANY* By /s/ Jordan M. Stitzer ------------------------------- Title:] Second Vice President [THE TRAVELERS INDEMNITY COMPANY* By /s/ Jordan M. Stitzer ------------------------------- Title:] Second Vice President -79- 84 EXHIBIT A-1 LENNOX INTERNATIONAL INC. 9.55% SERIES B SENIOR PROMISSORY NOTE DUE DECEMBER 1, 1996 Note No. RB- New York, N.Y. $ , 1991 Private Placement No. 52610* AA 1 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 1996, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 9.55% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 10.55% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 9.55% Series B Senior Promissory Notes due 1996 of the Company (the "Series B Notes") issued, together with the Company's 11.05% Series C Senior Promissory Notes due 1997, 9.60% Series D Senior Promissory Notes due 1998, 10.15% Series E Senior Promissory Notes due 1998, 9.53% Series F Senior Promissory Notes due 2001, 9.50% Series G Senior Promissory Notes due 2001 and 9.69% Series H Senior Promissory Notes due 2003 (collectively, together with the Series B Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life 85 Insurance Company of New York, Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series B Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series B Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series B Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series B Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series B Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series B Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------- Title: -2- 86 EXHIBIT A-2 LENNOX INTERNATIONAL INC. 11.05% SERIES C SENIOR PROMISSORY NOTE DUE DECEMBER 1, 1997 Note No. RC- New York, N.Y. $ , 1991 Private Placement No. 52610* AB 9 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 1997, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 11.05% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 12.05% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 11.05% Series C Senior Promissory Notes due 1997 of the Company (the "Series C Notes") issued, together with the Company's 9.55% Series B Senior Promissory Notes due 1996, 9.60% Series D Senior Promissory Notes due 1998, 10.15% Series E Senior Promissory Notes due 1998, 9.53% Series F Senior Promissory Notes due 2001, 9.50% Series G Senior Promissory Notes due 2001 and 9.69% Series H Senior Promissory Notes due 2003 (collectively, together with the Series C Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life 87 Insurance Company of New York, Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series C Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series C Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series C Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series C Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series C Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series C Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------- Title: -2- 88 EXHIBIT A-3 LENNOX INTERNATIONAL INC. 9.60% SERIES D SENIOR PROMISSORY NOTE DUE DECEMBER 1, 1998 Note No. RD- New York, N.Y. $ , 1991 Private Placement No. 52610* AC 7 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 1998, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 9.60% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 10.60% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 9.60% Series D Senior Promissory Notes due 1998 of the Company (the "Series D Notes") issued, together with the Company's 9.55% Series B Senior Promissory Notes due 1996, 11.05% Series C Senior Promissory Notes due 1997, 10.15% Series E Senior Promissory Notes due 1998, 9.53% Series F Senior Promissory Notes due 2001, 9.50% Series G Senior Promissory Notes due 2001 and 9.69% Series H Senior Promissory Notes due 2003 (collectively, together with the Series D Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life 89 Insurance Company of New York, Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series D Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series D Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series D Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series D Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series D Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series D Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------- Title: -2- 90 EXHIBIT A-4 LENNOX INTERNATIONAL INC. 10.15% SERIES E PROMISSORY NOTE DUE DECEMBER 1, 1998 Note No. RE- New York, N.Y. $ , 1991 Private Placement No. 52610* AD 5 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 1998, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 10.15% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 11.15% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 10.15% Series E Senior Promissory Notes due 1998 of the Company (the "Series E Notes") issued, together with the Company's 9.55% Series B Senior Promissory Notes due 1996, 11.05% Series C Senior Promissory Notes due 1997, 9.60% Series D Senior Promissory Notes due 1998, 9.53% Series F Senior Promissory Notes due 2001, 9.50% Series G Senior Promissory Notes due 2001 and 9.69% Series H Senior Promissory Notes due 2003 (collectively, together with the Series E Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life 91 Insurance Company of New York, Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series E Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series E Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series E Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series E Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series E Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series E Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------- Title: -2- 92 EXHIBIT A-5 LENNOX INTERNATIONAL INC. 9.53% SERIES F SENIOR PROMISSORY NOTE DUE DECEMBER 1, 2001 Note No. RF- New York, N.Y. $ , 1991 Private Placement No. 52610* AE 3 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 2001, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 9.53% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 10.53% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 9.53% Series F Senior Promissory Notes due 2001 of the Company (the "Series F Notes") issued, together with the Company's 9.55% Series B Senior Promissory Notes due 1996, 11.05% Series C Senior Promissory Notes due 1997, 9.60% Series D Senior Promissory Notes due 1998, 10.15% Series E Senior Promissory Notes due 1998, 9.50% Series G Senior Promissory Notes due 2001 and 9.69% Series H Senior Promissory Notes due 2003 (collectively, together with the Series F Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life 93 Insurance Company of New York, Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series F Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series F Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series F Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series F Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series F Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series F Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------- Title: -2- 94 EXHIBIT A-6 LENNOX INTERNATIONAL INC. 9.50% SERIES G SENIOR PROMISSORY NOTE DUE DECEMBER 1, 2001 Note No. RG- New York, N.Y. $ , 1991 Private Placement No. 52610* AF 0 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 2001, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 9.50% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 10.50% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 9.50% Series G Senior Promissory Notes due 2001 of the Company (the "Series G Notes") issued, together with the Company's 9.55% Series B Senior Promissory Notes due 1996, 11.05% Series C Promissory Notes due 1997, 9.60% Series D Senior Promissory Notes due 1998, 10.15% Series E Senior Promissory Notes due 1998, 9.53% Series F Senior Promissory Notes due 2001 and 9.69% Series H Senior Promissory Notes due 2003 (collectively, together with the Series G Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life Insurance Company of New York, 95 Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series G Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series G Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series G Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series G Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series G Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series G Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------- Title: -2- 96 EXHIBIT A-7 LENNOX INTERNATIONAL INC. 9.69% SERIES H SENIOR PROMISSORY NOTE DUE DECEMBER 1, 2003 Note No. RH- New York, N.Y. $ , 1991 Private Placement No. 52610* AG 8 FOR VALUE RECEIVED, the undersigned, LENNOX INTERNATIONAL INC., a corporation organized and existing under the laws of the State of Delaware (herein called the "Company"), hereby promises to pay to or registered assigns, the principal sum of DOLLARS (or so much thereof as shall not have been prepaid) on December 1, 2003, with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal hereof at the rate of 9.69% per annum from the date hereof, payable semiannually on June 1 and December 1 in each year, commencing on June 1, 1992, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 10.69% per annum on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, until the same shall be paid. Payments of principal, premium, if any, and interest are to be made in lawful money of the United States of America at the office of Morgan Guaranty Trust Company of New York, 23 Wall Street, New York, New York 10015, or at such other place as may be provided pursuant to the Agreements of Assumption and Restatement referred to below. This Note is one of the 9.69% Series H Senior Promissory Notes due 2003 of the Company (the "Series H Notes") issued, together with the Company's 9.55% Series B Senior Promissory Notes due 1996, 11.05% Series C Senior Promissory Notes due 1997, 9.60% Series D Senior Promissory Notes due 1998, 10.15% Series E Senior Promissory Notes due 1998, 9.53% Series F Senior Promissory Notes due 2001 and 9.50% Series G Senior Promissory Notes due 2001 (collectively, together with the Series H Notes, the "Notes") pursuant to the nine separate Agreements of Assumption and Restatement, each dated as of December 1, 1991, between the Company and each of Teachers Insurance and Annuity Association of America, The Travelers Insurance Company, The Travelers Indemnity Company, The Travelers Life Insurance Company, The Charter Oak Fire Insurance Company, Connecticut General Life Insurance Company, INA Life 97 Insurance Company of New York, Tandem Insurance Group, Inc. and The Phoenix Insurance Company and is subject thereto and entitled to the benefits thereof. As provided in said Agreements, this Series H Note is subject to optional prepayments in whole or in part, in certain cases with a premium, and also to required prepayments, all as specified in said Agreements. Upon surrender of this Series H Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Series H Note for a like principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may deem and treat the Person in whose name this Series H Note is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and the Company shall not be affected by any notice to the contrary. Said Agreements provide that by acceptance of this Series H Note the holder hereof shall be deemed to have agreed to certain obligations of confidentiality in respect of certain information received by such holder pursuant to said Agreements. In case an Event of Default (as defined in said Agreements) shall occur and be continuing, the principal of this Series H Note may become or be declared due and payable in the manner and with the effect provided in said Agreements. LENNOX INTERNATIONAL INC. By ------------------------------------- Title: -2-
   1
                                                                   EXHIBIT 10.2


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                            LENNOX INTERNATIONAL INC.





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                             NOTE PURCHASE AGREEMENT



                          Dated as of December 1, 1993



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                     6.73% Senior Promissory Notes due 2008





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   2



                                                 TABLE OF CONTENTS
                                                 -----------------
Page ---- SECTION 1. PURCHASE OF NOTES............................................................................. 1 1.1. Authorization................................................................................. 1 1.2. Purchase and Sale of Notes; the Closing....................................................... 2 1.3. Investment Representation..................................................................... 2 1.4. Source of Funds............................................................................... 2 SECTION 2. REPRESENTATIONS OF THE COMPANY................................................................ 3 2.1. Organization and Authority of the Company..................................................... 3 2.2. Disclosure.................................................................................... 3 2.3. Incorporation, Good Standing and Ownership of Shares of Subsidiaries.................................................................................. 3 2.4. Financial Statements.......................................................................... 4 2.5. Compliance with Other Instruments of the Company; No Dividend Restriction................................................................................... 5 2.6. Governmental Authorizations, etc.............................................................. 5 2.7. Litigation; Observance of Statutes, Regulations and Orders.................................... 6 2.8. Taxes......................................................................................... 6 2.9. Title to Property............................................................................. 7 2.10. Licenses, Permits, etc........................................................................ 7 2.11. Compliance with ERISA......................................................................... 7 2.12. Private Offering by the Company............................................................... 8 2.13. Solvency...................................................................................... 8 2.14. Use of Proceeds; Margin Regulations........................................................... 8 2.15. Existing Debt................................................................................. 9 2.16. Existing Investments.......................................................................... 9 2.17. Foreign Assets Control Regulations, etc....................................................... 9 2.18. Status Under Certain Statutes................................................................. 10 2.19. Environmental Matters......................................................................... 10 SECTION 3. CONDITIONS OF CLOSING......................................................................... 10 3.1. Proceedings Satisfactory...................................................................... 10 3.2. Opinions of Counsel........................................................................... 10 3.3. Representations True, etc.; Officers' Certificate............................................. 10 3.4. Legality...................................................................................... 11 3.5. Absence of Certain Events..................................................................... 11
-i- 3 3.6. Other Agreements, etc......................................................................... 11 3.7. Private Placement Number...................................................................... 11 3.8. Fees Payable at Closing....................................................................... 11 3.9. Delivery of Letter Agreement.................................................................. 12 SECTION 4. PREPAYMENT, PAYMENT AND PURCHASE OF THE NOTES................................................. 12 4.1. Mandatory Prepayments of the Notes; Payment at Maturity....................................... 12 4.2. Optional Prepayment of the Notes.............................................................. 12 4.3. Special Purchase of Notes..................................................................... 13 4.4. Notice of Prepayment.......................................................................... 13 4.5. Allocation of Prepayments..................................................................... 13 4.6. Surrender of Notes............................................................................ 13 4.7. Purchase of Notes............................................................................. 13 4.8. Maturity...................................................................................... 13 SECTION 5. FINANCIAL STATEMENTS AND INFORMATION.......................................................... 13 SECTION 6. INSPECTION OF PROPERTIES AND BOOKS............................................................ 18 SECTION 7. COVENANTS..................................................................................... 19 7.1. Payment of Principal, Special Premium and Interest; Maintenance of Books and Reserves.................................................................................. 19 7.2. Payment of Taxes; Corporate Existence; Maintenance of Properties; Compliance with Laws.......................................................................... 20 7.3. Insurance..................................................................................... 20 7.4. Debt.......................................................................................... 21 7.5. Liens......................................................................................... 22 7.6. Dividends and Other Restricted Payments; Restricted Investments............................... 23 7.7. Sales and Leasebacks.......................................................................... 25 7.8. Maintenance of Certain Financial Conditions................................................... 25 7.9. Subsidiary Stock and Debt..................................................................... 25 7.10. Consolidation, Merger or Disposition of Assets................................................ 26 7.11. Issuance of Stock............................................................................. 28 7.12. Purchase of Notes Upon Change of Control...................................................... 28 7.13. Transactions with Affiliates.................................................................. 30 7.14. Change in Business............................................................................ 30 7.15. Environmental Matters......................................................................... 30 7.16. Limitation on Dividend Restrictions, etc...................................................... 30 7.17. Most Favored Lender's Status.................................................................. 30 SECTION 8. DEFINITIONS................................................................................... 31
-ii- 4 8.1. Definitions................................................................................... 31 8.2. Accounting Terms.............................................................................. 42 SECTION 9. EVENTS OF DEFAULT; REMEDIES................................................................... 43 9.1. Events of Default Defined; Acceleration of Maturity........................................... 43 9.2. Suits for Enforcement......................................................................... 46 9.3. Remedies Cumulative........................................................................... 46 9.4. Remedies Not Waived........................................................................... 46 SECTION 10. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES....................................................... 46 SECTION 11. LOST, ETC. NOTES................................................................................... 47 SECTION 12. AMENDMENT AND WAIVER............................................................................... 47 SECTION 13. HOME OFFICE PAYMENT................................................................................ 48 SECTION 14. LIABILITIES OF THE HOLDERS......................................................................... 49 SECTION 15. TAXES.............................................................................................. 49 SECTION 16. MISCELLANEOUS...................................................................................... 49 16.1. Expenses...................................................................................... 49 16.2. Reliance on and Survival of Representations................................................... 50 16.3. Successors and Assigns........................................................................ 50 16.4. Notices....................................................................................... 50 16.5. Substitution of Your Wholly-Owned Subsidiary.................................................. 50 16.6. Law Governing................................................................................. 51 16.7. Headings...................................................................................... 51 16.8. Entire Agreement.............................................................................. 51 16.9. Counterparts.................................................................................. 51 16.10. Maximum Interest Payable...................................................................... 51 16.11. Interpretation of Disclosures................................................................. 52 16.12. Notice to Transferees......................................................................... 52 16.13. Consent to Jurisdiction; Service of Process................................................... 52
