<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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LENNOX INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 3585 42-0991521
(State or other jurisdiction of (Primary Industrial Standard (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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2140 LAKE PARK BLVD.
RICHARDSON, TEXAS 75080
(972) 497-5000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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CARL E. EDWARDS, JR.
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
LENNOX INTERNATIONAL INC.
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS 75080
(972) 497-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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ANDREW M. BAKER LOUIS N. LADERMAN J. CHASE COLE VICTOR I. LEWKOW
BAKER & BOTTS, L.L.P. SERVICE EXPERTS, INC. WALLER LANSDEN DORTCH & DAVIS, PLLC CLEARY, GOTTLIEB, STEEN &
2001 ROSS AVENUE SIX CADILLAC DRIVE, SUITE 511 UNION STREET, SUITE 2100 HAMILTON
DALLAS, TEXAS 75201 400 NASHVILLE, TN 37219 ONE LIBERTY PLAZA
(214) 953-6500 BRENTWOOD, TN 37027 (615) 244-6380 NEW YORK, NY 10006-1470
(615) 371-0990 (212) 225-2000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering: [ ] _________
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE REGISTRATION FEE
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Common Stock, par value $.01 per 14,301,943
share................................. shares(1) $11.00 $157,321,373 $41,533(3)
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(1) Represents the maximum number of shares of common stock, par value $0.01 per
share, of Lennox International Inc. that may be issued to stockholders of
Service Experts, Inc. pursuant to the transactions described herein, based
on (a) the exchange ratio of 0.67 of a Lennox share for each Service Experts
share and (b) the maximum number of shares of common stock, par value $0.01
per share, of Service Experts, Inc. that may be outstanding immediately
prior to the consummation of the transactions described herein, giving
effect to the exercise of all outstanding options and warrants to purchase
and the conversion of all convertible debt into, and other stock based
awards entitling the recipient to acquire, shares of Service Experts common
stock.
(2) The value of a share of Lennox common stock was determined by taking the
average of the high and low prices of such a share as reported on the New
York Stock Exchange on December 7, 1999.
(3) The total amount of the registration fee is $41,533. However, pursuant to
Section 6(b) and Rule 457(b) of the Securities Act of 1933, the amount of
the filing fee is reduced by the amount of $29,231 (the filing fee paid to
the Commission with respect to the joint preliminary proxy statement filed
confidentially by Lennox and Service Experts with the Commission on November
19, 1999). The registration fee, after giving effect to the above reduction,
is $12,302.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1999
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[LENNOX LOGO] [SERVICE EXPERTS LOGO]
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MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
Service Experts, Inc. has agreed to be acquired by Lennox International
Inc. in a merger transaction in which Service Experts would become a
wholly-owned subsidiary of Lennox. We believe this combination will create a
leading vertically integrated heating, ventilation and air conditioning company.
If we complete the merger, Service Experts stockholders will receive 0.67
of a share of Lennox common stock for each share of their Service Experts common
stock. We estimate that after the merger, the former stockholders of Service
Experts will own approximately 21% of the outstanding shares of Lennox common
stock.
Lennox common stock trades on the New York Stock Exchange under the trading
symbol "LII."
We are asking Service Experts stockholders to approve the merger agreement
and the merger. We are asking Lennox stockholders to approve the issuance of
Lennox common stock in the merger. We cannot complete the merger unless we
receive these necessary approvals of stockholders of both companies.
We have each scheduled a special meeting of our respective stockholders to
vote on these important matters.
The dates, times and places of the meetings are:
For Service Experts stockholders:
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10:00 a.m., local time
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Brentwood, Tennessee
For Lennox stockholders:
- ------------------------------------------------------
10:00 a.m., local time
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Richardson, Texas
This document gives you detailed information about the special meetings and
the proposed transactions. We encourage you to read this document carefully. IN
PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 FOR
A DESCRIPTION OF VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE PROPOSED
TRANSACTION.
We are very enthusiastic about this merger and the strength and
capabilities we expect from the combined company. We join all the other members
of the two companies' boards of directors in recommending that you vote in favor
of the merger agreement and the merger or the issuance of common stock in the
merger, as applicable.
Very truly yours,
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/s/ ALAN R. SIELBECK /s/ JOHN W. NORRIS, JR.
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Alan R. Sielbeck John W. Norris, Jr.
Chairman of the Board, President Chairman of the Board and
and Chief Executive Officer Chief Executive Officer
Service Experts, Inc. Lennox International Inc.
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OF LENNOX COMMON STOCK TO
BE ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This joint proxy statement/prospectus is dated and was first
mailed to the stockholders of Lennox and Service Experts on or about .
<PAGE> 3
[SERVICE EXPERTS LOGO]
SERVICE EXPERTS, INC.
SIX CADILLAC DRIVE, SUITE 400
BRENTWOOD, TENNESSEE 37027
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
To the Stockholders of Service Experts, Inc.:
A Special Meeting of stockholders of Service Experts, Inc. will be held on
, at 10:00 a.m., local time, at , Brentwood,
Tennessee for the following purposes described in the accompanying joint proxy
statement/prospectus:
- To consider and vote on the approval and adoption of an Agreement and
Plan of Merger, dated as of October 26, 1999, among Service Experts,
Inc., Lennox International Inc. and a subsidiary of Lennox, and the
merger pursuant to this agreement; and
- To transact any other business that may properly come before the special
meeting or any adjournment or postponement.
The board of directors has determined that owners of record of Service
Experts common stock at the close of business on are entitled to
notice of and to vote at the special meeting or any adjournment or postponement.
By Order of the Board of Directors,
/s/ ANTHONY M. SCHOFIELD
Chief Financial Officer,
Secretary and Treasurer
YOUR VOTE IS IMPORTANT
TO BE SURE YOUR SHARES ARE REPRESENTED AT THE MEETING,
PLEASE COMPLETE, DATE, SIGN AND RETURN YOUR PROXY CARD
IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOU MAY VOTE IN PERSON AT THE MEETING EVEN IF YOU
SEND IN YOUR PROXY CARD.
<PAGE> 4
[LENNOX LOGO]
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS 75080
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
To the Stockholders of Lennox International Inc.:
A Special Meeting of stockholders of Lennox International Inc. will be held
on , at 10:00 a.m., local time, at , Richardson,
Texas for the following purposes described in the accompanying joint proxy
statement/prospectus:
- To consider and vote on the issuance of shares of Lennox common stock
pursuant to a merger to be consummated in accordance with an Agreement
and Plan of Merger, dated as of October 26, 1999, among Service Experts,
Inc., Lennox International Inc. and a subsidiary of Lennox; and
- To transact any other business that may properly come before the special
meeting or any adjournment or postponement.
The board of directors has determined that owners of record of Lennox
common stock at the close of business on are entitled to notice of and
to vote at the special meeting or any adjournment or postponement.
By Order of the Board of Directors,
/s/CARL E. EDWARDS, JR.
Executive Vice President,
General Counsel and Secretary
YOUR VOTE IS IMPORTANT
TO BE SURE YOUR SHARES ARE REPRESENTED AT THE MEETING,
PLEASE COMPLETE, DATE, SIGN AND RETURN YOUR PROXY CARD
IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOU MAY VOTE IN PERSON AT THE MEETING EVEN IF YOU
SEND IN YOUR PROXY CARD.
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... iv
SUMMARY..................................................... 1
The Companies............................................. 1
Lennox's Reasons for the Merger........................... 2
Service Experts' Reasons for the Merger................... 2
Merger Recommendations to Stockholders.................... 2
Conflicts of Interest..................................... 2
Opinions of Financial Advisors............................ 3
The Terms of the Merger Agreement......................... 3
What Stockholders Will Receive............................ 3
No Appraisal Rights....................................... 3
Tax Consequences of the Merger............................ 3
Comparative Per Share Market Price Information............ 4
Treatment of Service Experts Stock Options, Warrants,
Restricted Stock and Convertible Notes................. 4
Record Date For Stockholders to Vote at the Special
Meetings............................................... 4
Vote of Stockholders Required............................. 4
Voting Agreements......................................... 5
Conditions to the Completion of the Merger................ 5
Termination of the Merger Agreement....................... 5
Termination Fees and Expense Reimbursement................ 6
Stock Option Agreement.................................... 6
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA............ 7
Selected Historical Financial Data of Service Experts..... 7
Selected Historical Financial and Other Data of Lennox.... 8
Selected Unaudited Pro Forma Financial Data............... 9
COMPARATIVE PER SHARE DATA.................................. 10
RISK FACTORS................................................ 11
Risk Factors Relating to the Merger....................... 11
Risk Factors Relating to the Failure to Approve the
Merger................................................. 12
Risk Factors Relating to the Business of Lennox and
Service Experts as a Combined Company.................. 13
Risk Factors Relating to Lennox's Governing Documents and
Stock Price............................................ 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 17
THE SPECIAL MEETINGS........................................ 18
Date, Times and Places.................................... 18
Matters to be Considered at the Special Meetings.......... 18
Record Date; Stock Entitled to Vote; Quorum............... 18
Votes Required............................................ 19
Share Ownership of Management............................. 19
Shares Held in Street Name; Voting of Proxies............. 20
Proxy Solicitation........................................ 21
THE MERGER TRANSACTION...................................... 22
Service Experts Proposal.................................. 22
Lennox Proposal........................................... 22
Background of the Merger.................................. 22
Service Experts' Reasons for the Merger; Recommendation of
Service Experts Board.................................. 25
Opinion of Service Experts Financial Advisors............. 29
Lennox's Reasons for the Merger; Recommendation of Lennox
Board.................................................. 35
Opinion of Lennox Financial Advisor....................... 38
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i
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PAGE
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Material Federal Income Tax Consequences of the Merger...... 43
Conflicts of Interest..................................... 45
Regulatory Matters........................................ 45
Stock Exchange Listing.................................... 46
No Appraisal Rights....................................... 46
COMPARATIVE PER SHARE AND MARKET PRICE INFORMATION.......... 47
Dividend Policy........................................... 47
INFORMATION ABOUT SERVICE EXPERTS........................... 48
INFORMATION ABOUT LENNOX.................................... 49
Selected Historical Financial and Other Data of Lennox.... 49
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 50
Business of Lennox........................................ 64
Management of Lennox...................................... 81
Certain Relationships and Related Party Transactions...... 95
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................................... 96
MATERIAL TERMS OF THE MERGER AGREEMENT...................... 101
Structure of the Merger................................... 101
Timing of Closing and Effective Time...................... 101
Merger Consideration...................................... 101
Cancellation of Shares.................................... 101
Procedures for Surrender of Certificates; Fractional
Shares................................................. 101
Treatment of Service Experts Stock Options, Warrants,
Restricted Stock and Convertible Notes................. 102
Board of Directors and Officers........................... 103
Covenants................................................. 103
Representations and Warranties............................ 107
Additional Agreements..................................... 108
Conditions to the Completion of the Merger................ 110
Termination of the Merger Agreement....................... 111
Amendments and Waiver..................................... 113
MATERIAL TERMS OF THE STOCK OPTION AGREEMENT................ 113
The Stock Option.......................................... 113
Exercise of the Stock Option.............................. 113
Cash Election............................................. 113
Listing and Registration Rights........................... 113
Limitation on Total Profit................................ 113
Effect of the Stock Option Agreement...................... 114
Standstill Provision...................................... 114
VOTING AGREEMENTS........................................... 115
Lennox Shareholder Agreements............................. 115
Service Experts Shareholder Agreements.................... 115
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER
RESTRICTIONS.............................................. 116
OWNERSHIP OF LENNOX COMMON STOCK............................ 116
COMPARISON OF STOCKHOLDER RIGHTS............................ 120
DESCRIPTION OF LENNOX CAPITAL STOCK......................... 124
Common Stock.............................................. 124
Preferred Stock........................................... 124
Business Combination Statute.............................. 125
Certificate of Incorporation and Bylaw Provisions......... 126
Rights to Purchase Securities and Other Property.......... 130
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ii
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PAGE
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Transfer Agent and Registrar................................ 130
LEGAL MATTERS............................................... 130
EXPERTS..................................................... 130
WHERE YOU CAN FIND MORE INFORMATION......................... 130
SUBMISSION OF STOCKHOLDER PROPOSALS......................... 132
INDEX TO FINANCIAL STATEMENTS............................... F-1
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ANNEX A -- Agreement and Plan of Merger
ANNEX B -- Stock Option Agreement
ANNEX C -- Form of Service Experts Shareholder Agreement
ANNEX D -- Form of Lennox Shareholder Agreement
ANNEX E -- Opinion of SunTrust Equitable Securities Corporation
ANNEX F -- Opinion of Wasserstein Perella & Co., Inc.
ANNEX G -- Opinion of Warburg Dillon Read LLC
</TABLE>
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THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT SERVICE EXPERTS THAT IS NOT INCLUDED IN OR DELIVERED
WITH THIS DOCUMENT. THIS INFORMATION IS AVAILABLE TO YOU WITHOUT CHARGE UPON
EITHER WRITTEN OR ORAL REQUEST. YOU CAN OBTAIN THIS INFORMATION BY REQUESTING IT
IN WRITING OR BY TELEPHONE FROM SERVICE EXPERTS AT THE FOLLOWING ADDRESS AND
TELEPHONE NUMBER:
SERVICE EXPERTS, INC.
SIX CADILLAC DRIVE, SUITE 400
BRENTWOOD, TENNESSEE 37027
ATTENTION: INVESTOR RELATIONS
(615) 371-9990
IF YOU WOULD LIKE TO REQUEST THIS INFORMATION, PLEASE DO SO BY
(FIVE BUSINESS DAYS PRIOR TO THE SPECIAL MEETINGS) IN ORDER TO RECEIVE IT BEFORE
THE SPECIAL MEETINGS.
FOR ADDITIONAL SOURCES OF THE DOCUMENTS INCORPORATED BY REFERENCE AND OTHER
INFORMATION ABOUT SERVICE EXPERTS AND LENNOX, YOU SHOULD READ "WHERE YOU CAN
FIND MORE INFORMATION" ON PAGE 130.
iii
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHEN AND WHERE ARE THE SPECIAL MEETINGS OF STOCKHOLDERS?
A. Each company's special meeting will take place on . The location of each
special meeting is indicated on page 18.
Q: WHAT DO I NEED TO DO NOW?
A. After you have carefully read this document, indicate on your proxy card how
you want to vote. Complete, sign, date and mail the proxy card in the enclosed
return envelope as soon as possible. The board of directors of Service Experts
believes that the merger is advisable, fair to Service Experts stockholders and
in their best interest and recommends that Service Experts stockholders vote for
approval and adoption of the merger agreement and the merger. The board of
directors of Lennox believes that the merger is advisable, fair to Lennox
stockholders and in their best interest and recommends that Lennox stockholders
vote for the issuance of shares of Lennox common stock in the merger.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A. If you do not provide your broker with instructions on how to vote your
shares held in "street name," your broker will not be permitted to vote your
shares on the proposals presented at your special meeting. You should therefore
provide your broker with instructions as to how to vote your shares.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A. You may change your vote:
- by sending a written notice to the corporate secretary of your company
prior to your special meeting stating that you would like to revoke your
proxy;
- by completing, signing and dating another proxy card and returning it by
mail prior to your special meeting; or
- by attending your special meeting and voting in person.
Lennox stockholders who want help in changing their vote should call
. Service Experts stockholders who want help in changing their vote
should call .
Q: SHOULD I SEND IN MY STOCK CERTIFICATES AT THIS TIME?
A. No. After we complete the merger, we will send Service Experts stockholders
written instructions for exchanging their stock certificates. Stock certificates
held by Lennox stockholders do not need to be exchanged.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A. We must first obtain the approvals of our stockholders at the special
meetings and the necessary regulatory clearances. We currently expect to
complete the merger in the first quarter of 2000. However, we cannot assure you
when or if the merger will occur.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANIES, THE SPECIAL MEETINGS
OR THE MERGER?
A. Both Service Experts and Lennox file reports and other information with the
SEC. You may read and copy this information at the SEC's public reference
facilities. Please call the SEC at 1-800-SEC-0330 for information about these
facilities. This information is also available at the Internet site the SEC
maintains at http://www.sec.gov and at the offices of the New York Stock
Exchange, or you can request copies of these documents from us.
