================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-15149
LENNOX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-0991521
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(972) 497-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
---------
As of October 31, 2000, the number of shares outstanding of the
registrant's common stock, par value $.01 per share, was 55,509,455.
1
LENNOX INTERNATIONAL INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statements of Income (Unaudited) - Three Months
and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows (Unaudited) - Nine Months
Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2000 and December 31, 1999
(In thousands, except share data)
ASSETS
September 30, December 31,
2000 1999
---- ----
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 45,473 $ 29,174
Accounts and notes receivable, net 475,360 443,107
Inventories 380,427 345,424
Deferred income taxes 36,551 25,367
Other assets 43,783 44,526
----------- -----------
Total current assets 981,594 887,598
INVESTMENTS IN JOINT VENTURES 12,264 12,434
PROPERTY, PLANT AND EQUIPMENT, net 355,642 329,966
GOODWILL, net 676,618 394,252
OTHER ASSETS 53,697 59,423
----------- -----------
TOTAL ASSETS $ 2,079,815 $ 1,683,673
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt $ 30,645 $ 22,219
Current maturities of long-term debt 37,763 34,554
Accounts payable 241,597 196,143
Accrued expenses 258,155 200,221
Income taxes payable 8,406 9,859
----------- -----------
Total current liabilities 576,566 462,996
LONG-TERM DEBT 670,233 520,276
DEFERRED INCOME TAXES 500 928
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS 14,725 15,125
OTHER LIABILITIES 73,377 72,377
----------- -----------
Total liabilities 1,335,401 1,071,702
MINORITY INTEREST 2,010 14,075
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,
59,719,869 shares and 46,161,607 shares issued
for 2000 and 1999, respectively 597 462
Additional paid-in capital 367,442 215,523
Retained earnings 443,993 409,851
Accumulated other comprehensive loss (41,928) (12,706)
Deferred compensation (3,400) (2,848)
Treasury stock, at cost, 2,474,784 and 1,172,200 shares
for 2000 and 1999, respectively (24,300) (12,386)
----------- ------------
Total stockholders' equity 742,404 597,896
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,079,815 $ 1,683,673
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 2000 and 1999
(Unaudited, in thousands, except per share data)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
NET SALES $ 857,618 $ 669,053 $ 2,468,142 $ 1,749,953
COST OF GOODS SOLD 583,613 456,611 1,667,042 1,199,611
----------- ----------- ----------- -----------
Gross Profit 274,005 212,442 801,100 550,342
OPERATING EXPENSES:
Selling, general and administrative 238,276 157,813 672,164 429,015
----------- ----------- ----------- -----------
Income from operations 35,729 54,629 128,936 121,327
INTEREST EXPENSE, net 13,968 9,093 41,960 24,193
OTHER 497 378 1,243 (403)
MINORITY INTEREST 88 832 (427) 212
----------- ----------- ----------- -----------
Income before income taxes 21,176 44,326 86,160 97,325
PROVISION FOR INCOME TAXES 8,790 17,042 35,757 39,840
----------- ----------- ----------- -----------
Net income $ 12,386 $ 27,284 $ 50,403 $ 57,485
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.22 $ 0.65 $ 0.90 $ 1.52
Diluted $ 0.22 $ 0.64 $ 0.89 $ 1.48
The accompanying notes are an integral part of these consolidated financial
statements.
4
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited, in thousands)
For the
Nine Months Ended
September 30,
---------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50,403 $ 57,485
Adjustments to reconcile net income to net cash provided by operating activities -
Minority interest (427) 212
Joint venture losses 1,106 2,409
Depreciation and amortization 65,018 41,825
Loss on disposal of equipment 1,297 701
Other (220) (994)
Changes in assets and liabilities, net of effects of acquisitions -
Accounts and notes receivable 24,477 (94,086)
Inventories (17,725) (11,873)
Other current assets (217) (3,682)
Accounts payable 12,361 18,718
Accrued expenses 16,333 (9,946)
Deferred income taxes (5,390) 2,184
Income taxes payable and receivable 2,679 17,014
Long-term warranty, deferred income and other liabilities 1,067 (2,559)
--------- ---------
Net cash provided by operating activities 150,762 17,408
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment 2,454 746
Purchases of property, plant and equipment (39,749) (53,203)
Investment in joint ventures (1,029) (567)
Acquisitions, net of cash acquired (227,236) (226,127)
Proceeds from sale of business -- 5,490
--------- ---------
Net cash used in investing activities (265,560) (273,661)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving short-term debt 11,697 96,554
Proceeds from revolving long-term debt 106,323 43,917
Proceeds from new long-term debt 60,000 --
Repayment of long-term debt (14,564) (2,619)
Proceeds from issuance of common stock 790 141,799
Repurchases of common stock (15,532) (152)
Cash dividends paid (16,263) (9,924)
--------- ---------
Net cash provided by financing activities 132,451 269,575
INCREASE IN CASH AND CASH EQUIVALENTS 17,653 13,322
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (1,354) (589)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 29,174 28,389
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 45,473 $ 41,122
========= =========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 39,460 $ 20,830
========= =========
Income taxes $ 41,727 $ 21,637
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION:
The accompanying unaudited consolidated balance sheet as of September 30,
2000, and the consolidated statements of income for the three months and nine
months ended September 30, 2000 and 1999 and the consolidated statements of cash
flows for the nine months ended September 30, 2000 and 1999 should be read in
conjunction with Lennox International Inc.'s (the "Company") consolidated
financial statements and the accompanying footnotes as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999. In
the opinion of management, the accompanying consolidated financial statements
contain all material adjustments, consisting principally of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to applicable rules and regulations, although the Company
believes that the disclosures herein are adequate to make the information
presented not misleading. The operating results for the interim periods are not
necessarily indicative of the results to be expected for a full year.
The Company's fiscal year ends on December 31 of each year, and the
Company's quarters are each comprised of 13 weeks. For convenience, throughout
these financial statements, the 13 weeks comprising each three month period are
denoted by the last day of the respective calendar quarter.
2. REPORTABLE BUSINESS SEGMENTS:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
131, the Company discloses business segment data for its reportable business
segments, which have been determined using the "management approach." The
management approach is based on the way segments are organized within the
Company for making operating decisions and assessing performance. Operations for
the North American retail segment include primarily the retail sale and service
of heating and air conditioning products that have historically been included in
the North American residential segment. As a result of the growth in operations
of this segment, retail segment results have now been stated separately on a
comparative basis. Therefore, the Company's business operations are organized
within the following five reportable business segments (in thousands):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
NET SALES 2000 1999 2000 1999
--------- ---- ---- ---- ----
North American residential $308,370 $328,173 $ 954,040 $ 917,257
North American retail 288,817 66,067 772,283 109,788
Commercial air conditioning 136,368 127,922 354,390 337,985
Commercial refrigeration 88,795 94,176 273,975 238,351
Heat transfer (1) 61,640 60,847 191,421 164,206
Eliminations (26,372) (8,132) (77,967) (17,634)
-------- -------- ---------- ----------
$857,618 $669,053 $2,468,142 $1,749,953
======== ======== ========== ==========
[FN]
(1) The Heat Transfer segment had intersegment sales of $5,503 and $5,722 for
the three months ended September 30, 2000 and 1999, respectively, and $17,901
and $17,696 for the nine months ended September 30, 2000 and 1999, respectively.
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
INCOME (LOSS) FROM OPERATIONS 2000 1999 2000 1999
- ----------------------------- ---- ---- ---- ----
North American residential $23,663 $42,824 $ 86,631 $105,812
North American retail 11,822 3,698 36,482 6,174
Commercial air conditioning 6,015 5,138 7,695 6,285
Commercial refrigeration 9,216 9,925 24,711 19,095
Heat transfer 3,525 2,851 12,792 10,308
Corporate and other (1) (16,283) (8,075) (34,223) (23,802)
Eliminations (2,229) (1,732) (5,152) (2,545)
------- ------- --------- ---------
$35,729 $54,629 $128,936 $121,327
======= ======= ======== ========
[FN]
(1) Includes $5,100 for closing operations in Mexico and Argentina.
6
As of September 30, As of December 31,
TOTAL ASSETS 2000 1999
- ------------ ---- ----
North American residential $ 571,822 $ 596,895
North American retail 775,662 290,978
Commercial air conditioning 235,449 251,226
Commercial refrigeration 229,240 252,176
Heat transfer 154,785 179,615
Corporate and other 144,221 127,320
Eliminations (31,364) (14,537)
----------- -----------
$ 2,079,815 $ 1,683,673
=========== ===========
3. INVENTORIES:
Components of inventories are as follows (in thousands):
As of September 30, As of December 31,
2000 1999
---- ----
Finished goods $243,583 $219,303
Repair parts 50,776 36,153
Work in process 19,997 20,957
Raw materials 113,598 117,209
-------- --------
427,954 393,622
Reduction for last-in, first-out 47,527 48,198
-------- --------
$380,427 $345,424
======== ========
4. LINES OF CREDIT AND FINANCING ARRANGEMENTS:
The Company has bank lines of credit aggregating $688 million, of which $430
million was outstanding at September 30, 2000 with the remaining $258 million
available for future borrowings, subject to covenant limitations. Included in
the lines of credit are two $300 million domestic facilities governed by
revolving credit facility agreements between the Company and syndicates of
banks. The facilities contain certain financial covenants and bear interest, at
the Company's option, at a rate equal to either (a) the greater of the bank's
prime rate or the federal funds rate plus 0.5% or (b) the London Interbank
Offered Rate plus a margin equal to 0.5% to 1.25%, depending upon the ratio of
total funded debt to EBITDA. The Company pays a commitment fee equal to 0.10% to
0.30% of the unused commitment, depending upon the ratio of total funded debt to
EBITDA. The agreements provide restrictions on the Company's ability to incur
additional indebtedness, encumber its assets, sell its assets, or pay dividends.
On August 29, 2000, the Company borrowed $25.0 million under a shelf
agreement with The Prudential Insurance Company of America. Terms of the
borrowing include an interest rate of 7.75%, interest to be paid semi-annually
and an ultimate maturity date of August 25, 2005. Terms and conditions of the
borrowing are similar to those of the existing revolving credit agreements.
7
5. 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 outstanding and the number of equivalent shares assumed
outstanding, if dilutive, under the Company's stock-based compensation plans and
from convertible securities. Diluted earnings per share are computed as follows
(in thousands, except per share amounts):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $12,386 $27,284 $50,403 $57,485
======= ======= ======= =======
Weighted average shares outstanding 56,308 42,164 56,070 37,910
Effect of diluted securities attributable to stock
options and performance share awards 487 737 355 878
------- ------- ------- -------
Weighted average shares outstanding, as
adjusted 56,795 42,901 56,425 38,788
======= ======= ======= =======
Diluted earnings per share $ 0.22 $ 0.64 $ 0.89 $ 1.48
======= ======= ======= =======
6. INVESTMENTS IN SUBSIDIARIES:
SERVICE EXPERTS, INC.
On January 21, 2000, the Company acquired Service Experts, Inc., a holding
company owning retail outlets for heating and air conditioning products and
services. The acquisition took place in the form of a merger wherein 0.67 of a
share of the Company's common stock was exchanged for each share of Service
Experts, Inc. common stock. The 12.2 million shares so exchanged were valued at
approximately $140.5 million. In addition, transaction costs of approximately
$4.1 million were paid, and $162.7 million of Service Experts, Inc. debt was
assumed and concurrently repaid, resulting in a total purchase price of $307.3
million. The acquisition was accounted for under the purchase method of
accounting. Based on current estimates, which may be revised at a later date,
approximately $169.0 million was allocated to the fair value of the assets
acquired, approximately $105.0 million was allocated to the fair value of
liabilities assumed, and $243.3 million was allocated to goodwill, which is
being amortized on a straight-line basis over 40 years. The results of Service
Experts, Inc. have been fully consolidated with those of the Company since the
date of acquisition.
DEALERS
In September of 1998, the Company initiated a program to acquire high
quality heating and air conditioning dealers in metropolitan areas of the United
States and Canada (the "Dealers"). During the first nine months of 2000, nine
Dealers in the United States and two Dealers in Canada were purchased for a
total price of approximately $40.6 million. In addition, approximately $21.8
million was paid in the first nine months of 2000 as additional payments on
Dealers acquired in 1999. Of this $21.8 million, $6.3 million was in the form of
558,835 shares of the Company's common stock. The purchase of the Dealers in the
first nine months of 2000 and the additional payments on Dealers acquired in
1999 were accounted for under the purchase method of accounting. Based on
current estimates, which may be revised at a later date, approximately $12.9
million was allocated to the fair value of assets acquired, $8.5 million was
allocated to the fair value of liabilities assumed and $57.9 million was
allocated to goodwill which is being amortized on a straight-line basis over 40
years. The results of the acquired Dealers have been fully consolidated with
those of the Company since the respective dates of acquisition.
As of September 30, 2000, the Company had commitments to acquire two
additional Dealers for approximately $8.0 million.
8
The following table presents the pro forma results as if the above companies
had been acquired on January 1, 1999 (in thousands, except per share data):
For the For the
Three Months Ended Nine Months Ended
September 30 September 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $859,008 $846,117 $2,516,773 $2,226,415
Net income 12,481 29,859 51,661 70,122
Basic earnings per share 0.22 0.54 0.92 1.38
Diluted earnings per share 0.22 0.54 0.92 1.36
7. TREASURY STOCK:
On November 1, 1999, the Company's Board of Directors authorized the
purchase of up to 5,000,000 shares of the issued and outstanding common stock.
As of September 30, 2000, 2,729,300 of such shares had been purchased at a total
cost of $27.8 million. On March 6, 2000, the Company entered into forward
purchase contracts to purchase 1,557,100 shares of its common stock. On May 5,
2000, the Company entered into forward purchase contracts to purchase an
additional 858,000 shares of its common stock. In accordance with the terms of
these contracts, settlement is permitted on either a net cash settlement, net
share settlement, or a physical settlement basis. Therefore, the shares so
contracted remain issued and outstanding until such time as the contracts are
settled. The Company settled the first of the forward contracts to acquire
shares of its common stock. On July 7, 2000, 1,557,100 shares were purchased for
a net cash settlement of $15.4 million. The Company expects to settle the
remaining contracts in the fourth quarter of 2000. (See SUBSEQUENT EVENTS for
further information.)
8. RECENT ACCOUNTING PRONOUNCEMENTS:
In September 2000, the Emerging Issues Task Force issued EITF00-10 which
requires disclosure of shipping and handling costs that are not included in
costs of goods sold. These costs, for the Company, are included in the
Consolidated Statements of Income under OPERATING EXPENSES as part of selling,
general and administrative expense. Following are the amounts for shipping and
handling (in thousands):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
$32,240 $29,505 $93,783 $85,614
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, for the Company, is effective beginning with the
first quarter of 2001. Management does not believe that the adoption of this
pronouncement will have a significant impact on the Company's financial
statements.