-iii- 5 SCHEDULE I -- Names and Addresses of Purchasers EXHIBIT A -- Form of Notes EXHIBIT B -- Subsidiaries EXHIBIT C -- Debt EXHIBIT D -- Investments EXHIBIT E -- Form of Opinion of Company's Counsel EXHIBIT F -- Form of Subordination Provisions EXHIBIT G -- Letter Agreement -iv- 6 LENNOX INTERNATIONAL INC. 2100 Lake Park Boulevard Richardson, Texas 75080 NOTE PURCHASE AGREEMENT as of December 1, 1993 To the Noteholder Identified on the Signature Page at the End of this Agreement: Ladies and Gentlemen: LENNOX INTERNATIONAL INC., a Delaware corporation (together with any successor or transferee which becomes such in the manner specified in Section 7.10, the "Company"), hereby agrees with you as follows: SECTION 1. PURCHASE OF NOTES. 1.1. Authorization. The Company has duly authorized an issue of its 6.73% promissory notes due December 1, 2008 in the aggregate principal amount of $100,000,000, each such Note to be substantially in the form of Exhibit A. As used herein, the term "Notes" shall include all notes originally issued pursuant to this Agreement and all Other Agreements referred to below and all notes delivered in substitution or exchange for any of said notes and, where applicable, shall include the singular number as well as the plural. The term "Note" shall mean one of the Notes. Each Note is to (a) bear interest from the date thereof on the unpaid principal amount thereof at the rate of 6.73% per annum (computed on the basis of a 360-day year of twelve 30-day months) payable semiannually on June 1 and December 1 of each year, commencing June 1, 1994, and with interest (so computed) on any overdue principal (including any overdue prepayment of principal) and the Special Premium and (to the extent permitted by applicable law) on any overdue interest at the rate of 8.73% per annum until paid, payable semiannually as aforesaid or, at the option of the registered holder thereof, on demand and (b) mature and be due and payable as to the entire remaining unpaid principal amount thereof on December 1, 2008. Capitalized terms used and not otherwise defined herein shall have the respective meanings assigned thereto in Section 8. Unless otherwise specified, any reference in this Agreement to a particular section or other subdivision, or a particular schedule or exhibit, shall be considered a reference to that section or other subdivision of, or to that schedule or exhibit to, this Agreement. -1- 7 1.2. Purchase and Sale of Notes; the Closing. The Company shall issue and sell to you and, subject to the terms and conditions hereof, you shall purchase from the Company, Notes in the aggregate principal amount set forth opposite your name on Schedule I hereto, at a price equal to 100% of the principal amount thereof. The closing of the purchase of the Notes shall be held commencing at 9:00 A.M., Dallas time, on December 1, 1993 (the "Closing Date"), at the offices of Baker & Botts, L.L.P., located at 2001 Ross Avenue, Dallas, Texas. On the Closing Date the Company will deliver to you the Notes to be purchased by you in the form of a single Note in the principal amount shown opposite your name on Schedule I (or such greater number of Notes aggregating such principal amount as you may request), dated the Closing Date and registered in your name (or the name of your nominee) against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer to the Company's account number 849820 at The Northern Trust Company (ABA #071000152). If on the Closing Date the Company shall fail to tender such Notes to you as provided in this Section 1.2, or any of the conditions specified in Section 3 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights you may have by reason of such failure or nonfulfillment. The Company represents and warrants that contemporaneously herewith it is entering into eight separate Note Purchase Agreements (the "Other Agreements") identical with this Agreement (except for the signature of the holder at the end thereof) with the other institutional purchasers (the "Other Purchasers") named in Schedule I, providing for the issue and sale to the Other Purchasers of the aggregate principal amount of Notes shown opposite their names on said Schedule I. This Agreement and the Other Agreements are to be separate agreements and the purchase of the Notes by you and the Other Purchasers are to be separate and several purchases. This Agreement and the Other Agreements are herein sometimes collectively referred to as the "Agreements". 1.3. Investment Representation. You represent to the Company that on the Closing Date you will acquire the Notes being purchased by you for your own account, or for a separate account managed by you, for investment and not with a view to the distribution or sale of the Notes, subject, however, to any requirement of law that the disposition of your property be at all times within your control and without prejudice to your right to sell or otherwise dispose of all or any part of the Notes held by you pursuant to an effective registration under the Securities Act or under an exemption from such registration available under the Securities Act. 1.4. Source of Funds. You represent to the Company that no part of the funds to be used by you to pay the purchase price of the Notes to be purchased by you hereunder constitutes assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust), other than employee benefit plans identified on a letter, if any, that has been furnished by you to the Company, has any interest and that all such funds constitute funds allocated to general accounts maintained by you. As used in this Section -2- 8 1.4, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to them in Section 3 of ERISA. SECTION 2. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to you that: 2.1. Organization and Authority of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own or hold under lease the property it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver the Agreements and the Notes and to perform the provisions hereof and thereof. The Company has, by all necessary corporate action (no action of shareholders of the Company being required by law, by its charter or by-laws, or otherwise), duly authorized the execution and delivery of this Agreement, the Other Agreements and the Notes and the performance of its obligations under this Agreement and the Notes. The Company is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification and in which the failure so to qualify would materially affect adversely the business, operations or properties of the Company, or of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform the Agreements and discharge its obligations on the Notes. 2.2. Disclosure. The Company has caused to be delivered to you an Offering Memorandum with respect to the Notes, dated October, 1993, prepared on behalf of the Company by Dillon, Read & Co. Inc. (the "Memorandum"). The Memorandum contains a complete summary description of the business and properties of the Company and the conduct of its operations. Neither this Agreement, the Memorandum, the financial statements referred to in Section 2.4 nor any other document, instrument or certificate delivered to you by or on behalf of the Company in connection with the transactions contemplated by the Agreements contains any untrue statement of a material fact, or omits to state any fact necessary to make the statements contained herein or therein (taken as a whole) not misleading. The Company does not know of any fact (other than matters of a general economic nature) which materially affects adversely or, so far as the Company can reasonably now foresee, will materially affect adversely, the business, operations or properties of the Company, or of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform the Agreements and discharge its obligations on the Notes. 2.3. Incorporation, Good Standing and Ownership of Shares of Subsidiaries. Annexed hereto as Exhibit B is a complete and correct list of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its incorporation, the jurisdictions in which substantial operating assets are located and the percentage of shares of each class outstanding owned by the Company and each other Subsidiary and specifying whether such Subsidiary is designated a Restricted Subsidiary. All of the outstanding shares of -3- 9 each of said Subsidiaries shown in Exhibit B as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned beneficially and of record by the Company or another Subsidiary free and clear of any Lien. No Subsidiary owns any shares of the Company. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification and in which the failure so to qualify would materially affect adversely the business, operations or properties of the Company or of the Company and its Subsidiaries taken as a whole, or the ability of the Company to perform the Agreements and discharge its obligations on the Notes. Each Subsidiary has all requisite power and authority to own or hold under lease the property it purports to own or hold under lease and to transact the business it transacts and proposes to transact. There are no outstanding rights, options, warrants, conversion rights or agreements for the purchase or acquisition from the Company or any Subsidiary of any shares of capital stock of any such Subsidiary. 2.4. Financial Statements. The Company has delivered to you copies of (a) the audited balance sheets of the Company and its Subsidiaries as at December 31 in each of the years 1988, 1989, 1990, 1991 and 1992 and the related statements of income, stockholders' equity and cash flows for the annual periods ended December 31, 1989, 1990, 1991 and 1992, accompanied by the reports thereon by Coopers & Lybrand, independent certified public accountants of the Company; (b) the unaudited consolidated and consolidating balance sheets of the Company and its Subsidiaries as at March 31, June 30 and September 30, 1993 and the related unaudited consolidated and consolidating statements of income, stockholders' equity and cash flows for the quarters then ended; and (c) the Company's Long-Term Debt Repayment Schedule (Present Debt) as of December 1, 1993. All the above-mentioned financial statements (including in each case the related schedules and notes) are correct and complete and fairly present the financial position of the Company as of the respective dates of said balance sheets and the results of its operations for the respective periods covered by said statements of income, stockholders' equity and cash flows (subject, in the case of the unaudited financial statements, to year-end adjustments) and have been prepared in accordance with GAAP consistently applied throughout the periods involved, except as set forth in the notes thereto. There are no material liabilities, contingent or otherwise, of the Company or any Subsidiary (of any type required by GAAP to be reflected in a consolidated balance sheet of the Company and its Subsidiaries or the footnotes thereto) as -4- 10 of December 31, 1992 not reflected in the consolidated balance sheet of the Company and its Subsidiaries as of said date described in paragraph (a) of this Section 2.4 (or the footnotes thereto). Since December 31, 1992 there have been no changes in the assets, liabilities or financial position of the Company from that set forth in the audited balance sheets of the Company as of said date, other than (i) expenses of approximately $9,200,000 after taxes accrued in connection with the consolidation of the Columbus Plant into the Marshalltown Plant, (ii) approximately $12,001,000 accrued as a result of the after-tax charge in fiscal year 1993 to net income of the Company and its Restricted Subsidiaries on a consolidated basis upon adoption of Financial Accounting Standards Board Statement No. 106 and (iii) changes in the ordinary course of business which have not, either individually or in the aggregate, been materially adverse to the Company. 2.5. Compliance with Other Instruments of the Company; No Dividend Restriction. The consummation of the transactions contemplated by this Agreement and the performance of the terms and provisions of the Agreements and the Notes will not result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under any indenture, mortgage, deed of trust, license, bank loan or credit agreement, lease, corporate charter, by-law, or other agreement or instrument to which the Company is a party or by which the Company or any of its properties is or may be bound or affected, or violate any existing law, governmental rule or regulation or any Order of any court, arbitrator or Governmental Body applicable to the Company. Neither the Company nor any Subsidiary is a party to or bound by any instrument or agreement which contains any restriction on the incurrence by the Company of any Debt other than (i) the Agreements, (ii) the Agreements of Assumption and Restatement dated as of December 1, 1991 shown on Exhibit C and (iii) the Revolving Credit Agreement dated as of December 4, 1991, among the Company, the banks named therein and The Northern Trust Company, as agent, under each of which the Company is permitted to maintain outstanding the Debt evidenced by the Notes. No Restricted Subsidiary is bound by or subject to any contract or charter or by-law provision limiting the amount of, or otherwise imposing restrictions on the declaration, payment or setting aside of funds for the making of, dividends or other distributions in respect of the capital stock of such Restricted Subsidiary to the Company or another Restricted Subsidiary. 2.6. Governmental Authorizations, etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Body or any other Person (including any trustee or holder of any indebtedness, obligation or other securities of the Company or any of its Subsidiaries) is required for the validity of the execution and delivery or for the performance by the Company of the Agreements or the Notes or the discharge by the Company of its obligations under the Agreements and the Notes. 2.7. Litigation; Observance of Statutes, Regulations and Orders. There are no actions, suits or proceedings (including, without limitation, actions, suits or proceedings under any statute or other law relating to environmental protection or occupational health and safety practices) pending or, to the knowledge of the Company, threatened against or affecting -5- 11 the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Body (except actions, suits or proceedings of the character normally incident to the kind of business conducted by the Company or any Subsidiary which (a) do not question the validity or legality of this Agreement or the Notes or any action taken or to be taken pursuant hereto or thereto and (b) in the aggregate, if adversely determined, would not materially affect adversely the business, operations or properties of the Company, or of the Company and its Subsidiaries taken as a whole or the ability of the Company to perform the Agreements or discharge its obligations on the Notes). Neither the Company nor any Subsidiary is in default under any Order of any court, arbitrator or Governmental Body which default could have a materially adverse effect on the Company or on the Company and its Subsidiaries taken as a whole; and neither the Company nor any Subsidiary is subject to or a party to any Order of any court or Governmental Body arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade or unfair competition, or environmental protection or occupational health and safety practices, or similar matters. As used in this Agreement, the term "Governmental Body" includes any Federal, State, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign; and the term "Order" includes any order, writ, injunction, decree, judgment, award, determination, direction or demand. 2.8. Taxes. The Company and its Subsidiaries have filed all Federal tax returns required to have been filed by them and all tax returns which are required to have been filed in each jurisdiction in which they are qualified to do business, as aforesaid, and have paid all taxes shown to be due and payable on such returns and all other material taxes and assessments payable by them, to the extent the same have become due and payable and before they have become delinquent, except for any taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has set aside on its books reserves (segregated to the extent required by GAAP) deemed by it to be adequate. The Company does not know of any proposed material tax assessment against the Company or any Subsidiary, and in the opinion of the Company all tax liabilities are adequately provided for on the books of the Company and its Subsidiaries. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service (or the applicable statute of limitations has run) and such liabilities have been paid for all fiscal years up to and including the fiscal year ended December 31, 1987. 2.9. Title to Property. The Company and its Restricted Subsidiaries have good title to their respective real properties and other properties as reflected in the most recent audited consolidated balance sheet of the Company and its Subsidiaries referred to in Section 2.4(a) or purported to have been acquired by the Company or such Restricted Subsidiary after said date, except as sold or otherwise disposed of in the ordinary course of business, subject to no title defects which would not be acceptable in accordance with good business practice to -6- 12 similar companies engaged in a similar business. Except as permitted by Section 7.5, all properties of the Company and each Restricted Subsidiary are free and clear of all Liens. 2.10. Licenses, Permits, etc. The Company and its Subsidiaries possess all licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names, or rights thereto, required to conduct their respective businesses substantially as now conducted and as currently proposed to be conducted, without known conflict with the rights of others. 2.11. Compliance with ERISA. No employee benefit plan established or maintained by the Company or by any Commonly Controlled Entity or to which the Company or any Commonly Controlled Entity is required to make contributions, which is subject to Part 3 of Subtitle B of Title 1 of ERISA, or Section 412 of the Code, had, as of the last day of the most recent fiscal year of such plan heretofore ended, an accumulated funding deficiency (as such term is defined in Section 302 of ERISA or Section 412 of the Code). Except as set forth in the audited consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended December 31, 1992 referred to in Section 2.4(a), the present value of all accrued benefits under each such employee benefit plan (based on those assumptions used to fund such plan, which assumptions are reasonable) did not, as of such date exceed the then current value of the assets of such plan allocable to such benefits. The amount by which the aggregate vested benefit obligations for the qualified pension plans of the Company and its Subsidiaries, determined as of the end of the fiscal year ended December 31, 1992, exceed the aggregate fair value of the assets of such plans determined as of the end of such fiscal year, is less than $3,000,000. No liability to the Pension Benefit Guaranty Corporation (other than required insurance premiums, all of which, to the extent due and payable, have been paid) has been incurred with respect to any such plan and there has not been any reportable event within the meaning of ERISA, or any other event or condition, which presents a material risk of termination of any such plan by the Pension Benefit Guaranty Corporation. To the knowledge of the Company after reasonable investigation, neither the Department of Labor, the Internal Revenue Service nor any other Governmental Body has determined that any such plan or any trust created thereunder, or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as defined in Section 4975 of the Code) with respect to any such plan that could subject any such plan, trust, trustee, administrator, the Company or any Commonly Controlled Entity to any material tax or penalty on prohibited transactions imposed under said Section 4975 or Section 502(i) of ERISA, and the Company is not aware of any facts that would constitute such a prohibited transaction. Neither the execution, delivery or performance by the Company of the Agreements nor the issuance and sale by the Company of the Notes will involve any prohibited transaction (as so defined). The representation by the Company in the immediately preceding sentence is made in reliance upon and subject to the accuracy of your representation contained in Section 1.4 and the representation by the Company in the immediately preceding sentence is expressly conditioned thereupon. Neither the Company nor any Commonly Controlled Entity is making or accruing, or has made or accrued, an obligation to make contributions to any Multiemployer Plan. For purposes hereof, (i) "Commonly Con- -7- 13 trolled Entity" shall mean any trade or business, whether or not incorporated, which is under common control with the Company (within the meaning of Section 414(b) or (c) of the Code); and (ii) "Multiemployer Plan" shall mean a "multiemployer plan," as defined in Section 4001(a)(3) of ERISA. 2.12. Private Offering by the Company. Neither the Company nor Dillon, Read & Co. Inc. (the only Person authorized by the Company to act on its behalf in connection with the offer and sale of the Notes) has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than you, the Other Purchasers and no more than fifty other institutional investors. Neither the Company nor anyone acting on its behalf has taken, or will take, any action which would subject the issuance or sale of the Notes to Section 5 of the Securities Act. As used in this Section 2.12, the term "Notes" shall mean the Notes to be executed and delivered under the Agreements and any similar security or securities. 