Service Experts stockholders may call and Lennox stockholders may
call for information on the merger and the special meetings.
iv
<PAGE> 9
SUMMARY
This summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. For a more complete description of the legal terms of the
merger, you should carefully read the rest of this document and the other
documents we refer to. You should also read "Where You Can Find More
Information" on page 130. We have included page references directing you to a
more complete description of each item presented in this summary.
THE COMPANIES (SEE PAGES 48 AND 49)
LENNOX INTERNATIONAL INC.
2140 Lake Park Blvd.
Richardson, Texas 75080
(972) 497-5000
Lennox is a one hundred year old leading global provider of climate control
solutions and had 1998 net sales of $1.8 billion. Lennox designs, manufactures
and markets a broad range of products for the heating, ventilation, air
conditioning and refrigeration markets, which is sometimes referred to as
"HVACR." Lennox's products are sold under well-established brand names including
Lennox, Armstrong Air, Bohn, Larkin, Heatcraft and others. In September 1998,
Lennox initiated a program to acquire dealers in metropolitan areas in the
United States and Canada so it can provide heating and air conditioning products
and services directly to consumers. As of September 30, 1999, Lennox had
acquired 57 dealers in Canada and 19 in the United States for an aggregate
purchase price of approximately $164 million and had signed letters of intent to
acquire seven additional Canadian dealers and 25 United States dealers for an
aggregate purchase price of approximately $82 million.
Lennox's furnaces, heat pumps, air conditioners, pre-fabricated fireplaces
and related products are available in a variety of designs, efficiency levels
and price points that provide an extensive line of comfort systems. A majority
of Lennox's sales of residential heating and air conditioning products in the
United States and Canada are to the repair and replacement market, which is less
cyclical than the new construction market. Lennox also provides a range of air
conditioning products for commercial market applications such as mid-size office
buildings, restaurants, churches and schools. Lennox's commercial refrigeration
products are used primarily in cold storage applications for food preservation
in supermarkets, convenience stores, restaurants, warehouses and distribution
centers. Lennox's heat transfer products are used by it in its HVACR products
and sold to third parties.
SERVICE EXPERTS, INC.
Six Cadillac Drive, Suite 400
Brentwood, Tennessee 37027
(615) 371-9990
Service Experts was formed in 1996 and has become one of the leading
providers of residential heating, ventilating and air conditioning, which is
sometimes referred to as "HVAC," services and replacement equipment in the
United States. As of September 30, 1999, Service Experts operated 120 HVAC
service and replacement businesses in 36 states. Service Experts also owns
Contractor Success Group, Inc., a company that provides HVAC businesses
proprietary products, as well as marketing, management, educational and advisory
services. The Service Experts' businesses install, service and maintain central
air conditioners, furnaces and heat pumps, primarily in existing homes.
Management estimates that approximately 75% of the Service Experts' pro forma
net revenue in 1998, giving effect to all completed service center acquisitions,
was related to replacing, maintaining and servicing HVAC equipment at existing
residences, and to the sale of ancillary products such as indoor air quality
devices and services. Service Experts focuses on the service and replacement
market of the HVAC industry rather than the new construction market because
management believes that the service and replacement market offers higher
margins and exposes Service Experts to less credit risk. The service and
replacement market offers more attractive pricing because of customers' demands
for immediate, convenient and reliable service.
1
<PAGE> 10
THE MERGER
LENNOX'S REASONS FOR THE MERGER (SEE PAGE 35)
Lennox believes that the merger greatly accelerates Lennox's growth
strategy of expanding its ability to distribute its products directly to
consumers by acquiring heating and air conditioning dealers in the United States
and Canada and provides Lennox with a retail presence in highly desirable
metropolitan areas in the United States. The merger will add approximately 120
high quality dealers to Lennox's existing dealer network and will provide Lennox
with an infrastructure in which to manage its existing heating and air
conditioning dealers in the United States and Canada. In addition, Lennox
expects to realize significant cost savings from the combination of the two
companies.
SERVICE EXPERTS' REASONS FOR THE MERGER (SEE PAGE 25)
Service Experts believes that it would face risks and uncertainties as an
independent publicly-traded company in attempting to stabilize and revitalize
the company in view of the difficulties that have materially adversely affected
financial results in 1999. Service Experts conducted a process to explore
strategic alternatives, and the process had not led to any other definitive
offers. The board of directors and senior management of Service Experts believes
that the merger is the most viable alternative for addressing such risks and
uncertainties and is in the best long-term interest of Service Experts'
business.
MERGER RECOMMENDATIONS TO STOCKHOLDERS (SEE PAGES 25 AND 35)
To Service Experts Stockholders:
The Service Experts board of directors believes that the merger is
advisable, fair to you and in your best interest and recommends that you vote
FOR approval and adoption of the merger agreement and the merger.
To Lennox Stockholders:
The Lennox board of directors believes that the merger is advisable, fair
to you and in your best interest and recommends that you vote FOR the issuance
of shares of Lennox common stock in the merger.
CONFLICTS OF INTEREST (SEE PAGE 45)
When Service Experts stockholders consider the Service Experts board of
directors' recommendation that Service Experts stockholders vote in favor of the
merger agreement and the merger, Service Experts stockholders should be aware
that Service Experts executive officers and a number of other members of
management have interests in the merger that may be different from, or in
addition to, theirs.
Under the terms of their employment agreements, Alan R. Sielbeck, Ronald L.
Smith and Anthony M. Schofield, each an executive officer of Service Experts,
will receive severance payments totalling approximately $3.5 million in the
event their employment is terminated, voluntarily or by Lennox, within 24 months
of the change of control of Service Experts resulting from the merger. The
severance payment to each of these executive officers will be in a single lump
sum equal to three times his base salary plus an amount equal to three times his
average annual bonus in the previous two years. Each will also continue to
participate in the fringe benefit plans of Service Experts, or its successor,
for a period of three years following termination or, if sooner, until the date
of employment by a new employer. If any payments to an officer will subject him
to excise tax, the officer will receive an additional payment in the amount that
makes him whole for liability related to the excise tax.
In the merger agreement, Lennox has agreed to nominate and recommend an
individual proposed by Service Experts and acceptable to Lennox who is currently
a member of the Service Experts board of directors for election to a three-year
term on the Lennox board of directors.
2
<PAGE> 11
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 29 AND 38)
In deciding to approve the merger, each board of directors considered the
opinion of its financial advisors. The Service Experts board of directors
received an opinion from each of SunTrust Equitable Securities Corporation and
Wasserstein Perella & Co., Inc. that, as of the date the merger agreement was
entered into, the exchange ratio was fair from a financial point of view to the
stockholders of Service Experts. Lennox's board of directors received an opinion
from Warburg Dillon Read LLC that, as of the date the merger agreement was
entered into, the exchange ratio was fair from a financial point of view to
Lennox. These opinions are attached as Annex E, Annex F and Annex G to this
joint proxy statement/ prospectus. We encourage you to review these opinions.
THE TERMS OF THE MERGER AGREEMENT (SEE PAGE 101)
We have attached the merger agreement as Annex A to this joint proxy
statement/prospectus. We encourage you to review the merger agreement as it is
the legal document that governs the merger.
We propose a merger in which a subsidiary of Lennox will merge into Service
Experts, with Service Experts being the surviving company. As a result of the
merger, Service Experts will become a wholly-owned subsidiary of Lennox.
The merger will occur shortly after the satisfaction of all conditions to
the completion of the merger. We currently expect that the merger will occur
during the first quarter of 2000.
WHAT STOCKHOLDERS WILL RECEIVE (SEE PAGE 101)
Service Experts
As a result of the merger, Service Experts stockholders will receive 0.67
of a share of Lennox common stock for each share of Service Experts common
stock.
No fractional shares will be issued. Instead, fractional shares will be
aggregated and sold in the open market by the exchange agent on behalf of the
stockholders. The stockholders will receive the proceeds from the sale of the
fractional shares.
Example: If you currently own 100 shares of Service Experts common stock,
then after the merger you will be entitled to receive 67 shares of Lennox common
stock. If you currently own 50 shares of Service Experts common stock, then
after the merger you will be entitled to receive 33 shares of Lennox common
stock and a check for the proceeds from the sale of one-half of a share of
Lennox common stock.
SERVICE EXPERTS STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
UNTIL INSTRUCTED TO DO SO AFTER THE MERGER IS COMPLETED.
Lennox
Shares of Lennox common stock held by Lennox stockholders before the merger
will continue to remain outstanding.
NO APPRAISAL RIGHTS (SEE PAGE 46)
The owners of shares of Service Experts common stock and shares of Lennox
common stock do not have any right to an appraisal of the value of their shares
in connection with the merger.
TAX CONSEQUENCES OF THE MERGER (SEE PAGE 43)
We expect that the merger will qualify as a tax-free reorganization and
that Service Experts stockholders will not recognize any gain or loss upon the
conversion of shares of Service Experts common stock into shares of Lennox
common stock, except for any gain or loss recognized in connection with cash
received for a fractional share of Lennox common stock.
3
<PAGE> 12
The federal income tax consequences described above may not apply to some
owners of Service Experts shares, including some types of owners specifically
referred to on page 44. Your tax consequences will depend upon your personal
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the merger to you.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 47)
The shares of both Service Experts and Lennox common stock are listed on
the New York Stock Exchange. The following table presents the closing price for
Lennox common stock and Service Experts common stock on October 26, 1999, the
last full trading day before the execution of the merger agreement was
announced, and on , , the last trading day prior to the date
of this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
LENNOX SERVICE EXPERTS
DATE COMMON STOCK COMMON STOCK
---- ------------ ---------------
<S> <C> <C>
October 26, 1999............................................ $13.25 $7.56
...........................................
</TABLE>
TREATMENT OF SERVICE EXPERTS STOCK OPTIONS, WARRANTS, RESTRICTED STOCK AND
CONVERTIBLE NOTES (SEE PAGE 102)
At the time of the merger, Lennox will assume each outstanding employee
option and each warrant to purchase shares of Service Experts common stock. In
addition, each restricted stock award granted by Service Experts will be deemed
to be a restricted stock award granted by Lennox on the same terms and
conditions. Lennox will also be bound by the conversion provisions of the notes
of Service Experts that are convertible into shares of Service Experts common
stock so that the convertible notes will instead be convertible into Lennox
common stock.
The number of shares of Lennox common stock that holders of options,
warrants, restricted stock awards and convertible notes will be entitled to
receive and the exercise price, strike price and conversion price, as the case
may be, will be adjusted by the exchange ratio.
RECORD DATE FOR STOCKHOLDERS TO VOTE AT THE SPECIAL MEETINGS (SEE PAGE 18)
Service Experts
If you are a Service Experts stockholder, you may vote at your special
meeting if you owned shares of Service Experts common stock at the close of
business on . As of the close of business on that day, shares
of Service Experts common stock were outstanding.
Lennox
If you are a Lennox stockholder, you may vote at your special meeting if
you owned shares of Lennox common stock at the close of business on
. As of the close of business on that day, shares of Lennox
common stock were outstanding.
VOTE OF STOCKHOLDERS REQUIRED (SEE PAGE 19)
For Service Experts Stockholders
Approval and adoption of the merger agreement and the merger requires the
affirmative vote of a majority of the outstanding shares of Service Experts
common stock. Service Experts stockholders will have one vote for each share of
Service Experts common stock owned on the Service Experts record date.
At the close of business on the record date, directors and executive
officers of Service Experts and their affiliates beneficially owned and were
entitled to vote approximately shares of Service Experts common stock,
which represented approximately % of the shares of Service Experts common
stock outstanding on that date. Each of those directors and executive officers
has indicated his present intention to vote, or cause to be voted, the shares of
Service Experts common stock owned by him FOR the approval and adoption of the
merger and the merger agreement.
4
<PAGE> 13
For Lennox Stockholders
Approval of the issuance of shares of Lennox common stock in the merger
requires the affirmative vote of a majority of the votes cast on the proposal,
so long as the total number of votes cast in favor of and against the proposal
represents a majority of the shares of Lennox common stock that are entitled to
vote on the Lennox record date. Lennox stockholders will have one vote for each
share of Lennox common stock owned on the Lennox record date.
At the close of business on the record date, directors and executive
officers of Lennox and their affiliates beneficially owned and were entitled to
vote approximately shares of Lennox common stock, which represented
approximately % of the shares of Lennox common stock outstanding on that date.
Each of those directors and executive officers has indicated his or her present
intention to vote, or cause to be voted, the shares of Lennox common stock owned
by him or her FOR the proposal to approve the issuance of shares of Lennox
common stock in the merger.
VOTING AGREEMENTS (SEE PAGE 115)
The executive officers of Service Experts, owning as of October 25, 1999 a
total of approximately 4.4% of outstanding Service Experts common stock, have
agreed to vote their shares of Service Experts common stock for approval and
adoption of the merger agreement and the merger. Officers and directors of
Lennox owning as of October 25, 1999 approximately 19.1% of outstanding Lennox
common stock have agreed to vote their shares of Lennox common stock for
approval of the issuance of shares of Lennox common stock in the merger.
CONDITIONS TO THE COMPLETION OF THE MERGER (SEE PAGE 110)
Our respective obligations to complete the merger are subject to a number
of conditions. These include:
- receipt of the necessary approvals by the stockholders of Service Experts
and Lennox;
- authorization for listing on the New York Stock Exchange of the shares of
Lennox common stock to be issued to the Service Experts stockholders in
the merger;
- expiration or termination of the relevant waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act;
- the absence of any injunction or similar order preventing consummation of
the merger;
- the representations and warranties of Service Experts and Lennox set
forth in the merger agreement being correct in all material respects on
the date of closing of the merger;
- the performance in all material respects of the obligations to be
performed by Service Experts and Lennox under the merger agreement; and
- the issuance of opinions by our respective attorneys that the merger will
qualify as a non-taxable reorganization for federal income tax purposes.
Lennox and Service Experts each filed notification and report forms with
the Federal Trade Commission and the Department of Justice under the
Hart-Scott-Rodino Act and the statutory waiting period is expected to end on or
about January 6, 2000.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 111)
Either Service Experts or Lennox may terminate the merger agreement if any
of the following occurs:
- we do not complete the merger by April 30, 2000;
- Service Experts stockholders do not approve the merger agreement and the
merger;
5
<PAGE> 14
- Lennox stockholders do not approve the issuance of shares of Lennox
common stock in the merger;
- a law or court order permanently prohibits the completion of the merger;
- the other company is in material breach of the representations or
warranties it made in the merger agreement or there is a material breach
by the other company of its obligations under the merger agreement, in
each case which is not cured within 30 days after receiving notice; or
- there has been a material adverse effect on the business of the other
company.
In addition, Lennox may unilaterally terminate the merger agreement if any
of the following occurs:
- the Service Experts board of directors withdraws or modifies its
recommendation of the merger; or
- the Service Experts board of directors recommends to the Service Experts
stockholders another acquisition transaction.
Service Experts may unilaterally terminate the merger agreement if it
receives a proposal for another transaction and if the Service Experts board of
directors determines that in order to satisfy its fiduciary obligations to its
stockholders it must terminate the merger agreement.
TERMINATION FEES AND EXPENSE REIMBURSEMENT (SEE PAGE 112)
Service Experts would be required to pay Lennox a termination fee of $5
million if the merger agreement is terminated for any of the following reasons:
- if Lennox terminates the merger agreement because Service Experts
materially breaches its obligations under the merger agreement and at the
time of termination there is another acquisition proposal pending for
Service Experts;
- if Lennox terminates the merger agreement because the Service Experts
board of directors withdraws or modifies its recommendation of the merger
or recommends to the Service Experts stockholders another acquisition
transaction;
- if Service Experts board of directors terminates the merger agreement in
accordance with its fiduciary duties because it receives another
acquisition proposal; or
- if Lennox terminates the merger agreement because Service Experts
materially breaches its obligations under the merger agreement and within
six months of termination Service Experts agrees to or consummates
another acquisition transaction.
In addition, Service Experts or Lennox, as applicable, will be required to
pay the other party a fee of $4 million if the merger agreement is terminated
because its required stockholder approval is not obtained and it is not
otherwise eligible to terminate the merger agreement.