9. COMPREHENSIVE INCOME:
Comprehensive income is computed as follows (in thousands):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $ 12,386 $27,284 $ 50,403 $ 57,485
Cumulative foreign currency
translation adjustments (12,741) 2,949 (29,222) (3,487)
-------- -------- -------- --------
Total comprehensive income (loss) $ (355) $30,233 $ 21,181 $53,998
========= ======= ======== =======
9
10. OTHER EVENTS:
On July 27, 2000, the Board of Directors of the Company declared a dividend
of one right ("Right") for each outstanding share of its common stock to
stockholders of record at the close of business on August 7, 2000. Each Right
entitles the registered holder to purchase from the Company a unit consisting of
one one-hundredth of a share (a "Fractional Share") of Series A Junior
Participating Preferred Stock, par value $.01 per share, at a purchase price of
$75.00 per Fractional Share, subject to adjustment.
11. SUBSEQUENT EVENTS:
The Company settled the last of the forward contracts to acquire shares of
its common stock. On October 6, 2000, 858,000 shares were purchased for a net
cash settlement of $9.8 million.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Lennox participates in five reportable business segments of the heating,
ventilation, air conditioning and refrigeration ("HVACR") industry. The first
segment is the North American residential market, in which Lennox manufactures
and markets a full line of heating, air conditioning and hearth products for the
residential replacement and new construction markets in the United States and
Canada. The second segment is the North American retail market which includes
sales and installation of, and maintenance and repair services for, HVACR
equipment by Lennox-owned dealers in the United States and Canada. The third
segment is the global commercial air conditioning market, in which Lennox
manufactures and sells rooftop products and applied systems for commercial
applications. The fourth segment is the global commercial refrigeration market,
which consists of unit coolers, condensing units and other commercial
refrigeration products. The fifth segment is the heat transfer market, in which
Lennox designs, manufactures and sells evaporator and condenser coils, copper
tubing and related manufacturing equipment to original equipment manufacturers
and other specialty purchasers on a global basis.
Lennox sells its products and services to numerous types of customers,
including distributors, installing dealers, homeowners, national accounts and
original equipment manufacturers. The demand for Lennox's products is 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 Lennox's 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 Lennox's manufacturing processes are copper,
aluminum and steel. In instances where Lennox is unable to pass on to its
customers increases in the costs of copper and aluminum, Lennox may enter into
forward contracts for the purchase of those materials. Lennox attempts to
minimize the risk of price fluctuations in key components by entering into
contracts, typically at the beginning of the year, which generally provide for
fixed prices throughout the year. These hedging strategies enable Lennox to
establish product prices for the entire model year while minimizing the impact
of price increases of components and raw materials on its margins. Warranty
expense is estimated based on historical trends and other factors.
Lennox acquired James N. Kirby Pty. Ltd., an Australian company that
participates in the commercial refrigeration and heat transfer markets in
Australia, in June 1999 for approximately $65 million in cash, common stock and
seller financing. In addition, Lennox assumed approximately $20.5 million of
Kirby's debt.
Lennox, through its Excel Comfort Systems subsidiary, purchased the heating,
ventilation and air conditioning ("HVAC") related assets of The Ducane Company,
Inc. in October 1999 for approximately $53 million in cash. This purchase adds
to the brands offered in the North American residential segment.
In September 1998, Lennox initiated a program to acquire high quality
heating and air conditioning dealers in metropolitan areas in the United States
and Canada to market "Lennox" and other brands of heating and air conditioning
products. This strategy enables Lennox to extend its distribution directly to
the consumer and permits it to participate in the revenues and margins available
at the retail level while strengthening and protecting its brand equity. Lennox
believes 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 United States is comprised of over 30,000
dealers. In addition, Lennox believes 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 September 30, 2000,
Lennox had acquired over 225 dealers in the U.S. and Canada, including the
dealers acquired through the acquisition of Service Experts, Inc. The aggregate
purchase price of these dealers was approximately $611 million as of September
30, 2000.
11
On January 21, 2000, Lennox completed the acquisition of Service Experts,
Inc., an HVAC company comprised of HVAC retail businesses across the United
States, for approximately 12.2 million shares of Lennox common stock and the
assumption of approximately $163 million of debt, which was concurrently repaid.
The success of the Service Experts acquisition, along with Lennox's other
acquisitions, will depend on Lennox's ability to integrate these businesses into
its business without substantial costs, delays or other operational or financial
difficulties. The acquisition added over 120 dealers to the U.S. retail network.
Lennox's fiscal year ends on December 31 of each year, and its 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, income data
for the three months and nine months ended September 30, 2000 and 1999:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.1 68.2 67.5 68.6
------ ------ ----- ------
Gross profit 31.9 31.8 32.5 31.4
Selling, general and administrative expenses 27.7 23.6 27.3 24.5
------ ------ ----- ------
Income from operations 4.2 8.2 5.2 6.9
Interest expense, net 1.6 1.4 1.6 1.3
Other 0.1 0.1 0.1 0.0
Minority interest -- 0.1 -- --
------- ------- ----- ------
Income before income taxes 2.5 6.6 3.5 5.6
Provision for income taxes 1.1 2.5 1.5 2.3
------- ------- ----- ------
Net income 1.4% 4.1% 2.0% 3.3%
======= ======= ===== ======
The following table sets forth net sales by business segment and geographic
market (dollars in millions):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
----------------- ----------------- ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------- - ------ - ------ -
BUSINESS SEGMENT:
North American residential $308.4 36.0% $328.1 49.0% $ 954.0 38.7% $ 917.3 52.4%
North American retail 288.8 33.7 66.1 9.9 772.3 31.3 109.7 6.3
Commercial air conditioning 136.4 15.8 127.9 19.1 354.4 14.3 338.0 19.3
Commercial refrigeration 88.8 10.4 94.2 14.1 274.0 11.1 238.4 13.6
Heat transfer 61.6 7.2 60.9 9.1 191.4 7.8 164.2 9.4
Eliminations (26.4) (3.1) (8.1) (1.2) (78.0) (3.2) (17.6) (1.0)
------ ----- ------ ----- -------- ----- -------- -----
Total net sales $857.6 100.0% $669.1 100.0% $2,468.1 100.0% $1,750.0 100.0%
====== ===== ====== ===== ======== ===== ======== =====
GEOGRAPHIC MARKET:
U.S $684.6 79.8% $475.5 71.1% $1,952.1 79.1% $1,301.3 74.4%
International 173.0 20.2 193.6 28.9 516.0 20.9 448.7 25.6
------ ----- ------ ----- -------- ----- -------- -----
Total net sales $857.6 100.0% $669.1 100.0% $2,468.1 100.0% $1,750.0 100.0%
====== ===== ====== ===== ======== ===== ======== =====
12
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES. Net sales increased $188.5 million, or 28.2%, to $857.6 million
for the quarter ended September 30, 2000 from $669.1 million for the quarter
ended September 30, 1999.
Net sales related to the North American residential segment were $308.4
million for the quarter ended September 30, 2000, a decrease of $19.7 million,
or 6.0%, from $328.1 million for the quarter ended September 30, 1999. Included
in the third quarter of 2000 are $16.0 million of sales from the acquired Ducane
operations. Excluding these acquired sales, North American residential net sales
decreased $35.7 million, or 10.9%, compared to the third quarter of 1999.
Over 50% of Lennox's North American residential equipment sales are
concentrated in geographic locations that had a cold summer in 2000. Cooling
degree days through August of this year were 50% below last year's levels in the
Northeast region of the United States and 27% below last year's levels in the
Midwest region of the United States. This unusually cool summer reduced the
stress on existing air conditioning equipment, which depressed equipment sales
and reduced demand for profitable add-on air conditioning in those markets where
air conditioning is a discretionary purchase.
Lennox's hearth products business also contributed to the sales decrease as
a result of declining housing starts and delays in realizing synergies from the
individual hearth operations acquired in the past 24 months.
Net sales in the North American retail segment were $288.8 million for the
quarter ended September 30, 2000, an increase of $222.7 million from the $66.1
million of net sales for the quarter ended September 30, 1999. This increase was
almost entirely due to acquisitions.
Commercial air conditioning net sales increased $8.5 million, or 6.6%, to
$136.4 million for the quarter ended September 30, 2000 compared to the quarter
ended September 30, 1999. North American sales were particularly strong,
achieving growth of 14.7% for the quarter. The addition of two new commercial
districts early in the year and the phase-in of Lennox's cost-effective Value
line contributed to the growth. The increase domestically was offset by a
decrease in net sales internationally, primarily due to the impact of the Euro
exchange rate. International sales growth was 5.0%, after adjusting for the
impact of currency exchange rate movements.
Net sales related to the commercial refrigeration segment were $88.8 million
for the quarter ended September 30, 2000, a decrease of $5.4 million, or 5.7%,
from $94.2 million for the quarter ended September 30, 1999. North American
commercial refrigeration net sales increased 3.7% due to strength in all served
segments. Europe and Australia, two of Lennox's key refrigeration markets, had
significant decreases in the value of their currency compared to the U.S.
dollar. Excluding the impact of currency fluctuations, international sales
decreased 2.8% for the third quarter of 2000. Some slowdown in the Australian
business was a result of the Olympic games being held in Sydney for three weeks
in the third quarter of 2000.
Heat transfer revenues increased $0.7 million, or 1.3 %, to $61.6 million
for the quarter ended September 30, 2000 compared to the quarter ended September
30, 1999. Net sales in the North American heat transfer business increased $3.5
million, or 9.0%. Part of this increase can be attributed to the SAP system
installation negatively impacting third quarter 1999 results. Installation of
the SAP system included a one-week plant shutdown at the Grenada, Mississippi
facility. International heat transfer operations net sales decreased $2.7
million primarily due to the large drop in the U.S. exchange rate of the Euro
and the Australian dollar.
GROSS PROFIT. Gross profit was $274.0 million for the quarter ended
September 30, 2000 compared to $212.4 million for the quarter ended September
30, 1999, an increase of $61.6 million. Gross profit margin was 31.9% for the
quarter ended September 30, 2000 and 31.8% for the quarter ended September 30,
1999. Acquisitions account for the majority of the increase of $80.1 million in
gross profit. Acquired businesses contributed 0.6% to the increase in gross
profit margins. The decrease in sales resulting from unfavorable weather
conditions and foreign currency translations resulted in gross profit dollars of
Lennox's traditional businesses decreasing $18.5 million. The gross profit
margins of Lennox's traditional businesses decreased 0.5% for the third quarter
of 2000, compared to the third quarter of 1999, primarily due to a decrease in
purchases of replacement and discretionary air conditioning in the Northern
United States and Canada as a result of the cold summer. Lennox's European and
Australian businesses' gross margins were negatively impacted to the extent
components of U.S. origin were used, due to foreign currency exchange rate
movements.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $238.3 million for the quarter ended September 30,
2000, an increase of $80.5 million, or 51.0%, from $157.8 million for the
quarter ended September 30, 1999. Selling, general and administrative expenses
represented 27.7% and 23.6% of total revenues for the third quarter of 2000 and
1999, respectively. Of the $80.5 million increase, acquired companies
represented $70.8 million, or 88.0%, of the increase in selling, general and
administrative expenses. Acquired companies' selling, general and administrative
expenses were 30.4% of sales. The majority of the remaining $9.7 million
increase was due to a $5.1 million charge taken in the quarter to close two
operations in Latin America. The two operations were a sales and distribution
business in Mexico and a manufacturing plant that was part of our joint venture
in Argentina. Fees of $2.3 million for an accounts receivable asset
securitization program implemented in June of 2000 were all incremental to the
third quarter of 1999. Increased personnel and facilities costs account for the
balance of the growth in selling, general and administrative expense.
INTEREST EXPENSE, NET. Interest expenses, net for the quarter ended
September 30, 2000, increased to $14.0 million from $9.1 million for the quarter
ended September 30, 1999. Increased borrowings to fund acquisitions were
responsible for the increase in interest expense.
PROVISION FOR INCOME TAXES. The provision for income taxes was $8.8 million
for the quarter ended September 30, 2000 and $17.0 million for the quarter ended
September 30, 1999. The effective tax rate of 41.5% and 38.4% for the quarters
ended September 30, 2000 and 1999, respectively, differs from the statutory
federal rate of 35.0% principally due to state and local taxes, non-deductible
goodwill expenses, and foreign operating losses for which no tax benefits have
been recognized.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
NET SALES. Net sales increased $718.1 million, or 41.0%, to $2,468.1 million
for the nine months ended September 30, 2000 from $1,750.0 million for the nine
months ended September 30, 1999.
Net sales related to the North American residential segment were $954.0
million for the nine months ended September 30, 2000, an increase of $36.7
million, or 4.0%, from $917.3 million for the nine months ended September 30,
1999. Of the $36.7 million increase, $47.5 million was due to sales from an
acquired hearth products company and the acquisition of Ducane's HVAC product
lines. The resulting $10.8 million decrease in North American residential net
sales is due primarily to the following three factors:
- A warmer than normal winter in the first quarter of 2000 in the
Northern United States.
- A cooler than normal summer in the third quarter of 2000 in the
Northeast and Midwest regions of the United States and in Canada.
- A decrease in Lennox's hearth products business as a result of
declining housing starts and delays in realizing synergies from
individual hearth operations acquired in the past 24 months.
Net sales in the North American retail segment were $772.3 million for the
nine months ended September 30, 2000, an increase of $662.6 million from the
$109.7 million of net sales for the nine months ended September 30, 1999. This
increase was almost entirely due to acquisitions.
Commercial air conditioning net sales increased $16.4 million, or 4.9%, to
$354.4 million for the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999. North American commercial air conditioning
sales increased 9.1% for the first nine months of 2000 compared to the first
nine months of 1999. The addition of two new commercial districts early in the
year and the phase-in of Lennox's cost-effective Value line contributed to the
growth. The increase domestically was offset by a decrease in net sales
internationally, due primarily to the impact of exchange rates. International
sales growth was 9.0%, after adjusting for the impact of currency exchange rate
movements. This growth is primarily due to the fact Lennox has rationalized its
European products and they are being marketed throughout Europe rather than just
within the country of manufacture.
Net sales related to the commercial refrigeration segment were $274.0
million for the nine months ended September 30, 2000, an increase of $35.6
million, or 14.9%, from $238.4 million for the nine months ended September 30,
1999.
14
Of this increase, $27.5 million was due to the acquisition of James N.
Kirby Pty. Ltd. North American commercial refrigeration net sales increased
11.2% as a result of strong sales in the walk-in cooler and telecommunications
segments and the completion of some large cold storage projects. The increase
domestically was offset by a decrease in net sales internationally, due to the
impact of exchange rates. International net sales increased 5.7%, after
adjusting for the impact of currency exchange rate movements. International
sales volume growth was primarily a result of Lennox's increased participation
in two areas of the European refrigeration market - sales of supermarket rack
systems and direct sales to contractors through Lennox's H K Refrigeration
brand.
Heat transfer revenues increased $27.2 million, or 16.6%, to $191.4 million
for the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999. The acquisitions of James N. Kirby Pty. Ltd. and Livernois
Engineering Holding Company contributed $22.0 million to heat transfer revenues
in the first nine months of 2000. Net sales growth in the North American heat
transfer business increased 5.5%. The increase domestically was offset by a
decrease in net sales internationally, primarily due to the impact of exchange
rates. International net sales increased 5.0%, after adjusting for the impact of
currency exchange rate movements.