2.13. Solvency. The Company is, and upon giving effect to the issuance of the Notes will be, a "solvent institution," as said term is used in Section 1405(c) of the New York Insurance Law, whose "obligations are not in default as to principal or interest," as said terms are used in said Section 1405(c). 2.14. Use of Proceeds; Margin Regulations. The Company will apply a portion of the proceeds of the sale of the Notes under the Agreements to the repayment of $47,900,000 of the principal amount of existing notes listed on Exhibit C as item one and will apply the remainder of the proceeds to general corporate purposes. No part of the proceeds from the sale of the Notes will be used, directly or indirectly, by the Company or any Subsidiary for the purpose of purchasing or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 CFR 207, as amended), or for the purpose of purchasing or carrying or trading in any securities under such circumstances as to involve the Company or any Subsidiary in a violation of Regulation X of said Board (12 CFR 224, as amended) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220, as amended). The assets of the Company and its Subsidiaries do not consist to the extent of 25% or more of margin stock, and the Company has no present intention of acquiring margin stock to the extent of 25% or more of its assets, and in no event under any circumstances during the term of the Agreements will 25% or more of the assets of the Company and its Subsidiaries consist of margin stock. As used in this Section, the term "margin stock" shall have the meaning assigned to it in the aforesaid Regulation G. 2.15. Existing Debt. Annexed hereto as Exhibit C is a complete and correct list of all secured and unsecured Debt of the Company and its Restricted Subsidiaries (other than Debt of Restricted Subsidiaries to the Company) as of the date hereof, showing as to each item of such Debt the obligor, the aggregate principal amount outstanding on the date specified in Exhibit C, the final maturity date of such Debt, and a brief description of any security -8- 14 therefor. With respect to each item of Debt of the Company listed in Exhibit C, the Company has delivered to your special counsel named in Section 3.2 a true and complete copy of each instrument evidencing any such Debt in excess of $100,000 or pursuant to which any such Debt in excess of $100,000 was issued or secured (including each amendment, consent, waiver or similar instrument in respect thereof), as the same is in effect on the date hereof. Neither the Company nor any Subsidiary is in default in the performance or observance of any of the terms, covenants or conditions contained in any of said instruments and neither the Company nor any Restricted Subsidiary is in default with respect to any Debt listed in Exhibit C, and no event has occurred and is continuing which, with notice or the lapse of time or both, would become such a default. 2.16. Existing Investments. Annexed hereto as Exhibit D is a complete and correct list of Investments of the Company and its Restricted Subsidiaries as of the date specified in Exhibit D, other than Investments of the character specified in Subsection (a) of the definition of "Restricted Investment" set forth in Section 8.1. 2.17. Foreign Assets Control Regulations, etc. Neither the Company nor any of its Subsidiaries is a "national" of any foreign country designated in the Foreign Assets Control Regulations, the Transaction Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the Cuban Assets Control Regulations, the Nicaraguan Trade Control Regulations or the Libyan Sanctions Regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended). None of the proceeds of the sale of the Notes under the Agreements will be used, directly or indirectly, for the purpose of engaging in any transaction which violates any of said Regulations or which violates the Foreign Funds Control Regulations or the Transaction Control Regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended), or any regulation or ruling issued thereunder. 2.18. Status Under Certain Statutes. The Company is not an "investment company" or a Person directly or indirectly "controlled" by or "acting on behalf of" an investment company within the meaning of the Investment Company Act of 1940, as amended. The Company is not a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 2.19. Environmental Matters. (a) The Company and its Subsidiaries currently are in compliance with all applicable Environmental Laws except to the extent failure to comply has not had and will not have a material adverse effect on the Company or the Company and its Subsidiaries, taken as a whole. (b) Neither the Company nor any Subsidiary has any knowledge of any events, conditions or circumstances that could reasonably be expected to give rise to any -9- 15 liability on the part of the Company or any Subsidiary based on or related to (i) a violation of any Environmental Law or (ii) the presence on, in, under or above the Company Premises of any Hazardous Substance, other than any such liabilities referred to in this Subdivision (b) that will not have, either in any one case or in the aggregate, a material adverse effect on the Company or the Company and its Subsidiaries, taken as a whole. SECTION 3. CONDITIONS OF CLOSING. Your obligation to purchase and pay for the Notes to be purchased by you hereunder shall be subject to the conditions hereinafter set forth: 3.1. Proceedings Satisfactory. All proceedings taken in connection with the issuance of the Notes and the consummation of the transactions contemplated hereby and all documents and papers relating thereto shall be satisfactory to you and your special counsel, and you and your special counsel shall have received copies of such documents and papers, all in form and substance satisfactory to you and your special counsel, as you or they may reasonably request in connection therewith. 3.2. Opinions of Counsel. You shall have received opinions, each dated the Closing Date, addressed to you and satisfactory in form, scope and substance to you from (a) Anne W. Teeling, Esq., Assistant General Counsel for the Company, substantially in the form of Exhibit E and covering such other matters as you or your special counsel may reasonably request, and (b) Baker & Botts, L.L.P., your special counsel in connection with the transactions contemplated by this Agreement, covering such matters as you may reasonably request. 3.3. Representations True, etc.; Officers' Certificate. All representations and warranties of the Company contained in this Agreement or otherwise made in writing by or on behalf of the Company in connection with the transactions contemplated hereby shall (except as affected by the consummation of such transactions) be true on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date; the Company shall have performed all agreements on its part required to be performed under the Agreements on or prior to the Closing Date; no Default or Event of Default shall have occurred and be continuing; since the date of the most recent audited balance sheets referred to in Section 2.4, neither the Company nor any Subsidiary shall have consolidated with, merged into, or sold, leased or otherwise disposed of its properties as an entirety or substantially as an entirety to any Person; and you shall have received a certificate signed by the Chief Executive Officer, a Vice President or the Treasurer of the Company and by the Secretary or an Assistant Secretary of the Company, dated the Closing Date, certifying to the effects specified in this Section. 3.4. Legality. On the Closing Date the Notes to be purchased by you hereunder shall be a legal investment for you under the laws of each jurisdiction to which you may be subject, without resort to any basket provision of said laws such as New York -10- 16 Insurance Law Section 1405(a)(8), and you shall have received such certificates or other evidence as you may reasonably request demonstrating the legality of such investment under such laws. 3.5. Absence of Certain Events. There shall not have occurred any material adverse change in the assets, liabilities, business, operations, properties or condition (financial or otherwise) of the Company or of the Company and its Subsidiaries, taken as a whole, from that reflected in the most recent audited financial statements referred to in Section 2.4, copies of which shall have been delivered to you. 3.6. Other Agreements, etc. The Other Agreements shall have been duly entered into and, contemporaneously with the purchase of the Notes to be purchased by you at the Closing, the Other Purchasers shall have purchased the Notes to be purchased by them pursuant to the Other Agreements and the Company shall have received payment in full of the purchase price thereof. 3.7. Private Placement Number. The Notes shall have been assigned a private placement number by Standard and Poor's CUSIP Service Bureau. 3.8. Fees Payable at Closing. Your special counsel shall have received the legal fees and expenses required to be paid or reimbursed by the Company, as provided in Section 16.1, in connection with their preparation and review of the Agreements and documents and papers relating thereto and negotiations and other matters in connection therewith, and for which the Company shall have received invoices on or prior to the second Business Day preceding the Closing Date. 3.9. Delivery of Letter Agreement. You shall have received a copy of the Letter Agreement, as such term is defined in Section 8 of this Agreement, substantially in the form of Exhibit G hereto, executed by the Company and each Other Purchaser. SECTION 4. PREPAYMENT, PAYMENT AND PURCHASE OF THE NOTES. 4.1. Mandatory Prepayments of the Notes; Payment at Maturity. On December 1, 2000 and on each December 1 thereafter to and including December 1, 2007 (so long as any of the Notes shall be outstanding), the Company will prepay $11,111,000.00 in aggregate principal amount of the Notes (or, if less, the unpaid balance thereof). On December 1, 2008, the Company will in any event pay the entire remaining unpaid principal amount of the Notes together with all interest accrued thereon; provided, however, that if any Note or Notes (but less than all the Notes) shall be purchased pursuant to Section 7.12, then the aggregate principal amount of the Notes required to be prepaid on any December 1 thereafter pursuant to this Section 4.1 shall be reduced to that amount which bears the same relation to the amount of such prepayment specified to be made on such December 1 (or such lower amount to which such required prepayment shall have theretofore been reduced in -11- 17 accordance with this proviso) as the aggregate principal amount of the Notes outstanding immediately following said purchase pursuant to Section 7.12 bears to the aggregate principal amount of the Notes outstanding immediately prior to said purchase pursuant to Section 7.12. The Company covenants and agrees that it will, in the event of any reduction pursuant to the immediately preceding proviso, promptly after the purchase giving rise to such reduction, give to each holder of a Note or Notes written notice thereof, specifying in each such case the amounts of the respective mandatory prepayments due thereafter in respect of each Note held by such holder (giving effect to such reduction) and containing calculations demonstrating the method by which such reduction was effected. Each prepayment pursuant to this Section 4.1 shall be at 100% of the principal amount so to be prepaid, together with accrued interest thereon to the date of such prepayment, without the Special Premium. 4.2. Optional Prepayment of the Notes. Upon notice given as provided in Section 4.4, the Company, at its option, may at any time or from time to time prepay the Notes in whole or in part in multiples of $100,000, in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date of such prepayment, plus a premium equal to the Special Premium. No prepayment of less than all the Notes pursuant to this Section 4.2 shall relieve the Company of its obligation to make (nor shall it reduce the amount of) the prepayments of principal on the Notes required by Section 4.1. Each partial prepayment made pursuant to this Section 4.2 shall be allocated as provided in Section 4.5. 4.3. Special Purchase of Notes. The Company shall be required to purchase Notes of each holder thereof which shall have replied affirmatively to an offer to purchase the same given as contemplated by Section 7.12, such purchase to be made at the price and on the date and otherwise as provided in Section 7.12. 4.4. Notice of Prepayment. The Company shall call the Notes for prepayment pursuant to Section 4.2 by giving written notice thereof to each holder of an outstanding Note, which notice shall be given not less than 30 nor more than 60 days prior to the date fixed for such prepayment in such notice and shall specify the amount so to be prepaid and the date fixed for such prepayment. Each such notice of prepayment shall be accompanied by a certificate of an authorized financial officer of the Company stating the facts showing compliance with the provisions of Section 4.2. Upon the giving of notice of any prepayment as provided in this Section 4.4, the Company will prepay on the date therein fixed for prepayment the principal amount of the Notes so to be prepaid as specified in such notice, together with interest and the Special Premium, if any, as specified in Section 4.2. 4.5. Allocation of Prepayments. In the event of any prepayment pursuant to Section 4.1 or 4.2 of less than all of the outstanding Notes, the Company will allocate the principal amount so to be prepaid (but only in units of $1,000) among the Notes in proportion, as nearly as may be, to the respective principal amounts thereof not theretofore called for prepayment. -12- 18 4.6. Surrender of Notes. Any Note paid or prepaid in full shall thereafter be surrendered to the Company upon its written request therefor and canceled and not reissued. 4.7. Purchase of Notes. The Company will not, and will not permit any Affiliate to, acquire directly or indirectly by purchase or prepayment or otherwise any of the outstanding Notes except by way of payment, prepayment or purchase in accordance with the provisions of the Notes and the Agreements. 4.8. Maturity. In the case of each prepayment of Notes, whether required or optional, the principal amount of each Note to be prepaid shall become due and payable on the date fixed for such prepayment together with interest as specified in Section 4.1 or 4.2, as the case may be. SECTION 5. FINANCIAL STATEMENTS AND INFORMATION. The Company will furnish to you and to any of your Affiliates, so long as you or such Affiliate shall hold any of the Notes, and (upon request) to each other Qualified Institutional Holder of any Notes, in duplicate: (a) as soon as available and in any event within 45 days after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, (i) copies of a consolidated and consolidating balance sheet of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries as of the end of such accounting period and of the related consolidated and consolidating statements of income and stockholder's equity and cash flows of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries for the portion of the fiscal year ended with the last day of such quarterly accounting period, all in reasonable detail and stating, in the case of such consolidated statements, in comparative form the respective figures for the corresponding date and period in the previous fiscal year, and certified by the principal financial officer of the Company, in the case of such consolidated statements, as having been prepared in accordance with GAAP and as presenting fairly the information contained therein, subject to year-end and audit adjustments and, in the case of such consolidating statements, as being fairly stated in all material respects in relation to the consolidated financial statements for such period as a whole, subject to year-end and audit adjustments, (ii) a written statement of such financial officer of the Company setting forth computations in reasonable detail showing, as of the date of such balance sheet, (A) the ratio of Current Assets to Current Liabilities, (B) the amount of Net Worth and Total Capitalization, (C) the maximum amount of additional Debt and Restricted Debt which the Company could have incurred -13- 19 under Section 7.4 and the outstanding amount of Debt and Restricted Debt of the Company and each Restricted Subsidiary and (D) the amount available for Restricted Payments and Restricted Investments in compliance with Section 7.6, and (iii) a written discussion and analysis by management of the financial condition and results of operations of the line of business conducted by each material Restricted Subsidiary for such accounting period; (b) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, (i) copies of a consolidated and consolidating balance sheet of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries as of the end of such fiscal year and of the related consolidated and consolidating statements of income and stockholder's equity and cash flows of the Company and its Restricted Subsidiaries and of the Company and its Subsidiaries for such fiscal year, all in reasonable detail and stating in comparative form the respective figures as of the end of and for the previous fiscal year, accompanied, in the case of such consolidated statements, by an unqualified report thereon of independent certified public accountants of recognized national standing selected by the Company (which report shall contain a statement to the effect that such consolidated financial statements present fairly the financial position of the corporation or corporations being reported upon as at the dates indicated and the results of operations and cash flows of such corporation or corporations for the periods indicated and have been prepared in accordance with GAAP applied on a basis consistent with prior years (except for changes in application in which such accountants concur and which are noted in such financial statements) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards at the time in effect, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances) and, in the case of such consolidating statements, either certified by the principal financial officer of the Company as fairly stating, or accompanied by a report thereon by such accountants containing a statement to the effect that such consolidating financial statements fairly state, the financial position and the results of operations and cash flows of the corporations being reported on in all material respects in relation to the consolidated financial statements for the periods indicated as a whole, (ii) a written statement of the principal financial officer of the Company, setting forth computations in reasonable detail showing, as of the date -14- 20 of such balance sheet, (A) the ratio of Current Assets to Current Liabilities, (B) the amount of Net Worth and Total Capitalization, (C) the maximum amount of additional Debt and Restricted Debt which the Company could have incurred under Section 7.4 and the outstanding amount of Debt and Restricted Debt of the Company and each Restricted Subsidiary, and (D) the amount available for Restricted Payments and Restricted Investments in compliance with Section 7.6, and (iii) a written discussion and analysis by management of the financial condition and results of operations of the line of business conducted by each material Restricted Subsidiary for such accounting period, and (iv) a certificate of such accountants as shall furnish a report pursuant to clause (i) of this Subsection (b) of this Section 5 stating that in making the audit necessary for such report, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof and the action the Company has taken or proposes to take with respect thereto; (c) concurrently with the financial statements for each quarterly accounting period and for each fiscal year of the Company furnished pursuant to Subsections (a) and (b) of this Section, (i) a certificate signed by the President or a Vice President and by the Treasurer of the Company stating that, based upon such examination or investigation and review of the Agreements as in the opinion of the signers is necessary to enable the signers to express an informed opinion with respect thereto, to the best knowledge of said signers, the Company is not and has not during such period been in default in the performance or observance of any of the terms, covenants or conditions hereof, or, if the Company shall be or shall have been in default, specifying all such defaults, and the nature and period of existence thereof, and what action the Company has taken, is taking or proposes to take with respect thereto; provided that it shall not be necessary for any such certificate to be signed by more than one of the officers of the Company listed in this Subsection (c)(i) if the officer so signing shall have been approved for that purpose in writing by the holder or holders of not less than 66-2/3% in aggregate principal amount of all the Notes outstanding and Mr. Clyde Wyant, Executive Vice President, Chief Financial Officer and Treasurer of the Company is hereby approved by you for such purpose, (ii) a written statement of the principal financial officer of the Company setting forth computations showing in reasonable detail (A) the aggregate book value of property of the Company and its Restricted Subsidiaries -15- 21 subject to sale-leaseback transactions permitted by Section 7.7, and (B) the book value of assets of the Company and its Restricted Subsidiaries sold since the Closing Date and since the first day of such fiscal year, and (iii) a written statement of the principal financial officer of the Company that, to the best of his knowledge after due inquiry, except as otherwise disclosed in writing to you, there is no litigation (including derivative actions), arbitration proceeding or governmental proceeding pending to which the Company or any Subsidiary is a party, or with respect to the Company or