STOCK OPTION AGREEMENT (SEE PAGE 113)
In connection with the merger agreement, Service Experts and Lennox entered
into a stock option agreement under which Service Experts granted to Lennox an
option to purchase approximately 19.9% of Service Experts' outstanding common
stock, at a price of $8.94 per share. The option is exercisable under the same
circumstances in which Service Experts is required to pay to Lennox the full $5
million termination fee as described above.
The stock option agreement limits the amount of profit Lennox is permitted
to receive as a result of payment of the termination fee by Service Experts and
the exercise of the option to $7 million in total. We have attached the stock
option agreement as Annex B to this joint proxy statement/prospectus.
6
<PAGE> 15
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA OF SERVICE EXPERTS
The following table presents selected consolidated financial data of
Service Experts. Service Experts was incorporated on March 27, 1996. As a result
of the adoption of Securities and Exchange Commission Staff Accounting Bulletin
No. 97 on July 31, 1996, the historical financial statements of Service Experts
for periods prior to August 21, 1996 are the combined financial statements of AC
Service & Installation Co., Inc. and Donelson Air Conditioning Company, Inc. and
eight subsequent acquisitions accounted for as poolings of interests. AC Service
and Donelson Air Conditioning were under common control prior to August 21,
1996. On August 21, 1996 and simultaneous with the closing of its initial public
offering, Service Experts acquired in separate transactions 12 HVAC replacement
and service businesses and Contractor Success Group, Inc. in exchange for shares
of Service Experts common stock and cash. AC Service and Donelson Air
Conditioning were treated as the acquiring entity in this transaction in
accordance with SEC Staff Accounting Bulletin No. 97. The operations of these
predecessor companies have been included in financial statements from the date
of acquisition. The above-mentioned acquisitions have been accounted for using
the historical cost basis of the acquired companies in accordance with SEC Staff
Accounting Bulletin No. 48. The following should be read with the consolidated
financial statements and notes of Service Experts incorporated by reference in
this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenue............................ $54,535 $59,754 $85,184 $248,110 $407,835 $293,604 $429,876
Cost of goods sold..................... 41,704 46,820 61,405 161,281 261,670 188,083 291,852
------- ------- ------- -------- -------- -------- --------
Gross margin........................... 12,831 12,934 23,779 86,829 146,165 105,521 138,024
Selling, general and administrative
expenses............................. 10,985 12,255 18,837 62,103 104,627 73,660 114,359
------- ------- ------- -------- -------- -------- --------
Income from operations................. 1,846 679 4,942 24,726 41,538 31,861 23,665
Other income (expenses)................ (214) (428) (117) 599 (2,853) (1,557) (5,678)
------- ------- ------- -------- -------- -------- --------
Income before federal and state income
taxes................................ 1,632 251 4,825 25,325 38,685 30,304 17,987
Provision for income tax
expense.............................. 325 240 1,104 9,380 15,260 12,141 8,492
------- ------- ------- -------- -------- -------- --------
Net income............................. $ 1,307 $ 11 $ 3,721 $ 15,945 $ 23,425 $ 18,163 $ 9,495
======= ======= ======= ======== ======== ======== ========
Pro Forma net income(1)................ $ 932 $ 207 $ 3,180 $ 15,315 $ 23,028 $ 17,843 $ 9,495
======= ======= ======= ======== ======== ======== ========
Net income per share:
Basic................................ $ 0.50 $ 0.00 $ 0.68 $ 1.08 $ 1.39 $ 1.09 $ 0.54
======= ======= ======= ======== ======== ======== ========
Diluted.............................. $ 0.50 $ 0.00 $ 0.67 $ 1.07 $ 1.37 $ 1.07 $ 0.53
======= ======= ======= ======== ======== ======== ========
Pro forma net income per share:
Basic................................ $ 0.36 $ 0.08 $ 0.58 $ 1.04 $ 1.36 $ 1.07 $ 0.54
======= ======= ======= ======== ======== ======== ========
Diluted.............................. $ 0.36 $ 0.08 $ 0.58 $ 1.03 $ 1.35 $ 1.05 $ 0.53
======= ======= ======= ======== ======== ======== ========
Weighted average shares outstanding:
Basic................................ 2,601 2,601 5,491 14,774 16,875 16,684 17,716
======= ======= ======= ======== ======== ======== ========
Diluted.............................. 2,601 2,601 5,520 14,992 17,068 16,922 17,932
======= ======= ======= ======== ======== ======== ========
</TABLE>
- ---------------
(1) Reflects a pro forma tax adjustment on income of AC Service and the pooled
companies previously taxed as Subchapter S corporations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------- ------- ------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 879 $ 531 $12,756 $ 35,696 $ 83,037 $ 98,808
Total assets........................... 15,638 20,697 83,398 198,210 356,555 444,412
Total debt............................. 4,887 8,899 6,928 16,579 109,172 160,827
Stockholders' equity................... 4,501 4,094 56,059 143,807 206,382 227,147
</TABLE>
7
<PAGE> 16
SELECTED HISTORICAL FINANCIAL AND OTHER DATA OF LENNOX
The following selected financial and other data of Lennox for each of the
years in the five-year period ended December 31, 1998 have been derived from its
financial statements which have been audited by Arthur Andersen LLP. The summary
financial and other data for each of the nine months ended September 30, 1998
and 1999 are derived from Lennox's unaudited financial statements which, in its
opinion, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such information. Lennox's
fiscal quarters are each comprised of 13 weeks. For convenience, the 39-week
periods ended October 3, 1998 and October 2, 1999 are referred to as the nine
months ended September 30, 1998 and 1999, respectively. Effective September 30,
1997 Lennox increased its ownership of Ets. Brancher, its European joint
venture, from 50% to 70% and, accordingly, changed its accounting method of
recognizing this investment from the equity method to the consolidation method.
You should read "Information About Lennox--Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 50 and Lennox's
financial statements and notes included elsewhere in this joint proxy
statement/prospectus for a further explanation of the financial data summarized
here.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $1,168,099 $1,306,999 $1,364,546 $1,444,442 $1,821,836 $1,364,799 $1,749,953
Cost of goods sold........... 815,511 946,881 961,696 1,005,913 1,245,623 930,464 1,199,611
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........ 352,588 360,118 402,850 438,529 576,213 434,335 550,342
Selling, general and
administrative expenses.... 273,421 285,938 298,049 326,280 461,143 331,294 422,529
Other operating expense,
net........................ 7,460 2,555 4,213 7,488 8,467 6,247 6,486
Product inspection
charge(1).................. -- -- -- 140,000 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations........ 71,707 71,625 100,588 (35,239) 106,603 96,794 121,327
Interest expense, net........ 20,830 20,615 13,417 8,515 16,184 10,903 24,193
Other........................ 836 (622) (943) 1,955 1,602 1,286 (403)
Minority interest............ -- -- -- (666) (869) (583) 212
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes...... 50,041 51,632 88,114 (45,043) 89,686 85,188 97,325
Provision (benefit) for
income taxes............... 19,286 17,480 33,388 (11,493) 37,161 35,220 39,840
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)... $ 30,755 $ 34,152 $ 54,726 $ (33,550) $ 52,525 $ 49,968 $ 57,485
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share:
Basic...................... $ 0.93 $ 1.04 $ 1.62 $ (0.99) $ 1.50 $ 1.44 $ 1.52
Diluted.................... 0.93 1.04 1.59 (0.99) 1.47 1.40 1.48
Weighted average shares
outstanding:
Basic...................... 32,938 32,899 33,693 33,924 34,914 34,775 37,910
Diluted.................... 32,994 32,964 34,386 33,924 35,739 35,567 38,788
Dividends per share.......... $ 0.20 $ 0.22 $ 0.26 $ 0.28 $ 0.32 $ 0.24 $ 0.26
OTHER DATA:
Depreciation and
amortization............... $ 32,896 $ 32,212 $ 34,149 $ 33,430 $ 43,545 $ 28,126 $ 41,825
Capital expenditures......... 36,189 26,675 31,903 34,581 52,435 30,505 53,203
Research and development
expenses................... 22,773 22,682 23,235 25,444 33,260 24,373 29,495
</TABLE>
8
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 2,980 $ 73,811 $151,877 $147,802 $ 28,389 $ 41,122
Working capital.................... 252,301 307,502 325,956 335,891 263,289 332,161
Total assets....................... 737,528 768,517 820,653 970,892 1,152,952 1,609,434
Total debt......................... 243,480 219,346 184,756 198,530 317,441 492,161
Stockholders' equity............... 286,849 315,313 361,464 325,478 376,440 587,022
</TABLE>
- ---------------
(1) Represents a pre-tax charge taken in the fourth quarter of 1997 for
estimated costs of an inspection program for Lennox's Pulse furnaces
installed from 1982 to 1990 in the United States and Canada. Lennox
initiated the inspection program because it received anecdotal reports of
accelerated corrosion of a component of these products under extreme
operating conditions. The program ended on June 30, 1999 and future expenses
associated with the program are not expected to be significant.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma financial data are derived from
the unaudited pro forma financial information included elsewhere in this joint
proxy statement/prospectus and should be read together with that data and with
the notes to that data. These selected unaudited pro forma financial data are
based upon the historical financial statements of Lennox and Service Experts.
The unaudited pro forma balance sheet as of September 30, 1999 is presented as
if the merger of Lennox and Service Experts had occurred on September 30, 1999.
The unaudited pro forma statements of operations for the year ended December 31,
1998 and the nine months ended September 30, 1999 are presented as if the merger
of Lennox and Service Experts and the initial public offering of Lennox had
occurred on January 1, 1998.
These selected unaudited pro forma financial data are for illustrative
purposes only and do not necessarily indicate the operating results or financial
position that would have been achieved had the merger of Lennox and Service
Experts and the initial public offering of Lennox been completed as of the dates
indicated or of the results that may be obtained in the future. In addition, the
data does not reflect synergies that might be achieved from combining these
operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS DATA:
Net sales................................................. $2,193,761 $2,154,510
Income from operations.................................... 149,990 146,370
Net income................................................ $ 83,061 $ 71,443
Weighted average shares outstanding
Basic.................................................. 55,202 56,473
Diluted................................................ 56,027 57,351
Net income per Lennox common share -- basic............... $ 1.50 $ 1.27
Net income per Lennox common share -- diluted............. $ 1.48 $ 1.25
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET DATA:
Total assets.............................................. $1,982,456
Long-term debt, including capital leases.................. 495,718
Stockholders' equity...................................... 727,322
</TABLE>
9
<PAGE> 18
COMPARATIVE PER SHARE DATA
The following table sets forth the earnings, book value and cash dividends
per common share for Lennox on a historical basis, for Service Experts on a
historical basis, for the combined company on a pro forma combined basis and for
the combined company on a Service Experts pro forma equivalent basis. The
information under the heading "Service Experts Pro Forma Equivalent" shows the
effect of the merger between Lennox and Service Experts from the perspective of
an owner of Service Experts common stock. The information was calculated by
multiplying the pro forma combined company information by the exchange ratio of
0.67.
The historical information of Lennox presented below should be read with
Lennox's financial statements and notes included elsewhere in this joint proxy
statement/prospectus. The historical information of Service Experts presented
below should be read with Service Experts' consolidated financial statements and
notes incorporated by reference in this joint proxy statement/prospectus. The
unaudited pro forma earnings per share and cash dividends per share have been
presented as if the merger of Lennox and Service Experts and the initial public
offering of Lennox had occurred on January 1, 1998. The unaudited pro forma book
value per share as of September 30, 1999 and December 31, 1998 has been
presented as if the merger of Lennox and Service Experts and the initial public
offering of Lennox had occurred on September 30, 1999 and December 31, 1998,
respectively. The pro forma data has been derived from the unaudited pro forma
financial information included elsewhere in this joint proxy
statement/prospectus and should be read together with that data and the notes to
that data.
The unaudited pro forma data presented below is for illustrative purposes
only and does not necessarily indicate the operating results or financial
position that would have been achieved had the merger of Lennox and Service
Experts and the initial public offering of Lennox occurred on the dates
indicated or of the results that may be obtained in the future. In addition, the
data does not reflect synergies that might be achieved from combining these
operations.
<TABLE>
<CAPTION>
SERVICE
SERVICE EXPERTS
LENNOX EXPERTS PRO FORMA PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, 1999 HISTORICAL HISTORICAL COMBINED EQUIVALENT
- ------------------------------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Earnings per share:
Basic.......................................... $ 1.52 $ 0.54 $ 1.27 $ 0.85
Diluted........................................ 1.48 0.53 1.25 0.84
Book value per share:
Basic.......................................... 15.48 12.82 12.88 8.63
Diluted........................................ 15.13 12.67 12.68 8.50
Cash dividends per share:
Basic.......................................... 0.26 -- 0.18 0.12
Diluted........................................ 0.26 -- 0.17 0.11
YEAR ENDED DECEMBER 31, 1998
Earnings per share:
Basic.......................................... $ 1.50 $ 1.39 $ 1.50 $ 1.01
Diluted........................................ 1.47 1.37 1.48 0.99
Book value per share:
Basic.......................................... 10.78 12.23 11.90 7.97
Diluted........................................ 10.53 12.09 11.72 7.85
Cash dividends per share:
Basic.......................................... 0.32 -- 0.20 0.13
Diluted........................................ 0.32 -- 0.20 0.13
</TABLE>
10
<PAGE> 19
RISK FACTORS
In addition to the other information that we have included and incorporated
by reference in this joint proxy statement/prospectus, you should carefully read
and consider the following factors in evaluating the proposals to be voted on at
your special stockholders' meeting.
RISK FACTORS RELATING TO THE MERGER
LENNOX'S FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED, AND THE MARKET PRICE OF
LENNOX COMMON STOCK MAY DECLINE FURTHER
Lennox's financial results, including earnings per share, may be adversely
affected by the following factors:
- Lennox may be unable to overcome the matters that have materially
adversely affected Service Experts' financial results in 1999, including
a decline in gross margins and the loss of focus by some field managers.
- The integration of Lennox and Service Experts may be unsuccessful. This
will happen if Lennox is unable to achieve costs savings and
profitability enhancements as fully or as quickly as Lennox expects,
which could occur if:
- Lennox is unable to quickly improve the financial performance of
unprofitable Service Experts dealers; or
- Lennox is unable to reduce infrastructure costs in the combined
company by eliminating duplicative infrastructure expenses.
- The benefits of the merger may not exceed the costs associated with the
merger, considering the dilution to Lennox's stockholders resulting from
the issuance of shares in the merger to stockholders of Service Experts.
- Lennox may experience unexpected changes in its business or operations,
or may be adversely affected by general market, industry or economic
conditions.
The market price of Lennox's common stock declined significantly after the
public announcement of the merger and the contemporaneous public announcement
that Service Experts' earnings would fall below analysts' estimates for the
third quarter of 1999. The market price of Lennox common stock could decline
further if:
- Lennox's financial results are adversely affected by the merger; or
- Lennox does not achieve the benefits of the merger as rapidly or to the
extent anticipated by financial analysts or investors.
You should read "Comparative Per Share and Market Price Information" on
page 47 and obtain current market quotations for Lennox common stock.
SERVICE EXPERTS STOCKHOLDERS WILL RECEIVE CONSIDERATION WITH A LOWER MARKET
VALUE AS THE MARKET PRICE OF LENNOX COMMON STOCK DECLINES
Because the number of shares of Lennox common stock that each share of
Service Experts common stock will be exchanged for in the merger is fixed, the
market value of these shares will depend on the market price of Lennox common
stock when the merger becomes effective. As the price of Lennox common stock
declines, the value of the consideration to be received by Service Experts
stockholders in the merger correspondingly declines. Neither Service Experts nor
Lennox has the right to terminate the merger agreement as a result of changes in
the price of Lennox common stock. You should read "Comparative Per Share and
Market Price Information" on page 47 and obtain current market quotations for
Lennox common stock.