GROSS PROFIT. Gross profit was $801.1 million for the nine months ended
September 30, 2000 compared to $550.3 million for the nine months ended
September 30, 1999, an increase of $250.8 million. Gross profit margin was 32.5%
for the nine months ended September 30, 2000 and 31.4% for the nine months ended
September 30, 1999. Acquisitions account for an increase of $256.1 million in
gross profit. Acquired businesses contributed 0.5% to the increase in gross
profit margins. The decrease in sales resulting from unfavorable weather
conditions and foreign currency translations resulted in the gross profit
dollars of Lennox's traditional businesses decreasing $5.3 million. However,
gross profit margins of Lennox's traditional businesses increased 0.6% for the
first nine months of 2000 compared to the first nine months of 1999, primarily
due to manufacturing efficiencies, product mix and selected price increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $672.2 million for the nine months ended September
30, 2000, an increase of $243.2 million, or 56.7%, from $429.0 million for the
nine months ended September 30, 1999. Selling, general and administrative
expenses represented 27.3% and 24.5% of total revenues for the first nine months
of 2000 and 1999, respectively. Of the $243.2 million increase, acquired
companies represented $218.7 million, or 89.9%, of the increase in selling,
general and administrative expenses. Acquired companies' selling, general and
administrative expenses were 28.7% of sales. The remaining $24.5 million
increase includes a charge of $5.1 million to close two operations in Latin
America. The two operations were a sales and distribution business in Mexico and
a manufacturing plant that was part of our joint venture in Argentina. Fees of
$3.0 million for an accounts receivable asset securitization program implemented
in June of 2000 were all incremental to 1999. Increased advertising and
promotion, personnel and facilities costs account for the balance of the growth
in selling, general and administrative expense.
INTEREST EXPENSE, NET. Interest expenses, net for the nine months ended
September 30, 2000 increased to $42.0 million from $24.2 million for the nine
months ended September 30, 1999. Increased borrowings to fund acquisitions were
responsible for the increase in interest expense.
PROVISION FOR INCOME TAXES. The provision for income taxes was $35.8 million
for the nine months ended September 30, 2000 and $39.8 million for the nine
months ended September 30, 1999. The effective tax rates of 41.5% and 40.9% for
the nine months ended September 30, 2000 and 1999, respectively, differ from the
statutory federal rate of 35.0% principally due to state and local taxes,
non-deductible goodwill expenses, and foreign operating losses for which no tax
benefits have been recognized.
LIQUIDITY AND CAPITAL RESOURCES
Lennox's recent capital requirements have related principally to
acquisitions, the expansion of production capacity and increased working capital
needs that have accompanied sales growth.
Net cash provided by operating activities was $150.8 million and $17.4
million for the nine months ended September 30, 2000 and 1999, respectively. The
increase in cash provided by operations is primarily due to the proceeds from
the sale of $130 million in accounts receivables. Net cash used in investing
activities totaled $265.6 million and $273.7 million for the nine months ended
September 30, 2000 and 1999, respectively. Capital spending was $13.5 million
less in the nine months ended September 30, 2000 than for the comparable period
in 1999, reflecting opportunities taken by Lennox to lease equipment rather than
buy. Net cash provided by financing activities was $132.5
15
million and $269.6 million for the nine months ended September 30, 2000 and
1999, respectively. Net borrowing needs decreased $25.6 million in the first
nine months of 2000 versus the same period in 1999 primarily due to the cash
received by Lennox from the sale of receivables. Due to the seasonality of the
air conditioning and refrigeration businesses, Lennox typically uses cash in the
first six months of the year and generates cash during the latter half of the
year.
In the past, Lennox has used a combination of internally generated funds,
external borrowings and common stock to make acquisitions. With a base of over
225 dealers established in the retail sector, future acquisitions of such retail
centers will be on a very selective basis. The aggregate purchase price of the
Dealers acquired through September 30, 2000 was approximately $611 million. As
of September 30, 2000, Lennox had commitments to acquire two additional Dealers
for approximately $8.0 million.
On April 5, 2000 Lennox purchased the remaining 30% of Ets. Brancher not
already owned for 101,800,000 French francs ($16.2 million). In June 1999, James
N. Kirby Pty. Ltd. was acquired for approximately $65 million. In addition,
approximately $20.5 million of Kirby's debt was assumed. The purchase price
consisted of approximately $16 million in cash, $33 million in deferred payments
and 650,430 shares of common stock. If Lennox's common stock does not trade at a
price greater than $29.09 per share for five consecutive days from the period of
June 2000 to June 2001, then Lennox is obligated to pay the former owners of
Kirby the difference between the trading price for the last five days of this
period and $29.09 for 577,500 of the shares of common stock.
Capital expenditures were $39.7 million for the nine months ended September
30, 2000. These expenditures primarily related to production equipment
(including tooling) and information systems.
Lennox has bank lines of credit aggregating $688 million, of which $430
million was outstanding at September 30, 2000 with the remaining $258 million
available for future borrowings, subject to covenant limitations. Included in
the lines of credit are two $300 million domestic facilities governed by
revolving credit facility agreements between Lennox and syndicates of banks. The
facilities contain certain financial covenants and bear interest, at Lennox's
option, at a rate equal to either (a) the greater of the bank's prime rate or
the federal funds rate plus 0.5% or (b) the London Interbank Offered Rate plus a
margin equal to 0.5% to 1.25%, depending upon the ratio of total funded debt to
EBITDA. Lennox pays a commitment fee equal to 0.10% to 0.30% of the unused
commitment, depending upon the ratio of total funded debt to EBITDA. The
agreements provide restrictions on Lennox's ability to incur additional
indebtedness, encumber its assets, sell its assets, or pay dividends.
On August 29, 2000, Lennox borrowed $25.0 million under a shelf agreement
with The Prudential Insurance Company of America. Terms of the borrowing include
an interest rate of 7.75%, interest to be paid semi-annually and an ultimate
maturity date of August 25, 2005. Terms and conditions of the borrowing are
similar to those of the existing revolving credit agreements.
Lennox believes its shares of stock are undervalued and has initiated
programs to repurchase shares. Lennox's Board of Directors has authorized the
purchase of up to 5,000,000 shares. Through December 1999, 1,172,000 shares had
been repurchased at a total cost of $12.4 million. To continue the repurchase
program while maintaining available debt capacity, Lennox, on March 6, 2000,
entered into forward purchase contracts for 1,557,100 shares that were settled
on July 7, 2000 for a cash payment of $15.4 million. On May 5, 2000 Lennox
entered into additional forward purchase contracts for 858,000 shares, which
were settled on October 6, 2000 for a cash payment of $9.8 million. There are no
forward purchase contracts unsettled as of the date of this report.
Lennox believes that cash flow from operations, as well as available
borrowings under its credit facilities will be sufficient to fund operations for
the foreseeable future.
16
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Emerging Issues Task Force issued EITF00-10 which
requires disclosure of shipping and handling costs that are not included in
costs of goods sold. These costs, for Lennox, are included in the Consolidated
Statements of Income under OPERATING EXPENSES as part of selling, general and
administrative expense. Following are the amounts for shipping and handling (in
thousands):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
$32,240 $29,505 $93,783 $85,614
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, for Lennox, is effective beginning with the first
quarter of 2001. Management does not believe that the adoption of this
pronouncement will have a significant impact on Lennox's financial statements.
FORWARD LOOKING INFORMATION
This Report contains forward-looking statements and information that are
based on the beliefs of Lennox's management as well as assumptions made by and
information currently available to management. All statements other than
statements of historical fact included in this Report constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including but not limited to statements identified by the words "may,"
"will," "should," "plan," "predict," "anticipate," "believe," "intend,"
"estimate" and "expect" and similar expressions. Such statements reflect
Lennox's current views with respect to future events, based on what it believes
are reasonable assumptions; however, such statements are subject to certain
risks, uncertainties and assumptions. These include, but are not limited to,
warranty and product liability claims; ability to successfully complete and
integrate acquisitions; ability to manage new lines of business; the
consolidation trend in the HVACR industry; adverse reaction from customers to
Lennox's acquisitions or other activities; the impact of the weather on
business; competition in the HVACR business; increases in the prices of
components and raw materials; general economic conditions in the U.S. and
abroad; labor relations problems; operating risks and environmental risks.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those in the forward-looking statements. Lennox disclaims any intention or
obligation to update or review any forward-looking statements or information,
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Lennox's 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 the nine months ended September 30, 2000 and 1999,
net sales from outside the U.S. represented 20.9% and 25.6%, respectively, of
total net sales. Historically, foreign currency transaction gains (losses) have
not had a material effect on operations.
From time to time Lennox enters into foreign currency contracts to hedge
receivables or payables denominated in foreign currencies. These contracts do
not subject Lennox to risk from exchange rate movements because the gains or
losses on the contracts offset losses or gains, respectively, on the items being
hedged. As of September 30, 2000, Lennox had obligations to deliver the
equivalent of $36.5 million of various foreign currencies at various dates
through December 31, 2001, and contracts to buy $.3 million of various foreign
currencies through December 29, 2000 for which the counterparties to the
contracts will pay or receive fixed contract amounts. The net fair value of the
currency contracts was a liability of $3.2 million at September 30, 2000.
To minimize risks from fluctuations in the price of copper and aluminum,
Lennox enters into combinations of long-term purchase commitments at fixed
prices and forward contracts. Maturity dates on the forward contracts coincide
with
17
expected actual cash purchases of the commodities. As of September 30, 2000,
long-term purchase commitments for copper and aluminum aggregate $11.9 million,
which approximates the fair value of the commitments. Forward contracts for
copper and aluminum aggregate $63.2 million and have a fair value as an asset of
$2.9 million.
18
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT
NUMBER DESCRIPTION
*3.1 -- Restated Certificate of Incorporation of Lennox (incorporated by
reference to Exhibit 3.1 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
*3.2 -- Amended and Restated Bylaws of Lennox (incorporated by reference to
Exhibit 3.2 to Lennox's Registration Statement on Form S-1 (Registration
No. 333-75725)).
*4.1 -- Specimen Stock Certificate for the Common Stock, par value $.01 per
share, of Lennox (incorporated by reference to Exhibit 4.1 to Lennox's
Registration Statement on Form S-1 (Registration No. 333-75725)).
10.1 -- Form of revised Employment Agreement entered into between Lennox and
certain executive officers (filed herewith).
10.2 -- Form of revised Change of Control Employment Agreement entered into
between Lennox and certain executive officers (filed herewith).
27.1 -- Financial Data Schedule (filed herewith).
- ----------
[FN]
* Incorporated herein by reference as indicated.
REPORTS ON FORM 8-K
A Current Report on Form 8-K dated July 27, 2000 was filed by Lennox. The
Report includes information under Items 5 and 7 concerning a dividend by Lennox
to its stockholders of certain preferred stock purchase rights.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LENNOX INTERNATIONAL INC.
Date: November 10, 2000
/S/ CLYDE W. WYANT
----------------------------------------
Principal Financial Officer
and Duly Authorized Signatory
20
EXHIBIT INDEX
Exhibit
Number Description
* 3.1 -- Restated Certificate of Incorporation of Lennox (incorporated by
reference to Exhibit 3.1 to Lennox's Registration Statement on Form
S-1 (Registration No. 333-75725)).
* 3.2 -- Amended and Restated Bylaws of Lennox (incorporated by reference to
Exhibit 3.2 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
* 4.1 -- Specimen Stock Certificate for the Common Stock, par value $.01 per
share, of Lennox (incorporated by reference to Exhibit 4.1 to Lennox's
Registration Statement on Form S-1 (Registration No. 333-75725)).
10.1 -- Form of revised Employment Agreement entered into between Lennox and
certain executive officers (filed herewith).
10.2 -- Form of revised Change of Control Employment Agreement entered
into between Lennox and certain executive officers (filed herewith).
27.1 -- Financial Data Schedule (filed herewith).
- ----------
[FN]
* Incorporated herein by reference as indicated.
Reports on Form 8-K
A Current Report on Form 8-K dated July 27, 2000 was filed by Lennox. The
Report includes information under Items 5 and 7 concerning a dividend by Lennox
to its stockholders of certain preferred stock purchase rights.
EXHIBIT 10.1
July 31, 2000
Employee
Address
Dear ______:
Lennox International Inc. ("Lennox") recognizes you as a key employee, important
to its future profitability, growth and financial strength. Accordingly, Lennox
proposes to enter into an agreement with you to establish certain terms of your
employment, including a specified duration or term of employment, the basis for
your compensation and assignments, certain post-employment covenants, mechanisms
to resolve disputes and certain benefits and income to you in the event you
leave the employ of Lennox under certain specified circumstances (the
"Agreement"). We believe the Agreement benefits both you and Lennox by
clarifying your employment relationship so that we all understand its terms. The
Agreement provides you with greater certainty and security with various aspects
of your employment relationship, as well as provides you with information to
assist you with future financial planning. In that same regard, the Agreement
assists Lennox in its own financial and business planning. The purpose of this
letter is to describe the terms of your employment with Lennox after the
effective date of this Agreement. You had originally entered into an employment
agreement with Lennox, dated _____________ (the "Original Agreement"), which
both you and Lennox now wish to amend and restate as provided in this Agreement.
The term "Employee" will be used to refer to you in this Agreement where
appropriate. The controlling terms of this Agreement are set forth in the body
of this letter Agreement as well as in the Exhibits to this Agreement which are
incorporated by reference. The specific terms of the Exhibits are controlling
should there be any confusion or conflict between them and this letter. With the
signing by both parties of this Agreement, you and Lennox will have agreed to
the following:
1. NATURE OF EMPLOYMENT. You and Lennox have agreed that your employment
relationship with Lennox will no longer be "at will" and terminable by
either party at any time. Instead, this employment relationship will be
governed by the terms of this Agreement for as long as it remains in effect
and even after its termination for any provisions, which by their terms
survive. The terms agreed upon by you and Lennox provide the consideration
and inducement for each party to enter into this Agreement and are
described more fully throughout the body of this Agreement and the attached
Exhibits A through C.
2. TERM OF AGREEMENT; TERMINATION DATE. This Agreement will become effective
on the date of signing this Agreement by both parties (the "Effective
Date") and the Original Agreement, as now amended and restated, will be in
effect until December 31 of that year and thereafter for a series of
one-year terms.
3. TERMINATION OF EMPLOYMENT. Your employment with Lennox may be terminated
for a number of reasons prior to the expiration of any term of this
Agreement as described below. The rights of each party under each
circumstance will vary and are described in the attached Exhibits. More
specifically, if Lennox terminates your employment for any reason other
than for "Cause", as defined in Section B.3 of Exhibit A, you will be
entitled to receive, in addition to any other compensation or benefits
described in Section B.2 of Exhibit A, severance benefits consisting of
either the Normal Severance Payment defined in Section 2 of Exhibit C or
the Enhanced Severance Payment defined in Section 3 of Exhibit C as
determined by those provisions. However, the provisions of Sections
C.2(a)-(d) of Exhibit A will continue to be effective after the termination
of this Agreement regardless of the reason for your termination.
a. TERMINATION BY EMPLOYEE. You may terminate your employment at any time
upon 30 days notice to Lennox (or a lesser period if approved by
Lennox) of your intent to terminate or not to renew this Agreement
and, in that event, Lennox shall be obligated only to pay you your
Base Salary and other applicable benefits provided to employees in
your position that are effective at the time of the voluntary
resignation up to the effective date of the termination only.
b. TERMINATION FOR CAUSE. Lennox may terminate your employment, at any
time, for Cause, as defined in Section B.3 of Exhibit A, to be
effective immediately upon delivery to you of notice of termination.