any Subsidiary or their respective properties, which has a significant possibility of materially and adversely affecting the business, operations, properties or condition of the Company or of the Company and its Subsidiaries taken as a whole; (d) promptly after the same are available and in any event within 15 days thereafter (if the Company or any Subsidiary shall have become registered under Section 12 of the Exchange Act) copies of all such proxy statements, financial statements and reports as the Company or such Subsidiary shall send or make available generally to any of its security holders and copies of all regular and periodic reports and of all registration statements (other than on Form S-8 or a similar form) which the Company or such Subsidiary may file with the Commission or with any securities exchange; (e) within 15 days after the end of each fiscal month, a complete copy of any written agreement entered into by the Company during such fiscal month amending, modifying, waiving or supplementing any financial covenant set forth in an agreement or instrument evidencing Debt of the Company in an aggregate unpaid principal amount of $10,000,000 or more (together with a copy of the agreement or instrument so amended, modified, waived or supplemented if not previously furnished by the Company), provided, that if the Company shall be a party to any agreement providing a holder of Debt of the Company with greater rights with respect to delivery of amendments, modifications, waivers or supplements to agreements or instruments of the Company evidencing Debt than are provided to you above in this paragraph (e), the Company shall give prompt written notice of such fact to each holder of a Note, each such holder shall be entitled to the benefit of such greater rights and this Agreement shall be deemed modified to the extent required to provide such greater rights; (f) promptly upon any officer of the Company (i) obtaining knowledge of any condition or event which constitutes a Default or an Event of Default, or becoming aware that the holder of any Note has given any written notice expressly asserting the occurrence of a Default or Event of Default, a statement by the principal financial officer of the Company specifying in reasonable detail the nature and period of existence thereof and what action the Company has taken or is taking or proposes to -16- 22 take with respect thereto, or (ii) becoming aware that the holder of any Note has taken any other action with respect to a claimed Default or Event of Default or that any holder of any Debt referred to in Section 9.1(d) has given any notice to the Company or any Restricted Subsidiary or taken any other action with respect to a claimed default under or in respect of any such Debt or with respect to the occurrence or existence of any event or condition of the type referred to in Section 9.1(e) or 9.1(f), a statement by the principal financial officer of the Company specifying in reasonable detail the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto, provided, that if the Company shall be a party to any agreement providing a holder of Debt of the Company with greater rights with respect to notices of the events described above in this paragraph (f) than are provided to you above in this paragraph (f) or in Section 9.1(c) with respect to this paragraph (f), the Company shall give prompt written notice of such fact to each holder of a Note, each such holder shall be entitled to the benefit of such greater rights and this Agreement shall be deemed modified to the extent required to provide such greater rights; (g) promptly upon entering into, assuming or otherwise becoming bound by or obligated under any agreement or instrument evidencing Debt of the Company or any Restricted Subsidiary (other than any agreement providing for automatic modification thereof in substantially the same form as Section 9.1(d) of this Agreement) which (i) provides that the holder of any such Debt may declare such Debt to be due and payable prior to the scheduled maturity thereof as a result of the occurrence of any default in the performance of any term or condition contained in the agreement or instrument evidencing any other Debt of the Company or any Restricted Subsidiary (regardless of whether such other Debt shall have been declared due and payable prior to the stated maturity thereof) or (ii) contains any Additional Covenants or Additional Defaults (as defined in Section 7.17), written notice to such effect, making reference in such notice to Section 9.1(d) or Section 7.17 of this Agreement, as the case may be; and (h) such other information, including financial statements and computations relating to the performance of the provisions of this Agreement and the affairs of the Company, as may from time to time be reasonably requested by you or your Affiliates or a Qualified Institutional Holder. The Company will keep at its principal executive office true copies of the Agreements (as from time to time in effect), and cause the same to be available for inspection at said office during normal business hours by any holder of a Note or any prospective purchaser of a Note designated by a holder thereof. SECTION 6. INSPECTION OF PROPERTIES AND BOOKS. -17- 23 (a) So long as you or your nominee or any other Qualified Institutional Holder holds any of the Notes, your or such Qualified Institutional Holder's representatives shall have the right to visit and inspect any of the properties of the Company and its Restricted Subsidiaries in the presence of an officer of the Company, to examine the books of account and records of the Company and its Restricted Subsidiaries, to make copies and extracts therefrom, to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries with, and to be advised as to the same by, its officers and (in the presence of an officer of the Company) key employees, and its independent public accountants, all at such times and intervals as you or such other Qualified Institutional Holder may reasonably desire. The Company will likewise afford your and such Qualified Institutional Holder's representatives the opportunity to obtain any information, to the extent the Company or any Restricted Subsidiary possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy of any of the representations and warranties made by the Company hereunder. (b) You agree, and (by its acceptance of any Note) each other holder of Notes shall be deemed to have agreed, to use your best efforts to hold in confidence all information furnished pursuant to the Agreements and relating to the Company or any of its Subsidiaries which was designated in writing as "confidential" at the time the same was furnished, provided, however, that you or such other holder may disclose any information, irrespective of whether or not such information shall have been designated as "confidential", (i) to actual or prospective purchasers of the Notes or any participations therein, (ii) to prospective assignees pursuant to Section 16.3, (iii) pursuant to or in connection with any action, suit or proceeding by, or any statute, rule or regulation of, any Governmental Body, (iv) pursuant to any Order of any court, arbitrator or Governmental Body or as otherwise required by law, (v) to your auditors, to the extent required in the course of their audit, to your counsel or to the National Association of Insurance Commissioners or similar associations or authorities, or (vi) to the extent necessary in the enforcement of your rights hereunder and under the Notes during the continuance of a Default or Event of Default; and the Company, for itself and on behalf of its Subsidiaries, expressly consents to the disclosure of any such information to any of such Persons (and under any such circumstances) contemplated in this Section; provided, further, however, that any Person to whom any such information shall be disclosed pursuant to Clause (i) or (ii) of this Subsection shall agree with you or such other holder of Notes to likewise be bound by and subject to the provisions of this Section. (c) Anything herein to the contrary notwithstanding, neither the Company nor any of its Subsidiaries shall have any obligations to disclose pursuant hereto any engineering, scientific, or other technical data without significance to your analysis of the financial position of the Company and its Subsidiaries. SECTION 7. COVENANTS. The Company covenants and agrees that from the date of the Agreements to the Closing Date and thereafter so long as any Note shall be outstanding: -18- 24 7.1. Payment of Principal, Special Premium and Interest; Maintenance of Books and Reserves. The Company will duly and punctually pay the principal of, the Special Premium (if any) and interest on the Notes in accordance with the terms of the Notes and the Agreements. The Company will, and will cause each of its Restricted Subsidiaries to, keep proper books of record and account and set aside appropriate reserves, all in accordance with GAAP. 7.2. Payment of Taxes; Corporate Existence; Maintenance of Properties; Compliance with Laws. The Company will, and will cause each of its Subsidiaries to, (a) subject to Section 7.10, do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and its licenses, rights (charter and statutory) and franchises to the extent the same are material and the termination thereof would be adverse to the Company, or to the Company and its Restricted Subsidiaries taken as a whole, or to the ability of the Company to perform the Agreements and discharge its obligations on the Notes; and the Company will maintain its principal office at a location in the United States of America where notices, presentations and demands in respect of this Agreement and the Notes may be made upon it and will notify, in writing, each holder of a Note of any change of location of such office and such office shall be maintained at 2100 Lake Park Boulevard, Richardson, Texas, 75080, until such time as the Company shall so notify the holders of the Notes of any such change; (b) pay and discharge or cause to be paid and discharged all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its property, real, personal or mixed, or upon any part thereof, when due, as well as all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon its property; provided, however, that neither the Company nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings, and if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (c) maintain and keep, or cause to be maintained and kept, all material properties used or useful in the business of the Company and its Subsidiaries in good repair, working order and condition, and from time to time make or cause to be made all repairs, renewals, replacements and improvements which are necessary in connection with the proper and advantageous conduct of such business; and (d) use its best efforts to comply in all material respects with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, any Governmental Body, in respect of the conduct of its business and the ownership of its -19- 25 properties (including, without limitation, applicable statutes, regulations and orders relating to equal employment opportunities), except such as are being contested in good faith by appropriate proceedings. 7.3. Insurance. The Company will insure and keep insured, and will cause each of its Subsidiaries to insure and keep insured, with financially sound and reputable insurers, so much of their respective properties, and such insurance shall be of such type and in such amounts (and with such deductibles), as similarly situated manufacturing companies in accordance with good business practice customarily insure properties of a similar character against loss by fire and from other causes. In addition, the Company will, and will cause each Subsidiary to, maintain public liability insurance with financially sound and reputable insurers or maintain a program of self-insurance covering claims for personal injury, death or property damage suffered by others upon or in or about any premises occupied by it or occurring as a result of its ownership, maintenance or operation of any automobiles, trucks or other vehicles, aircraft or other facilities or as a result of the use of products manufactured, constructed or sold by it or services rendered by it, in such amounts (and with such deductibles) as such insurance is usually maintained by companies engaged in a similar business and as is in accordance with good business practice, provided that the aggregate annual amount of such self-insurance maintained by the Company and its Subsidiaries shall not on any date exceed 5% of Net Worth as at the end of the most recently completed fiscal quarter. 7.4. Debt. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, create, assume, incur, agree to purchase or repurchase or provide funds in respect of, or otherwise become or be directly or indirectly liable in respect of, by way of Guarantee or otherwise, any Debt, except that, subject in any event to the last paragraph of this Section 7.4: (a) the Company may remain liable in respect of the Debt evidenced by the Notes; (b) the Company and its Restricted Subsidiaries may remain liable in respect of the Debt described in Exhibit C, but may not extend, renew, refund or refinance any thereof except as otherwise permitted by another provision of this Section 7.4, provided that on the Closing Date $47,900,000 of the Debt described in item one of Exhibit C shall be repaid out of the proceeds of the Notes; (c) any Restricted Subsidiary may become and remain liable in respect of unsecured Debt of such Restricted Subsidiary owing to the Company or a Wholly- owned Restricted Subsidiary, and the Company may become and remain liable in respect of Subordinated Debt owing to a Wholly-owned Restricted Subsidiary; and (d) the Company and any Restricted Subsidiary may become and remain liable in respect of additional Debt if on the date (the "Incurrence Date") on which the -20- 26 Company or such Restricted Subsidiary proposes to incur any such Debt, and after giving effect to such incurrence and the substantially concurrent incurrence of any other Debt and to the substantially concurrent retirement of any other Debt and to the application of the proceeds of all such Debt, Total Debt shall not exceed 55% of Total Capitalization; provided, however, that nothing in this Section 7.4(d) shall permit the Company or any Restricted Subsidiary to incur any Restricted Debt on any Incurrence Date unless, after giving effect to any such incurrence and to the substantially concurrent incurrence of any other Restricted Debt and to the substantially concurrent retirement of any Restricted Debt and to the application of the proceeds of all such Restricted Debt, the Restricted Debt Amount shall not exceed 10% of Total Capitalization. For all purposes of this Section 7.4, (i) any Person becoming a Restricted Subsidiary after the date of this Agreement shall be deemed to have incurred all of its then outstanding Debt at the time it becomes a Restricted Subsidiary and (ii) in the event the Company or any Restricted Subsidiary shall extend, renew, refund or refinance any Debt, the Company or such Restricted Subsidiary shall be deemed to have incurred such Debt at the time of such extension, renewal, refunding or refinancing. The Company will not in any event incur or permit to exist any Debt of the Company to a Restricted Subsidiary other than Subordinated Debt owing to a Wholly-owned Restricted Subsidiary. 7.5. Liens. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, create, assume, incur or suffer to be created, assumed or incurred or to exist any Lien in respect of any property of any character owned by the Company or any Restricted Subsidiary (whether such property is held on the date hereof or hereafter acquired), except, subject in any event to the last paragraph of this Section 7.5 and to Subsection (d) of Section 7.4: (a) Liens representing (i) Liens for taxes or assessments or other governmental charges or levies, either not yet due and payable or to the extent that nonpayment thereof shall be permitted by the proviso to Section 7.2(b), (ii) Liens created by or resulting from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings diligently pursued, and (iii) other Liens consisting of minor title defects affecting real property or which are otherwise incidental to the normal conduct of the business of the Company and its Restricted Subsidiaries or the ownership of their respective properties which do not secure Debt and which do not in the aggregate materially impair the use of such property in the operation of the -21- 27 business of the Company, or of the Company and its Restricted Subsidiaries taken as a whole, or materially impair the value of such property for the purposes of such business; (b) Liens existing on the date of this Agreement specified in Exhibit C and securing the item or items of Debt indicated thereon; provided that the principal amount of the Debt secured by such Liens shall not be increased, or refinanced or refunded except as permitted under Section 7.4; (c) Liens on assets of any Restricted Subsidiary securing Debt or other obligations of such Restricted Subsidiary owing to the Company or to a Wholly-owned Restricted Subsidiary; and (d) Liens in addition to those permitted by the preceding clauses (a), (b) and (c) if, immediately after giving effect to the creation thereof, the Company shall be entitled to incur at least $1 of additional Debt constituting Restricted Debt under the proviso to Section 7.4(d). For all purposes of this Section 7.5, any refunding or refinancing of any Lien by the Company or any Restricted Subsidiary shall be deemed to be an incurrence of such Lien at the time of such refunding or refinancing, and any Lien existing on any property or assets at the time it or the Person owning it is acquired by the Company or any Restricted Subsidiary shall be deemed to have been created at the time of such acquisition. In the event that any property or assets of the Company or any Restricted Subsidiary shall become or be subject to a Lien not permitted by the foregoing clauses (a) through (d) of this Section 7.5, the Company shall make or cause to be made effective provision satisfactory to the holders of the outstanding Notes whereby the Notes will be secured equally and ratably with all other obligations secured thereby, and in any event, the Notes shall have the benefit, to the full extent that (and with such priority as) the holders thereof may be entitled under applicable law, of an equitable Lien on such property or asset; provided, however, that any Lien created, assumed, incurred or suffered to exist in violation of this Section 7.5 shall constitute an Event of Default whether or not the Company shall have made effective provision to secure the Notes equally and ratably with any such other obligations or the holders of Notes shall be entitled to such equal and ratable security or any such equitable Lien. 7.6. Dividends and Other Restricted Payments; Restricted Investments. The Company will not directly or indirectly (i) declare or pay any dividend, or make any distribution, on the Company's shares of any class, other than dividends or distributions payable in common shares of the Company, or (ii) make any other Restricted Payment, and the Company will not make and will not permit any Restricted Subsidiary to make any Restricted Investment, unless, on the date of declaration in the case of any proposed dividend and on the date of payment or distribution in the case of any proposed Restricted Payment (including any dividend) or Restricted Investment (the "Computation Date"), and after giving effect thereto, -22- 28 (a) the aggregate amount of all Restricted Payments made during the period (taken as one accounting period) commencing on January 1, 1991 and ending on and including the Computation Date (the "Computation Period"), and of all Restricted Investments made during the Computation Period and outstanding on the Computation Date, shall not exceed an amount equal to the sum of (i) $45,000,000, plus (ii) 85% of the aggregate amount of Consolidated Net Income for each full fiscal year in the Computation Period for which Consolidated Net Income is positive, minus (iii) 100% of the aggregate amount of Consolidated Net Income for each full fiscal year in the Computation Period for which there is a deficit, plus 85% (or, in the case of a deficit, minus 100%) of Consolidated Net Income for any period in the Computation Period not included in Clause (ii) or (iii) above; (b) no Event of Default or Default shall have occurred and be continuing; and (c) the Company shall be entitled to incur at least $1 of additional Debt under Section 7.4(d). The Company will not declare any dividend (other than dividends payable solely in shares of its common stock) on any shares of any class of its stock which is payable more than 90 days after the date of declaration thereof. For purposes of this Section 7.6, Investments owned by any Person or for which it is obligated at the time it becomes a Restricted Subsidiary shall be deemed to be made at the time such Person becomes a Restricted Subsidiary. Notwithstanding any other provision of this Section 7.6 to the contrary, the Company may, at any time or from time to time, reacquire up to an aggregate amount of $15,000,000 of shares of its common stock in transactions qualifying as distributions under Section 303 of the Code if but only if (i) such acquisitions are at prices not exceeding the fair market value of the shares so acquired, in each case as determined in good faith by a resolution of the Board, and (ii) no Event of Default or Default shall have occurred and be continuing. The amount of said dividends shall not be subject to the limitations of this Section 7.6 or included in any future computations pursuant to this Section 7.6. 