11
<PAGE> 20
THE LIMITED LIQUIDITY OF LENNOX COMMON STOCK MAY PREVENT SERVICE EXPERTS
STOCKHOLDERS RECEIVING LENNOX COMMON STOCK IN THE MERGER FROM SELLING THEIR
SHARES PROMPTLY
Lennox has only completed its initial public offering on July 29, 1999, and
the public float and trading volume for shares of Lennox common stock is
limited, and may continue to be limited following the merger. Service Experts
stockholders who do not wish to retain their shares of Lennox common stock after
the merger may have difficulty selling their shares promptly or may receive a
lower price for their shares than they otherwise would if the public float and
trading volume for Lennox shares was larger.
THE TERMINATION FEE AND THE STOCK OPTION AGREEMENT MAY DISCOURAGE OTHER
COMPANIES FROM TRYING TO ACQUIRE SERVICE EXPERTS
In the merger agreement, Service Experts agreed to pay a termination fee to
Lennox in specified circumstances, including when a third party acquires or
seeks to acquire Service Experts. In the stock option agreement, Service Experts
granted Lennox an option to purchase a number of shares of Service Experts
common stock equal to 19.9% of the Service Experts common stock outstanding at
the time of exercise, exercisable under similar circumstances. These agreements
could discourage other companies from trying to acquire Service Experts even
though those other companies might be willing to offer greater value to Service
Experts stockholders than Lennox has offered in the merger agreement.
RISK FACTORS RELATING TO THE FAILURE TO APPROVE THE MERGER
FAILURE TO COMPLETE THE MERGER COULD MATERIALLY ADVERSELY AFFECT SERVICE EXPERTS
AND THE PRICE OF ITS COMMON STOCK
If the merger is not completed, Service Experts may be subject to a number
of material risks, including the following:
- The risk that Service Experts' relationships with manufacturers of HVAC
equipment, other than Lennox, may have been adversely affected in
expectation of the merger and those relationships may not be able to be
quickly repaired.
- A number of Service Experts employees may leave because of the
uncertainty of their future with Service Experts.
- Service Experts may not be able to successfully continue its acquisition
program because the failure to complete the merger would contribute to a
negative perception of Service Experts by potential acquisition targets.
- The market prices of Service Experts common stock may decline to the
extent that the current market prices of Service Experts common stock
reflect a market assumption that the merger will be completed.
- Costs related to the merger and, depending on the circumstances of
termination of the merger agreement, Service Experts' possible obligation
to pay Lennox a termination fee and payments under the stock option
agreement of up to $7 million, could have a material adverse effect on
Service Experts' financial condition and could lead to a default under
its bank credit agreement.
- If Service Experts were to resume its exploration of strategic
alternatives and seek another business combination, there could be no
assurances that another party would be interested or would be willing to
offer an equivalent or higher price.
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RISK FACTORS RELATING TO THE BUSINESS OF LENNOX AND SERVICE EXPERTS AS A
COMBINED COMPANY
The following risk factors assume that the merger is successfully completed
and describe the risks of the ongoing operations to the combined company.
WE MAY INCUR MATERIAL COSTS AS A RESULT OF WARRANTY AND PRODUCT LIABILITY CLAIMS
THAT WOULD NEGATIVELY IMPACT OUR PROFITABILITY
The development, manufacture, sale and use of our products, as well as the
installation and service of heating and air conditioning products, involves a
risk of warranty and product liability claims. We maintain product liability
insurance. Our product liability insurance policies have limits, however, that
if exceeded, may result in material costs that would have an adverse effect on
our future profitability. In addition, warranty claims are not covered by our
product liability insurance and there may be types of product liability claims
that are also not covered by our product liability insurance.
WE MAY NOT BE ABLE TO REALIZE OUR BUSINESS STRATEGY OF SUCCESSFULLY COMPLETING
OR OPERATING STRATEGIC ACQUISITIONS
We intend to grow in part through the acquisition of heating and air
conditioning dealers and other complementary businesses both in the United
States and internationally. This strategy will involve reviewing and potentially
reorganizing the operations, corporate infrastructure and systems and financial
controls of acquired businesses. The success of our acquisition strategy may be
limited because of unforeseen expenses, difficulties, complications and delays
encountered in connection with the expansion of our operations through
acquisitions. We may not be able to acquire or manage profitably additional
businesses or to integrate successfully any acquired businesses into our
business without substantial costs, delays or other operational or financial
difficulties. In addition, we may be required to incur additional debt or issue
equity to pay for future acquisitions.
LENNOX HAS ENTERED NEW BUSINESSES IN WHICH IT HAS LIMITED EXPERIENCE AND LENNOX
MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OR OPERATE THESE NEW BUSINESSES
With the merger and its recently initiated program of acquiring heating and
air conditioning dealers, and with Lennox's acquisitions of hearth product
manufacturers, Lennox has entered into new lines of business. Lennox cannot
assure you that it will be able to successfully manage or operate these new
businesses.
THE MERGER AND LENNOX'S DEALER ACQUISITION PROGRAM COULD LEAD TO LOSS OF SALES
FROM INDEPENDENT DEALERS AND DEALERS OWNED BY CONSOLIDATORS OR A SHORTAGE OF
PRODUCTS FOR SALE
With the merger and Lennox's recently initiated program of acquiring
heating and air conditioning dealers in the U.S. and Canada, we face the risk
that dealers owned by consolidators and independent dealers may discontinue
using our heating and air conditioning products because we are and increasingly
will be in competition with them. Through the first nine months of 1999, Lennox
sold approximately $42 million of heating and air conditioning products to
dealers owned by consolidators, excluding Service Experts, representing 2.4% of
its net sales for such period. Service Experts dealers acquire the majority of
their heating and air conditioning products from manufacturers who are
competitors of Lennox. We face the risk of not having enough heating and air
conditioning products for our dealers, and consequently having lower revenues,
if these other manufacturers discontinue selling products to our dealers because
the dealers are owned by Lennox, a competing manufacturer, and Lennox is unable
to supply these requirements or to find an alternative source of supply.
COOLER THAN NORMAL SUMMERS AND WARMER THAN NORMAL WINTERS MAY DEPRESS OUR SALES
Demand for our products and services is strongly affected by the weather.
Hotter than normal summers generate strong demand for our replacement air
conditioning and refrigeration products and colder than normal winters have the
same effect on our heating products. Conversely, cooler than normal summers and
warmer than normal winters depress our product sales. Demand for HVAC services
is generally higher during the summer and winter months. Because a high
percentage of our overhead and operating expenses is relatively fixed throughout
the year, operating earnings and net earnings tend to be lower in quarters with
lower sales.
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WE MAY NOT BE ABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE HVACR BUSINESS
Competition in our various markets could cause us to reduce our prices or
lose market share, or could negatively affect our cash flow, which could have an
adverse effect on our future financial results. Substantially all of the markets
in which we participate are highly competitive. The most significant competitive
factors we face are product reliability, product performance, service and price,
with the relative importance of these factors varying among our product lines.
In addition, our heating and air conditioning dealers face competition from
independent dealers and dealers owned by consolidators and utility companies,
some of whom may be able to provide their products or services at lower prices
than we can.
WE MAY BE ADVERSELY AFFECTED BY PROBLEMS IN THE AVAILABILITY OF OR INCREASES IN
THE PRICES OF COMPONENTS AND RAW MATERIALS
Increases in the prices of raw materials or components or problems in their
availability could depress our sales or increase the costs of our products. We
are dependent upon components purchased from third parties as well as raw
materials such as copper, aluminum and steel. We enter into contracts each year
for the supply of key components at fixed prices. However, if a key supplier is
unable or unwilling to meet our supply requirements, we could experience supply
interruptions or cost increases, either of which could have an adverse effect on
our gross profit. In addition, we regularly pre-purchase a portion of our raw
materials at a fixed price each year to hedge against price fluctuations, but a
large increase in raw materials prices could significantly increase the cost of
our products.
THE PROFITABILITY OF OUR INTERNATIONAL OPERATIONS COULD BE ADVERSELY AFFECTED BY
ECONOMIC TURMOIL, WAR OR CIVIL UNREST
Our international operations are subject to various economic, political and
other risks that are generally not present in our North American operations.
International risks include:
- instability of foreign economies and governments;
- price and currency exchange controls;
- unfavorable changes in monetary and tax policies and other regulatory
changes;
- fluctuations in the relative value of currencies;
- expropriation and nationalization of our foreign assets; and
- war and civil unrest.
We sell products in over 70 countries and have business units located in
Europe, Asia Pacific, Latin America and Mexico. Sales of our products outside of
the United States represented approximately 19.2% of our 1998 net sales. If the
merger had occurred on January 1, 1998, the pro forma percentage of our net
sales outside of the United States during 1998 would have been approximately
16%. However, we anticipate that, over time, international sales will continue
to grow as a percentage of our total sales.
OUR OPERATIONS ARE SUBJECT TO INHERENT RISKS THAT COULD RESULT IN LOSS OF LIFE
OR SEVERE DAMAGE TO OUR PROPERTIES AND THE SUSPENSION OF OPERATIONS
Our operations are subject to hazards and risks inherent in operating large
manufacturing facilities, including fires, natural disasters and explosions, all
of which can result in loss of life or severe damage to our properties and the
suspension of operations. We maintain business interruption and other types of
property insurance as protection against operating hazards. The occurrence of a
significant event not fully covered by insurance could have an adverse effect on
our profitability.
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SINCE A SIGNIFICANT PERCENTAGE OF OUR WORKFORCE IS UNIONIZED, WE FACE RISKS OF
WORK STOPPAGES AND OTHER LABOR RELATIONS PROBLEMS
We are subject to a risk of work stoppage and other labor relations matters
because a significant percentage of our workforce is unionized. As of September
30, 1999, approximately 23% of Lennox's workforce was unionized. Within the
United States, we currently have eight manufacturing facilities and five
distribution centers, along with our North American Parts Center in Des Moines,
Iowa, with collective bargaining agreements ranging from three to eight years in
length. Of our significant manufacturing facilities, the contract at our
Lynwood, California facility expires in December 1999. Outside of the United
States, we have 13 significant facilities that are represented by unions. The
agreement for our facility in Laval, Quebec expires in December 1999. If the
merger had occurred on September 30, 1999, the pro forma percentage of our
workforce that was unionized would have been approximately 17%. However, as we
expand our operations we are subject to increased unionization of our workforce.
The results of future negotiations with these unions, including the effects of
any production interruptions or labor stoppages, could have an adverse effect on
our future financial results. You should read "Information About
Lennox--Business of Lennox--Employees" on page 75 for a more complete discussion
of our collective bargaining agreements.
SKILLED LABOR SHORTAGES COULD ADVERSELY AFFECT OUR BUSINESS
The service and replacement business operated by Service Experts and Lennox
dealers requires an adequate supply of skilled labor to provide timely, high
quality service. In addition, high turnover in skilled positions may adversely
affect operating costs of the service and replacement business. Accordingly, our
ability to increase productivity and net earnings in that business segment
depends on our ability to employ the skilled laborers necessary to meet our
service requirements. We cannot assure you that we will be able to maintain the
skilled labor force necessary to operate the service and replacement business
efficiently or that our labor expenses will not increase because of a shortage
of skilled workers.
EXPOSURE TO ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
Our future profitability could be adversely affected by current or future
environmental laws. We are subject to extensive and changing federal, state and
local laws and regulations designed to protect the environment in the United
States and in other parts of the world. These laws and regulations could impose
liability for remediation costs or result in civil or criminal penalties in
cases of non-compliance. Compliance with environmental laws increases our costs
of doing business. Because these laws are subject to frequent change, we are
unable to predict the future costs resulting from environmental compliance.
The United States and other countries have established programs for
limiting the production, importation and use of certain ozone depleting
chemicals, including refrigerants used by us in most of our air conditioning and
refrigeration products. Some categories of these refrigerants have been banned
completely and others are currently scheduled to be phased out in the United
States by the year 2030. The United States is under pressure from the
international environmental community to accelerate the current 2030 deadline.
In Europe, this phaseout may occur even sooner. The industry's failure to find
suitable replacement refrigerants for substances that have been or will be
banned or the acceleration of any phase out schedules for these substances by
governments could have an adverse effect on our future financial results. You
should read "Information About Lennox--Business of Lennox--Regulation" on page
78 for a more complete discussion of environmental regulations that affect our
business.
WE MAY BE ADVERSELY IMPACTED BY THE YEAR 2000 AND THE CONVERSION OF OUR
MANAGEMENT INFORMATION SYSTEMS TO DISTRIBUTED PROCESSING SYSTEMS
Year 2000 problems might require us to incur unanticipated expenses or
experience interruptions of operations that could have an adverse effect on our
future sales and profitability. In 1996, Lennox began converting all of its
major domestic management information systems from mainframe systems to
distributed processing systems. In order to avoid disruption to our operations,
Lennox has conducted the
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conversion on a phased basis. At this time, all of Lennox's major domestic
operations are supported by distributed processing. In addition, we have and
will continue to make investments in our computer systems and applications in an
effort to ensure that they are Year 2000 compliant. However, we may experience
interruptions of operations because of problems in implementing distributed
processing or because of Year 2000 problems within our company or any acquired
business, including Service Experts. Our suppliers or customers might experience
Year 2000 problems. You should read "Information About Lennox--Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance" on page 62 and "Information About Lennox--Business of
Lennox--Information Systems" on page 74 for a more complete discussion of our
systems upgrade and Year 2000 compliance initiative.
THE NORRIS FAMILY WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER OUR COMPANY
The ability of the Norris family to exercise significant control over
Lennox may discourage, delay or prevent a takeover attempt that a stockholder
might consider in his or her best interest and that might result in a
stockholder receiving a premium for his or her common stock. Following the
merger, approximately 110 descendants of, or persons otherwise related to, D.W.
Norris, one of our original owners, will collectively control over approximately
55% of the outstanding shares of our common stock. Accordingly, if the Norris
family were to act together, it would have the ability to:
- control the vote of most matters submitted to our stockholders, including
any merger, consolidation or sale of all or substantially all of our
assets;
- elect all of the members of our board of directors;
- prevent or cause a change in control of our company; and
- decide whether to issue additional common stock or other securities or
declare dividends.
RISK FACTORS RELATING TO LENNOX'S GOVERNING DOCUMENTS AND STOCK PRICE
Stockholders of Service Experts should consider the following risks in
connection with their investment in and ownership of Lennox common stock.
ANTI-TAKEOVER PROVISIONS IN LENNOX'S GOVERNING DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF LENNOX
Lennox's governing documents contain provisions that may have the effect of
delaying, deterring or preventing a change in control. A stockholder might
consider a change in control in his or her best interest because he or she might
receive a premium for his or her Lennox common stock. Examples of these
provisions include:
- a vote of more than 80% of the outstanding voting stock is required for
stockholders to amend specified provisions of the governing documents;
- Lennox's board of directors is divided into three classes, each serving
staggered three-year terms;
- members of Lennox's board of directors may be removed only for cause and
only upon the affirmative vote of at least 80% of the outstanding voting
stock; and
- a vote of more than 80% of the outstanding voting stock is required to
approve specified transactions between Lennox and any person or group
that owns at least 10% of our voting stock.
Lennox's board of directors has the ability, without stockholder action, to
issue shares of preferred stock that could, depending on their terms, delay,
discourage or prevent a change in control of Lennox. In addition, the Delaware
General Corporation Law, under which Lennox is incorporated, contains provisions
that impose restrictions on business combinations such as mergers between Lennox
and a holder of 15% or more of its voting stock. You should read "Description of
Lennox Capital Stock" on page 124 for a more complete description of these
provisions.
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THE PRICE OF LENNOX COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY AND YOU COULD LOSE
ALL OR PART OF YOUR INVESTMENT AS A RESULT
The price of Lennox common stock may be affected by a number of factors,
including:
- actual or anticipated fluctuations in Lennox's operating results;
- changes in expectations as to Lennox's future financial performance or
changes in financial estimates of securities analysts;
- announcements of new products or technological innovations; and
- the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of Lennox common stock, regardless of Lennox's actual operating
performance.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document, including information incorporated by reference, contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
statements relate to expectations concerning matters that are not historical
facts. In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors." These factors may cause our actual results to differ materially
from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results.
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THE SPECIAL MEETINGS
DATE, TIMES AND PLACES
LENNOX
Lennox's special meeting will be held at Richardson,
Texas, at 10:00 a.m., local time, on , .