If Lennox terminates you for Cause, you are only entitled to receive
your Base Salary and other applicable benefits provided to employees
in your position that are effective at the time of termination up
through the effective date of termination.
c. TERMINATION OTHER THAN FOR CAUSE. Your employment may also be
terminated by Lennox other than for Cause at any time (including
Lennox' non-renewal of the Agreement) but such a decision triggers
certain defined benefits for you. In the event Lennox elects to
terminate you under this provision, Lennox agrees to pay either the
Normal Severance Payment as defined in Section 2 of Exhibit C or,
solely at your option, the Enhanced Severance Payment as defined in
Section 3 of Exhibit C, provided you comply with all requirements
described in Section 3 of Exhibit C. These benefits are contractually
defined by this Agreement and are not dependent on the other benefits
policies of Lennox at the time of your termination.
d. TERMINATION AS A RESULT OF DISABILITY OR DEATH. Should you die or
become permanently disabled (completely unable to perform your duties
as defined in the
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benefit plans of Lennox) during the term of this Agreement, your
employment will be terminated effective as of the date of your death
or permanent disability.
e. WITHHOLDINGS FROM PAYMENT/OFFSET. Any payments made by Lennox to
you under Section 3 will be subject to all applicable local, state,
federal or foreign taxes, including, without limitation, income tax,
withholding tax, and social security tax. Further, to the extent you
have, on the date of termination, any outstanding debts or financial
obligations to Lennox, including, but not limited to, loans,
overpayment of wages, bonuses or other forms of incentive payments,
unauthorized travel or purchasing expenses, or theft of Lennox' funds
or property, you agree that Lennox shall be entitled to set off
against and withhold from such payments due you for such debts or
obligations.
4. NONPAYMENT UPON BREACH. Notwithstanding anything in this Agreement to
the contrary, at any time after the date of termination, if you, by any
intentional or grossly negligent action or omission to act, breach any
covenant, agreement, condition or obligation contained herein, Lennox is
entitled to cease making any payments and to cease providing any of the
benefits to you under this Agreement. Additionally, Lennox reserves the
right to seek repayment of any amounts previously paid hereunder along with
recovery of any other damages caused by you.
5. RESOLUTION OF DISPUTES. In the event that any employment dispute as
defined in Section A of Exhibit B arises between Lennox and any Employee,
the parties involved will make all efforts to resolve any such dispute
through informal means. If these informal attempts at resolution fail,
Lennox and the Employee agree to and shall submit the dispute to final and
binding arbitration pursuant to the policy and terms outlined in Exhibit B,
to which the parties expressly agree to be bound. The parties fully and
completely understand and agree that arbitration is the exclusive forum for
all such arbitrable disputes and that the parties are giving up all rights
to a court trial or jury trial; however, the parties, by agreeing to the
policy for resolution of disputes outlined in Exhibit B are not waiving any
substantive rights or remedies to which they would otherwise be entitled.
6. WAIVER, MODIFICATION, AND INTEGRATION. The waiver by any party hereto of
a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by any party. This
Agreement, which includes all Exhibits referenced or attached, expresses
the entire agreement of the parties concerning matters contained herein and
supersedes all prior and contemporaneous representations, understandings
and agreement, either oral or in writing, between the parties hereto with
respect to such matters and all such prior or contemporaneous
representations, understandings and agreements, both oral and written, are
hereby terminated. This Agreement may not be modified, altered or amended
except by written agreement of the Employee and the Chief Executive
Officer, except when the Chief Executive Officer is involved, and in that
event, an official designated by the Board of Directors for Lennox.
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7. BINDING EFFECT. This Agreement shall be binding and effective upon
Lennox and its successors and permitted assigns, and upon the Employee,
Employee's heirs and representatives. The Employee hereby represents and
warrants to Lennox that Employee has not previously assumed any obligations
inconsistent with those contained in this Agreement, including, but not
limited to, covenants not to compete with another person, firm, corporation
or other entity.
8. GOVERNING LAW, VENUE AND PERSONAL JURISDICTION. It is the intention of
the parties that the laws of the State of Texas should govern the validity
of this Agreement, the construction of its terms, and the interpretation of
the rights and duties of the parties hereto. The parties agree that venue
for all disputes shall be in Dallas County, Texas. The parties further
agree to submit to personal jurisdiction in Dallas County, Texas.
Sincerely,
LENNOX INTERNATIONAL INC.
By: ______________________________
Robert E. Schjerven
ACCEPTED AND AGREED this ______ day of _______________, 2000.
EMPLOYEE
- ------------------------------
Signature
- ------------------------------
Printed Name
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EXHIBIT A
TERMS OF EMPLOYMENT
The following are the specific agreements of Lennox and the Employee providing
the details and basis for this Agreement and are intended by each as its
consideration to induce the other party to enter into this Agreement. Each party
agrees that the consideration provided by the other is adequate for its
agreements to the following terms:
A. RENEWAL. On January 1 of each year (the "Anniversary Date") after the
end of the first term and for each year thereafter, this Agreement will be
automatically renewed for an additional year, unless either party notifies
the other, in writing, at least 30 days prior to the Anniversary Date, that
it does not wish to renew the Agreement. No reason need be given by either
party for the non-renewal of the Agreement. If Lennox elects not to renew,
however, Employee is nevertheless entitled to the benefits provided in this
Agreement, subject to all of its provisions. If Employee elects not to
renew, Employee will receive only those benefits provided upon voluntary
termination as described in Section 3(a) of the letter agreement.
B. AGREEMENTS BY LENNOX.
1. EMPLOYEE DUTIES. Lennox will assign to the Employee such duties and
responsibilities that would appropriately be performed by an employee
holding Employee's position and/or job title on a permanent basis as
it deems consistent with the Employee's qualifications and experience
provided, however, that Lennox can assign other duties on a temporary
basis. Lennox retains the right to change such duties and to change
the location of the Employee's assignment as and when it deems
appropriate.
2. EMPLOYEE COMPENSATION. Employee shall receive a salary of that
amount in effect at the initial effective or subsequent renewal dates
of this Agreement (as may be, from time to time, adjusted in
accordance with Lennox' applicable salary policies which may be
changed by Lennox in its sole discretion), payable in accordance with
the then applicable payroll policies and subject to all required and
authorized withholdings and deductions ("Base Salary"). When
calculated on an annual basis, this is referred to as Annual Base
Salary, and when calculated on a monthly basis, this is referred to as
Monthly Base Salary. The Base Salary will be set in accordance with
Lennox' policy regarding salaries and will not be reduced during the
annual term of the Agreement unless Employee's job duties are changed,
in which circumstance Lennox reserves the right to lessen Employee's
compensation by no more than ten percent for the remainder of the year
without such change amounting to a breach or termination of this
Agreement. Employee is also entitled to such short
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term bonuses, stock options, long-term incentive program payments and
fringe benefits as are applicable to employees in your position
pursuant to Lennox' then applicable policies and plans. Benefits may
be subject to periodic review and may be changed by Lennox in its sole
discretion.
3. TERMINATION FOR CAUSE DEFINED. Lennox may terminate Employee's
employment, at any time, for Cause as set forth in Section 3(b) of the
body of the Letter Agreement. "Cause" is defined as (a) any violation
by an Employee of Lennox' written policies as they may exist or be
created or modified from time to time in the future, including, as
examples and not as a limitation of the policies to which an Employee
may be subject, those policies prohibiting discrimination in the
workplace, including the prohibition of harassment, on the ground of
race, sex, religion, age or any other prohibited basis; (b) any state
or federal criminal conviction, including, but not limited to, entry
of a plea of nolo contendere or deferred adjudication upon a felony or
misdemeanor charge; (c) the commission by Employee of any material act
of misconduct or dishonesty; (d) any intentional or grossly negligent
action or omission to act which breaches any covenant, agreement,
condition or obligation contained in this Agreement; or (e) acts that
in any way have a direct, substantial and adverse effect on Lennox'
reputation.
Lennox' termination for Cause determination is subject to the
Employee's rights to a resolution of a dispute of that determination
as provided in Exhibit B of this Agreement.
4. PAYMENTS UPON DISABILITY OR DEATH. In the event Employee dies or
becomes permanently disabled during the term of the Agreement,
Employee or Employee's designated beneficiaries will be entitled to
the payments described in Section 3(c) of the Agreement, together with
any other benefits provided to employees in an equivalent position in
effect at that time. Should Employee die during the severance period,
all payments of severance amounts shall cease upon the later of
Employee's death or the expiration of the twenty-fourth month after
the date of Employee's termination in the event the employee has
agreed to the terms of the enhanced severance benefit. Any payments
after Employee's death that may be due hereunder will be paid to
Employee's beneficiary named in connection with Exhibit D of this
Agreement, or if no such designation has been made by Employee, then
to Employee's executors, administrators, heirs, personal
representatives, successors, or assigns, as the case may be.
C. AGREEMENTS BY EMPLOYEE.
1. EFFORT AND COOPERATION. Employee agrees to devote his or her full
efforts and time to the performance of this Agreement and shall not,
without the prior written consent of the Chief Executive Officer, or
in the event the Chief Executive Officer is
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involved, a designee assigned by the Board of Directors, engage in any
other employment, business or other activity that would materially
interfere with the performance of his or her duties under this
Agreement. Employee further agrees that following his or her
termination from employment, Employee will provide reasonable
cooperation with and assistance to Lennox in all respects, including,
but not limited to, the transition of his or her duties and
responsibilities, cooperation on any project for a reasonable period
not to exceed six months, or any litigation involving Lennox related
to your employment at Lennox at any time such litigation may occur.
Lennox will reimburse the Employee any reasonable expenses incurred.
2. PROTECTIVE COVENANTS. Employee recognizes that Employee's employment
by Lennox is one of the highest trust and confidence. In return for
the Employee's agreement to the protective covenants herein, Lennox
agrees that the (i) Employee will become fully familiar with many
aspects of Lennox' business, including future changes customarily
related to the performance of the duties of Employee's position during
the term of the Agreement, (ii) Employee will be given access to
proprietary confidential information of Lennox or its customers and
other information which is of special and peculiar commercial or
competitive value to Lennox or its customers for use in connection
with Lennox' business, which proprietary confidential information is
for the sole and exclusive benefit of Lennox, (iii) Employee will be
given all specialized training necessary to perform his or her
assigned duties, and (iv) Employee will be provided with Lennox'
goodwill in dealing with customers, vendors and potential business
contacts.
Employee acknowledges and agrees that if any such proprietary and
confidential information of either Lennox or its customers were to
become known by any persons outside of Lennox with a need to have such
information, hardship, loss or irreparable injury and damage could
result to Lennox or its customers which would be difficult if not
impossible to measure. Therefore, Employee agrees that (i) it is
necessary for Lennox to protect its business and that of its customers
from such damage, (ii) that the information is of a confidential
nature, (iii) that the following covenants constitute a reasonable and
appropriate means, consistent with the best interests of both Employee
and Lennox, to protect Lennox and its customers against such damage
and to protect the value of their confidential proprietary
information, (iv) that the following covenants are agreed to as a term
and condition of Employee's continued employment with Lennox and are
supported by adequate consideration from Lennox, and (v) shall apply
to and be binding upon Employee as provided herein:
a. TRADE SECRETS, PROPRIETARY AND CONFIDENTIAL INFORMATION.
Employee will have access to, and contact with certain trade
secrets and confidential and proprietary information of
Lennox, including, without limitation, unique skills,
concepts, sales presentations, marketing programs, marketing
strategy,
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business practices, methods of operation, systems, sales
methods, proposals, customer lists, customer leads,
documents identifying past, present and future customers,
hiring and training methods, financial and other customer
data, lists of agents, and other confidential information
("Trade Secrets"). Employee agrees to protect and safeguard
the Trade Secrets, business practices, and confidential and
proprietary information of Lennox. Employee further agrees
and covenants that, except as may be required by Lennox in
connection with this Agreement, or with the prior written
consent of Lennox, Employee shall not, either during his or
her employment with Lennox or thereafter, directly or
indirectly, use for Employee's own benefit or for the
benefit of another, disclose, disseminate, or distribute to
another, any Trade Secret, business practice, or
confidential or proprietary information (whether or not
acquired, learned, obtained, or developed by Employee alone
or in conjunction with others) of Lennox or of others with
whom Lennox has a business relationship. Such Trade Secrets,
business practices, and confidential and proprietary
information include, but are not limited to, Lennox'
patents, trademarks, licenses and technical information
concerning its operations, data bases, Lennox' sales
information and marketing strategy, the identities of
Lennox' customers, contractors, suppliers, and others with
whom Lennox has a business relationship, Lennox arrangements
with such parties, Lennox' customer list and Lennox' pricing
policies and strategy. All memoranda, notes, records,
drawings, documents, or other writings whatsoever made,
compiled, acquired, or received by Employee during the term
of Employee's employment with Lennox, arising out of, in
connection with, or related to any activity or business of
Lennox, including, but not limited to, Lennox' customers,
contractors, suppliers, or others with whom Lennox has a
business relationship, Lennox' arrangements with such
parties, and Lennox' pricing policies and strategy, are, and
shall continue to be, the sole and exclusive property of
Lennox, and shall, together with all copies thereof and all
advertising literature, be returned and delivered to Lennox
by Employee immediately, without demand, upon the
termination of the Employee's employment with Lennox or
shall be returned at any time upon Lennox demand.
b. RESTRICTIONS ON DIVERTING EMPLOYEES OF LENNOX. Employee
agrees that during employment with Lennox, and for a period
of 24 complete calendar months following the termination of
employment, Employee will not, either directly or
indirectly, call on, solicit, induce or attempt to induce
any of the employees or officers of Lennox that Employee had
knowledge of or association with during Employee's
employment with Lennox to terminate their association with
Lennox either personally or through the efforts of his or
her subordinates.
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c. RESTRICTIONS ON DIVERTING VENDORS OR CONTRACTORS. Employee
agrees that during his or her employment with Lennox, and
for a period of 24 complete calendar months following his or
her termination of employment, Employee will not, either
directly or indirectly, call on, solicit, or induce any of
Lennox' vendors or suppliers that Employee had contact with,
direct knowledge of through his or her position with Lennox,
or associated with in the course of employment with Lennox
to terminate their association with Lennox either personally
or through the efforts of his or her subordinates.
d. RESTRICTIONS ON SOLICITING CUSTOMERS. For a period of 24
calendar months following the termination of employment,
Employee will not directly or indirectly call on, service,
or solicit competing business or provide consulting services
regarding the same from customers of Lennox that Employee
had (i) direct contact with or (ii) access to information
and files about as part of Employee's duties with Lennox
within the previous 24 months. This restriction is limited,
by geography, to the specific places, addresses, or
locations where a covered customer is present and available
for solicitation or servicing.