7.7. Sales and Leasebacks. The Company will not and will not permit any Restricted Subsidiary to, as part of the same transaction or series of related transactions, sell or otherwise transfer to any Person or Persons any item or items of property, whether now owned or hereafter acquired, having a book value in any one case or in the aggregate for all such -23- 29 property so transferred from and including the date hereof through the date of such transfer of $20,000,000 or more if the Company or such Restricted Subsidiary shall then or thereafter, as part of the same transaction or series of related transactions, rent or lease as lessee, or similarly acquire the right to possession or use of such property, or one or more properties which it intends to use for the same purpose or purposes as such property. 7.8. Maintenance of Certain Financial Conditions. The Company will not permit: (a) Current Assets as at the end of any fiscal quarter of the Company to be less than 150% of Current Liabilities as at the end of such fiscal quarter; (b) Net Worth as at the last day of any fiscal quarter of the Company to be less than the Minimum Amount for such fiscal quarter. For purposes of this Section 7.8(b), the "Minimum Amount" shall be (i) for the fiscal quarter ending December 31, 1991, $230,000,000, and (ii) for each fiscal quarter thereafter, the sum of the Minimum Amount for the immediately preceding fiscal quarter plus 15% (or 0% in the case of a deficit) of Consolidated Net Income for such immediately preceding fiscal quarter; or (c) the aggregate vested benefit obligations for the qualified pension plans of the Company and its Subsidiaries, determined in each fiscal year by the Company's actuaries in the ordinary course of business, to exceed the aggregate fair value of the assets of such plans, also determined in each fiscal year by the Company's actuaries in the ordinary course of business, by more than $3,000,000. For purposes of paragraph (c) of this Section 7.8, obligations and assets of pension plans of the Company and its Subsidiaries shall be determined as of the end of each fiscal year in accordance with Statement No. 87 of the Financial Accounting Standards Board. 7.9. Subsidiary Stock and Debt. The Company will not: (a) directly or indirectly sell, assign, pledge or otherwise transfer or dispose of any Debt of, or claim against, or any shares of stock or similar interests or other securities of (or warrants, rights or options to acquire stock or similar interests or other securities of), any Restricted Subsidiary, except to a Wholly-owned Restricted Subsidiary and except as directors' qualifying shares if required by applicable law; (b) permit any Restricted Subsidiary directly or indirectly to sell, assign, pledge or otherwise transfer or dispose of any Debt of, or claim against, or any shares of stock or similar interests or other securities of (or warrants, rights or options to acquire stock or similar interests or other securities of), any other Restricted Subsidiary, except to the Company or a Wholly-owned Restricted Subsidiary and -24- 30 except as directors' qualifying shares if required by applicable law; (c) permit any Restricted Subsidiary to have outstanding any shares of preferred stock other than shares of preferred stock which are owned by the Company or a Wholly-owned Restricted Subsidiary; or (d) permit any Restricted Subsidiary directly or indirectly to issue or sell any shares of its stock or similar interests or other securities (or warrants, rights or options to acquire stock or similar interests or other securities) except to the Company or a Wholly-owned Restricted Subsidiary or as directors' qualifying shares if required by applicable law; provided, however, that all stock or similar interests or other securities (or warrants, rights or options to acquire stock or similar interests or other securities) of any Restricted Subsidiary with annual sales for the immediately preceding fiscal year less than $50,000,000 may be simultaneously sold as an entirety for a cash consideration at least equal to the fair value thereof (as determined in good faith by a resolution of the Board) at the time of such sale, if (A) such Restricted Subsidiary being sold does not at the time own any Debt or stock or similar interests or other securities of (or warrants, rights or options to acquire stock or similar interests or other securities of) the Company or of any other Restricted Subsidiary which is not also being simultaneously sold as an entirety as permitted by this Section 7.9 or Section 7.10, (B) the assets of such Restricted Subsidiary being sold represented by the equity interests to be so transferred are such that the sale of such assets would be permitted by Section 7.10 (in which case such transaction shall be considered and deemed a disposition of assets for the purposes of Section 7.10), and (C) immediately after the consummation of such transaction, (x) the Company shall then be permitted to incur $1.00 of additional Debt pursuant to Section 7.4(d), and (y) both prior to and immediately following such sale, no condition or event shall exist which constitutes a Default or an Event of Default. 7.10. Consolidation, Merger or Disposition of Assets. The Company will not and will not permit any Restricted Subsidiary to, directly or indirectly, consolidate or merge with, or sell, lease or otherwise dispose of any of its assets to, any Person, except, subject (to the extent hereinafter provided) to the last paragraph of this Section 7.10: (a) the Company may consolidate or merge with any other corporation, provided that the Company shall be the continuing or surviving corporation and, after giving effect to any such consolidation or merger, no Change of Control shall have occurred; (b) any Restricted Subsidiary may consolidate or merge with, and any Restricted Subsidiary may sell, lease or otherwise dispose of its assets to, the Company or a Wholly-owned Restricted Subsidiary; -25- 31 (c) the Company may consolidate with or merge into, or sell, lease or otherwise dispose of its assets as an entirety or substantially as an entirety to, any solvent corporation, but only if (i) such corporation (A) is duly organized and validly existing in good standing under the laws of the United States of America or a State thereof and (B) expressly assumes, pursuant to a written agreement satisfactory in form, scope and substance to the holders of the Notes, the due and punctual payment of the principal of, the Special Premium (if any) and interest on the Notes according to their tenor, and the due and punctual performance and observance of the obligations of the Company under the Agreements and the Notes, an executed counterpart of which agreement shall have been furnished to each holder of a Note together with a favorable opinion of counsel satisfactory to each such holder covering such matters relating to such corporation, such assumption and such agreement as such holder may reasonably request, and (ii) in the case of any such transaction which would involve or result in a Change of Control, the Company shall have offered to purchase all Notes held by each holder thereof pursuant to Section 7.12 and, not later than the time of consummation of such transaction, shall have purchased, in compliance with Section 7.12, the full amount of all Notes of each holder thereof which shall have accepted such offer; (d) the Company and any Restricted Subsidiary may sell, lease or otherwise dispose of any of its assets in the ordinary course of business; (e) Industries may sell the Columbus Plant and the Fort Worth Plant, and Heatcraft may sell the Wilmington Plant, for a consideration at least equal to the fair market value thereof (as determined in good faith by the Board); and (f) the Company and any Restricted Subsidiary may sell, lease or otherwise dispose of any of its assets (other than in the ordinary course of its business) for a consideration at least equal to the fair market value thereof (as determined in good faith by the Board) at the time of such sale, lease or other disposition, provided that the assets so sold, leased, or otherwise disposed of on any date, when taken together with all assets theretofore sold, leased, or otherwise disposed of by the Company and its Restricted Subsidiaries (including all deemed dispositions of assets pursuant to Section 7.9 and all assets sold in connection with sale-leaseback transactions permitted under Section 7.7), (i) during the fiscal year in which such date occurs, (A) shall not have contributed more than 15% of Consolidated Operating Income for the immediately preceding fiscal year and (B) shall not have a book value exceeding 15% of the book value of consolidated total assets of the Company and its Restricted Subsidiaries as at the end of the immediately preceding fiscal year, and (ii) during the period from and -26- 32 including the date hereof through the date of such disposition, shall not have a book value exceeding 30% of the book value of consolidated total assets of the Company and its Restricted Subsidiaries as at the end of the immediately preceding fiscal year. Immediately after any consolidation, merger or other disposition under Subsection (a), (b), (c), (e) or (f) of this Section 7.10, (1) no Event of Default or Default shall have occurred and be continuing, and (2) the Company (which term, for the purpose of this sentence, shall not include the corporation that originally executed this Agreement if any other Person has become the Company pursuant to any assumption described in Subsection (c) of this Section 7.10) shall be entitled to incur at least $1 of additional Debt under Section 7.4(d). No disposition under Subsection (c) of this Section 7.10 shall release the corporation that originally executed this Agreement from its liability as obligor on the Notes. 7.11. Issuance of Stock. The Company will not (either directly or indirectly by the issuance of rights or options for, or securities convertible into, such shares) issue, sell or otherwise dispose of any shares of any class of its capital stock (other than directors' qualifying shares, if required by applicable law) if any Change of Control shall thereby occur, unless the Company shall have offered to purchase the Notes pursuant to Section 7.12. 7.12. Purchase of Notes Upon Change of Control. At least 15 Business Days (or, in the case of any transaction permitted by Section 7.10 or 7.11 resulting in a Change of Control, at least 45 days) and not more than 90 days prior to the occurrence of any Change of Control, the Company shall give written notice thereof to each holder of an outstanding Note in the manner and to the address specified for notices pursuant to this Section 7.12 for such holder in Schedule I or as otherwise specified by such holder in writing to the Company. Such notice shall contain (i) an offer by the Company to purchase, on the date of such Change of Control or, if such notice shall be delivered less than 35 days prior to the date of such Change of Control, on the date 35 days after the date of such notice (the "Purchase Date"), all Notes held by each such holder at a price equal to 100% of the principal amount thereof, together with interest accrued thereon to the Purchase Date, plus a premium equal to the Special Premium, (ii) the estimated respective amounts of accrued interest and the Special Premium payable to such holder in respect of such purchase, showing in each case in reasonable detail the calculation thereof and, with respect to the estimated Special Premium, the Reference Rate used in such calculation and (iii) the Company's estimate of the date on which such Change of Control shall occur. Said offer shall be deemed to lapse as to any such holder which has not replied affirmatively thereto in writing within 35 days of the giving of such notice. As soon as practicable (and in any event at least 24 hours) prior to such Change of Control, the Company shall give written confirmation of the date thereof to each such holder which has affirmatively replied to the notice given pursuant to the first sentence of this Section 7.12. In the event that the Company shall purchase any Notes pursuant to this Section 7.12, the same shall thereafter be canceled and not reissued and shall not be deemed "outstanding" for any purpose of this Agreement. -27- 33 For the purposes of this Section 7.12, a "Change of Control" shall be deemed to occur if any New Owner shall acquire beneficial ownership of shares in the Company having Voting Rights pertaining thereto which would allow such New Owner to elect more members of the Board than could be elected by the exercise of all Voting Rights pertaining to shares in the Company then owned beneficially by the Norris Family. As used in this Section 7.12: (i) "Voting Rights" pertaining to shares of a corporation means the rights to cast votes for the election of directors of such corporation in ordinary circumstances (without consideration of voting rights which exist only in the event of contingencies). (ii) "Norris Family" means all persons who are lineal descendants of D.W. Norris (by birth or adoption), all spouses of such descendants, all estates of such descendants or spouses which are in the course of administration, all trusts for the benefit of such descendants or spouses, and all corporations or other entities in which, directly or indirectly, such descendants or spouses (either alone or in conjunction with other such descendants or spouses) have the right, whether by ownership of stock or other equity interests or otherwise, to direct the management and policies of such corporations or other entities (each such person, spouse, estate, trust, corporation or entity being referred to herein as a "member" of the Norris Family). In addition, so long as any employee stock ownership plan exercises its Voting Rights in the same manner as members of the Norris Family (exclusive of employee stock ownership plans) who have a majority of the Voting Rights exercised by all such members of the Norris Family, such employee stock ownership plan shall be deemed a member of the Norris Family. (iii) "New Owner" means any person (other than a member of the Norris Family), or any syndicate or group of persons (exclusive of all members of the Norris Family) which would be deemed a "person" for the purposes of Section 13(d) of the Exchange Act, who directly or indirectly acquires shares in the Company. Notwithstanding anything in this Section 7.12 to the contrary, if an Event of Default exists following a Change of Control and the Notes are accelerated pursuant to the provisions of Section 9.1, the holders of the Notes shall be entitled to receive the Special Premium relating to such accelerated amount as provided in Section 9.1. 7.13. Transactions with Affiliates. The Company will not and will not permit any Restricted Subsidiary to engage in any material transaction with an Affiliate on terms less favorable to the Company or such Restricted Subsidiary than would have been obtainable at the time from any Person which is not an Affiliate in arm's-length dealing provided, that the foregoing restrictions shall not apply to any transaction between the Company and a Wholly- owned Restricted Subsidiary or between a Wholly-owned Restricted Subsidiary and another Wholly-owned Restricted Subsidiary. -28- 34 7.14. Change in Business. The Company will not either directly or by or through a Subsidiary make or permit any substantial change in the nature of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement except for such changes as are natural extensions of the heating, cooling, refrigeration, copper tube manufacturing and electronics businesses. 7.15. Environmental Matters. (a) The Company will and will cause each of its Subsidiaries to comply in all material respects with all applicable Environmental Laws if, individually or in the aggregate, failure to comply therewith could reasonably be expected to have a material adverse effect on the financial condition or results of operations of the Company or the Company and its Subsidiaries, taken as a whole. (b) The Company will not and will not permit any of its Subsidiaries to cause or allow any Hazardous Substance to be present at any time on, in, under or above any real property or any part thereof in which the Company or any Subsidiary has a direct interest (including without limitation ownership thereof or any arrangement for the lease, rental or other use thereof, or the retention of any mortgage or security interest therein or thereon), except in a manner and to an extent that is in compliance in all material respects with all applicable Environmental Laws or that will not have a material adverse effect on the financial condition or results of operations of the Company or the Company and its Subsidiaries, taken as a whole. 7.16. Limitation on Dividend Restrictions, etc. The Company will not permit any Restricted Subsidiary to enter into, adopt, create or otherwise be or become bound by or subject to any contract or charter or by-law provision limiting the amount of, or otherwise imposing restrictions on the declaration, payment or setting aside of funds for the making of, dividends or other distributions in respect of the capital stock of such Restricted Subsidiary to the Company or another Restricted Subsidiary. 7.17. Most Favored Lender's Status. The Company will not and will not permit any Restricted Subsidiary to enter into, assume or otherwise be bound or obligated under any agreement creating or evidencing Debt or any agreement executed and delivered in connection with any Debt containing one or more Additional Covenants or Additional Defaults (as defined below), unless prior written consent to such agreement shall have been obtained pursuant to Section 12; provided, however, in the event the Company or any Restricted Subsidiary shall enter into, assume or otherwise become bound by or obligated under any such agreement without the prior written consent of the holders of the Notes, the terms of this Agreement shall, without any further action on the part of the Company or any of the holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company further covenants to promptly execute and deliver at its expense an amendment to this Agreement in form and substance satisfactory to the holders of at least 66-2/3% in aggregate unpaid principal amount of all Notes at the time outstanding evidencing the amendment of this Agreement to include -29- 35 such Additional Covenants and Additional Defaults, provided that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this Section 7.17, but shall merely be for the convenience of the parties hereto. For purposes of this Agreement, (i) the term "Additional Covenant" shall mean any affirmative or negative covenant or similar restriction applicable to the Company or any Restricted Subsidiary (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (A) is similar to that of the covenants in Section 7 of this Agreement, or related definitions in Section 8 of this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the holder or holders of such other Debt (and such covenant or similar restriction shall be deemed an "Additional Covenant" only to the extent that it is more restrictive or more beneficial) or (B) is different from the subject matter of the covenants in Section 7 of this Agreement, or related definitions in Section 8 of this Agreement; and (ii) the term "Additional Default" shall mean any provision which permits the holder of such Debt to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise require the Company or any Restricted Subsidiary to purchase such Debt prior to the stated maturity of such Debt and which either (A) is similar to the Defaults and Events of Default contained in Section 9.1 of this Agreement, or related definitions in Section 8 of this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the holder or holders of such other Debt (and such provision shall be deemed an "Additional Default" only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (B) is different from the subject matter of the Defaults and Events of Default contained in Section 9.1 of this Agreement, or related definitions in Section 8 of this Agreement. SECTION 8. DEFINITIONS. 8.1. Definitions. Except as otherwise specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used in this Agreement and such terms shall include the singular as well as the plural: "Affiliate" of any specified Person shall mean any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreements" shall have the meaning specified in Section 1.2. -30- 36 "Board" shall mean (i) in the case of determinations of value under Section 7.10, the board of directors of the Restricted Subsidiary which owns the relevant assets and (ii) in all other cases, either the board of directors of the Company or any duly authorized committee of that board. "Business Day" shall mean a day other than a Saturday or Sunday or a day on which banks are required or authorized to close in New York, New York, or Dallas, Texas. "Capital Lease" shall mean any lease of property which in accordance with GAAP should be capitalized on the lessee's balance sheet; and "Capital Lease Obligation" shall mean the amount of the liability under a Capital Lease which is or should be so capitalized in accordance with GAAP. "Change of Control" shall have the meaning specified in Section 7.12. "Closing Date" shall have the meaning specified in Section 1.2. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute thereto, together with the rules and regulations issued thereunder, in each case as in effect from time to time. "Columbus Plant" shall mean the real and personal property of Industries located on Olentangy River Road in Columbus, Ohio. "Commission" shall mean the Securities and Exchange Commission and any other similar or successor agency of the Federal Government administering the Securities Act. "Commonly Controlled Entity" shall have the meaning specified in Section 2.11. "Company" shall have the meaning specified in the introductory paragraph. "Company Premises" shall mean real property in which the Company or any Person which has at any time been or hereafter becomes a Subsidiary of the Company at any time has or ever had any direct interest, including, without limitation, ownership thereof, or any arrangement for the lease, rental or other use thereof, or the retention or claim of any mortgage or security interest therein or thereon. "Computation Date" shall have the meaning specified in Section 7.6. "Computation Period" shall have the meaning specified in Section 7.6. -31- 37 "Consolidated Net Income" for any period shall mean the Net Income of the Company and its Restricted Subsidiaries for such period consolidated in accordance with GAAP. "Consolidated Operating Income" for any period shall mean Consolidated Net Income for such period plus the net amount deducted during such period in determining the amount thereof in respect of interest expense (including the interest equivalent in respect of Capital Lease Obligations) and taxes imposed on or measured by income or excess profits. "Current Assets" shall mean the current assets of the Company and its Restricted Subsidiaries determined in accordance with GAAP on a consolidated basis after eliminating all intercompany items. "Current Liabilities" shall mean the current liabilities of the Company and its Restricted Subsidiaries determined in accordance with GAAP on a consolidated basis after eliminating all intercompany items and after excluding current liabilities consisting of current maturities of long-term debt. "Debt" as applied to any Person (without duplication) shall mean all obligations of such Person for borrowed money (whether short or long-term and whether or not represented by bonds, debentures, notes, drafts or other similar instruments) and any notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, and in any event shall include (a) any obligation owed for all or any part of the purchase price of property or other assets or for the cost of the property or other assets constructed or of improvements, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business, (b) any obligation of another Person of a type described in clause (a), (c) or (d) of this definition which is secured by any Lien on or payable out of the proceeds of production from property owned or held by such Person, even though such Person has not assumed or become liable for the payment of such obligation, (c) any Capital Lease Obligation of such Person, (d) any Guarantee by such Person of or with respect to Debt of another Person, and (e) all preferred stock issued by such Person which is redeemable, or for which mandatory sinking fund payments are due, at any time on or before December 1, 2008. The Debt of the Company shall in any event include (without duplication) all Debt of the Company to a Subsidiary. The amount of Debt and assets of any Person shall not be affected by deposits, trust arrangements or similar arrangements which, in accordance with GAAP, extinguish debt for which such Person remains legally liable. "Default" shall mean any default or other event which, with notice or the lapse of time or both, would constitute an Event of Default. "Environmental Laws" shall mean any past, present or future Federal, state, local or foreign statutory or common law, or any regulation, code, plan, order, decree, -32- 38 judgment, permit, grant, franchise, concession, restriction, agreement or injunction issued, entered, promulgated or approved thereunder, relating to (a) the environment or human health or safety, including, without limitation, any law relating to emissions, discharges, releases or threatened releases of Hazardous Substances into the environment (including, without limitation, air, surface water, groundwater or land), or (b) the manufacture, generation, refining, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport, arranging for transport, or handling of Hazardous Substances. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Events of Default" shall have the meaning specified in Section 9.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, and any similar or successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Fort Worth Plant" shall mean the real and personal property of Industries located at the corner of Airport Freeway and Maxine, Fort Worth, Texas. "GAAP" shall mean generally accepted accounting principles as in effect at the time of application to the provisions hereof, provided that for all purposes of this Agreement it is understood and agreed that the Company shall account for its Unrestricted Subsidiaries on the equity method. "Governmental Body" shall have the meaning specified in Section 2.7. "Guarantee" of or by any Person shall mean any guarantee or other contingent liability, direct or indirect, with respect to any Debt of another Person, through an agreement or otherwise, including, without limitation, (a) any endorsement (otherwise than for collection or deposit in the ordinary course of business) or discount with recourse or undertaking substantially equivalent to or having similar economic effect of a guarantee with respect to any such Debt, (b) any contingent obligations of such Person in respect of letters of credit, letter of credit facilities, bankers' acceptance facilities or similar credit facilities (excluding in any event obligations in respect of (1) trade or commercial letters of credit given in the ordinary course of business and (2) stand-by letters of credit given to support obligations other than Debt obligations) and (c) any agreement (1) to purchase, or to advance or supply funds for the payment or purchase of, any such Debt, (2) to purchase, sell or lease property, products, materials or supplies, or transportation or services, primarily for the purpose of enabling such other Person to pay the Debt or to ensure the owner thereof against loss regardless of the delivery or non-delivery of the property, products, materials or supplies or transportation or services, or (3) to make any loan, advance, capital contribution or other investment in such other Person to assure a minimum equity, working capital or other balance sheet condition for -33- 39 any date, or to provide funds for the payment of any liability, dividend or stock liquidation payment, or otherwise to supply funds to or in any manner invest in such other Person. The amount of any Guarantee shall (subject to any limitation contained therein) be equal to the outstanding principal amount of the Debt guaranteed. "Hazardous Substance" shall mean any contaminant, pollutant or toxic or hazardous substance, and any substance that is defined or listed as a hazardous, toxic or dangerous substance under any Environmental Law or that is otherwise regulated or prohibited under any Environmental Law as a hazardous, toxic or dangerous substance. "Heatcraft" shall mean Heatcraft Inc., a Mississippi corporation. "Industries" shall mean Lennox Industries Inc., an Iowa corporation. "Investment" shall mean any investment in any Person made by stock purchase, capital contribution, loan, advance or otherwise, provided that the amount of any such investment in any Person shall be computed in accordance with GAAP. Investments shall not on any date include notes receivable accepted by the Company or any Restricted Subsidiary in settlement of trade accounts receivable of non-Affiliates so long as the allowance for doubtful accounts of the Company and its Restricted Subsidiaries includes the excess, if any, of (a) the aggregate principal amount of all such notes on such date over (b) 5% of the sum of (i) the aggregate principal amount of all such notes plus (ii) all trade accounts receivable of the Company and its Restricted Subsidiaries on such date, before allowances for doubtful accounts. "Letter Agreement" shall mean that certain letter agreement, dated as of December 1, 1993, among the Company, you and the Other Purchasers, substantially in the form of Exhibit G hereto. "Lien" shall mean, as to any Person, any mortgage, lien, pledge, adverse claim, charge, other encumbrance in favor of any vendor, lessor, lender or other secured party in or on, or any interest or title of any such vendor, lessor, lender or other secured party under any conditional sale or other title retention agreement or Capital Lease with respect to, any property or asset of such Person, or the signing or filing of a financing statement with respect to property owned by such Person which names such Person as debtor, or the signing of any security agreement authorizing any other party as the secured party thereunder to file any such financing statement. "Marshalltown Plant" shall mean the real and personal property of Industries located on South 12th Avenue in Marshalltown,Iowa. "Multiemployer Plan" shall have the meaning specified in Section 2.11. -34- 40 "Net Income" of any Person for any period shall mean the net income (or net loss) of such Person for such period, determined in accordance with GAAP, excluding (a) the proceeds of any life insurance policy; (b) any gain arising from (1) the sale or other disposition of any assets (other than current assets) to the extent that the aggregate amount of gains exceeds the aggregate amount of losses from the sale, abandonment or other disposition of assets (other than current assets), (2) any write-up of assets, or (3) the acquisition by such Person of its outstanding Debt securities; (c) any amount representing the interest of such Person in the undistributed earnings of any other Person; (d) any earnings of any other Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or a Restricted Subsidiary and any earnings, prior to the date of acquisition, of any other Person acquired in any other manner; and (e) any deferred credit (or amortization of a deferred credit) arising from the acquisition of any Person. "Net Worth" shall mean, as of any date of determination thereof, the total stockholders' equity of the Company and its Subsidiaries determined in accordance with GAAP on a consolidated basis, provided that if the portion of total stockholders' equity attributable to Unrestricted Subsidiaries exceeds 15% of total stockholders' equity, Net Worth shall be reduced by the amount of such excess. "New Owner" shall have the meaning specified in Section 7.12. "Norris Family" shall have the meaning specified in Section 7.12. "Note" or "Notes" shall have the meaning specified in Section 1.1. "Note Register" shall have the meaning specified in Section 10. "Order" shall have the meaning specified in Section 2.7. "Other Agreements" shall have the meaning specified in Section 1.2. "Other Purchasers" shall have the meaning specified in Section 1.2. -35- 41 "outstanding" shall refer, when used with reference to the Notes as of a particular time, to all Notes theretofore issued as provided in the Agreements, except (i) Notes theretofore reported as lost, stolen, damaged or destroyed, or surrendered for transfer, exchange or replacement, in respect of which replacement Notes have been issued, (ii) Notes theretofore paid in full, and (iii) Notes theretofore canceled by the Company; and except that, for the purpose of determining whether holders of the requisite principal amount of Notes have made or concurred in any waiver, consent, approval, notice or other communication under the Agreements, Notes owned by the Company or any Affiliate thereof shall not be deemed to be outstanding. "Person" shall include an individual, a corporation, an association, a partnership, a trust or estate, a government, foreign or domestic, and any agency or political subdivision thereof, or any other entity. "Purchase Date" shall have the meaning specified in Section 7.12. "Qualified Institutional Holder" shall mean any holder which is an institutional investor (a) which holds at the time in question at least $3,000,000 in aggregate principal amount of Notes or any lesser principal amount thereof constituting at least 20% of the aggregate principal amount of Notes then outstanding or (b) which purchases from a holder 100% of the Notes held by such holder (after giving effect to any reduction in principal resulting from a prepayment of Notes). "Restricted Debt" shall mean any of (i) Debt (including, without limitation, Capital Lease Obligations, purchase money obligations and industrial revenue bonds) of the Company or a Restricted Subsidiary which is secured by a Lien not otherwise permitted under clause (a), (b) or (c) of Section 7.5; or (ii) Debt of a Restricted Subsidiary owing to any Person other than the Company or a Wholly-owned Restricted Subsidiary. "Restricted Debt Amount" shall mean as of any date of determination, the sum (without duplication) of the aggregate principal amount outstanding of all Restricted Debt. "Restricted Investment" shall mean any Investment by the Company or any Restricted Subsidiary other than (a) any Investment in (1) a marketable obligation, maturing within two years after acquisition thereof, issued or guaranteed by the United States of America or an instrumentality or agency thereof, and entitled to the full faith and credit of the United States of America, (2) a demand deposit account with, or a certificate of deposit or other obligation, maturing within one year after acquisition thereof, either fully insured by the Federal Deposit Insurance Corporation (or any successor Federal agency) or issued by a national or State bank or trust company having capital, surplus and undivided profits of at least $250,000,000, and having (or being the wholly-owned -36- 42 subsidiary of a holding company having) a credit rating in respect of its short-term obligations of A-2 or higher from Standard & Poor's Corporation or P-2 or higher from Moody's Investors Service, Inc., (3) open market commercial paper, maturing within 270 days after acquisition thereof, having a credit rating of A-2 or higher from Standard & Poor's Corporation or P-2 or higher from Moody's Investors Service, Inc. and (4) a demand deposit account either fully insured by the Federal Deposit Insurance Corporation (or any successor Federal Agency) or with a national or State bank or trust company having capital, surplus and undivided profits of at least $100,000,000, if such demand deposit account is required to conduct operations of the Company or any Restricted Subsidiary in the same local area in which such bank or trust company is located and the aggregate amount of Investments in all such demand deposit accounts permitted by this clause (4) does not exceed 1% of Net Worth; (b) any Investment existing on the date hereof, as set forth in Exhibit D hereto, including any extensions or renewals of any such Investment; (c) any Investment hereafter acquired in exchange for, or out of the net cash proceeds from the substantially concurrent sale of, common shares of the Company; (d) Investments in (i) shares of adjustable rate or floating rate preferred stock, variable rate notes or other Debt or equity issues of business corporations, or (ii) Debt issues of municipalities, the issuers of which Investments described in this subsection (d) shall in any case have a credit rating in respect of their long-term obligations of A- or higher from Standard & Poor's Corporation or A3 or higher from Moody's Investors Service, Inc., provided (i) that the aggregate outstanding amount of Investments which shall at any time not constitute Restricted Investments pursuant to this Subsection (d) of the definition of Restricted Investments shall not exceed one-third of the then aggregate outstanding amount of all Investments of the Company and its Restricted Subsidiaries at such time (disregarding for this purpose Investments in Restricted Subsidiaries or joint ventures), and (ii) the aggregate outstanding amount of Investments issued by a single issuer which shall at any time not constitute Restricted Investments pursuant to this Subsection (d) shall not exceed $5,000,000; and (e) any Investment by the Company or any Restricted Subsidiary in any Restricted Subsidiary or any Person which simultaneously therewith becomes a Restricted Subsidiary. -37- 43 For the purposes of this definition, the outstanding amount of any Investment shall be the amount originally actually invested, net of any return of capital, and disregarding any appreciation or decline in value, or write-up, write-down or write-off, of the Investment concerned. "Restricted Payment," in respect of the Company, shall mean (a) the declaration of any dividend on, or the incurrence of any liability to make any other payment or distribution in respect of, shares of the Company of any class (other than one payable solely in its common shares); and (b) any payment or distribution on account of the purchase, redemption or other retirement of any shares of the Company of any class, or of any warrant, option or other right to acquire such shares, or any other payment or distribution (other than pursuant to a dividend theretofore declared or liability theretofore incurred as specified in the foregoing Subsection (a)), made in respect thereof, either directly or indirectly except a purchase, redemption or other retirement of shares of the Company out of the net cash proceeds from the substantially concurrent sale of common shares of the Company. The amount of any Restricted Payment in property shall be deemed to be the greater of its fair value (as determined by the Board) or its net book value. "Restricted Subsidiary" shall mean any Subsidiary of the Company which (a) is listed as a Restricted Subsidiary on Exhibit B or (b) is organized under the laws of, and conducts substantially all of its business and maintains substantially all of its property and assets within, the continental United States of America or any State thereof. Once a Subsidiary is or becomes a Restricted Subsidiary it may not thereafter become an Unrestricted Subsidiary. "Securities Act" shall mean the Securities Act of 1933, and any similar or successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Special Premium" shall mean, with respect to any principal amount of Notes being prepaid pursuant to Section 4.2, any purchase of the principal amount of Notes pursuant to Section 7.12 or any acceleration of the principal amount of any Note pursuant to Section 9.1 (such prepaid, purchased or accelerated principal amount being hereinafter referred to as the "Prepaid Principal"), as at any date of determination, an amount equal to the greater of (i) zero and (ii) the excess of: (A) the sum of the respective present values as of the date such Special Premium becomes due and payable of: -38- 44 (1) each prepayment of principal (if any) required to be made with respect to such Prepaid Principal pursuant to Section 4.1 with respect to such Prepaid Principal during the Discount Period, (2) the payment of principal balance required to be made at final maturity with respect to such Prepaid Principal, and (3) each payment of interest which would be required to be paid during such Discount Period with respect to such Prepaid Principal from time to time outstanding, determined, in the case of each such required prepayment, principal payment at final maturity and interest payment, by discounting the amount thereof (on a semiannual basis) from the date fixed therefor back to the date of payment of such Special Premium at the Reference Rate (assuming for such purpose that all such payments and prepayments of principal and payments of interest with respect to such Prepaid Principal were made when due pursuant to the terms of the Agreements and the Notes, and that no other payment or prepayment with respect to such Prepaid Principal was made), over (B) the amount of such Prepaid Principal. For purposes of the foregoing definition of Special Premium, (1) "Discount Period" shall mean the period beginning on the date of such payment of Special Premium and ending on the stated final maturity of the Notes; and (2) "Reference Rate" shall mean a per annum rate determined by adding 0.50% to the annual yield implied for actively traded United States Treasury securities having a term to maturity equal to the Weighted Average Life to Maturity of the portion of the Notes being prepaid, purchased or accelerated as determined by reference to (i) the yields reported, as of 10:00 a.m. (New York City time) on the Business Day next preceding the date of such payment, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace "Page 678" on the Telerate Service), or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Federal Reserve Statistical Release H.15(519) ("Release H.15") published most recently prior to the third day preceding the date of such payment, or, if Release H.15 is no longer published, such annual yield as determined, at the Company's expense, by an independent investment banking firm acceptable to the Company and the holders of Notes; provided that, if there shall be no actual United States Treasury security having a term to maturity equal to such Weighted Average Life to Maturity of the Notes, the annual yield for a United States Treasury security deemed to have such a term to maturity shall be interpolated on a basis consistent with the annual yields of other United States Treasury securities as determined by reference to Release H.15, or (if Release H.15 is no longer -39- 45 published) as determined at the Company's expense by such an independent investment banking firm. "Subordinated Debt" of any Person shall mean Debt of such Person which is expressly made subordinate and junior in right of payment to the Notes pursuant to terms contained in the instrument or agreement evidencing such Debt substantially in the form of Exhibit F. "Subsidiary" shall mean any corporation of which the Company and/or one or more of its Subsidiaries own more than 50% of the outstanding stock having by its terms ordinary voting power to elect a majority of the board of directors of such corporation, irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, and, except as otherwise expressly indicated herein, references to Subsidiaries shall refer to Subsidiaries of the Company. "this Agreement" shall mean this Note Purchase Agreement (together with the Schedules and Exhibits hereto), as from time to time amended, modified or supplemented in accordance with its terms. "Total Capitalization" shall mean the sum of Net Worth and Total Debt. "Total Debt" shall mean, as at any date of determination, the aggregate amount (without duplication) of Debt of the Company and its Restricted Subsidiaries outstanding on such date, consolidated in accordance with GAAP after eliminating all intercompany items. Total Debt of the Company shall not in any event include Subordinated Debt of the Company to a Wholly-owned Restricted Subsidiary or Debt of a Wholly-owned Restricted Subsidiary to the Company or to another Wholly-owned Restricted Subsidiary. "Unrestricted Subsidiary" shall mean any Subsidiary other than a Restricted Subsidiary. "Voting Rights" shall have the meaning specified in Section 7.12. "Weighted Average Life to Maturity" as applied to any indebtedness at any date, shall mean the number of years (or portions of years) obtained by dividing (a) the then outstanding principal amount of such indebtedness into (b) the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the date on which such payment is to be made. -40- 46 "Wholly-owned Restricted Subsidiary" shall mean any Restricted Subsidiary, all of the equity securities (or all of the equity securities other than directors' qualifying shares) of which are owned by the Company or another Wholly-owned Restricted Subsidiary. "Wilmington Plant" shall mean the real and personal property of Heatcraft located at 602 Sunnyvale Drive, Wilmington, North Carolina. 