SERVICE EXPERTS
Service Experts' special meeting will be held at
Brentwood, Tennessee, at 10:00 a.m., local time, on , .
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
LENNOX
At Lennox's special meeting, Lennox stockholders will be asked to vote to
approve the issuance of shares of Lennox common stock in the merger. Lennox
stockholders will also consider and vote upon any other matter properly brought
before the Lennox special meeting or any adjournment or postponement of the
meeting.
SERVICE EXPERTS
At Service Experts' special meeting, Service Experts stockholders will be
asked to vote to approve and adopt the merger agreement and the merger. You
should read "The Merger Transaction" on page 22 and "Material Terms of the
Merger Agreement" on page 101. Service Experts stockholders will also consider
and vote upon any other matter properly brought before the Service Experts
special meeting or any adjournment or postponement of the meeting.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
LENNOX
Owners of record of shares of Lennox common stock at the close of business
on , , the record date for Lennox's special meeting, are
entitled to receive notice of and to vote at Lennox's special meeting. On the
record date, approximately shares of Lennox common stock were issued and
outstanding.
A quorum of Lennox stockholders is necessary to have a valid meeting of
stockholders. A majority of the shares of Lennox common stock issued and
outstanding and entitled to vote on the record date must be represented in
person or by proxy at Lennox's special meeting in order for a quorum to be
established. Abstentions and broker "non-votes" count as present for
establishing a quorum. Shares held by Lennox in its treasury or by any
majority-owned subsidiary or Lennox do not count toward a quorum. A broker non-
vote occurs on an item when a broker is not permitted to vote on that item
without instruction from the beneficial owner of the shares and no instruction
is given. We expect, in the event that a quorum is not present at Lennox's
special meeting, the meeting will be adjourned or postponed to solicit
additional proxies.
Owners of record of shares of Lennox common stock on the record date are
each entitled to one vote per share on each matter to be considered at Lennox's
special meeting.
SERVICE EXPERTS
Owners of record of shares of Service Experts common stock at the close of
business on , , the record date for Service Experts' special
meeting, are entitled to receive notice of and to vote at Service Experts'
special meeting. On the record date, approximately shares of Service
Experts common stock were issued and outstanding.
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A quorum of Service Experts stockholders is necessary to have a valid
meeting of stockholders. A majority of the shares of Service Experts common
stock issued and outstanding and entitled to vote on the record date must be
represented in person or by proxy at Service Experts' special meeting in order
for a quorum to be established. Abstentions and broker "non-votes" count as
present for establishing a quorum. Shares held by Service Experts in its
treasury or by any majority-owned subsidiary of Service Experts do not count
toward a quorum. A broker non-vote occurs on an item when a broker is not
permitted to vote on that item without instructions from the beneficial owner of
the shares and no instruction is given. We expect, in the event that a quorum is
not present at Service Experts' special meeting, the meeting will be adjourned
or postponed to solicit additional proxies.
Owners of record of shares of Service Experts common stock on the record
date are each entitled to one vote per share on the approval and adoption of the
merger agreement and the merger.
VOTES REQUIRED
LENNOX
The approval of the issuance of shares of Lennox common stock in the merger
requires the affirmative vote of a majority of the shares of Lennox common stock
for which votes are cast at the special meeting in connection with the vote on
the issuance of Lennox common stock, so long as the total number of votes cast
in favor of and against the proposal represents a majority of the shares of
Lennox common stock that are entitled to vote on the record date. An abstention
or a broker "non-vote" will have no effect on the vote. THE LENNOX BOARD URGES
THE LENNOX STOCKHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
THE BOARD OF DIRECTORS OF LENNOX HAS UNANIMOUSLY DETERMINED THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF LENNOX AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ISSUANCE OF SHARES OF LENNOX
COMMON STOCK IN THE MERGER.
SERVICE EXPERTS
The approval and adoption of the merger agreement and the merger requires
the affirmative vote of a majority of the shares of Service Experts common stock
outstanding on the record date. An abstention or a broker "non-vote" will have
the same effect as a vote against the proposal to approve and adopt the merger
agreement and the merger. ACCORDINGLY, THE SERVICE EXPERTS BOARD URGES THE
SERVICE EXPERTS STOCKHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY
AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
THE BOARD OF DIRECTORS OF SERVICE EXPERTS HAS UNANIMOUSLY DETERMINED THE
MERGER IS ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF SERVICE EXPERTS AND
ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
SHARE OWNERSHIP OF MANAGEMENT
LENNOX
At the close of business on the record date, directors and executive
officers of Lennox and their affiliates beneficially owned and were entitled to
vote approximately shares of Lennox common stock, which represented
approximately % of the shares of Lennox common stock outstanding on that date.
Each of those directors and executive officers has indicated his or her present
intention to vote, or cause to be voted, the shares of Lennox common stock owned
by him or her FOR the proposal to approve the issuance of shares of Lennox
common stock in the merger. A number of directors and executive officers of
Lennox owning as of October 25, 1999 an aggregate of 8,565,879 shares of Lennox
common stock, which represents approximately 19.1% of the issued and outstanding
shares of Lennox common stock, have executed shareholder agreements in which
such individuals have agreed to vote their shares in favor of the proposal to
approve the issuance of shares of Lennox common stock in the merger. You should
read
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"Voting Agreements--Lennox Shareholder Agreements" on page 115 for a discussion
of the terms of these shareholder agreements.
SERVICE EXPERTS
At the close of business on the record date, directors and executive
officers of Service Experts and their affiliates beneficially owned and were
entitled to vote approximately shares of Service Experts common stock,
which represented approximately % of the shares of Service Experts common
stock outstanding on that date. Each of those directors and executive officers
has indicated his present intention to vote, or cause to be voted, the shares of
Service Experts common stock owned by him FOR the approval and adoption of the
merger and the merger agreement. The executive officers of Service Experts
owning as of October 25, 1999 an aggregate of 808,551 shares of Service Experts
common stock, which represents approximately 4.4% of the issued and outstanding
shares of Service Experts common stock, have executed shareholder agreements in
which such individuals have agreed to vote their shares in favor of the approval
and adoption of the merger and the merger agreement. You should read "Voting
Agreements--Service Experts Shareholder Agreements" on page 115 for a discussion
of the terms of these shareholder agreements.
SHARES HELD IN STREET NAME; VOTING OF PROXIES
SHARES HELD IN "STREET NAME"
Under the applicable rules of the New York Stock Exchange, brokers who hold
shares in street names for customers who are the beneficial owners of those
shares are prohibited from giving a proxy to vote those customers' shares with
respect to the proposals to be voted on at the special meetings in the absence
of specific instructions from the customer. Broker "non-votes" are those shares
held by a broker that are not voted because the customer has not provided
instructions to the broker.
SUBMITTING PROXIES
Lennox and Service Experts stockholders may vote their shares by attending
their respective special meeting and voting their shares in person at the
meeting, or by completing the enclosed proxy card, signing and dating it and
mailing it in the enclosed postage pre-paid envelope. If a proxy card is signed
by a stockholder and returned without specific voting instructions, the shares
represented by the proxy will be voted FOR the proposal presented at Lennox's
special meeting or FOR the proposal presented at Service Experts' special
meeting, as applicable.
Lennox and Service Experts stockholders whose shares are held in "street
name" (i.e., in the name of a broker, bank or other record holder) must either
direct the record holder of their shares as to how to vote their shares or
obtain a proxy from the record holder to vote at their respective special
meeting.
REVOKING PROXIES
Lennox and Service Experts stockholders of record may revoke their proxies
at any time prior to the time their proxies are voted at Lennox's special
meeting or Service Experts' special meeting, respectively. Proxies may be
revoked by written notice, including by telegram or telecopy, to the Secretary
of Lennox or Service Experts, as applicable, by a later-dated proxy signed and
returned by mail or by attending Lennox's special meeting or Service Experts'
special meeting, as applicable, and by voting in person. Attendance at Lennox's
special meeting or Service Experts' special meeting will not in and of itself
constitute a revocation of a proxy. Any written notice of a revocation of a
proxy must be sent so as to be delivered before the taking of the vote at the
applicable special meeting as follows:
FOR LENNOX STOCKHOLDERS, TO:
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, TX 75080
Telecopy: (972) 497-6660
Attention: Carl E. Edwards, Jr.
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FOR SERVICE EXPERTS STOCKHOLDERS, TO:
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Telecopy: (615) 221-4131
Attention: Anthony M. Schofield
Lennox stockholders who require assistance in changing or revoking a proxy
should call . Service Experts stockholders who require assistance
in changing or revoking a proxy should call .
OTHER BUSINESS; ADJOURNMENTS
We are not aware of any other business to be acted upon at either meeting.
If, however, other matters are properly brought before either meeting, or any
adjourned meeting, your proxies will have discretion to act on those matters or
to adjourn the meeting, according to their best judgment.
Adjournments of the special meetings may be made for the purpose of, among
other things, soliciting additional proxies. Any adjournment may be made at any
time by stockholders representing a majority of the votes present in person or
by proxy at the applicable special meeting, whether or not a quorum exists,
without further notice other than by an announcement made at the meeting.
Neither company currently intends to seek an adjournment of its special meeting.
PROXY SOLICITATION
The cost of solicitation of proxies will be paid by Lennox for solicitation
of proxies from Lennox stockholders and by Service Experts for solicitation of
proxies from Service Experts stockholders. In addition to solicitation by mail,
the directors, officers and employees of Lennox and Service Experts may also
solicit proxies from stockholders by telephone, telecopy, telegram, electronic
mail or in person. We will also make arrangements with brokerage houses and
other custodians, nominees and fiduciaries to send the proxy materials to
beneficial owners. Upon request, we will reimburse those brokerage houses and
custodians for their reasonable expenses in so doing.
Service Experts has retained Morrow & Co., Inc. to aid in the solicitation
of proxies and to verify certain records related to the solicitations. Morrow &
Co. will receive a base fee of $7,500 as compensation for its services and
reimbursement for its related out-of-pocket expenses.
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARDS. THE EXCHANGE
AGENT WILL SEND TRANSMITTAL FORMS WITH INSTRUCTIONS FOR THE SURRENDER OF
CERTIFICATES REPRESENTING SHARES OF SERVICE EXPERTS COMMON STOCK TO FORMER
SERVICE EXPERTS STOCKHOLDERS SHORTLY AFTER THE MERGER IS COMPLETED.
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THE MERGER TRANSACTION
We are furnishing this joint proxy statement/prospectus to stockholders of
Service Experts and Lennox in connection with the solicitation of proxies by the
board of directors of Service Experts and the board of directors of Lennox for
use at the special meetings of their respective stockholders.
SERVICE EXPERTS PROPOSAL
At Service Experts' special meeting, Service Experts stockholders will be
asked to vote to approve and adopt the merger agreement and the merger. The
merger will not be completed until the merger agreement and the merger are
approved and adopted by Service Experts stockholders.
LENNOX PROPOSAL
At Lennox's special meeting, Lennox stockholders will be asked to vote to
approve the issuance of shares of Lennox common stock in the merger. The merger
will not be completed until the issuance of shares of Lennox common stock in the
merger is approved and adopted by Lennox stockholders.
BACKGROUND OF THE MERGER
Beginning in the spring of 1998 and continuing through October 1999,
representatives of Service Experts engaged in discussions with a number of
companies that had expressed possible interest in pursuing a strategic business
combination with Service Experts. Service Experts formally retained SunTrust
Equitable Securities Corporation ("SunTrust Equitable") and Wasserstein Perella
& Co., Inc. ("WP&Co.") as its financial advisors in November, 1998. Throughout
the process, the Service Experts board of directors was kept apprised of the
status of all discussions and was advised by outside legal counsel (Cleary,
Gottlieb, Steen & Hamilton and Waller Lansden Dortch & Davis, A Professional
Limited Liability Company) regarding the directors' fiduciary duties.
During the spring, summer and fall of 1998, representatives of Service
Experts, including Service Experts' senior management, held extensive
discussions with representatives of a major corporation regarding a possible
stock-for-stock business combination transaction at prices that, based on the
then market-prices of each company's stock, represented a premium for Service
Experts common stock, but no agreement was reached. You should read "Comparative
Per Share and Market Price Information" on page 47 for historical information on
Service Experts' stock price.
In October 1998, James L. Mishler, the president of Lennox Retail Inc.,
contacted Alan R. Sielbeck, chairman, president and chief executive officer of
Service Experts, and expressed interest in exploring a possible business
relationship, including a business combination. On October 13, 1998, Mr.
Sielbeck and Anthony M. Schofield, chief financial officer, secretary and
treasurer of Service Experts, had preliminary discussions on such topics with
representatives of Lennox and met with John W. Norris, Jr., president and chief
executive officer of Lennox, Mr. Mishler, Robert E. Schjerven, president and
chief operating officer of Lennox Industries Inc., and Clyde W. Wyant, executive
vice president, chief financial officer and treasurer of Lennox, in Dallas,
Texas. These discussions did not involve an exchange of non-public information
or result in any proposals or negotiations. There was no further contact between
representatives of Lennox and Service Experts regarding a possible business
combination until October 1999.
On February 23, 1999, Service Experts issued a press release announcing
results for the fourth quarter of 1998, and announcing its reduced expectation
for 1999 net income.
In the spring of 1999, Service Experts engaged in a series of discussions
and meetings with four potential acquirors (including the corporation with which
there had been extensive conversations in 1998). At the Service Experts board's
suggestion, two additional companies were contacted to determine their potential
interest in a business combination. The four interested companies executed
confidentiality agreements, conducted at least some diligence and were invited
to participate in a formal bidding process and to perform further diligence on
Service Experts.
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On June 21, 1999, Service Experts received proposals from two of these
companies, both involving complex structures and a combination of cash and stock
consideration at prices in excess of the then-market price for Service Experts
common stock. Both proposals were highly conditional, including substantial
conditions relating to financing (including, in one case, equity financing) and
additional due diligence. Both proposals were also conditioned on having an
exclusive period of negotiations. The next day the board of directors of Service
Experts met with Service Experts' financial and legal advisors to review the
terms of the conditional bids and the status of discussions with other potential
bidders. The board authorized Service Experts' management and advisors to
continue discussions for a short period on an exclusive basis with one of the
companies. When that period of exclusivity expired without an agreement being
reached or the bidder having eliminated major conditions to its proposal,
Service Experts continued discussions with both companies.
On July 19, 1999, Service Experts issued a press release announcing its
anticipated second quarter earnings, which were significantly below analysts'
estimates, and that it was in the process of evaluating its strategic
alternatives, which could include a business combination. The release noted that
Service Experts was being assisted by SunTrust Equitable and WP&Co., and had
held preliminary discussions with several parties, but that no transaction was
imminent.
Following the July 19 press release, Service Experts' representatives
continued to hold discussions with the two companies that had made conditional
bids on June 21, 1999, and with other interested parties that had either
contacted Service Experts or had been solicited by Service Experts or its
financial advisors at Service Experts' request.
After July 19, 1999, Service Experts or its financial advisors had contacts
with 28 additional potential acquirors (including Lennox commencing in October
1999) and had further discussions with four of the companies with which there
had been discussions in the spring of 1999. Fifteen of these 28 additional
potential acquirors executed confidentiality agreements providing for the
exchange of information and five parties (including Lennox) held meetings with
Service Experts' management and conducted due diligence. Each of the parties
that conducted diligence entered into confidentiality agreements that (except in
the case of Lennox and one other party) contained standstill provisions that
prohibited, for specified periods, the other party from acquiring more than 5%
of Service Experts common stock, except pursuant to a transaction approved by
the Service Experts board.
In October 1999, senior management of Lennox began to consider a possible
tax-free stock-for-stock business combination with Service Experts. Lennox had
completed its initial public offering in July 1999 and its common stock was now
publicly traded and could be more easily used as acquisition currency. In
addition, Service Experts common stock price had declined to a level where the
relative prices of the two companies' stocks were attractive to Lennox. Service
Experts was informed by Lennox that the acquisition of Service Experts would be
consistent with and accelerate Lennox's growth strategy of expanding its ability
to distribute products directly to consumers by acquiring heating and air
conditioning dealers in the United States and Canada. Representatives of Lennox
also indicated that the vast majority of the Service Experts' dealers were of
the same type of high quality dealers that Lennox had been acquiring in its
dealer acquisition program. Lennox retained Warburg Dillon Read LLC ("WDR") as
its financial advisor in early October 1999. For more information about Lennox's
reasons for the merger, you should read "--Lennox's Reasons for the Merger;
Recommendation of Lennox Board" on page 35.