A competing business is defined as a business that is the
same or so substantially similar in nature to Lennox so as
to have the possibility to affect or usurp Lennox' business
opportunities.
e. REMEDIES. In the event of breach or threatened breach by
Employee of any provision of Paragraph C.2 hereof, Lennox
shall be entitled to (i) cease any payments under this
Agreement as set forth in Section 4 of the body of the
Agreement, (ii) relief by temporary restraining order,
temporary injunction, and/or permanent injunction, (iii)
recovery of all attorneys fees and costs incurred by Lennox
in obtaining such relief, and (iv) any other legal and
equitable relief to which it may be entitled, including any
and all monetary damages. Lennox has the right to pursue
partial enforcement and/or to seek declaratory relief
regarding the enforceable scope of this Agreement without
penalty and without waiving Lennox' right to pursue any
other available remedy.
f. SURVIVAL OF COVENANTS. Each covenant of Employee set forth
in Paragraph C.2 shall survive the termination of Employee's
employment. The existence of any claim or cause of action by
Employee against Lennox, whether related to this Agreement
or otherwise, shall not constitute a defense to the
enforcement of the covenants in Paragraph C.2. In the event
an enforcement remedy is necessary under Paragraph C.2, the
restricted time periods provided for in Paragraph C.2 shall
commence on the date enforcement is
A5
ordered and complied with by Employee and shall be extended
by the period of noncompliance.
g. ACKNOWLEDGMENT OF ANCILLARY AGREEMENTS AND CONSIDERATION.
Employee acknowledges that his or her agreement to be bound
by the protective covenants set forth in Paragraph C.2 is
the inducement for Lennox (i) to enter into the other terms
of this Agreement (ii) to modify existing employment
agreements or other contracts, if any, affected by this
Agreement, (iii) to initiate or continue the employment of
Employee pursuant to the terms of this Agreement, (iv) to
provide Employee with initial or continued use or access to
confidential proprietary information of Lennox, and (v) to
provide the Employee with unique and specialized training
regarding Lennox' Trade Secrets, business practices and
marketing strategy, to provide use of goodwill as a
representative of Lennox and to ensure business expertise in
developing relations with third parties. Employee agrees
that each agreement set forth in this Agreement is otherwise
enforceable and independently sufficient to support all the
protective covenants in Paragraph C.2.
D. SEVERABILITY. If any provision contained in this Agreement is determined to
be Void, illegal or unenforceable, in whole or in part, then it will be
treated as though it never was contained herein and all other provisions
shall remain in full force and effect.
E. NOTICES. All communications required or allowed under this Agreement
shall be in writing and shall be deemed to have been delivered on the date
personally delivered or on the date deposited in the United States Postal
Service, postage prepaid, by certified mail, return receipt requested,
addressed to you at the address provided above and to Lennox at:
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, Texas 75080-2254
Attn: General Counsel
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EXHIBIT B
POLICY FOR RESOLUTION OF DISPUTES
A. AGREEMENT TO ARBITRATE.
1. ARBITRABLE DISPUTES. This Policy covers any legal dispute between
the parties, as set forth below, except for Lennox's right to seek
enforcement of Employee's protective covenants set forth in Paragraph
C.2 of Exhibit A or Employee's claims related to workers compensation
and/or unemployment insurance. The disputes subject to this policy are
all those disputes between the parties arising from any breach or
alleged breach of this Agreement or as to Employee's termination or as
to any allegation by the Employee that Lennox has violated any of the
Employee's rights under state or federal employment or civil rights
laws, or any other laws, statutes or constitutional provisions,
including, but not limited to, the following: unlawful discrimination
or harassment; claims based on any purported breach of contractual
obligations; claims based on any purported breach of duty arising in
tort, including violations of public policy; as well as any actions
recognized under common law or the combination of any of these claims;
and any claims against supervisors or agents of Lennox for which the
supervisors or agents were acting in the course and scope of their
employment or making any decisions or comments related to or connected
with employment, even if the supervisor or agent was not acting within
the course and scope of employment, shall be resolved in accordance
with the provisions of this Policy for Resolution of Disputes as set
forth herein. All arbitrable disputes are subject to applicable
statutes of limitations and other affirmative defenses recognized by
law. Employee or Lennox may seek a court order to enforce or compel
arbitration pursuant to the terms of this Policy.
2. ACCEPTANCE OF POLICY. By accepting or continuing employment with
Lennox, for the provision of a term of employment provided by Lennox,
for Lennox' agreement to pay a severance package, and for Lennox'
agreement to provide Employee access to confidential information,
Employee and Lennox agree that arbitration is the exclusive remedy for
all arbitrable disputes.
3. GOVERNING LAW/WAIVER OF RIGHTS. THIS POLICY AND AGREEMENT TO ARBITRATE
IS MADE PURSUANT TO THE FEDERAL ARBITRATION ACT AND APPLICABLE STATE
LAWS REGARDING ARBITRATION AND IS A FULL AND COMPLETE WAIVER OF THE
PARTIES' RIGHTS TO A CIVIL COURT ACTION AND RIGHTS TO A TRIAL BY JURY.
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B. REQUEST FOR ARBITRATION.
1. ATTEMPT AT INFORMAL RESOLUTION OF DISPUTES.
a. Prior to submission of any dispute to arbitration, Lennox and
the Employee shall attempt to resolve the dispute informally as
set forth below.
b. Lennox and the Employee will select a mutually acceptable
mediator from a list provided by an American Arbitration
Association Employment Dispute Division or other similar agency
who will assist the parties in attempting to reach a settlement
of the dispute. The mediator may make settlement suggestions to
the parties but shall not have the power to impose a settlement
upon them. If the dispute is resolved in mediation, the matter
shall be deemed closed. If the dispute is not resolved in
mediation and goes to the next step (binding arbitration), any
proposals or compromises suggested by either of the parties or
the mediator shall not be referred to or have any bearing on the
arbitration procedure. The mediator cannot also serve as the
arbitrator in the subsequent proceeding unless all parties
expressly agree in writing.
2. ARBITRATION PROCEDURES. The Employee or his/her representative must
submit a "Request for Arbitration" in writing to the Chief Executive
Officer of Lennox within the greater of 300 days or the applicable
statute of limitation that would apply if the claim had been brought
in court of (i) the termination of employment (including resignation),
(ii) the incident giving rise to the dispute or claim, or (iii) in the
case of unlawful discrimination, including sexual or other unlawful
harassment, the alleged conduct. This time limitation will not be
extended for any reason and shall not be subject to tolling, equitable
or otherwise. If the "Request for Arbitration" is not submitted in
accordance with the aforementioned time limitations, the Employee will
not be able to bring his/her claim to this or any other forum. The
Employee can obtain a "Request for Arbitration" form from the Human
Resource Department of Lennox International Inc. or other party
designated by the Chief Executive Officer. Alternatively, the Employee
can create his/her own "Request for Arbitration" form, as long as it
clearly states "Request for Arbitration" at the beginning of the first
page. The "Request for Arbitration" must include the following
information:
a. A factual description of the dispute in sufficient detail to
advise Lennox of the nature of the dispute;
b. The date when the dispute first arose;
c. The names, work locations, telephone numbers of any co-workers or
supervisors with knowledge of the dispute; and
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d. The relief requested by the Employee.
Lennox will respond in a timely manner to this "Request for
Arbitration," so that the parties can begin the process of selecting
an arbitrator. Such response may include any counterclaims that Lennox
chooses to bring against the Employee.
3. SELECTION OF THE ARBITRATOR. All disputes will be resolved by a
single arbitrator. The arbitrator will be mutually selected by Lennox
and the Employee. If the parties cannot agree on an arbitrator, then a
list of seven arbitrators, experienced in employment matters, shall be
provided by the American Arbitration Association. The arbitrator will
be selected by the parties who will alternately strike names from the
list. The last name remaining on the list will be the arbitrator
selected to resolve the dispute. Upon selection, the arbitrator shall
set an appropriate time, date, and place for the arbitration, after
conferring with the parties to the dispute.
4. ARBITRATOR'S AUTHORITY.The arbitrator shall have the powers enumerated
below:
a. Ruling on motions regarding discovery, and ruling on procedural
and evidentiary issues arising during the arbitration;
b. Issuing protective orders on the motion of any party or third
party witness (such protective orders may include, but not be
limited to, sealing the record of the arbitration, in whole or in
part (including discovery proceedings and motions, transcripts,
and the decision and award), to protect the privacy or other
constitutional or statutory rights of parties and/or witnesses);
c. Determining only the issue(s) submitted to him/her (the
issue(s) must be identified in the "Request for Arbitration" or
counterclaims, and any issue(s) not so identified in those
documents shall be deemed to be and is/are outside the scope of
the arbitrator's jurisdiction, and any award involving those
issue(s) shall be subject to a motion to vacate);
d. Shall have no authority to violate state or federal law; and
e. Issuing written opinions on the issues raised in the Arbitration.
5. PLEADINGS.
a. A copy of the "Request for Arbitration" shall be forwarded to the
arbitrator within five calendar days of his/her selection.
b. Within 10 calendar days following submission of the "Request for
Arbitration" to the arbitrator, Lennox shall respond in writing
to the "Request
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for Arbitration" to the arbitrator, Lennox shall respond in
writing to the "Request for Arbitration" by answer and/or
demurrer. The answer or demurrer shall be served on the
arbitrator and the Employee.
c. The answer to the "Request for Arbitration" shall include the
following information:
(1) a response, by admission or denial,to each claim setforth in
the "Request for Arbitration";
(2) all affirmative defenses asserted by Lennox to each claim;
and
(3) all counterclaims Lennox asserts against the Employee and
any related third party claims.
d. If Lennox contends that some or all of the Employee's claims set
forth in the "Request for Arbitration" are barred as a matter of
law, it may respond by demurrer setting forth the legal
authorities in support of its position. If Lennox demurs to less
than the entire "Request for Arbitration," Lennox must answer
those claims to which it does not demur at the same time that it
submits its demurrer.
e. The Employee shall have 20 calendar days to oppose Lennox'
demurrer. Any opposition must be in writing and served on the
arbitrator and Lennox.
f. If the answer alleges a counterclaim, within 20 days of service
of the answer, the Employee shall answer and/or demur to the
counterclaim in writing and serve the answer and/or demurrer on
the arbitrator and Lennox. If the Employee demurs to any
counterclaim, Lennox shall have 20 calendar days from its receipt
of the demurrer to submit a written opposition to the demurrer to
the Employee and the arbitrator.
g. The arbitrator shall rule on demurrer(s) to any claims and/or
counterclaims within 15 calendar days of service of the moving
and opposition papers.
h. If any demurrer is overruled, the moving party must answer those
claims to which it demurred within five calendar days of the
receipt of the arbitrator's ruling. The answer must be served on
the arbitrator and the opposing party.
i. When all claims and counterclaims have been answered, the
arbitrator shall set a time and place for hearing which shall be
no earlier than three months from the day on which the parties
are notified of the date of hearing and no
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later than 12 months from the date on which the arbitrator sets
the date for the hearing.
6. DISCOVERY. The discovery process shall proceed and be governed as
follows:
a. Parties may obtain discovery by any of the following methods:
(1) depositions upon oral examination, one per side as of right,
with more permitted if leave is obtained from the
arbitrator;
(2) written interrogatories, up to a maximum combined total of
20, with the responding party having 20 days to respond;
(3) request for production of documents or things or permission
to enter upon land or other property for inspection, with
the responding party having 20 days to produce the documents
and allow entry or to file objections to the request; and
(4) physical and mental examination, in accordance with the
Federal Rules of Civil Procedure, Rule 35(a).
b. Any motion to compel production, answers to interrogatories or
entry onto land or property must be made to the arbitrator within
15 days of receipt of objections.
c. All discovery requests shall be submitted no less than 60 days
before the hearing date.
d. The scope of discoverable evidence shall be in accordance with
Federal Rule of Civil Procedure 26(b)(1).
e. The arbitrator shall have the power to enforce the
aforementioned discovery rights and obligations by the imposition
of the same terms, conditions, consequences, liabilities,
sanctions, and penalties as can or may be imposed in like
circumstances in a civil action by a federal court under the
Federal Rules of Civil Procedure, except the power to order the
arrest or imprisonment of a person.
7. HEARING PROCEDURE. The hearing shall proceed according to the
American Arbitration Association's Rules with the following
amendments:
a. The arbitrator shall rule at the outset of the arbitration on
procedural issues that bear on whether the arbitration is allowed
to proceed.
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b. Each party has the burden of proving each element of its claim
or counterclaims, and each party has the burden of proving any of
its affirmative defenses.
c. In addition to, or in lieu of, closing arguments, either party
shall have the right to present post-hearing briefs, and the due
date for exchanging post-hearing briefs shall be mutually agreed
on by the parties and the arbitrator.
8. SUBSTANTIVE LAW. The applicable substantive law shall be the law of
the State of Texas or federal law. If both federal and state law speak
to a cause of action, the Employee shall have the right to elect
his/her choice of law. However, choice of law in no way affects the
procedural aspects of the arbitration, which are exclusively governed
by the provisions of this Policy.
9. OPINION AND AWARD. The arbitrator shall issue a written opinion and
award, in conformance with the following requirements:
a. The opinion and award must be signed and dated by the arbitrator.
b. The arbitrator's opinion and award shall decide all issues
submitted.
c. The arbitrator's opinion and award shall set forth the legal
principles supporting each part of the opinion.
d. The arbitrator shall have the same authority to award remedies
and damages as provided to a judge and/or jury under parallel
circumstances.
10. ENFORCEMENT OF ARBITRATOR'S AWARD. Following the issuance of the
arbitrator's decision, any party may petition a court to confirm,
enforce, correct or vacate the arbitrator's opinion and award under
the Federal Arbitration Act, and/or applicable state law.
11. FEES AND COSTS. Fees and costs shall be allocated in the following
manner:
a. Each party shall be responsible for its own attorneys' fees,
except as provided by law.
b. The Employee will pay a $150 filing fee to be paid to the
arbitration agency. Lennox will bear the remainder of the
arbitrator's fees and any costs associated with the facilities
for the arbitration.
c. Lennox and the Employee shall each bear an equal one-half of
any court reporters' fees, assuming both parties want a
transcript of the proceeding. If
B6
one party elects not to receive a transcript of the proceedings,
the other party will bear all of the court reporters' fee.
However, such an election must be made when the arrangements for
the court reporter are being made.
d. Each party shall be responsible for its costs associated with
discovery.
C. SEVERABILITY. In the event that any provision of this Policy is
determined by a court of competent jurisdiction to be illegal, invalid, or
unenforceable to any extent, such term or provision shall be enforced to
the extent permissible under the law and all remaining terms and provisions
of this Policy shall continue in full force and effect.
B7
EXHIBIT C
SEVERANCE TERMS
1. EFFECT OF PROTECTIVE COVENANTS. The provisions of Paragraphs C2(a)-(d)
of Exhibit A of this Agreement will continue in full force and effect
regardless of whether Employee continues to be employed by Lennox and
regardless of the reason Employee's employment is terminated and regardless
of the severance compensation to which Employee is entitled as set forth
below, if any.