8.2. Accounting Terms. (a) All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP, all computations made pursuant to this Agreement shall be made in accordance with GAAP, and all balance sheets and other financial statements shall be prepared in accordance with GAAP. Any reference herein, or in any document delivered in connection herewith, to financial statements of the Company at a date prior to October 11, 1991 shall be deemed references to the financial statements of Lennox International Inc., an Iowa corporation. (b) If any changes in accounting principles from those used in the preparation of the most recent audited historical financial statements delivered to you prior to the Closing Date are hereafter required or permitted by the rules, regulations, pronouncements and opinions of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) and are adopted by the Company with the agreement of its independent certified public accountants and such changes result or could result (for any present or future period) in a change in the method of calculation of any of the financial covenants, standards or terms in or relating to such covenants, the parties hereto agree to enter into discussions with a view to amending such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the financial condition of the Company and its Subsidiaries shall be the same after such changes as if such changes had not been made, provided, that no change in GAAP that would affect or could affect (for any present or future period) the method of calculation of any of said financial covenants, standards or terms shall be given effect in such calculations until such provisions are amended, in a manner satisfactory to the Company and the holders of the Notes, to so reflect such change to GAAP. SECTION 9. EVENTS OF DEFAULT; REMEDIES. 9.1. Events of Default Defined; Acceleration of Maturity. If any of the following events (herein called "Events of Default") shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or by operation of law or otherwise), that is to say: (a) default shall be made in the due and punctual payment of all or any part of the principal of, or the Special Premium (if any) on, any Note when and as the same -41- 47 shall become due and payable, whether at stated maturity, by acceleration, by notice of prepayment or otherwise; (b) default shall be made in the due and punctual payment of any interest on any Note when and as such interest shall become due and payable, and such default shall have continued for a period of three Business Days; (c) (i) default shall be made in the performance or observance of any covenant, agreement or condition contained in Section 5(f)(i), any of Sections 7.4 through (and including) Section 7.10, Section 7.12, or Section 7.16; or (ii) default shall be made in the performance or observance of any other covenant, agreement or condition contained in the Agreements or the Notes not specified in Section 9.1(a) or Section 9.1(b) or in the immediately preceding clause (i) of this Section 9.1(c) and such default shall have continued for a period of 30 days; (d) any event shall occur or any condition shall exist in respect of any Debt of the Company or any Restricted Subsidiary (other than the Notes) in an aggregate unpaid principal amount of $1,000,000 or more, or under any agreement securing or relating to any of such Debt, the effect of which is to cause or to permit the acceleration of the maturity of such Debt, or any such Debt shall not have been paid at the final maturity date thereof (as renewed or extended if such Debt shall have been renewed or extended) (provided that the words "or to permit" contained in the foregoing wording of this Section 9.1(d) shall be omitted from this Section 9.1(d) and of no effect at any time that and so long as neither the Company nor any Restricted Subsidiary shall any longer be a party to any agreement (other than this Agreement, the Other Agreements and any other agreement providing for automatic modification thereof in substantially the same form as this Section 9.1(d)) providing that the holder of any Debt of the Company or any Restricted Subsidiary may declare such Debt to be due and payable prior to the scheduled maturity thereof as a result of the occurrence of any default in the performance of any term or condition contained in the agreement or instrument evidencing any other Debt of the Company or any Restricted Subsidiary and further providing for such declaration regardless of whether such other Debt shall have been declared due and payable prior to the stated maturity thereof); (e) the Company or any Restricted Subsidiary shall (1) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (2) be generally unable to pay its debts as such debts become due, (3) make a general assignment for the benefit of its creditors, (4) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (5) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors' rights generally, (6) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an -42- 48 involuntary case under such Bankruptcy Code, (7) take any action under the laws of its jurisdiction of incorporation analogous to any of the foregoing, or (8) take any corporate action for the purpose of effecting any of the foregoing; (f) a proceeding or case shall be commenced, without the application or consent of the Company or any Restricted Subsidiary in any court of competent jurisdiction, seeking (1) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (3) similar relief in respect of it, under any law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 90 days; or an order for relief shall be entered in an involuntary case under such Bankruptcy Code, against the Company or any Restricted Subsidiary; or action under the laws of the jurisdiction of incorporation of the Company or any Restricted Subsidiary analogous to any of the foregoing shall be taken with respect to the Company or any Restricted Subsidiary and shall continue unstayed and in effect for any period of 90 consecutive days; (g) final judgment for the payment of money shall be rendered by a court of competent jurisdiction against the Company or any Restricted Subsidiary and the Company or any Restricted Subsidiary shall not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within 60 days from the date of entry thereof and within said period of 60 days, or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, and such judgment together with all other such judgments shall exceed in the aggregate U.S. $1,000,000 (or the equivalent amount of any other currency); or (h) any representation or warranty made by the Company in this Agreement or in any certificate or other instrument delivered hereunder or pursuant hereto or in connection with any provision hereof shall prove to be false or incorrect or breached in any material respect on the date as of which made; then (i) upon the occurrence of any Event of Default described in Subsection (e) or (f) with respect to the Company, the unpaid principal amount of all Notes, together with the interest accrued thereon which shall be deemed matured, shall automatically become immediately due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of actual acceleration or other requirements of any kind, all of which are hereby expressly waived by the Company, or (ii) during the continuance of any other Event of Default, the holder or holders of at least 66-2/3% of the unpaid principal amount of all of the Notes at the time outstanding may, by written notice to the Company, declare the unpaid principal amount of all Notes to be, and the same shall forthwith become due and payable, without further presentment, demand, protest, notice of intent to accelerate, or notice of actual acceleration, -43- 49 together with the interest accrued thereon which shall be deemed matured, plus (to the full extent permitted by applicable law) a premium equal to the Special Premium (determined with respect to such principal amount of Notes as of the date of such declaration), provided that, during the existence of an Event of Default described in Subsection (a) or (b) with respect to any Note, the holder of such Note may, by written notice to the Company, declare such Note to be, and the same shall forthwith become, due and payable, without further presentment, demand, protest, notice of intent to accelerate, or notice of actual acceleration, together with the interest accrued thereon which shall be deemed matured plus (to the full extent permitted by applicable law) a premium equal to the Special Premium determined as of the date of such declaration. If any holder of any Note shall exercise the option specified in the proviso to the preceding sentence, the Company will forthwith give written notice thereof to the holders of all other outstanding Notes and each such holder may (whether or not such notice is given or received), by written notice to the Company, declare the principal of all Notes held by it to be, and the same shall forthwith become, due and payable, without further presentment, demand, protest, notice of intent to accelerate, or notice of actual acceleration, together with the interest accrued thereon which shall be deemed matured. The provisions of this Section 9.1 are subject, however, to the condition that if, at any time after any Note shall have so become due and payable and prior to the entry of any final judgment for the payment of any monies due on the Notes or pursuant to the Agreements, the Company shall pay all arrears of interest on the Notes and all payments on account of the principal of and the Special Premium (if any) on the Notes which shall have become due otherwise than by acceleration (with interest on such principal, the Special Premium (if any) and, to the extent permitted by law, on overdue payments of interest, at the rate specified in the Notes) and all Events of Default (other than nonpayment of principal of and accrued interest on Notes due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 12, then, and in every such case, the holder or holders of at least 80% in unpaid principal amount of all of the Notes at the time outstanding, by written notice to the Company, may rescind and annul any such acceleration and its consequences; but no such action shall affect any subsequent Default or Event of Default or impair any right consequent thereon. 9.2. Suits for Enforcement. If any Event of Default shall have occurred and be continuing, the holder of any Note may proceed to protect and enforce its rights, either by suit in equity or by action at law, or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement, or the holder of any Note may proceed to enforce the payment of all sums due upon such Note or to enforce any other legal or equitable right of the holder of such Note. The Company covenants that, if it shall default in the making of any payment due under any Note or in the performance or observance of any agreement contained in this Agreement, it will pay to the holder thereof such further amounts, to the extent lawful, as shall -44- 50 be sufficient to pay the costs and expenses of collection or of otherwise enforcing such holder's rights, including reasonable counsel fees. 9.3. Remedies Cumulative. No remedy herein conferred upon you or the holder of any Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 9.4. Remedies Not Waived. No course of dealing between the Company and you or the holder of any Note and no delay or failure in exercising any rights hereunder or under any Note in respect thereof shall operate as a waiver of any of your rights or the rights of any holder of such Note. SECTION 10. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES. The Company will keep at its address for notices under Section 16.4 a register (herein sometimes referred to as the "Note Register"), in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), it will provide for the registration and registration of transfer of the Notes. Whenever any Note or Notes shall be surrendered either at such address for notices of the Company or at the place of payment named in the Notes, for transfer or exchange, accompanied (if so required by the Company) by an appropriate written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing, the Company will execute and deliver in exchange therefor a Note or Notes, as may be requested by such holder, in the same aggregate unpaid principal amount as the aggregate unpaid principal amount of the Note or Notes so surrendered. Any Note issued in exchange for any other Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, and neither gain nor loss of interest shall result from any such transfer or exchange. Any transfer tax relating to such transaction shall be paid by the holder requesting the exchange. The Company and any agent of the Company may treat the Person in whose name any Note is registered as the owner of such Note for the purpose of receiving payment of the principal of and the Special Premium (if any) and interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue. SECTION 11. LOST, ETC. NOTES. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Note, and (in case of loss, theft or destruction) of indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Note, if mutilated, the Company will deliver in lieu of such Note a Note in a like unpaid principal amount, dated as of the date to which interest has been paid thereon. -45- 51 Notwithstanding the foregoing provisions of this Section, if any Note of which you or any other institutional holder having a net worth of at least $50,000,000 is the owner is lost, stolen or destroyed, then the affidavit of your or such holder's Treasurer or Assistant Treasurer (or other responsible officials), setting forth the circumstances with respect to such loss, theft or destruction, shall be accepted as satisfactory evidence thereof, and no indemnity shall be required as a condition to the execution and delivery by the Company of a Note in lieu of such Note (or as a condition to the payment thereof, if due and payable) other than your or such holder's unsecured written agreement to indemnify the Company. SECTION 12. AMENDMENT AND WAIVER. (a) Any term, covenant, agreement or condition of the Agreements or of the Notes may, with the consent of the Company, be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by one or more substantially concurrent written instruments signed by the holder or holders of at least 66-2/3% in aggregate unpaid principal amount of all Notes at the time outstanding, provided, however, that (i) no such amendment or waiver shall (A) reduce the rate or extend the time of payment of interest on any of the Notes, without the consent of the holder of each Note so affected, or (B) modify any of the provisions of the Agreements or of the Notes with respect to the payment or prepayment thereof (including without limitation the definition of the term "Special Premium" and any other related definitions), or extend the scheduled maturity of the Notes, or reduce the percentage of holders of Notes required to approve any such amendment or effectuate any such waiver, without the consent of the holders of all the Notes then outstanding, and (ii) no such waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. (b) Any amendment or waiver pursuant to Subsection (a) of this Section 12 shall (except as provided in Clause (a)(i)(A)) apply equally to all the holders of the Notes amended or waived and shall be binding upon them, upon each future holder of any Note and upon the Company, in each case whether or not a notation thereof shall have been placed on any Note. (c) The Company will not agree in writing to any amendment, modification or waiver of any of the provisions of the Agreements or the Notes unless each holder of Notes (irrespective of the amount of Notes then owned by it) shall be informed thereof by the -46- 52 Company and shall be afforded the opportunity of considering the same and shall be supplied by the Company with sufficient information to enable it to make an informed decision with respect thereto. The Company will not, and will not permit any of its Subsidiaries or Affiliates to, offer or pay any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of Notes in order to obtain such holder's consent to any amendment, modification or waiver of any term or provision of the Agreements, or the Notes or any annulment or rescission of acceleration pursuant to Section 9.1, unless such remuneration or inducement is concurrently paid on the same terms proportionately to each holder of Notes then outstanding regardless of whether or not such holder consents to such waiver, amendment, annulment or rescission. SECTION 13. HOME OFFICE PAYMENT. Notwithstanding anything to the contrary in this Agreement or the Notes, so long as you or any nominee designated by you shall be the holder of any Note, the Company shall punctually pay all amounts which become due and payable on such Note to you by 11:00 a.m., New York City time, at your address and in the manner set forth in Schedule I hereto, or at such other place within the United States and in such other manner as you may designate by notice to the Company, without presentation or surrender of such Note. You agree that prior to the sale, transfer or other disposition of any such Note, you will make notation thereon of the portion of the principal amount paid or prepaid and the date to which interest has been paid thereon, or surrender the same in exchange for a Note or Notes aggregating the same principal amount as the unpaid principal amount of the Note so surrendered. The Company shall enter into an agreement similar to that contained in the first sentence of this Section 13 with any other institutional investor (or nominee thereof) who shall hold any of the Notes and who shall make with the Company an agreement similar to that contained in the second sentence of this Section. SECTION 14. LIABILITIES OF THE HOLDERS. Neither this Agreement nor any disposition of any of the Notes shall be deemed to create any liability or obligation on your part or that of any other holder of any Note to enforce any provision hereof or of any of the Notes for the benefit or on behalf of any other Person who may be the holder of any Note. SECTION 15. TAXES. The Company will pay all taxes (including interest and penalties) which may be payable in respect of the execution and delivery of this Agreement or the execution and delivery (but not the transfer) of any of the Notes or of any amendment of, or waiver or consent under or with respect to, the Agreements or of any of the Notes and will save you and all subsequent holders of the Notes harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax. The obligations of the Company under this Section 15 shall survive the payment of the Notes. SECTION 16. MISCELLANEOUS. 16.1. Expenses. Whether or not the transactions contemplated hereby are consummated, the Company shall: (a) pay the reasonable fees and disbursements of your -47- 53 special counsel and of any local counsel for any services rendered in connection with such transactions or in connection with any actual or proposed amendment, waiver or consent (whether or not the same becomes effective) with respect to this Agreement or the Notes, and all other reasonable expenses in connection therewith (including, without limitation, document production expenses and expenses incurred in connection with obtaining a private placement number from Standard and Poor's CUSIP Service Bureau); (b) reimburse you for your reasonable out-of-pocket expenses in connection with such transactions, amendments, waivers or consents (whether or not the same becomes effective), and any items of the character referred to in clause (a) which shall have been paid by you, and pay the cost of transmitting Notes (insured to your satisfaction) to your principal office upon the issuance thereof; (c) pay, and save you and each subsequent holder of any Note harmless from and against, any and all liability and loss with respect to or resulting from the non-payment or delayed payment of any and all placement fees and other liability which the Company may be or become obligated to pay any agent or finder in connection with such transactions; (d) pay the expenses described in Section 9.2 of this Agreement; and (e) pay, and save you and each subsequent holder of any Note harmless from and against liability for the payment of, all out-of-pocket expenses, including without limitation reasonable attorneys' fees, incurred in connection with responding to any subpoena or other legal process or informal investigative demand involving the Company or any of its Affiliates. The obligations of the Company under this Section 16.1 shall survive payment of the Notes. 16.2. Reliance on and Survival of Representations. All agreements, representations and warranties of the Company herein and in any certificates or other instruments delivered pursuant to this Agreement shall (a) be deemed to be material and to have been relied upon by you, notwithstanding any investigation heretofore or hereafter made by you or on your behalf, and (b) survive the execution and delivery of this Agreement and the delivery of the Notes to you, and shall continue in effect so long as any Note is outstanding and thereafter as provided in Sections 15 and 16.1. 