On October 11, 1999, the board of directors of Lennox met to discuss making
a proposal to acquire Service Experts. The board of directors of Lennox
authorized Lennox management to make a proposal to acquire Service Experts and
to negotiate the terms of a transaction to be presented to the Lennox board.
On October 12, 1999, a representative of WDR contacted representatives of
WP&Co. about a potential business combination involving Lennox and Service
Experts. Later in the day on October 12, 1999, Lennox made a written proposal to
Service Experts to effect a merger in which each outstanding share of Service
Experts common stock would be exchanged for 0.67 of a share of Lennox common
stock. That proposal was subject to completion of diligence, approval of
definitive agreements by the Lennox board of directors and execution of mutually
acceptable agreements.
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In response to this proposal, Mr. Sielbeck met with Messrs. Norris and
Wyant in Dallas, Texas on October 14, 1999 to discuss the possibility of such a
business combination, including timing and price, as well as Service Experts'
business. Mr. Sielbeck indicated that Service Experts had scheduled a board
meeting on October 22, 1999 and that the board would consider definitive offers
at that meeting.
On October 15, 1999, Lennox and Service Experts entered into a
confidentiality agreement.
On October 18 and 19, 1999, members of Lennox management reviewed certain
documents and had discussions with senior management of Service Experts
regarding the business and operations of Service Experts. As a result of this
diligence, Lennox management became concerned about the financial performance of
Service Experts.
On October 19, 1999, Lennox and Service Experts entered into an additional
confidentiality agreement regarding the provision of information by Lennox to
Service Experts and, on October 21, 1999, SunTrust Equitable and WP&Co. met with
senior management of Lennox to discuss the business and operations of Lennox and
to conduct other diligence.
On October 20 and 21, 1999, Lennox management discussed with its financial
and legal advisors the financial and operational situation at Service Experts.
These discussions included the considerations involved in making an offer for
Service Experts prior to the release by Service Experts of earnings for the
third quarter, then scheduled for November 2, 1999, including concerns that
further delay in agreeing to a combination with Service Experts could result in
a further deterioration of Service Experts business, the loss of key service
center general managers, and the possible submission of a competing bid at the
Service Experts board of directors October 22 meeting. On October 21, 1999
Lennox made a written proposal to effect a merger at the same 0.67 exchange
ratio, subject to certain remaining diligence, a mutually acceptable merger
agreement and appropriate deal protection devices, and Lennox board approval.
Lennox also furnished a draft merger agreement and option agreement, and
requested that Service Experts deal exclusively with Lennox.
On October 22, 1999, the Service Experts board met to discuss the Lennox
proposal and the status of discussions with those other companies that had
continued to conduct due diligence. Service Experts' financial advisors and
outside legal counsel participated in the board meeting. Members of senior
management and the board of directors discussed Service Experts' prospects on a
stand alone basis and its initiatives to stabilize and revitalize the company.
Service Experts' financial advisors made a presentation of their financial
analyses of the possible transactions. The board authorized Service Experts'
management and its advisors to continue, on its behalf, negotiations with
representatives of Lennox and to continue discussions with one of the other
potential acquirors that had previously indicated potential interest in a cash
acquisition at $10-$12 per share but had subsequently indicated that it did not
expect to be in a position to make a binding offer until it had done further
diligence, Service Experts' third quarter results had been determined and
announced, the market for Service Experts common stock had an opportunity to
react to the announcement and it had obtained the approval of its board of
directors.
During the period from October 23 through October 25, 1999, representatives
of Service Experts and representatives of Lennox negotiated the merger
agreement, the option agreement and the shareholder voting agreements, and held
further discussions with respect to the proposed exchange ratio, but no change
to the proposed exchange ratio resulted. During this period Service Experts
requested that Lennox execute a standstill agreement and Lennox requested that
Service Experts agree to deal exclusively with Lennox, but no such agreements
were entered into. In addition, representatives of senior management of Lennox
and its financial advisors also continued to conduct due diligence during this
period with respect to the business and financial performance of Service Experts
in meetings with Service Experts executive officers and financial advisors.
During this period Service Experts' representatives informed the other
potential acquiror of the status and timetable of Service Experts' discussions
with Lennox and continued to furnish the other potential acquiror with
additional information it requested and encouraged its representatives to make
an offer by October 26.
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Representatives of Lennox and Service Experts substantially completed
negotiations of the proposed agreements on October 25, 1999, subject to approval
by the respective boards of directors. The board of directors of Lennox held a
meeting on the evening of October 25, 1999 to consider the terms of the proposed
acquisition with Service Experts. A draft of the merger agreement and the stock
option agreement and a written summary of these agreements had been furnished to
the members of the board in advance. At the meeting, the legal counsel of Lennox
(Baker & Botts, L.L.P.) summarized the terms and conditions of the merger
agreement, the option agreement, the voting agreements and related matters. Carl
E. Edwards, Jr., the Executive Vice President, General Counsel and Secretary of
Lennox, advised the board of their fiduciary duties. Senior management of Lennox
reviewed the strategic rationale for the acquisition of Service Experts and
reviewed with the board of directors of Lennox the financial situation of
Service Experts and concerns they had that waiting to enter into a transaction
with Service Experts would result in less opportunity for Lennox. The board
discussed the timing of the proposed transaction and the impact of entering into
a business combination before a possible announcement by Service Experts that it
might miss analysts estimates for the third quarter versus waiting to a later
time. Representatives of WDR reviewed its financial analysis and rendered its
oral opinion, subsequently confirmed in writing, that, as of October 25, 1999,
the exchange ratio was fair from a financial point of view to Lennox. You should
read "--Opinion of Lennox Financial Advisor" on page 38 for a discussion of this
opinion, and the analyses, assumptions, limitations and qualifications on which
it is based. After discussion, the board of directors of Lennox resolved that
the merger was in the best interests of Lennox stockholders and approved the
merger, the merger agreement, the option agreement and the shareholder voting
agreements by unanimous vote.
Service Experts' board held a telephonic meeting on the evening of October
26, 1999 to consider the terms of the proposed merger with Lennox. A draft of
the merger agreement and a written summary of the agreement had been furnished
to the board in advance. At the meeting, Service Experts' legal counsel
summarized the terms and conditions of the merger agreement, the option
agreement, the shareholder voting agreements and related matters.
Representatives of WP&Co. and of SunTrust Equitable presented their financial
analyses of the proposed merger and rendered separate oral opinions,
subsequently confirmed in writing, that, as of October 26, 1999, the exchange
ratio was fair to Service Experts' stockholders from a financial point of view.
After discussion, the Service Experts' board resolved that the merger was
advisable and in the best interests of the Service Experts stockholders and
unanimously approved the merger, the merger agreement and the option agreement.
You should read "--Opinion of Service Experts Financial Advisors" on page 29 for
a discussion of this opinion, and the analyses, assumptions, limitations and
qualifications on which it is based.
Following the Service Experts board meeting, Service Experts and Lennox
executed the merger agreement and the option agreement, and the parties to the
shareholder voting agreements executed those agreements. Before the opening of
the financial markets on October 27, each company issued a press release
describing the proposed merger. Lennox also issued a press release containing
its third quarter results. Service Experts' press release regarding the merger
also stated that Service Experts estimated that its third quarter earnings were
expected to be $0.10 to $0.15 per diluted share before a one-time charge of
approximately $0.05 per diluted share relating to severance expenses. On
November 2, 1999, Service Experts announced that its third quarter earnings were
$0.13 per diluted share before a one-time charge of $0.05 per diluted share. For
further information about Service Experts' third quarter financial results, you
should read Service Experts' Quarterly Report on Form 10-Q. For more information
on where you can find this report, you should read "Where You Can Find More
Information" on page 130.
SERVICE EXPERTS' REASONS FOR THE MERGER; RECOMMENDATION OF SERVICE EXPERTS BOARD
The board of directors of Service Experts, after careful consideration, has
unanimously approved the merger agreement and the merger. The board of directors
of Service Experts believes that the merger is advisable, fair to and in the
best interests of, Service Experts and its stockholders, and unanimously
recommends that its stockholders vote FOR approval of the merger agreement and
the merger.
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THE BOARD OF DIRECTORS OF SERVICE EXPERTS BASED ITS APPROVAL OF THE MERGER
AND ITS DETERMINATION THAT THE MERGER AGREEMENT IS ADVISABLE, FAIR TO AND IN THE
BEST INTERESTS OF SERVICE EXPERTS AND ITS STOCKHOLDERS UPON A NUMBER OF MATERIAL
FACTORS, INCLUDING THE FOLLOWING:
- the process conducted by Service Experts and its financial advisors at
the request of Service Experts and on its behalf to explore strategic
alternatives, which process had not led to any other definitive offers or
any assurances that any offers with higher values would be received in
the near future;
- the risks and uncertainties that Service Experts would likely face as an
independent publicly-traded company in attempting to stabilize and
revitalize the company in view of the difficulties that had materially
adversely affected financial results during 1999, including risks and
uncertainties relating to a continuing decline in gross margins, the loss
or potential loss of focus by some field managers, the possible need to
negotiate covenant waivers from Service Experts' bank lenders, the likely
inability of Service Experts to make acquisitions until the other
difficulties were satisfactorily resolved and its stock price stabilized,
and changes in the competitive environment;
- the views of senior management that the merger was the most viable
alternative for addressing such risks and uncertainties and was in the
best long-term interest of the business;
- the financial analyses presented by SunTrust Equitable and WP&Co. at
board meetings on October 22 and October 26, 1999, and the oral fairness
opinions of both firms, subsequently confirmed by each firm in writing,
to the effect that, as of October 26, 1999, and based upon and subject to
the various considerations set forth in their opinions, the exchange
ratio was fair from a financial point of view to the stockholders of
Service Experts (a copy of the opinions of SunTrust Equitable and WP&Co.,
setting forth the assumptions made and limitations on the reviews
undertaken in rendering such opinions, are attached as Annex E and Annex
F, respectively, to this joint proxy statement/prospectus and are
described under "--Opinion of Service Experts Financial Advisors" on page
29);
- the financial condition, results of operations and business of Service
Experts and of Lennox, on both an historical and a prospective basis,
including management's estimates of Service Experts' results of
operations for the third quarter, which were significantly below
analysts' published estimates, and the possible impact of those results
on the market price for Service Experts' stock;
- the historical market prices and recent trading patterns of Service
Experts common stock and Lennox common stock, and market prices, recent
trading patterns and financial data relating to other companies engaged
in businesses similar to Service Experts or Lennox;
- the board of director's belief, at the time of approving the merger
agreement, that the merger would provide an opportunity for Service
Experts stockholders to receive a premium over recent market prices of
Service Experts common stock and over the price at which Service Experts
stock might trade following an announcement of its third quarter results,
which were expected to be significantly below analysts' published
estimates, based on the exchange ratio negotiated with Lennox and on
Lennox's stock prices at and prior to that time. Although Lennox's and
Service Experts' stock prices fell following the announcement of the
proposed merger and Service Experts' concurrent announcement of its
estimated third quarter financial results, the board of directors of
Service Experts continues to believe that the exchange ratio reflects a
premium for Service Experts' stock as compared to the price at which the
stock would be trading in the absence of the merger. In this regard,
while both SunTrust Equitable and WP&Co. specifically informed the
Service Experts' board that they did not and could not predict the price
at which any security would trade in the future, each firm did inform the
Service Experts' board at the October 26 board meeting that they believed
it would be reasonable to conclude that, absent the proposed merger,
trading prices for Service Experts common stock would be materially
adversely affected by Service Experts publication of its third quarter
1999 earnings, which were expected to be significantly below the
analysts' consensus estimate;
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- the presentation by legal counsel with respect to the terms of the
proposed agreements, and the board of director's belief, after
consultation with its legal and financial advisors, that the terms of the
merger agreement, including the conditions to each party's obligation to
close the merger and the ability of Service Experts to consider
alternative business combinations proposed by a third party under certain
circumstances (and to terminate the merger agreement to accept such
proposal upon the payment of a $5 million fee and the triggering of
Lennox's option on 19.9% of the number of Service Experts shares
outstanding on October 26, 1999), are generally consistent with
agreements for similar transactions;
- the ability of Service Experts stockholders after the merger to continue
to participate as investors in the business conducted by Service Experts
and to participate in the Lennox business and to benefit from the
potential appreciation in the value of Lennox common stock;
- the qualification of the merger as a reorganization for United States
federal income tax purposes, which will permit Service Experts
stockholders to receive Lennox common stock in a tax-free exchange; and
- current industry, economic and market conditions.
The Service Experts Board also considered, and balanced against the
potential benefits of the merger, a number of potentially negative factors,
including the following:
- the awareness that Lennox had only completed its initial public offering
on July 29, 1999, and that the public float and trading volume for shares
of Lennox common stock was very limited, and would continue to be limited
following the merger even though the merger would increase such float and
would likely increase trading volume;
- the risk that the issuance of Lennox common stock in the merger would not
be approved by Lennox's stockholders, despite the agreements by officers
and directors holding, as of October 25, 1999, approximately 19.1% of the
outstanding shares to vote in favor of this proposal and Lennox's
obligation to pay Service Experts a $4 million termination fee under
certain circumstances if Lennox stockholders did not approve this
proposal;
- the risk that the merger would not be consummated for some other reason;
- the possibility that the market value of Lennox common stock might
decrease, including as a result of the publication of Service Experts'
third quarter 1999 earnings, which were expected to be significantly
below the analysts' consensus estimates;
- the possibility that certain provisions of the merger agreement,
including among others the "no solicitation" and termination fee payment
provisions of the merger agreement, and the option agreement, might have
the effect of discouraging other persons potentially interested in
merging with or acquiring Service Experts from pursuing such an
opportunity, or reduce the price they would otherwise be willing to pay.
The board of directors of Service Experts was advised that Lennox was not
prepared to enter into the merger agreement without such provisions;
- the risk that HVAC manufacturers other than Lennox would, because of the
proposed merger, discontinue selling products to Service Experts' dealers
because Service Experts' dealers would be owned by Lennox, a competing
manufacturer, which, if Lennox is unable to supply these requirements or
find an alternative source of supply, would result in lower revenues;
- the risks that uncertainties relating to the merger, and limitations in
the merger agreement on how Service Experts can manage its business prior
to the completion of the merger, could adversely affect Service Experts'
business, despite provisions in or pursuant to the agreement intended to
reduce that risk (including provisions permitting Service Experts to
continue to hire and pay bonuses consistent with past practice to general
managers and certain other employees and to enter into retention
agreements with selected support center employees who might otherwise be
likely to leave prior to consummation of the merger);
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- certain prospective financial data prepared by Service Experts'
management for the years 2000-2003 which showed prospective results of
operations that were more optimistic than those included in the
prospective financial information relied upon by SunTrust Equitable and
WP&Co. in such firms' financial analyses of the merger. This additional
financial information was prepared by Service Experts management in early
September 1999 for internal purposes only and before the difficulties
that Service Experts would have to overcome to revitalize its business
were known. Accordingly, and in light of other factors, including Service
Experts' failure to meet prior forecasts, the Service Experts board of
directors, based on the advice of management, advised each of SunTrust
Equitable and WP&Co., to use the less optimistic forecast, which Service
Experts' management had delivered on October 22, 1999 (as modified on
October 25, 1999) to Service Experts' bank lenders for the purpose of
obtaining possible amendments to the covenants applicable to Service
Experts' bank debt. The financial analyses performed by SunTrust
Equitable and WP&Co. were, with the express consent of the Service
Experts' board of directors, based solely on the less optimistic
forecast. SunTrust Equitable and WP&Co. did, however, perform a
discounted cash flow analysis of Service Experts based on the more
optimistic forecasts, which showed, depending upon which discount rates
and terminal value assumptions were utilized, implied valuations of
$10.93 to $14.24 per share, compared to $7.74 to $10.04 per Service
Experts common share based on the less optimistic forecasts relied upon
by SunTrust Equitable and WP&Co. in connection with their analyses and
opinions. The analysis based on the more optimistic forecasts was
prepared for the information of the Service Experts board of directors
only and was not a part of the firms' financial analyses in connection
with their opinions. You should read "--Opinion of Service Experts
Financial Advisors" on page 29 for a discussion of these opinions, and
the analyses, assumptions, limitations and qualifications on which they
are based.