2. NORMAL SEVERANCE COMPENSATION. Should Employee be terminated by Lennox
prior to the expiration of the term specified in Section 2 of the body of
the Agreement or the Agreement is not renewed by Lennox for any reason
other than for Cause as defined in Section B.3 of Exhibit A, and provided
the Employee does not elect and qualify for the Enhanced Severance Payment
described in Section 3 of Exhibit C set forth below, Employee will be
entitled to receive monthly payments of the greater of the Employee's
Monthly Base Salary for the remainder of the Agreement's term or three
months of Employee's Monthly Base Salary in addition to any other
compensation or benefits applicable to an employee at Employee's level to
the extent the Employee would be eligible for such compensation or benefits
under the terms of those formal programs which are applicable to all
employees at Employee's level in effect at the time of termination and, for
any benefits which continue after termination, subject to any modification
which is made to such programs applicable to the all of the participants at
such time.
3. ENHANCED SEVERANCE BENEFITS. If Lennox terminates an Employee other than
for Cause (including Lennox' non-renewal of the Agreement) and that
Employee elects and meets the conditions of this Paragraph 3 of Exhibit C,
Lennox agrees to pay an Enhanced Severance Payment and provide the other
benefits described below ("Enhanced Severance Benefits"). The Employee must
agree to execute a written General Release of any and all possible claims
against Lennox existing at the time of termination in exchange for which
Lennox agrees to the following severance provisions:
(i) SEVERANCE PAYMENT. Lennox agrees to pay Employee's Monthly Base
Salary for a period of 24 months following the date of termination. In
addition, Lennox agrees to pay to the Employee, within 45 days of
termination, in a lump sum, the total of any short-term bonus payments
actually paid to the Employee over the twenty-four (24) month period
prior to the date of termination. The severance payments will be paid
in installments in accordance with the regular payroll policies of
Lennox then in effect and each installment will be subject to regular
payroll deductions and all applicable taxes.
C1
(ii) PERQUISITES. Within 45 days following the date of termination,
the Employee will receive in addition to (i) above, in a lump sum, a
payment of a sum equal to 10% of the Employee's Annual Base Salary in
effect at the time of termination in lieu of the continuation of or
payment for any perquisites, including, without limitation,
automobile, club membership, tax preparation, physical examination or
others being received by the Employee at the time of termination.
(iii)COBRA CONTINUATION. Lennox agrees to pay COBRA premiums to allow
Employee to continue to participate in Lennox group health plan on the
same terms as other Lennox employees for up to 18 months while
Employee is unemployed and not eligible for other group health
insurance coverage. Should Employee remain unemployed at the end of 18
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 for
his or her use in obtaining health insurance coverage outside the
group health plan.
(iv) OUTPLACEMENT. Lennox agrees to provide Employee with outplacement
services in accordance with Lennox' then applicable policy. In lieu of
such outplacement services, Lennox agrees to pay Employee a lump sum
payment of 10% of Employee's Annual Base Salary within 45 days
following the date of termination should Employee elect not to receive
outplacement services.
(v) DEATH BENEFIT. Employee's beneficiary, as set forth in Exhibit D,
will receive, in a lump sum, a death benefit equivalent to six months
of Employee's Monthly Base Salary in the event that the Employee
should die during the period in which the Employee is entitled to any
severance payment described above.
Nothing herein shall be construed to limit Employee's right to receive any
benefits and entitlements under Lennox' ERISA or other employee benefit
plans, with all such benefits being received by the Employee only to the
extent allowed by and subject to the terms of any such plan as it may from
time to time exist or be modified. Further, this Agreement is not intended
and the parties agree that it will not be interpreted as creating any
obligation for Lennox to create or maintain any employee benefit,
compensation, perquisite or other plan, policy or program for its employees
and Lennox retains the sole discretion to eliminate or modify any existing
plan, program or policy as it deems to be appropriate.
C2
EXHIBIT D
DESIGNATION OF BENEFICIARY
The following represent the designation of Beneficiary for the Employee named
below:
EMPLOYEE: _________________________
PRIMARY BENEFICIARY(S):
_____________________ ________________________ _________%*
Name Relationship Percent
_____________________ ________________________ _________%*
Name Relationship Percent
*The total should add to 100%
CONTINGENT BENEFICIARY(S):
_____________________ ________________________ _________%*
Name Relationship Percent
_____________________ ________________________ _________%*
Name Relationship Percent
*The total should add to 100%
This is to confirm the designation of my Beneficiary(s) to receive any benefits
provided under this Agreement which are not otherwise covered by Employee
benefit plans with other designations of beneficiary which I intend to supersede
any designation made above.
EMPLOYEE
------------------------------
Signature
------------------------------
Printed Name
------------------------------
Date
EXHIBIT 10.2
CHANGE OF CONTROL AGREEMENT
AMENDED AND RESTATED
CHANGE OF CONTROL EMPLOYMENT AGREEMENT
Table of Contents
Page
----
1. Employment Period...............................................1
2. Terms of Employment.............................................2
(a) Position and Duties.............................................2
(b) Compensation....................................................2
(i) Base Salary............................................2
(ii) Annual Bonus...........................................3
(iii) Qualified Plans........................................3
(iv) Welfare Benefit Plans..................................3
(v) Expenses...............................................4
(vi) Fringe Benefits and Perquisites........................4
(vii) Office and Support Staff...............................4
(viii) Vacation...............................................4
(ix) Equity and Performance Based Awards....................4
3. Termination of Employment.......................................5
(a) Death or Disability.............................................5
(b) Cause...........................................................5
(c) Good Reason; Window Period......................................5
(d) Notice of Termination...........................................6
(e) Date of Termination.............................................6
4. Obligations of the Company Upon Termination.....................7
(a) Good Reason or During a Window Period; Other than for Cause,
Death or Disability .........................................7
(b) Death...........................................................9
(c) Disability.....................................................10
(d) Cause; Other than for Good Reason or During a Window Period....10
5. Non-exclusivity of Rights......................................11
6. Full Settlement; Resolution of Disputes........................11
7. Certain Additional Payments by the Company.....................12
8. Confidential Information; Certain Prohibited Activities........14
9. Change of Control; Potential Change of Control.................15
10. Successors.....................................................20
11. Miscellaneous..................................................20
i
AMENDED AND RESTATED
CHANGE OF CONTROL EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED CHANGE OF CONTROL EMPLOYMENT AGREEMENT (the
"Agreement") by and between Lennox International Inc., a Delaware corporation
(the "Company"), and _____________________ (the "Executive"), dated as of the
31st day of July, 2000, to be effective as of the Agreement Effective Date (as
defined in Section 11(h) hereof).
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that,
in the event of a Change of Control or Potential Change of Control (in each case
as defined in Section 9 hereof), the Company will have the continued services of
the Executive and the Executive will be provided with compensation and benefits
arrangements that meet his expectations. In order to accomplish these
objectives, the Board caused the Company to enter into a Change of Control
Employment Agreement, dated as of April 23, 1999 (the "Original Agreement"),
with the Executive. The Company and the Executive wish to amend and restate the
Original Agreement as provided in this Agreement. It is understood that the
Executive has an existing employment agreement (the "Existing Agreement") with
the Company. This Agreement is intended to provide certain protections to
Executive that are not afforded by the Existing Agreement. This Agreement is
not, however, intended to provide benefits that are duplicative of the
Executive's current benefits. To the extent that this Agreement provides
benefits of the same types as those provided under the Existing Agreement, the
Company shall provide the better of the benefits in each case during the
Employment Period. If Executive remains employed by the Company at the
conclusion of an Employment Period, the Existing Agreement shall continue in
effect in accordance with its terms thereafter, except that Executive's Base
Salary for purposes of the Existing Agreement shall be equal to the Executive's
Annual Base Salary under this Agreement at the conclusion of the Employment
Period.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. EMPLOYMENT PERIOD.
Upon a Change of Control or Potential Change of Control, the Company
hereby agrees to continue the Executive in its employ, and the Executive
hereby agrees to remain in the employ of the Company, in accordance with, and
subject to, the terms and provisions of this Agreement, for the period (the
"Employment Period") commencing on the date upon which there occurs a Change of
Control or a Potential Change of Control and ending on (i) if a Change of
Control has occurred, the second anniversary of the Employment Effective Date or
(ii) if a Potential Change of Control has occurred but a Change of Control has
not occurred, the earliest of (x) the date upon which the Board determines in
good faith that a Change of Control is unlikely to occur, (y) any anniversary of
the Potential Change of Control, if at least 30 days prior to such anniversary
the Executive notifies the Company in writing that he elects to terminate his
employment with the Company as of such anniversary and (z) the second
anniversary of the Employment Effective Date. If the Employment Period commences
by reason of a Potential Change of Control and the Employment Period is
thereafter terminated pursuant to clause (ii) (x) of the preceding sentence,
this Agreement shall nevertheless remain in effect and a
1
new Employment Period shall commence upon a subsequent Change of Control or
Potential Change of Control. The Company shall promptly notify the Executive in
writing of the occurrence of a Change of Control or Potential Change of Control
and of any determination made by the Board pursuant to clause (ii)(x) above that
a Change of Control is unlikely to occur. As used herein, the term "Employment
Effective Date" shall mean, with respect to any Employment Period, the date upon
which such Employment Period commences in accordance with this Section 1.
2. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate
in all material respects with the most significant of those held,
exercised and assigned at any time during the 90-day period
immediately preceding the Employment Effective Date, and (B) the
Executive's services shall be performed at the location where the
Executive was employed immediately preceding the Employment Effective
Date or at another location within 35 miles thereof.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the
extent necessary to discharge the responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the
Employment Period it shall not be a violation of this Agreement for
the Executive to (A) serve on corporate, civic or charitable boards or
committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments,
so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement. It is expressly understood
and agreed that to the extent that any such activities have been
conducted by the Executive prior to the Employment Effective Date, the
continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Employment
Effective Date shall not thereafter be deemed to interfere with the
performance of the Executive's responsibilities to the Company.
(b) COMPENSATION.
(i) BASE SALARY. During the Employment Period, the Executive
shall receive an annual base salary equal to the base salary in effect
immediately prior to the Employment Effective Date or, if more
favorable to the Executive, the base salary in effect at any time
after the Employment Effective Date ("Annual Base
2
Salary"), which shall be paid in accordance with the normal
business practice of the Company. During the Employment Period, the
Annual Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time as shall be substantially
consistent with increases in base salary generally awarded in the
ordinary course of business to executives of the Company and its
affiliated companies. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to the Executive under
this Agreement. Annual Base Salary shall not be reduced after any such
increase and the term "Annual Base Salary" as utilized in this
Agreement shall refer to Annual Base Salary as so increased. As used
in this Agreement, the term "affiliated companies" shall include, when
used with reference to the Company, any company controlled by,
controlling or under common control with the Company.
(ii) ANNUAL BONUS. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year or portion thereof
during the Employment Period, an annual bonus (the "Annual Bonus") in
cash equal to the greater of (A) the greatest dollar amount of annual
bonus paid or awarded to or for the benefit of the Executive in
respect of any of the preceding three fiscal years or (B) an amount
comparable to the annual bonus awarded to other Company executives
taking into account Executive's position and responsibilities with the
Company, prorated in the case of either (A) or (B) for any period
consisting of less than twelve full months. The Annual Bonus awarded
for a particular fiscal year shall (unless the Executive elects to
defer receipt thereof) be paid no later than the last day of the third
month after the end of such year.
(iii) QUALIFIED PLANS. During the Employment Period, the
Executive shall be entitled to participate in all profit-sharing,
savings and retirement plans that are tax-qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended ("Code"), and
all plans that are supplemental to any such tax-qualified plans, in
each case to the extent that such plans are applicable generally to
other executives of the Company and its affiliated companies, but in
no event shall such plans provide the Executive with incentive
opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction
is applicable), savings opportunities and retirement benefit
opportunities that are, in each case, less favorable, in the
aggregate, than the most favorable plans of the Company and its
affiliated companies. As used in this Agreement, the term "most
favorable" shall, when used with reference to any plans, practices,
policies or programs of the Company and its affiliated companies, be
deemed to refer to the most favorable plans, practices, policies or
programs of the Company and its affiliated companies as in effect at
any time during the three months preceding the Employment Effective
Date or, if more favorable to the Executive, provided generally at any
time after the Employment Effective Date to other executives of the
Company and its affiliated companies.
(iv) WELFARE BENEFIT PLANS. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be
eligible for
3
participation in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the Company and
its affiliated companies (including, without limitation, medical,
prescription, dental, vision, disability, salary continuance, group
life and supplemental group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to
other executives of the Company and its affiliated companies, but in
no event shall such plans, practices, policies and programs provide
the Executive with benefits that are less favorable, in the aggregate,
than the most favorable such plans, practices, policies and programs
of the Company and its affiliated companies.
(v) EXPENSES. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the most
favorable policies, practices and procedures of the Company and its
affiliated companies.
(vi) FRINGE BENEFITS AND PERQUISITES. During the Employment
Period, the Executive shall be entitled to fringe benefits and
perquisites in accordance with the most favorable plans, practices,
programs and policies of the Company and its affiliated companies
applicable to similarly situated executives, which, in the aggregate,
shall not be less than Executive's benefits and perquisites in effect
prior to the commencement of the Employment Period or, if more
favorable to the Executive, the benefits and perquisites in effect at
any time after the Employment Effective Date .
(vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal
secretarial and other assistance, at least equal to the most favorable
of the foregoing provided to the Executive by the Company and its
affiliated companies at any time during the three months preceding the
Employment Effective Date.
(viii) VACATION. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most
favorable plans, policies, programs and practices of the Company and
its affiliated companies, but not less than the amount of vacation
time to which Executive was entitled prior to the commencement of the
Employment Period.
(ix) EQUITY AND PERFORMANCE BASED AWARDS. During the Employment
Period, the Executive shall be granted on an annual basis a long-term
incentive package consisting of stock options, restricted stock or
restricted stock units and other equity-based awards and performance
grants, as selected by the Company, with an aggregate value (as
determined by an independent consulting firm selected by Executive and
reasonably acceptable to the Company) that shall be not less than the
aggregate value of the long-term incentive package awarded the
4
Executive in any of the three years immediately preceding such
Employment Period.
3. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Executive's employment shall
terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period
(pursuant to the definition of Disability set forth below), it may
give to the Executive written notice in accordance with Section 11(d)
of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company
shall terminate effective on the 30th day after receipt of such notice
by the Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, the Executive shall not have
returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall mean the absence of the
Executive from the Executive's duties with the Company on a full-time
basis for 180 consecutive business days as a result of incapacity due
to mental or physical illness which is determined to be total and
permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative
(such agreement as to acceptability not to be withheld unreasonably).
(b) CAUSE. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this
Agreement, "Cause" shall mean (i) dishonesty by Executive which
results in substantial personal enrichment at the expense of the
Company or (ii) demonstratively willful repeated violations of
Executive's obligations under this Agreement which are intended to
result and do result in material injury to the Company.
(c) GOOD REASON;WINDOW PERIOD. The Executive's employment may be
terminated during the Employment Period by the Executive for Good
Reason or during a Window Period by the Executive without any reason.