16.3. Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of the respective parties hereto shall bind and inure to the benefit of their respective successors and assigns, except that, in the case of a successor to the Company by consolidation or merger or a transferee of its assets, this Agreement shall inure to the benefit of such successor or transferee only if it becomes such in accordance with Section 7.10; provided, however, that you shall not be obligated to purchase any Notes on the Closing Date from any Person other than the existing Lennox International Inc., a Delaware corporation. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of the Notes, and shall be enforceable by any such holder, whether or not an express assignment to such holder of rights under this Agreement has been made by you or your successor or assign, provided, however, that the benefit of Sections 5, 6, 11 (as to satisfactory indemnity) and 13 shall be limited as provided therein. -48- 54 16.4. Notices. All notices, opinions and other communications provided for in this Agreement shall be in writing and delivered or mailed, first class postage prepaid, addressed (a) if to the Company, at the address set forth at the head of this Agreement (marked for the attention of the Executive Vice President, Chief Financial Officer and Treasurer), or at such other address as the Company may hereafter designate by notice to you and to each other holder of any Note at the time outstanding, or (b) if to you, at your address as set forth in Schedule I hereto or at such other address as you may hereafter designate by notice to the Company, or (c) if to any other holder of any Note, at the address of such holder as it appears on the Note Register. 16.5. Substitution of Your Wholly-Owned Subsidiary. You shall have the right to substitute one of your wholly-owned subsidiaries as the holder of any of the Notes to be delivered to you hereunder, by written notice delivered to the Company, which notice shall be signed by you and such subsidiary, shall contain such subsidiary's agreement to be bound by this Agreement and shall contain a confirmation by such subsidiary of the accuracy with respect to it of the representations contained in Sections 1.3 and 1.4, provided that such confirmation may contain a statement to the effect that such subsidiary shall at all times have the right to transfer the Notes being delivered to it to you. The Company agrees that, upon receipt of any such notice, whenever the word "you" is used in this Agreement (other than this Section) such word shall be deemed to refer to such subsidiary in lieu of you. In the event that such subsidiary is so substituted hereunder and thereafter transfers its Notes or any portion thereof to you, upon receipt by the Company of notice of such transfer, whenever the word "you" is used in this Agreement (other than in this Section) such word shall be deemed to refer to such subsidiary only to the extent it retains any portion of the Notes, and shall be deemed to refer to you to the extent you own all or any portion of the Notes, and you and such subsidiary to such extent shall each have all the rights of an original holder of Notes under this Agreement. 16.6. LAW GOVERNING. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16.7. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms hereof. 16.8. Entire Agreement. This Agreement embodies the entire agreement and understanding between you and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. 16.9. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -49- 55 16.10. Maximum Interest Payable. The Company, you, and any other holders of any of the Notes, specifically intend and agree to limit contractually the amount of interest payable under this Agreement, the Notes, the Letter Agreement, and all other instruments and agreements executed in connection with the foregoing to the maximum amount of interest lawfully permitted to be charged under applicable law. Therefore, none of the terms of this Agreement, the Notes, the Letter Agreement, or any instrument pertaining to or relating to or executed in connection with such documents shall ever be construed to create a contract to pay interest (or amounts deemed to be interest under applicable law) at a rate in excess of the maximum rate permitted to be charged under applicable law, and none of the Company or any other party liable or to become liable hereunder, under the Notes, under the Letter Agreement, or under any other instruments and agreements related hereto and thereto shall ever be liable for interest in excess of the amount determined at such maximum rate, and the provisions of this Section 16.10 shall control over all other provisions of this Agreement, the Notes, the Letter Agreement, or any other instrument pertaining to or relating to the transactions herein or therein contemplated. If any amount of interest taken or received by you or any holder of a Note shall be in excess of said maximum amount of interest that, under applicable law, could lawfully have been collected incident to such transactions, then such excess shall be deemed to have been the result of a mathematical error by all parties hereto and shall be automatically applied to the reduction of the principal amount owing under the Notes or if such excessive interest exceeds the unpaid principal balance of the Notes, such excess shall be refunded promptly by the Person receiving such amount to the party paying such amount. All amounts paid or agreed to be paid in connection with such transactions that would under applicable law be deemed "interest" shall, to the extent permitted by such applicable law, be amortized, prorated, allocated and spread throughout the stated term of the Notes. "Applicable law" as used in this paragraph means that law in effect from time to time that permits the charging and collection of the highest permissible lawful, nonusurious rate of interest on the transaction herein contemplated including, without limitation, the laws of each State which may be held to be applicable, and of the United States of America, if applicable, and "maximum rate" as used in this paragraph means, with respect to each of the Notes, the maximum lawful, nonusurious rates of interest (if any) that under such applicable law may be charged to the Company from time to time with respect thereto. 16.11. Interpretation of Disclosures. In connection with the representations, warranties and certifications made by the Company pursuant to this Agreement, the Company is required to make certain disclosures to you with respect to possible or contingent losses and liabilities. The Company shall be free to make disclosures to you in addition to those required under this Agreement, and the making of any disclosure by the Company pursuant to this Agreement shall not constitute an admission by the Company that any such possible or contingent loss or liability actually exists or is owed. 16.12. Notice to Transferees. You agree that on or prior to any transfer by you of any Note, you will provide each transferee thereof a copy of the Letter Agreement. -50- 56 16.13. Consent to Jurisdiction; Service of Process. (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES, THE LETTER AGREEMENT, OR ANY OTHER DOCUMENTS OR TRANSACTIONS IN CONNECTION WITH OR RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR ACTIONS OF YOU, ANY OTHER PURCHASER, ANY SUBSEQUENT HOLDER OF A NOTE, OR THE COMPANY MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND THE COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTIONS, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. (b) In the case of the courts of the State of New York or of the United States sitting in the City of New York, State of New York, the Company hereby irrevocably designates, appoints, and empowers CT Corporation System (the "Process Agent") (which has consented thereto) with offices on the date hereof at 1633 Broadway, New York, New York 10019, as agent to receive for and on behalf of the Company service of process in the State of New York. The Company further agrees that such service of process may be made on the Process Agent by personal service of a copy of the summons and complaint or other legal process in any such legal suit, action or proceeding on the Process Agent, or by any other method of service provided for under the applicable laws in effect in the County of New York, State of New York, and the Process Agent hereby is authorized and directed to accept such service for and on behalf of the Company, and to admit service with respect thereto. (c) Upon service of process being made on the Process Agent as aforesaid, a copy of the summons and complaint or other legal process served shall be mailed by the Process Agent to the Company by air courier, at its address set forth at the top of page 1 of this Agreement, or to such other address as the Company may notify the Process Agent in writing. Service upon the Process Agent as aforesaid shall be deemed to be personal service on the Company and shall be legal and binding upon the Company for all purposes, notwithstanding any failure of the Process Agent to mail copies of such legal process thereto, or any failure on the part of the Company to receive the same. (d) The Company agrees that it will at all times continuously maintain an agent to receive service of process in the County of New York on its behalf. In the event that for any reason the Process Agent or any successor thereto shall no longer serve as agent for the Company to receive service of process in the County of New York on its behalf or the -51- 57 Company shall have changed its address without notification thereof to the Process Agent, the Company, immediately after having knowledge thereof, will irrevocably designate and appoint a substitute agent in the City of New York, New York and advise you, or any subsequent holder of a Note, thereof, or shall notify the Process Agent of its then current correct address. (e) Nothing contained in this section shall preclude you, or any subsequent holder of a Note, from bringing any legal suit, action or proceeding against the Company in the courts of any jurisdiction where the Company or any of its property or assets may be found or located. If you are in agreement with the foregoing, please sign the form of acceptance in the space provided below whereupon this Agreement shall become a binding agreement between you and the Company. Very truly yours, LENNOX INTERNATIONAL INC. By: /s/ CLYDE WYANT -------------------------------- Clyde Wyant Executive Vice President, Chief Financial Officer and Treasurer The foregoing Agreement is hereby accepted as of the date first above written: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ CRAIG S. WILSON ---------------------------------- Name: Craig S. Wilson Title: Vice President -52- 58 CONNECTICUT GENERAL LIFE INSURANCE COMPANY By CIGNA Investments, Inc. By: /s/ EDWARD LEWIS -------------------------------- Name: Edward Lewis Title: Managing Director -53- 59 CONNECTICUT GENERAL LIFE INSURANCE COMPANY, ON BEHALF OF ONE OR MORE SEPARATE ACCOUNTS By CIGNA Investments, Inc. By: /s/ EDWARD LEWIS ------------------------------------ Name: Edward Lewis Title: Managing Director LIFE INSURANCE COMPANY OF NORTH AMERICA By CIGNA Investments, Inc. By: /s/ EDWARD LEWIS ------------------------------------- Name: Edward Lewis Title: Managing Director UNITED OF OMAHA LIFE INSURANCE COMPANY By: /s/ RODNEY P. WALKER ---------------------------------------------- Name: Rodney P. Walker Title: Vice President Investments MUTUAL OF OMAHA INSURANCE COMPANY By: /s/ RODNEY P. WALKER ---------------------------------------------- Name: Rodney P. Walker Title: Vice President Investments -54- 60 COMPANION LIFE INSURANCE COMPANY By: /s/ JOHN L. MAGINN ---------------------------------------------- Name: John L. Maginn Title: Vice President and Assistant Treasurer By: /s/ RICHARD A. WITT ---------------------------------------------- Name: Richard A. Witt Title: Second Vice President and Assistant Treasurer UNITED WORLD LIFE INSURANCE COMPANY By: /s/ RODNEY P. WALKER ---------------------------------------------- Name: Rodney P. Walker Title: Authorized Signer FIRST COLONY LIFE INSURANCE COMPANY By: /s/ J. ALDEN BUTLER ---------------------------------------------- Name: J. Alden Butler Title: Senior Vice President -55- 61 SCHEDULE I ----------
Principal Amount of Notes Name of Purchasers to be Purchased - ------------------ --------------- A. THE PRUDENTIAL INSURANCE COMPANY $50,000,000 OF AMERICA Note Denomination(s): $50,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: Account No. 050-54-526 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York 10015 (ABA No.: 021-000-238) Each such wire transfer shall set forth the name of the Company, a reference to "6.73% Senior Notes due December 1, 2008, Security No. !INV4622!", and the due date and application (as among principal, interest and the Special Premium, if any) of the payment being made. 2. Address for all notices relating to payments: The Prudential Insurance Company of America c/o The Prudential Capital Group Gateway Center Three 100 Mulberry Street Newark, New Jersey 07102-4077 Attention: Manager, Private Placement Accounting
62 3. Address for all other communications and notices: The Prudential Insurance Company of America c/o The Prudential Capital Group 1201 Elm Street, Suite 4900 Dallas, Texas 75270 Attention: Managing Director 4. Recipient of telephonic prepayment notices: Manager, Private Placement Accounting (201) 802-6429 5. Tax Identification Number: 22-1211670 B. CONNECTICUT GENERAL LIFE $16,000,000 INSURANCE COMPANY (Note(s) to be registered in the name of CIG & CO.) Note Denomination(s): $7,800,000 $5,200,000 $3,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: FED ABA #021000021 CHASE NYC/CTR/BNF = CIGNA PRIVATE PLACEMENTS/AC = 9009001802 OBI = [ISSUE NAME, PRIVATE PLACEMENT NUMBER, DESCRIPTION OF SECURITY WITH RATE AND MATURITY, THE AMOUNT OF INTEREST AND/OR PRINCIPAL, THE AMOUNT OF ANY PREPAYMENT, THE PAYABLE DATE, THE ORIGINATOR'S CONTACT NAME AND TELEPHONE NUMBER]
-2- 63 Together with a notice of each payment to: Chase Manhattan Bank, N.A. Private Placement Servicing P.O. Box 1508, Bowling Green Station New York, New York 10081 Attention: CIGNA Private Placements Fax: 212-552-3107/1005 2. Address for all notices relating to payments: CIG & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Securities Accounting Department (S-206) CIG & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Private Securities Division (S-307) * For notices sent by overnight courier, express mail or messenger, substitute "900 Cottage Grove Road, Bloomfield, CT 06002" in place of "Hartford, CT 06152." 3. Address for all other communications and notices: CIG & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Private Securities Division (S-307) * For notices sent by overnight courier, express mail or messenger, substitute "900 Cottage Grove Road, Bloomfield, CT 06002" in place of "Hartford, CT 06152." 4. Recipient of telephonic prepayment notices: None
-3- 64 5. Tax Identification Number: 13-3574027 C. CONNECTICUT GENERAL LIFE INSURANCE COMPANY ON BEHALF OF ONE OR MORE SEPARATE ACCOUNTS $ 1,000,000 (Note(s) to be registered in the name of CIG & CO.) Note Denomination(s): $1,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: FED ABA #021000021 CHASE NYC/CTR/BNF = CIGNA PRIVATE PLACEMENTS/AC = 9009001802 OBI = [ISSUE NAME, PRIVATE PLACEMENT NUMBER, DESCRIPTION OF SECURITY WITH RATE AND MATURITY, THE AMOUNT OF INTEREST AND/OR PRINCIPAL, THE AMOUNT OF ANY PREPAYMENT, THE PAYABLE DATE, THE ORIGINATOR'S CONTACT NAME AND TELEPHONE NUMBER] Together with a notice of each payment to: Chase Manhattan Bank, N.A. Private Placement Servicing P.O. Box 1508, Bowling Green Station New York, New York 10081 Attention: CIGNA Private Placements Fax: 212-552-3107/1005 2. Address for all notices relating to payments: CIG & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Securities Accounting Department (S-206)
-4- 65 CIG & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Private Securities Division (S-307) * For notices sent by overnight courier, express mail or messenger, substitute "900 Cottage Grove Road, Bloomfield, CT 06002" in place of "Hartford, CT 06152." 3. Address for all other communications and notices: CIG & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Private Securities Division (S-307) * For notices sent by overnight courier, express mail or messenger, substitute "900 Cottage Grove Road, Bloomfield, CT 06002" in place of "Hartford, CT 06152." 4. Recipient of telephonic prepayment notices: None 5. Tax Identification Number: 13-3574027 D. LIFE INSURANCE COMPANY OF $ 3,000,000 NORTH AMERICA (Note(s) to be registered in the name of ZANDE & CO.) Note Denomination(s): $3,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: Morgan Guaranty Trust Company of New York ABA #0210-0023-8 BTR/BNF = CUSTZ/AC-99999024/Z ATTN: CUST. SVC. Life Insurance Company of North America
-5- 66 a/c 35001 Providing sufficient information to identify the source of the transfer and the amount of interest or principal. 2. Address for all notices relating to payments: ZANDE & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Securities Accounting Department (S-206) ZANDE & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Private Securities Division (S-307) * For notices sent by overnight courier, express mail or messenger, substitute "900 Cottage Grove Road, Bloomfield, CT 06002" in place of "Hartford, CT 06152." 3. Address for all other communications and notices: ZANDE & CO. c/o CIGNA Investments, Inc. Hartford, CT 06152* Attention: Private Securities Division (S-307) * For notices sent by overnight courier, express mail or messenger, substitute "900 Cottage Grove Road, Bloomfield, CT 06002" in place of "Hartford, CT 06152." 4. Recipient of telephonic prepayment notices: None 5. Tax Identification Number: 13-6020804
-6- 67 E. UNITED OF OMAHA LIFE INSURANCE COMPANY $ 8,500,000 Note Denomination(s): $8,500,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: FirsTier Bank - Omaha ABA No.: 1040-0002-9 17th & Farnam Streets Omaha, Nebraska 68102 For credit to: United of Omaha Life Insurance Company Account #144-7-076 For payment on: Interest Amount: Principal Amount: 2. Address for all notices relating to payments: United of Omaha Life Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment/Securities Accounting 3. Address for all other communications and notices: United of Omaha Life Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment Division 4. Recipient of telephonic prepayment notices: None 5. Tax Identification Number: 47-0322111
-7- 68 F. MUTUAL OF OMAHA INSURANCE COMPANY $ 5,000,000 Note Denomination(s): $5,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: First National Bank Omaha ABA No.: 1040-00016 16th & Dodge Street Omaha, Nebraska 68102 For credit to: Mutual of Omaha Insurance Company Account #26-743587 For payment on: Interest Amount: Principal Amount: 2. Address for all notices relating to payments: Mutual of Omaha Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investments/Securities Accounting 3. Address for all other communications and notices: Mutual of Omaha Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment Division 4. Recipient of telephonic prepayment notices: None 5. Tax Identification Number: 47-0246511
-8- 69 G. COMPANION LIFE INSURANCE COMPANY $ 1,000,000 (Note(s) to be registered in the name of HARE & CO.) Note Denomination(s): $1,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: Companion Life Insurance Company c/o The Bank of New York ABA #02100018 Account #111566 Income Collection Attention: P&I Department For payment on: ----------------- Interest Amount: ----------------- Principal Amount: ----------------- Payable Date: ----------------- CLICO 2. Address for all notices relating to payments: Companion Life Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment Securities Accounting With duplicate notice to: Companion Life Insurance Company 401 Theodore Fremd Avenue Rye, New York 10580-1493 Attention: Financial Division 3. Address for all other communications and notices:
-9- 70 Companion Life Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment Division With duplicate notice to: Companion Life Insurance Company 401 Theodore Fremd Avenue Rye, New York 10580-1493 Attention: Financial Division 4. Recipient of telephonic prepayment notices: None 5. Tax Identification Number: 13-6062916 H. UNITED WORLD LIFE INSURANCE COMPANY $ 500,000 Note Denomination(s): $500,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: FirsTier Bank - Omaha ABA No.: 1040-0002-9 17th & Farnam Streets Omaha, Nebraska 68102 For credit to: United World Life Insurance Company Account #016-7-039 For payment on: ----------------- Interest Amount: ----------------- Principal Amount: -----------------
-10- 71 2. Address for all notices relating to payments: United World Life Insurance Company c/o Mutual of Omaha Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment/Securities Accounting 3. Address for all other communications and notices: United World Life Insurance Company c/o Mutual of Omaha Insurance Company Mutual of Omaha Plaza Omaha, Nebraska 68175 Attention: Investment Division 4. Recipient of telephonic prepayment notices: None 5. Tax Identification Number: 75-6010770 I. FIRST COLONY LIFE INSURANCE COMPANY $15,000,000 Note Denomination(s): $15,000,000 1. All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: Account No. 10765400 Crestar Bank Richmond, Virginia ABA No.: 0510-0002-0 Credit - 2111 Attention: Income Processing Unit Number 27955
-11- 72 Each such wire transfer shall identify each payment as "Lennox International, Inc., Series 6.73% Senior Promissory Notes, due December 1, 2008, PPN 52610*AH 6, principal or interest". 2. Address for al