- the substantial management time and effort that would be required to
consummate the merger and integrate the operations of the two companies;
and
- other matters described under "Risk Factors" on page 11.
After detailed consideration of these factors, the board of directors of
Service Experts concluded that the potential benefits of the merger outweighed
these considerations and determined that the merger was fair to and in the best
interests of Service Experts and its stockholders.
The discussion above of the information and factors considered by the board
of directors of Service Experts is not intended to be exhaustive, but does
include the material factors considered by the board of directors. In view of
the wide variety of factors considered in connection with its evaluation of the
merger and the complexity of these matters, the board of directors of Service
Experts did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. Rather, the board of directors
of Service Experts made its determination based on the totality of the
information it considered. In considering the factors described above,
individual members of the board of directors of Service Experts may have given
different weight to different factors. The members of the board of directors
were aware that, as described under "--Conflicts of Interest" on page 45,
directors and officers of Service Experts have interests in the merger in
addition to, or different from, their interests as Service Experts stockholders,
and the board of directors considered this in determining to recommend the
transaction.
BASED ON THE FACTORS OUTLINED ABOVE, THE BOARD OF DIRECTORS OF SERVICE
EXPERTS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS ADVISABLE, FAIR TO AND IN
THE BEST INTERESTS OF SERVICE EXPERTS AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AND THE
MERGER AGREEMENT.
Service Experts and Lennox cannot, however, assure you that any of the
expected results, efficiencies, opportunities or other benefits described in
this section will be achieved as a result of the merger agreement and the
merger.
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OPINION OF SERVICE EXPERTS FINANCIAL ADVISORS
ROLE OF FINANCIAL ADVISORS
Service Experts retained SunTrust Equitable and WP&Co. to act as its
financial advisors in connection with its evaluation of possible business
combinations. On October 26, 1999, each of SunTrust Equitable and WP&Co.
delivered its oral opinion to the Service Experts board of directors, which
opinions were subsequently confirmed in writing, to the effect that as of such
date and subject to the various assumptions and limitations set forth in the
opinions, the exchange ratio provided for in the merger agreement was fair to
Service Experts stockholders from a financial point of view. Service Experts and
Lennox determined the amount and the form of consideration through arm's-length
negotiations and did not base this determination on any recommendation by
SunTrust Equitable or WP&Co., although SunTrust Equitable and WP&Co. provided
advice to Service Experts from time to time during the course of the
negotiations and the Service Experts board of directors did take into
consideration the opinions of SunTrust Equitable and WP&Co., among other
factors, in making its determination to recommend adoption of the merger
agreement and its approval by Service Experts stockholders. Service Experts
engaged SunTrust Equitable and WP&Co. solely as advisors to Service Experts and
its board of directors, and SunTrust Equitable and WP&Co. did not act as
advisors to or agents of any other person.
OPINIONS OF SUNTRUST EQUITABLE AND WP&CO.
The full texts of the SunTrust Equitable and WP&Co. opinions, dated October
26, 1999, which set forth, among other things, the opinion expressed, the
assumptions made, procedures followed, matters considered and limitations on the
review undertaken by SunTrust Equitable and WP&Co. in rendering their opinions,
are attached to this document as Annexes E and F, respectively. Service Experts
stockholders are strongly encouraged to read the SunTrust Equitable and WP&Co.
opinions in their entirety. The discussion of the SunTrust Equitable and WP&Co.
opinions that follows is qualified in its entirety by reference to the full text
of SunTrust Equitable and WP&Co. opinions attached as Annexes E and F,
respectively.
MATTERS REVIEWED
In arriving at their opinions, SunTrust Equitable and WP&Co. reviewed and
analyzed, among other things, the following:
- a draft of the merger agreement which, for purposes of the opinions, was
assumed not to differ in any material respect from the final form
thereof;
- publicly available information concerning Service Experts and Lennox that
SunTrust Equitable and WP&Co. believed to be relevant to their analyses;
- certain financial and operating information with respect to the business,
operations and prospects of Service Experts and Lennox furnished to it by
Service Experts and Lennox, as the case may be;
- historical market prices and trading activity for Service Experts and
Lennox common stock and a comparison of that trading history with those
publicly traded companies selected as being relevant or comparable in
certain respects to Service Experts or Lennox, as the case may be;
- comparisons of the historical financial results and present financial
condition of Service Experts and Lennox with those of other publicly
traded companies selected as being relevant or comparable in certain
respects to Service Experts and Lennox;
- the financial terms of certain other acquisitions and business
combination transactions recently effected that were considered
comparable to the merger or otherwise relevant; and
- the anticipated pro forma financial effects of the merger on the combined
company.
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SunTrust Equitable and WP&Co. also held discussions with the managements
and representatives of Service Experts and Lennox concerning:
- the historic and current operations of Service Experts and Lennox;
- their respective financial condition and prospects;
- prospective financial information relating to Service Experts and Lennox;
and
- strategic and operating benefits anticipated from the merger.
ASSUMPTIONS AND LIMITATIONS
In their review and analyses and in rendering their opinions, SunTrust
Equitable and WP&Co., with Service Experts' consent, assumed and relied without
independent verification upon various matters, including:
- the accuracy and completeness of all historical financial and other
historical information that was publicly available or furnished to
SunTrust Equitable and WP&Co. by or on behalf of Service Experts and
Lennox;
- the accuracy and completeness of forecasts relating to Service Experts
included in the prospective financial information that had been
identified to those firms as representing the best currently available
judgments and estimates of Service Experts' management as to Service
Experts' current business and future prospects and which SunTrust
Equitable and WP&Co. assumed were reasonably prepared in good faith and
that the prospective results reflected therein would be realized in the
amounts and at the times reflected in these forecasts (SunTrust Equitable
and WP&Co. expressed no opinion in their opinions, and express no opinion
in this document or otherwise, with respect to any of the prospective
financial information or the assumptions upon which it or any portion of
it is based);
- that obtaining regulatory and other approvals and third-party consents
required for consummation of the merger would not have an adverse impact
on Service Experts or Lennox or on the anticipated benefits of the
transaction;
- that the merger would qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code; and
- that the transactions described in the merger agreement would be
consummated without waiver or modification of any of the material terms
or conditions contained in the merger agreement.
Among the limitations on the opinions are:
- the SunTrust Equitable and WP&Co. opinions are for the use and benefit of
the Service Experts board of directors and were rendered to the Service
Experts board of directors in connection with its consideration of the
merger;
- the opinions of SunTrust Equitable and WP&Co. do not address the merits
of the underlying business decision by Service Experts to effect the
merger, the effect on Service Experts of the merger or the prospective
prices or trading ranges at which shares of Lennox common stock will
trade up to or following the merger;
- the SunTrust Equitable and WP&Co. opinions are directed only to the
fairness, from a financial point of view, of the exchange ratio to the
holders of Service Experts common stock and do not constitute a
recommendation to any Service Experts stockholder as to how such
stockholder should vote with respect to the merger and should not be
relied upon by any holder in respect of those matters;
- neither SunTrust Equitable nor WP&Co. reviewed any of the books and
records of Service Experts or Lennox; and
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- neither SunTrust Equitable nor WP&Co. conducted a physical inspection of
the properties or facilities of Service Experts or Lennox or obtained or
made an independent valuation or appraisal of the assets or liabilities
(contingent or otherwise) of Service Experts or Lennox, and no valuation
or appraisal of that type was provided to them.
The SunTrust Equitable and WP&Co. opinions are necessarily based upon
economic and market conditions and other circumstances existing as of the date
of the opinions and, accordingly, do not address the fairness of the exchange
ratio to the Service Experts stockholders as of any other date. Additionally,
forecasts of future results of operations prepared by Service Experts and Lennox
and relied on by SunTrust Equitable and WP&Co. may not be indicative of future
results, which may be significantly more or less favorable than suggested by the
forecasts, because the forecasts contain assumptions as to industry performance,
general business and economic conditions and other matters beyond the control of
Service Experts and Lennox. You should read "--Service Experts' Reasons for the
Merger; Recommendation of Service Experts Board" on page 25 for a discussion of
certain prospective financial information relating to Service Experts that is
different from the prospective financial information relied upon by SunTrust
Equitable and WP&Co. in advising Service Experts and which indicated better
prospective results of operations than those indicated in the prospective
financial information upon which SunTrust Equitable and WP&Co. relied.
ANALYSES PERFORMED
In arriving at their opinions, SunTrust Equitable and WP&Co. performed
quantitative analyses and considered a number of factors. The preparation of
opinions as to the fairness of a transaction from a financial point of view
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analyses and the applications of those methods to
the particular circumstances. In arriving at their opinions, SunTrust Equitable
and WP&Co. did not attribute any relative weight to any analysis or factor
considered but rather made qualitative judgments as to the significance and
relevance of each analysis and factor.
The following is a summary of the material financial analyses performed by
SunTrust Equitable and WP&Co. in connection with providing their opinions to the
Service Experts board of directors. Certain of the summaries of financial
analyses include information presented in tabular form. In order to fully
understand the financial analyses used by SunTrust Equitable and WP&Co., the
tables must be read together with the text accompanying the tables. The tables
alone do not constitute a complete description of the financial analyses. In
particular, you should note that in applying the various valuation methods to
the particular circumstances of Service Experts, Lennox and the merger, SunTrust
Equitable and WP&Co. made qualitative judgments as to the significance and
relevance of each analysis and factor. In addition, SunTrust Equitable and
WP&Co. made numerous assumptions with respect to industry performance, general
business and economic conditions, and other matters, many of which are beyond
the control of Service Experts and Lennox. Accordingly, the analyses listed in
the tables and described below must be considered as a whole. Considering any
portion of the analyses and the factors considered, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying the SunTrust Equitable and WP&Co. opinions.
Purchase Price Ratio Analysis. SunTrust Equitable and WP&Co. analyzed the
enterprise value multiples and equity value multiples of key operating
statistics for a range of transaction values. Assuming the $13.25 per share
closing price of Lennox on October 26, 1999, the last trading day prior to
announcement of the merger, the implied equity value to be received by holders
of Service Experts common stock was $8.8775 per share. Based on this implied
equity value per share, SunTrust Equitable and WP&Co. calculated the ratio of
implied equity value to net income as well as the ratio of enterprise value to
revenue, earnings before interest and taxes ("EBIT") and earnings before
interest, taxes, depreciation and amortization ("EBITDA") derived from Service
Experts' financial projections. Service Experts' enterprise value was obtained
by adding the implied equity value resulting from the merger and short- and
long-term debt, and subtracting cash and cash equivalents.
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<PAGE> 40
Based upon the purchase price ratio analysis, the implied equity value per
share yielded a premium to market price of 17.4% over the closing price of
Service Experts shares of $7.5625 on October 26, 1999, the last trading day
prior to announcement of the merger, and a 42.0% premium over the closing price
of Service Experts shares of $6.25 on October 21, 1999, the last trading day
prior to the Service Experts board of directors meeting to consider the Lennox
proposal.
The following table presents the ratios of implied equity value to
forecasted 1999 and forecasted 2000 net income and the ratios of enterprise
value to forecasted 1999 and 2000 revenue, EBITDA and EBIT.
<TABLE>
<S> <C>
EQUITY VALUE MULTIPLES:*
1999E Net income............................................ 13.9x
2000E Net income............................................ 11.3x
ENTERPRISE VALUE MULTIPLES:*
1999E Revenue............................................... 0.53x
2000E Revenue............................................... 0.50x
1999E EBITDA................................................ 6.3x
2000E EBITDA................................................ 5.3x
1999E EBIT.................................................. 9.4x
2000E EBIT.................................................. 7.6x
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Lennox common stock traded at levels lower than the $13.25 per share
amounts assumed in the foregoing analysis immediately following the announcement
of the merger and the price for Lennox common stock will likely continue to
fluctuate in the future. You should read "Comparative Per Share and Market Price
Information" on page 47.
Summary Contribution Analysis. A contribution analysis measures the
relative contribution of Service Experts and Lennox to the combined company for
various measures such as revenues, operating income, pretax income and net
income. For this analysis, SunTrust Equitable and WP&Co. analyzed the respective
financial contributions of Service Experts and Lennox to the combined companies'
historical results for calendar year 1998 (which did not take into account an
acquisition which was completed in the third fiscal quarter of 1998 and which
was accounted for as a pooling of interest) and forecasted results for calendar
1999 through 2001 reflected in the prospective financial information for Service
Experts and analyst estimates for Lennox for calendar 1999 through 2001.
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<PAGE> 41
The following table presents the relative contribution of Service Experts
to the combined company's historical 1998 and forecasted 1999, 2000 and 2001
revenues, operating income, pretax income and net income contained in the
prospective financial information described above, excluding estimated operating
synergies and strategic benefits which the management of Service Experts
believed would result from the merger.
<TABLE>
<CAPTION>
SERVICE EXPERTS LENNOX
--------------- ------
<S> <C> <C>
Ownership implied by exchange ratio......................... 21.3% 78.7%
CONTRIBUTION OF:*
1998 Revenue................................................ 18.1% 81.9%
1999E Revenue............................................... 19.7% 80.3%
2000E Revenue............................................... 17.9% 82.1%
2001E Revenue............................................... 19.6% 80.4%
1998 Operating income....................................... 27.6% 72.4%
1999E Operating income...................................... 14.1% 85.9%
2000E Operating income...................................... 13.8% 86.2%
2001E Operating income...................................... 14.0% 86.0%
1998 Pretax income.......................................... 29.7% 70.3%
1999E Pretax income......................................... 15.2% 84.8%
2000E Pretax income......................................... 14.0% 86.0%
2001E Pretax income......................................... 14.1% 85.9%
1998 Net income............................................. 30.3% 69.7%
1999E Net income............................................ 13.9% 86.1%
2000E Net income............................................ 12.7% 87.3%
2001E Net income............................................ 12.7% 87.3%
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Pro Forma Merger Analysis. SunTrust Equitable and WP&Co. analyzed the pro
forma impact of the merger on Lennox's earnings per share based on Service
Experts' forecasts through the end of calendar 2000 and analyst estimates for
Lennox for calendar 2000 and 2001. Using these forecasts and excluding any
estimated synergies, SunTrust Equitable and WP&Co. noted that in their opinion
the merger would not be accretive to Lennox's earnings in 2000 or 2001, but
that, if the estimated synergies were included, the merger would be accretive to
Lennox's fully diluted earnings in 2000 and 2001, in each case compared to
Lennox on a stand-alone basis.
Analysis of Comparable Acquisitions. SunTrust Equitable and WP&Co. reviewed
publicly available information to determine the purchase prices and multiples
paid in certain other transactions recently effected involving target companies
which were similar to Service Experts in terms of business mix, product
portfolio and/or markets served that the firms considered comparable. SunTrust
Equitable and WP&Co. calculated the enterprise value of such comparable
transactions and applied it to certain historical financial criteria of the
acquired business, including the revenue run rate for the trailing 12-month
period. The following table presents the high and low revenue run rate multiples
for the selected transactions:
<TABLE>
<CAPTION>
COMPARABLE
ACQUISITIONS
-------------
LOW HIGH SERVICE EXPERTS
----- ----- ---------------
<S> <C> <C> <C>
ENTERPRISE VALUE TO:
Trailing 12 month revenue run rate...................... 0.41x 0.58x 0.50x
</TABLE>
Because the circumstances surrounding each of the transactions analyzed
were so diverse and because of the inherent differences in the businesses,
operations, financial condition and prospects of Service
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<PAGE> 42
Experts and the companies included in the comparable transactions group,
SunTrust Equitable and WP&Co. informed the Service Experts board of directors
that the firms believed that a purely quantitative comparable transaction
analysis would not be meaningful in the context of the merger. Instead, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning financial and operating characteristics
of Service Experts and other factors that could affect the public trading values
of the companies to which they are being compared.