For purposes of this Agreement, "Window Period" shall mean the 90-day
period commencing 366 days after any Change of Control as defined in
Section 9 of this Agreement. For purposes of this Agreement, "Good
Reason" shall mean:
(i) any change in the Executive's position (including
status, offices, titles and reporting requirements), authority,
duties or responsibilities as contemplated by Section 2 of this
Agreement, excluding for this purpose any de minimus changes and
excluding an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive, or any
other assignment to the Executive of any duties inconsistent in
any respect with such position, authority, duties or
responsibilities, other than de minimus inconsistencies or other
than, in each case, any such change in duties or such assignment
that would clearly constitute a promotion or other improvement in
Executive's position;
5
(ii) any failure by the Company to comply with any of the
provisions of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith
and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at
any office or location other than that described in Section
2(a)(i)(B) hereof;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by
this Agreement;
(v) any failure by the Company to comply with and satisfy
the requirements of Section 10 of this Agreement, provided that
(A) the successor described in Section 10(c) has received, at
least ten days prior to the Date of Termination (as defined in
subparagraph (e) below), written notice from the Company or the
Executive of the requirements of such provision and (B) such
failure to be in compliance and satisfy the requirements of
Section 10 shall continue as of the Date of Termination; or
(vi) in the event that the Executive is serving as a member
of the Board immediately prior to the Employment Effective Date,
any failure to reelect Executive as a member of the Board, unless
such reelection would be prohibited by the Company's By-laws as
in effect at the beginning of the Employment Period.
(d) NOTICE OF TERMINATION. Any termination by the Company for
Cause, or by the Executive for Good Reason or without any reason
during a Window Period, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 11(d) of
this Agreement. The failure by the Executive or the Company to set
forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any
right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) DATE OF TERMINATION.For purposes of this Agreement, the term
"Date of Termination" means (i) if the Executive's employment is
terminated by the Company for Cause, or by the Executive during a
Window Period or for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the
date on which the Company notifies the Executive of such termination
and (iii) if the Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of
death of the Executive or the Disability Effective Date, as the case
may be.
6
4. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) GOOD REASON OR DURING A WINDOW PERIOD; OTHER THAN FOR CAUSE,
DEATH OR DISABILITY. If, during the Employment Period, the Company
shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason
or his employment shall be terminated for any reason during a Window
Period:
(i) the Company shall pay or provide to or in respect of the
Executive the following amounts and benefits:
A. in a lump sum in cash, undiscounted, within 10
days after the Date of Termination, an amount equal to
the sum of (1) the Executive's Annual Base Salary
through the Date of Termination, (2) the product of
(x) the highest Annual Bonus paid or awarded to or
for the benefit of Executive during the three fiscal
years preceding the Date of Termination and (y) a
fraction, the numerator of which is the number of days
in the current fiscal year through the Date of
Termination and the denominator of which is 365, (3)
any deferred compensation previously awarded to or
earned by the Executive (together with any accrued
interest or earnings thereon) and (4) any compensation
for unused vacation time for which the Executive is
eligible in accordance with the most favorable plans,
policies, programs and practices of the Company and its
affiliated companies, in each case to the extent not
theretofore paid (the sum of the amounts described in
clauses (1), (2), (3) and (4) shall be hereinafter
referred to as the "Accrued Obligation");
B. in a lump sum in cash, undiscounted, within 10
days after the Date of Termination, an amount equal
to the sum of (1) three times the Annual Base Salary
and (2) three times the highest Annual Bonus paid or
awarded to or for the benefit of the Executive during
the three fiscal years preceding the Date of
Termination;
C. an additional three Years of Vesting Service
and Years of Credited Service, as well as an
incremental three years added to Executive's age,
for purposes of the Company's Supplemental Retirement
Plan and Profit Sharing Restoration Plan;
D. in a lump sum in cash, undiscounted, within 10
days after the Date of Termination, an amount equal to
the sum of (1) three times the Annual Base Salary and
(2) three times the highest Annual Bonus paid or
awarded to or for the benefit of the Executive
during the three fiscal years preceding the Date of
Termination (the amounts in this clause D. to reflect
the equity component of Executive's overall
compensation);
7
E. in a lump sum in cash, undiscounted, within 10
days after the Date of Termination, an amount equal to
the sum of (1) 15% of the Annual Base Salary (this
amount being paid in lieu of the provision of out
placement services) and (2) three times 15% of the
Annual Base Salary that would have been paid or awarded
to or for the benefit of the Executive during the
fiscal year that includes the Date of Termination (this
amount to reflect the perquisites component of
Executive's overall compensation);
F. effective as of the Date of Termination,
(x) immediate vesting and exercisability of,
termination of any restrictions on sale or transfer
(other than any such restriction arising by operation
of law)with respect to and treatment of any performance
goals as having been satisfied at the highest possible
level with respect to each and every stock option,
restricted stock award, restricted stock unit award and
other equity-based award and performance award (each,
a "Compensatory Award") that is outstanding as of
a time immediately prior to the Date of Termination,
(y) the extension of the term during which each and
every Compensatory Award may be exercised by the
Executive until the earlier of (1)the third anniversary
of the Date of Termination or (2) the date upon which
the right to exercise any Compensatory Award would
have expired if the Executive had continued to be
employed by the Company under the terms of this
Agreement until the second anniversary of the
Employment Effective Date and (z) at the sole election
of Executive, in exchange for any or all Compensatory
Awards that are either denominated in or payable in
Common Stock, an amount in cash equal to the number of
shares of Common Stock that are subject to the
Compensatory Award multiplied by the excess of (i) the
Highest Price Per Share (as defined below) over (ii)
the exercise or purchase price, if any, of such
Compensatory Awards. As used herein, the term "Highest
Price Per Share" shall mean the highest price per share
that can be determined to have been paid or agreed to
be paid for any share of Common Stock by a Covered
Person (as defined below) at any time during the
Employment Period or the six-month period immediately
preceding the Employment Effective Date.As used herein,
the term "Covered Person" shall mean any Person other
than an Exempt Person (in each case as defined in
Section 9 hereof) who (i) is the Beneficial Owner (as
defined in Section 9 hereof) of 35% or more of the
outstanding shares of Common Stock or 35% or more of
the combined voting power of the outstanding Voting
Stock (as defined in Section 9 hereof) of the Company
at any time during the Employment Period or the
two-year period immediately prior to the Employment
Effective Date, or (ii) is a Person who has any
material involvement in proposing or effecting the
Change of Control or Potential Change of Control (but
excluding any Person whose involvement in proposing or
effecting the Change of Control or Potential Change of
Control resulted solely from such Person's voting or
selling of Common Stock in connection with the Change
of
8
Control or Potential Change of Control, from such
Person's status as a director or officer of the Company
in evaluating and/or approving a Change of Control or
Potential Change of Control or both). In determining
the Highest Price Per Share, the price paid or agreed
to be paid by a Covered Person will be appropriately
adjusted to take into account (W) distributions paid or
payable in stock, (X) subdivisions of outstanding
stock, (Y) combinations of shares of stock into a
smaller number of shares and (Z) similar events.
(ii) for the three-year period commencing with the Date of
Termination, and in the case of medical and health benefits for
the COBRA continuation period commencing thereafter, the Company
shall continue medical and health benefits and group life and
supplemental group life benefits to the Executive and/or the
Executive's family at least equal to those that would have been
provided to them in accordance with the plans, programs,
practices and policies described in Section 2(b)(iv) of this
Agreement if the Executive's employment had not been terminated
(such continuation of such benefits for the applicable period
herein set forth shall be hereinafter referred to as "Welfare
Benefit Continuation"). For purposes of determining eligibility
of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be
considered to have remained employed until the third anniversary
of Executive's Date of Termination and to have retired on such
date; and
(iii) the Company shall timely pay or provide to the
Executive and/or the Executive's family any other amounts or
benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant to
this Agreement and under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies
as in effect and applicable generally to other executives and
their families on the Employment Effective Date (such other
amounts and benefits shall be hereinafter referred to as the
"Other Benefits").
(b) DEATH. If the Executive's employment is terminated by reason
of the Executive's death during the Employment Period, and other than
during a Window Period in which event the provisions of Section 4(a)
shall govern and the Executive shall be entitled to the amounts and
benefits set forth therein, this Agreement shall terminate and the
Company shall be obligated to pay to the Executive's legal
representatives under this Agreement the greater of (i) such benefits
as would be provided to Executive under the Existing Agreement or
(ii)(A) the payment of the Accrued Obligations (which shall be paid to
the Executive's estate or beneficiary, as applicable, in a lump sum in
cash within 30 days of the Date of Termination), (B) the payment of an
amount equal to the Annual Salary that would have been paid to the
Executive pursuant to this Agreement for the period beginning on the
Date of Termination and ending on the first anniversary thereof if the
Executive's employment had not terminated by reason of death (which
shall be paid to the Executive's estate or beneficiary, as applicable,
in a lump sum in cash within 30
9
days of the Date of Termination), (C) the timely payment or provision
of the Welfare Benefit Continuation and Other Benefits and (D)
effective as of the Date of Termination, (x) immediate vesting and
exercisability of, and termination of any restrictions on sale or
transfer (other than any such restriction arising by operation of law)
with respect to, each and every Compensatory Award outstanding as of a
time immediately prior to the Date of Termination, (y) the extension
of the term during which each and every Compensatory Award may be
exercised or purchased by the Executive until the earlier of (I) the
third anniversary of the Date of Termination or (II) the date upon
which the right to exercise or purchase any Compensatory Award would
have expired if the Executive had continued to be employed by the
Company under the terms of this Agreement until the second anniversary
of the Employment Effective Date and (z) at the sole election of
Executive's legal representative, in exchange for any Compensatory
Award that is either denominated in or payable in Common Stock, an
amount in cash equal to the excess of (I) the Highest Price Per Share
over (II) the exercise or purchase price, if any, of such Compensatory
Award.
(c) DISABILITY. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, and
other than during a Window Period in which event the provisions of
Section 4(a) shall govern and the Executive shall be entitled to the
amounts and benefits set forth therein, this Agreement shall terminate
and the Company shall be obligated to pay to the Executive, the
greater of (i) such benefits as would be provided to Executive under
the Existing Agreement or (ii)(A) the payment of the Accrued
Obligations (which shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination), (B) the payment of an
amount equal to the Annual Salary that would have been paid to the
Executive pursuant to this Agreement for the period beginning on the
Date of Termination and ending on the first anniversary thereof if the
Executive's employment had not terminated by reason of Disability
(which shall be paid to the Executive in a lump sum in cash within 30
days of the Date of Termination), (C) the timely payment or provision
of the Welfare Benefit Continuation and Other Benefits and (D)
effective as of the Date of Termination, (x) immediate vesting and
exercisability of, and termination of any restrictions on sale or
transfer (other than any such restriction arising by operation of law)
with respect to, each and every Compensatory Award outstanding as of a
time immediately prior to the Date of Termination, (y) the extension
of the term during which each and every Compensatory Award may be
exercised or purchased by the Executive until the earlier of (I) the
third anniversary of the Date of Termination or (II) the date upon
which the right to exercise or purchase any Compensatory Award would
have expired if the Executive had continued to be employed by the
Company under the terms of this Agreement until the second anniversary
of the Employment Effective Date and (z) at the sole election of
Executive, in exchange for any Compensatory Award that is either
denominated in or payable in Common Stock, an amount in cash equal to
the excess of (I) the Highest Price Per Share over (II) the exercise
or purchase price, if any, of such Compensatory Award.
(d) CAUSE; OTHER THAN FOR GOOD REASON OR DURING A WINDOW PERIOD .
If the Executive's employment shall be terminated for Cause during the
Employment Period, and other than during a Window Period in which
event the provisions of Section 4(a)
10
shall govern and the Executive shall be entitled to the amounts and
benefits set forth therein, this Agreement shall terminate without
further obligations under this Agreement to the Executive other than
for Accrued Obligations. If the Executive terminates employment during
the Employment Period other than for Good Reason and other than during
a Window Period, this Agreement shall terminate without further
obligations to the Executive, other than for the payment of Accrued
Obligations. In such case, all Accrued Obligations shall be paid to
the Executive in a lump sum in cash within 30 days of the Date of
Termination.
5. NON-EXCLUSIVITY OF RIGHTS. Except as provided in Section 4 of this
Agreement, nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which
the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts
which are vested benefits or which the Executive is otherwise entitled to
receive under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
such plan, policy, practice or program is expressly superseded by this
Agreement.
6. FULL SETTLEMENT; RESOLUTION OF DISPUTES.
(a) The Company's obligation to make payments provided for in
this Agreement and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment,
defense, mitigation or other claim, right or action which the Company
may have against the Executive or others. The Company agrees to pay
promptly as incurred, to the full extent permitted by law, all legal
fees and expenses which the Executive may reasonably incur as a result
of any contest (unless the Executive's claim is found by a court of
competent jurisdiction to have been frivolous) by the Company, the
Executive or others of the validity or enforceability of, or liability
under, any provision of this Agreement (other than Section 8 hereof)
or any guarantee of performance thereof (including as a result of any
contest by the Executive about the amount of any such payment pursuant
to this Agreement), plus in each case interest on any delayed payment
at the Applicable Federal Rate provided for in Section 7872(f)(2)(A)
of the Code.
(b) If there shall be any dispute between the Company and the
Executive concerning (i) in the event of any termination of the
Executive's employment by the Company, whether such termination was
for Cause, or (ii) in the event of any termination of employment by
the Executive, whether Good Reason existed or whether such termination
occurred during a Window Period, then, unless and until there is a
final, nonappealable judgment by a court of competent jurisdiction
declaring that such termination was for Cause or that the
determination by the Executive of the existence of Good Reason was not
made in good faith or that the termination by the Executive did not
occur during a Window Period, the Company shall pay all amounts, and
provide all
11
benefits, to the Executive and/or the Executive's family or other
beneficiaries, as the case may be, that the Company would be required
to pay or provide pursuant to Section 4(a) hereof as though such
termination were by the Company without Cause or by the Executive with
Good Reason or during a Window Period; provided, however, that the
Company shall not be required to pay any disputed amounts pursuant to
this paragraph except upon receipt of an undertaking by or on behalf
of the Executive to repay all such amounts to which the Executive is
ultimately adjudged by such court not to be entitled; provided further
that such undertaking need not be secured, whether by bond or
otherwise.
7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that any payment or distribution
to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments
required under this Section 7) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise
tax (such excise tax, together with any such interest and penalties,
hereinafter collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b) Subject to the provisions of Section 7(c), all determinations
required to be made under this Section 7, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by Arthur Andersen LLP (the "Accounting Firm");
provided, however, that the Accounting Firm shall not determine that
no Excise Tax is payable by the Executive unless it delivers to the
Executive a written opinion (the "Accounting Opinion") that failure to
report the Excise Tax on the Executive's applicable Federal income tax
return would not result in the imposition of a negligence or similar
penalty. In the event that Arthur Andersen LLP has served, at any time
during the two years immediately preceding a Change of Control Date,
as accountant or auditor for the individual, entity or group that is
involved in effecting or has any material interest in the Change of
Control, the Executive, at his option, shall appoint another
nationally recognized accounting firm to make the determinations and
perform the other functions specified in this Section 7 (which
accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Within 15 business days of the receipt of
notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company, the Accounting Firm shall
make all determinations required under this Section 7, shall provide
to the Company and the Executive a written report setting forth such
12
determinations, together with detailed supporting calculations, and,
if the Accounting Firm determines that no Excise Tax is payable, shall
deliver the Accounting Opinion to the Executive. Any Gross-Up Payment,
as determined pursuant to this Section 7, shall be paid by the Company
to the Executive within five days of the receipt of the Accounting
Firm's determination. Subject to the remainder of this Section 7, any
determination by the Accounting Firm shall be binding upon the Company
and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that a Gross-Up
Payment that will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be
made hereunder. In the event that it is ultimately determined in
accordance with the procedures set forth in Section 7(c) that the
Executive is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that
has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any
claims by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but not later than
30 days after the Executive actually receives notice in writing of
such claim and shall apprise the Company of the nature of such claim
and the date on which such claim is requested to be paid; provided,
however, that the failure of the Executive to notify the Company of
such claim (or to provide any required information with respect
thereto) shall not affect any rights granted to the Executive under
this Section 7 except to the extent that the Company is materially
prejudiced in the defense of such claim as a direct result of such
failure. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which he gives
such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of
such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim;
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney selected
by the Company and reasonably acceptable to the Executive;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) if the Company elects not to assume and control the
defense of such claim, permit the Company to participate in any
proceedings relating to such claim;
13
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 7(c), the Company shall have the right, at its sole option, to
assume the defense of and control all proceedings in connection with
such contest, in which case it may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts,
as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's right to assume the defense of and
control the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 7(c), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of Section 7(c)) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section
7(c), a determination is made that the Executive shall not be entitled
to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial
of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
8. CONFIDENTIAL INFORMATION; CERTAIN PROHIBITED ACTIVITIES.
(a) The Executive shall hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the
Company or any of its affiliated companies and which shall not be or
become public knowledge
14
(other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After the Executive's Date
of Termination, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal
process, communicate or divulge any such information, knowledge or
data to anyone other than the Company and those designated by it.
Except as provided in subsection (c) below, in no event shall an
asserted violation of the provisions of this Section 8 constitute a
basis for deferring or withholding any amounts otherwise payable to
Executive under this Agreement. Also, within 14 days of the
termination of Executive's employment for any reason, Executive shall
return to the Company all documents and other tangible items of or
containing Company information which are in Executive's possession,
custody or control.
(b) Executive agrees that for a period of 24 complete calendar
months following his Date of Termination, Executive will not, either
directly or indirectly, call on, solicit, induce or attempt to induce
any of the employees or officers of the Company whom Executive had
knowledge of or association with during Executive's employment with
the Company to terminate their association with the Company either
personally or through the efforts of his or her subordinates.
(c) In the event of a breach by Executive of any provision of
this Section 8, the Company shall be entitled to (i) cease any Welfare
Benefit Contribution entitlement provided pursuant to Section 4(a)(ii)
hereof, (ii) relief by temporary restraining order, temporary
injunction and/or permanent injunction, (iii) recovery of all
attorneys' fees and costs incurred in obtaining such relief and (iv)
any other legal and equitable relief to which it may be entitled,
including monetary damages.
9. CHANGE OF CONTROL; POTENTIAL CHANGE OF CONTROL.
(a) As used in this Agreement, the terms set forth below shall
have the following respective meanings:
"Beneficial Owner" shall mean, with reference to any securities,
any Person if:
(i) such Person is the "beneficial owner" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under
the Exchange Act, as in effect on the date of this Agreement)
such securities; provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subsection (i) as a result of an agreement,
arrangement or understanding to vote such security if such
agreement, arrangement or understanding: (x) arises solely from a
revocable proxy or consent given in response to a public (i.e.,
not including a solicitation exempted by Rule 14a-2(b)(2) of the
General Rules and Regulations under the Exchange Act) proxy or
consent solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and Regulations
under the Exchange Act and (y) is not then reportable by such
Person on Schedule 13D under the Exchange Act (or any comparable
or successor report); or
15
(ii) such Person is a member of a group (as that term is
used in Rule 13d-5(b) of the General Rules and Regulations under
the Exchange Act) that includes any other Person (other than
Exempt Persons) that beneficially owns such securities;
provided, however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own" any security held by a Norris Family Trust
with respect to which such Person acts in the capacity of trustee, personal
representative, custodian, administrator, executor, officer, partner,
member, or other fiduciary; provided, further, that nothing in this
definition shall cause a Person engaged in business as an underwriter of
securities to be the Beneficial Owner of, or to "beneficially own," any
securities acquired through such Person's participation in good faith in a
firm commitment underwriting until the expiration of forty days after the
date of such acquisition. For purposes hereof, "voting" a security shall
include voting, granting a proxy, consenting or making a request or demand
relating to corporate action (including, without limitation, a demand for a
stockholder list, to call a stockholder meeting or to inspect corporate
books and records) or otherwise giving an authorization (within the meaning
of Section 14(a) of the Exchange Act) in respect of such security.
The terms "beneficially own" and "beneficially owning" shall have
meanings that are correlative to this definition of the term "Beneficial
Owner."
"Change of Control" shall mean any of the following occurring
on or after the Agreement Effective Date:
(i) Any Person (other than an Exempt Person) shall become
the Beneficial Owner of 35% or more of the shares of Common Stock
then outstanding or 35% or more of the combined voting power of
the Voting Stock of the Company then outstanding; provided,
however, that no Change of Control shall be deemed to occur for
purposes of this subsection (i) if such Person shall become a
Beneficial Owner of 35% or more of the shares of Common Stock or
35% or more of the combined voting power of the Voting Stock of
the Company solely as a result of (x) an Exempt Transaction or
(y) an acquisition by a Person pursuant to a reorganization,
merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (x),
(y) and (z) of subsection (iii) of this definition are satisfied;
(ii) Individuals who, as of the Agreement Effective Date,
constitute the Board (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to
the Agreement Effective Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board; provided, further, that
there shall be excluded, for this purpose, any such individual
whose initial assumption of office occurs as a result of any
actual or threatened election contest that is subject to the
provisions of Rule 14a-11 under the Exchange Act;
16
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, (x) more
than 65% of the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then
outstanding Voting Stock of such corporation is beneficially
owned, directly or indirectly, by all or substantially all of the
Persons who were the Beneficial Owners of the outstanding Common
Stock immediately prior to such reorganization, merger or
consolidation (ignoring, for purposes of this clause (x), the
first proviso in the definition of "Beneficial Owner" set forth
in Section 9(a)) in substantially the same proportions as their
ownership immediately prior to such reorganization, merger or
consolidation of the outstanding Common Stock, (y) no Person
(excluding any Exempt Person or any Person beneficially owning,
immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 35% or more of the Common
Stock then outstanding or 35% or more of the combined voting
power of the Voting Stock of the Company then outstanding)
beneficially owns, directly or indirectly, 35% or more of the
then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or
the combined voting power of the then outstanding Voting Stock of
such corporation and (z) at least a majority of the members of
the board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial
agreement or initial action by the Board providing for such
reorganization, merger or consolidation; or
(iv) Approval by the shareholders of the Company of (x) a
complete liquidation or dissolution of the Company, unless such
liquidation or dissolution is approved as part of a plan of
liquidation and dissolution involving a sale or disposition of
all or substantially all of the assets of the Company to a
corporation with respect to which, following such sale or other
disposition, all of the requirements of clauses (y)(A), (B) and
(C) of this subsection (iv) are satisfied, or (y) the sale or
other disposition of all or substantially all of the assets of
the Company, other than to a corporation, with respect to which,
following such sale or other disposition, (A) more than 65% of
the then outstanding shares of common stock of such corporation
and the combined voting power of the Voting Stock of such
corporation is then beneficially owned, directly or indirectly,
by all or substantially all of the Persons who were the
Beneficial Owners of the outstanding Common Stock immediately
prior to such sale or other disposition (ignoring, for purposes
of this clause (y)(A), the first proviso in the definition of
"Beneficial Owner" set forth in Section 9(a)) in substantially
the same proportions as their ownership, immediately prior to
such sale or other disposition, of the outstanding Common Stock,
(B) no Person (excluding any Exempt Person and any Person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, 35% or more of the Common
Stock then outstanding or 35% or more of the combined voting
power of the Voting Stock of the Company then outstanding)
beneficially owns, directly or indirectly, 35% or more of the
then outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding Voting Stock of
such corporation and (C) at
17
least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of
the execution of the initial agreement or initial action of the
Board providing for such sale or other disposition of assets of
the Company.
"Common Stock" shall mean the common stock, par value $.01 per share,
of the Company, and shall include, for purposes of Section 4 hereof, stock
of any successor, within the meaning of Section 10(c).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exempt Person" shall mean (i) the Company, any subsidiary of the
Company, any employee benefit plan of the Company or any subsidiary of the
Company, and any Person organized, appointed or established by the Company
for or pursuant to the terms of any such plan, (ii) any Person who is shown
under the caption "Principal and Selling Stockholders" in the Company's
final prospectus dated July 28, 1999 relating to its initial public
offering of the Common Stock as beneficially owning (as determined pursuant
to Rule 13d-3 of the General Rules and Regulations under the Exchange Act,
as in effect on the date of this Agreement) one percent or more of the
Common Stock and (iii) any lineal descendant and any spouse of any such
lineal descendant of D.W. Norris, but only if such lineal descendant and
any spouse of any such lineal descendant shall not at any time hold shares
of Common Stock or Voting Stock of the Company with the primary purpose of
effecting with respect to the Company (A) an extraordinary corporate
transaction, such as a merger, reorganization or liquidation, (B) a sale or
transfer of a material amount of assets, (C) any material change in the
capitalization, (D) any other material change in the business or corporate
structure or operations, (E) changes in the corporate charter or bylaws or
(F) a change in the composition of the Board or of the members of senior
management.
"Exempt Transaction" shall mean an increase in the percentage of the
outstanding shares of Common Stock or the percentage of the combined voting
power of the outstanding Voting Stock of the Company beneficially owned by
any Person solely as a result of a reduction in the number of shares of
Common Stock then outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such Person shall purchase or
otherwise become the Beneficial Owner of additional shares of Common Stock
constituting 3% or more of the then outstanding shares of Common Stock or
additional Voting Stock representing 3% or more of the combined voting
power of the then outstanding Voting Stock.
"Norris Family Trust" shall mean any trust, estate, custodianship,
other fiduciary arrangement, corporation, limited partnership, limited
liability company or other business entity (collectively, a "Family
Entity") formed, owned, held, or existing primarily for the benefit of the
lineal descendants of D.W. Norris and any spouses of such lineal
descendants, but only if such Family Entity shall not at any time hold
Common Stock or Voting Stock of the Company with the primary purpose of
effecting with respect to the Company (i) an extraordinary corporate
transaction, such as a merger, reorganization or liquidation (ii) a sale or
transfer of a material amount of assets, (iii) any material change in
capitalization, (iv) any other material change in
18
business or corporate structure or operations, (v) changes in corporate
charter or bylaws, or (vi) a change in the composition of the Board or of
the members of senior management.
"Person" shall mean any individual, firm, corporation, partnership,
association, trust, unincorporated organization or other entity.
"Potential Change of Control" shall mean any of the following:
(i) a tender offer or exchange offer is commenced by any
Person which, if consummated, would constitute a Change of
Control;
(ii) an agreement is entered into by the Company providing
for a transaction which, if consummated, would constitute a
Change of Control;
(iii) any election contest is commenced that is subject to
the provisions of Rule 14a-11 under the Exchange Act; or
(iv) any proposal is made, or any other event or transaction
occurs or is continuing, which the Board determines, if
consummated, would result in a Change of Control.
"Voting Stock" shall mean, with respect to a corporation, all
securities of such corporation of any class or series that are entitled to
vote generally in the election of directors of such corporation (excluding
any class or series that would be entitled so to vote by reason of the
occurrence of any contingency, so long as such contingency has not
occurred).
(a) In the event that the Company is a party to a
transaction that is otherwise intended to qualify for "pooling of
interests" accounting treatment, such transaction constitutes a
Change of Control within the meaning of this Agreement and
individuals who satisfy the requirements in clauses (i) and (ii)
below constitute at least 51% of the number of directors of the
entity surviving such transaction or any parent thereof:
individuals who (i) immediately prior to such transaction
constituted the Board and (ii) on the date hereof constitute the
Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or
threatened election contest relating to the election of directors
of the Company) whose appointment or election by the Board or
nomination for election by the Company's stockholders was
approved or recommended by a vote of at least 51% of the
directors then still in office who either were directors on the
date hereof or whose appointment, election or nomination for
election was previously so approved or recommended, then this
Section 9 and other Agreement provisions concerning a Change of
Control shall, to the extent practicable, be interpreted so as to
permit such accounting treatment, and to the extent that the
application of this sentence does not preserve the availability
of such accounting treatment, then, to the extent that any
provision or combination of provisions of this Section 9 and
other Agreement provisions concerning a Change of Control
disqualifies the transaction as a "pooling" transaction
(including, if applicable, all provisions of the Agreement
relating to a Change of Control), the Board shall amend such
provision or
19
provisions if and to the extent necessary (including declaring
such provision or provisions to be null and void as of the date
hereof, which declaration shall be binding on Executive) so that
such transaction may be accounted for as a "pooling of
interests." All determinations with respect to this paragraph
shall be made by the Company, based upon the advice of the
accounting firm whose opinion with respect to "pooling of
interests" is required as a condition to the consummation of such
transaction.
10. SUCCESSORS.
(a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable
by the Executive otherwise than by will or the laws of descent
and distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's heirs, executors and other
legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and may only be assigned to a successor
described in Section 10(c).
(c) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Company to assume expressly and agree to perform this Agreement
in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
11. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without
reference to principles of conflict of laws that would require
the application of the laws of any other state or jurisdiction.
(b) The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
(c) This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or
their respective successors and heirs, executors and other legal
representatives.
(d) All notices and other communications hereunder shall be
in writing and shall be given, if by the Executive to the
Company, by telecopy or facsimile transmission at the
telecommunications number set forth below and, if by either the
Company or the Executive, either by hand delivery to the other
party or by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
20
If to the Executive:
------------------------------------------------------
------------------------------------------------------
If to the Company:
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, Texas 75080-2254
Telecommunications Number: (972) 497-6660
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(e) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(f) The Company may withhold from any amounts payable under
this Agreement such Federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or
regulation.
(g) The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other
provision of this Agreement or the failure to assert any right
the Executive or the Company may have hereunder, including,
without limitation, the right of the Executive to terminate
employment for Good Reason or during a Window Period pursuant to
Section 3(c) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right
of this Agreement.
(h) This Agreement shall become effective as of July 31,
2000 (the "Agreement Effective Date "), and upon effectiveness of
this Agreement, the Original Agreement shall be amended and
restated in its entirety to read as set forth herein.
21
IN WITNESS WHEREOF, the Executive has hereunto set his hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
LENNOX INTERNATIONAL INC.
-------------------------
By:----------------------
Name:--------------------
Title:-------------------
EXECUTIVE
-------------------------
Signature
5
1,000
9-MOS
DEC-31-2000
JAN-01-2000
SEP-30-2000
45,473
0
502,388
27,028
380,427
981,594
783,583
427,941
2,079,815
576,566
0
0
0
597
741,807
2,079,815
2,468,142
2,468,142
1,667,042
1,667,042
0
0
41,960
86,160
35,757
50,403
0
0
0
50,403
0.90
0.89