Comparable Companies Trading Analysis. SunTrust Equitable and WP&Co.
reviewed the stock market trading multiples and certain other financial
characteristics for selected companies that SunTrust Equitable and WP&Co. deemed
comparable to Service Experts. Using publicly available information, SunTrust
Equitable and WP&Co. calculated and analyzed the common equity market value
multiples of certain historical and projected financial criteria, such as net
income, and the enterprise value multiples of certain historical financial
criteria, such as run rate revenues and EBITDA, as of October 25, 1999, the last
trading day prior to the Service Experts board of directors meeting to consider
the potential merger.
The following table presents the preceding 12-month EBITDA multiple and
calendar year estimated 1999 and 2000 EBITDA and net income multiples.
<TABLE>
<CAPTION>
COMPARABLE
COMPANIES
-----------
LOW HIGH SERVICE EXPERTS
---- ---- ---------------
<S> <C> <C> <C>
EQUITY VALUE MULTIPLES:*
1999E EPS................................................. 6.5x 8.3x 13.9x
2000E EPS................................................. 5.2x 6.9x 11.3x
ENTERPRISE VALUE MULTIPLES:*
Trailing 12 months EBITDA................................. 5.1x 6.9x 6.1x
1999E EBITDA.............................................. 4.4x 5.3x 6.3x
2000E EBITDA.............................................. 3.3x 4.3x 5.3x
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Because of the inherent differences between the businesses, operations,
financial condition and prospects of Service Experts and the businesses,
operations, financial condition and prospects of the companies included in the
comparable company group, SunTrust Equitable and WP&Co. informed the Service
Experts board of directors that the firms believe it is inappropriate to, and
therefore they did not, rely solely on the quantitative results of the
comparable company analysis. Accordingly, SunTrust Equitable and WP&Co. also
made qualitative judgments concerning differences between the financial and
operating characteristics of Service Experts and companies in the comparable
company group that would affect the public trading values of Service Experts and
such comparable companies.
Discounted Cash Flow Analysis. SunTrust Equitable and WP&Co. also performed
a discounted cash flow analysis to generate an estimate of the net present value
of the projected after-tax unlevered free cash flows based upon Service Experts'
financial forecast. For this purpose, after-tax unlevered free cash flows are
defined as operating cash flow available after working capital, capital spending
including acquisitions, tax and other operating requirements. Utilizing the
financial forecasts furnished by Service Experts, SunTrust Equitable and WP&Co.
calculated a range of present values for Service Experts on a stand alone basis,
excluding any estimated synergies, of $7.74 to $10.04 per share, using a range
of after-tax discount rates from 12.0% to 16.0% and an estimated midpoint
terminal value EBITDA multiple in 2003 of 6.0x.
Other. In addition to the analyses outlined above, SunTrust Equitable and
WP&Co. conducted such other financial studies, analyses and investigations and
considered such other factors they deemed appropriate for purposes of their
opinions.
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<PAGE> 43
GENERAL INFORMATION
No company or transaction used in the foregoing analyses is identical to
Service Experts, Lennox or the transactions contemplated by the merger
agreement. The analyses described above were performed solely as a part of the
analytical process utilized by SunTrust Equitable and WP&Co. in connection with
their analysis of the transaction and do not purport to be appraisals or to
reflect the prices at which a company may enter into a business combination or
sale transaction.
SunTrust Equitable and WP&Co. are investment banking and advisory firms
and, as part of their investment banking activities, are regularly engaged in
the valuation of businesses and their securities in connection with: mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements, and
valuations for corporate and other purposes. The Service Experts board of
directors selected SunTrust Equitable and WP&Co. as its financial advisors in
connection with the proposed merger because SunTrust Equitable and WP&Co. are
internationally recognized investment banking firms and members of SunTrust
Equitable and WP&Co. have substantial experience in transactions similar to the
merger and the valuation of companies.
As compensation for their services in connection with the merger, Service
Experts has agreed to pay to each of SunTrust Equitable and WP&Co. customary
fees for providing financial advisory services in connection with the merger,
including providing the opinion described above. A significant portion of such
transaction fees are contingent upon the consummation of the merger. In
addition, Service Experts has agreed, among other things, to reimburse each of
SunTrust Equitable and WP&Co. for the expenses reasonably incurred in connection
with their engagement (including counsel fees and expenses) and to indemnify
each of SunTrust Equitable and WP&Co. and certain related parties from certain
liabilities that may arise out of their engagement by Service Experts, which may
include certain liabilities under the federal securities laws.
Apart from its work in connection with the merger, SunTrust Equitable has
performed investment banking and financial advisory services for Service Experts
from time to time for which SunTrust Equitable has received customary
compensation, including providing investment banking and financial advisory
services in connection with the formation and structuring of Service Experts for
which SunTrust Equitable received warrants to purchase 82,391 shares of Service
Experts common stock with an exercise price of $13.00 per share. In addition,
SunTrust Bank, Nashville, N.A., an affiliate of SunTrust Equitable, performs
commercial banking services for Service Experts and receives customary fees for
such services, and is currently Service Experts' largest commercial lender. In
the ordinary course of business, SunTrust Equitable and WP&Co. trade the equity
and debt securities of Service Experts for their own accounts and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in these securities.
LENNOX'S REASONS FOR THE MERGER; RECOMMENDATION OF LENNOX BOARD
The board of directors of Lennox, after careful consideration, has
unanimously approved the merger and the merger agreement. The board of directors
of Lennox believes that the terms of the merger are fair to, and in the best
interests of, Lennox and its stockholders, and unanimously recommends that its
stockholders vote FOR approval of the issuance of Lennox common stock in the
merger.
THE BOARD OF DIRECTORS OF LENNOX BASED ITS APPROVAL OF THE MERGER, ITS
DETERMINATION THAT THE MERGER AGREEMENT IS ADVISABLE AND IN THE BEST INTEREST OF
LENNOX AND ITS STOCKHOLDERS AND ITS RECOMMENDATION THAT STOCKHOLDERS OF LENNOX
APPROVE THE ISSUANCE OF LENNOX COMMON STOCK IN THE MERGER UPON A NUMBER OF
MATERIAL FACTORS, INCLUDING THE FOLLOWING:
- the business rationale for the merger, including the strategic fit
between Lennox and Service Experts and the belief that the combination of
Lennox and Service Experts has the potential to enhance stockholder
value;
- the compatibility of the business strategy of Service Experts with
Lennox's retail strategy regarding market segments served and business
approach;
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<PAGE> 44
- the ability of Lennox as a result of the merger to accelerate its
existing dealer growth strategy in the United States by adding
approximately 120 dealers to its existing dealer network;
- the compatibility of the geographic locations and market segments served
of the dealer base of Lennox and Service Experts, including that:
- Service Experts' dealers are located in highly desirable metropolitan
areas and Service Experts has an active market presence in areas in
which Lennox would like to expand, such as Florida, California and
Texas;
- Service Experts has a complimentary market presence in the Northeast;
- Lennox has acquired a high quality dealer base in Canada, especially
in Ontario, where Service Experts has no presence; and
- Service Experts dealers are primarily residential replacement and
service dealers (as opposed to commercial or new construction
dealers);
- the ability of Lennox as a result of the merger to utilize Service
Experts' information technology systems, and access Service Experts'
proprietary training and management products;
- Lennox's belief that the acquisition of Service Experts can result in
significant cost savings and enhanced profitability for the combined
company. The cost savings and enhanced profitability for the combined
company may be achieved as a result of the following:
- Lennox expects that there are short-term cost savings that can be
realized through eliminating duplicative fees associated with being a
public company, refinancing Service Experts' existing debt,
eliminating duplicate corporate and executive salaries and reducing
goodwill expense;
- Lennox believes that the merger will improve the productivity of
Service Experts' service center general managers (almost all of whom
are former independent owners and Service Experts stockholders) by
removing the uncertainty of who will acquire Service Experts,
exchanging in the merger the dealers' Service Experts stock for more
desirable Lennox stock and creating a bonus program for dealers; and
- Accordingly, Lennox expects that the merger will be accretive to
earnings in 2000 in the range of $0.04 to $0.06 per share of Lennox
common stock. Lennox's ability to achieve these results depends on
various factors, a number of which will be beyond its control. Lennox
can make no assurances if or to the extent that the merger will be
accretive to earnings per share or the effect the merger will have on
Lennox's results of operations. You should read "Special Note
Regarding Forward-Looking Statements" on page 17.
- the improved ability of Lennox as a result of the merger to respond to
competitive challenges from other companies purchasing HVAC dealers and
consolidating them into larger enterprises.
- the fact that the vast majority of the Service Experts dealers were the
kind and caliber of dealer that Lennox would have acquired if Lennox had
been acquiring dealers at the time Service Experts began its acquisition
program, and that the price to be paid by Lennox in the merger is
consistent with the price paid for its other dealer acquisitions based on
a percentage of revenues and as a multiple of adjusted EBITDA;
- the timing of the transaction, including the fact that waiting to make an
offer (including after Service Experts' earnings announcement for the
third quarter of 1999) could have resulted in further business
deterioration, the loss of key service center managers and competition
from a third party bid;
- the financial analysis presented by WDR at a board meeting on October 25,
1999, and the oral fairness opinion (subsequently confirmed in writing)
to the effect that, as of October 25, 1999 and subject to certain matters
stated in its opinion, the exchange ratio was fair to Lennox from a
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<PAGE> 45
financial point of view (a copy of WDR's opinion, setting forth the assumptions
made and limitations on the review undertaken in rendering such opinion, is
attached as Annex G to this joint proxy statement/prospectus and is described
under "--Opinion of Lennox Financial Advisor" on page 38);
- the financial condition, results of operations and business of Lennox and
Service Experts, on both a historical and a prospective basis, and
current industry, economic and market conditions;
- the historical market prices and recent trading patterns of Lennox common
stock and Service Experts common stock;
- the qualification of the merger as a reorganization for United States
federal income tax purposes;
- the accounting treatment of the merger, including the expected reduction
in goodwill on the financial statements of Service Experts as a result of
the merger;
- the presentations of Lennox's management and Lennox's financial, legal
and other advisors regarding the merger;
- the terms and conditions of the merger agreement, the stock option
agreement and the shareholder voting agreements, including, among other
things, (1) the exchange ratio, (2) the limitations upon the interim
business operations of Service Experts, (3) the conditions to the
consummation of the merger and (4) the circumstances under which the
merger agreement could be terminated, including the termination fees
associated with such termination;
- the interests of the officers and directors of Service Experts in the
merger, including the matters described under "-- Conflicts of Interest"
on page 45; and
- the impact of the merger on the customers and employees of Lennox and of
Service Experts.
The board of directors of Lennox also considered, and balanced against the
potential benefits of the merger, a number of potentially negative factors,
including the following:
- the challenges and costs of integrating the businesses of the two
companies and the attendant risks of not achieving the expected operating
efficiencies or improvements in earnings;
- the need to improve the decline in gross margins and profitability of
Service Experts' operations, including the need to refocus and retain the
services of service center managers;
- the fact that the exchange ratio is fixed and that adverse announcements
by Service Experts, including the announcement that Service Experts'
earnings for the third quarter of 1999 were expected to be significantly
below analysts' estimates, could negatively affect the price of Lennox
common stock;
- the substantial management time and effort that would be required to
consummate the merger and integrate the operations of the two companies;
- the potentially adverse reaction of Lennox's independent dealers to the
merger;
- the fact that Service Experts is considered a "consolidator" and
consolidators in virtually all businesses are viewed negatively by
institutional investors and market analysts and such negative perception
could be attributed to Lennox after the merger;
- the risk that the merger would not be consummated for some reason; and
- other matters described under "Risk Factors" on page 11.
After detailed consideration of these factors, the board of directors of
Lennox concluded that the potential benefits of the merger outweighed these
considerations and determined that the merger was fair to and in the best
interests of Lennox and its stockholders.
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<PAGE> 46
The foregoing discussion of the information and factors considered by the
board of directors of Lennox is not intended to be exhaustive but includes the
material factors considered by the board of directors of Lennox. In view of the
wide variety of factors considered in connection with its evaluation of the
merger and the complexity of these matters, the board of directors of Lennox did
not find it practicable to and did not quantify, rank or otherwise assign
relative weights to the specific factors considered in reaching its
determination. Rather, the Lennox board of directors made its determination
based upon the totality of the information it considered. In considering the
factors described above, individual members of the board of directors of Lennox
may have given different weight to different factors.
BASED ON THE FACTORS OUTLINED ABOVE, THE BOARD OF DIRECTORS OF LENNOX
UNANIMOUSLY RECOMMENDS THAT LENNOX STOCKHOLDERS VOTE FOR THE ISSUANCE OF SHARES
OF LENNOX COMMON STOCK IN THE MERGER.
OPINION OF LENNOX FINANCIAL ADVISOR
ROLE OF FINANCIAL ADVISOR
The board of directors of Lennox retained WDR to act as its financial
advisor and to provide an opinion as to whether the exchange ratio is fair, from
a financial point of view, to Lennox.
On October 25, 1999, WDR delivered its oral opinion to the board of
directors of Lennox, which opinion was subsequently confirmed in a written
opinion dated October 25, 1999, to the effect that, and based upon and subject
to the assumptions, limitations and qualifications set forth therein, as of the
date of the opinion, the exchange ratio was fair, from a financial point of
view, to Lennox.
OPINION OF WDR
The full text of the written opinion of WDR, dated October 25, 1999, which
sets forth assumptions made, matters considered and limitations on the review
undertaken in connection with the opinion, is attached hereto as Annex G to this
joint proxy statement/prospectus and is incorporated herein by reference.
The WDR opinion:
- is directed to the Lennox board of directors;
- is directed only to the exchange ratio; and
- does not constitute a recommendation to any Lennox stockholder as to how
the stockholder should vote at any special meeting of the Lennox
stockholders called to approve the issuance of Lennox common stock in the
merger.
MATTERS REVIEWED
In arriving at its opinion, WDR has, among other things:
- reviewed certain publicly available business and historical financial
information relating to Lennox and Service Experts;
- reviewed certain internal financial information and other data relating
to the business and financial prospects of Lennox, including estimates
and financial forecasts prepared by management of Lennox, that were
provided to WDR by Lennox and not publicly available;
- reviewed certain internal financial information and other data relating
to the business and financial prospects of Service Experts, including
estimates and financial forecasts prepared by and subjected to due
diligence by the management of Lennox and Service Experts and not
publicly available. In evaluating Service Experts' estimated future
financial performance, Lennox and WDR were provided with two sets of
projections. The first set of projections was prepared by the management
of Service Experts for its own internal use. The second set was
subsequently prepared by Service
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<PAGE> 47
Experts in connection with a proposed covenant amendment to Service
Experts' bank debt. However, Lennox did not rely on either set of
projections and instead prepared its own set of projections in the course
of performing due diligence on Service Experts and in detailed
discussions with certain members of the management of Service Experts.
The projections prepared by Lennox were used by WDR for all purposes,
including for the purpose of preparing their analyses and opinion.
- conducted discussions with members of the senior management of Lennox and
Service Experts;
- reviewed publicly available financial and stock market data with respect
to certain other companies in lines of business WDR believed to be
generally comparable to those of Lennox and Service Experts;
- compared the financial terms of the merger with the publicly available
financial terms of certain other transactions which WDR believe to be
generally relevant;
- considered certain pro forma effects of the merger on Lennox's financial
statements and reviewed certain estimates of synergies prepared by Lennox
management;
- reviewed drafts of the merger agreement, stock option agreement and
shareholder voting agreements; and
- conducted such other financial studies, analyses, and investigations, and
considered such other information as WDR deemed necessary or appropriate.
In connection with its review, WDR:
- has not assumed any responsibility for independent verification of any of
the information reviewed by WDR for the purpose of its opinion and has,
at the direction of Lennox, relied on the information received being
complete and accurate in all material respects;
- has not made any independent evaluation or appraisal of any of the assets
or liabilities (contingent or otherwise) of Lennox or Service Experts,
nor has WDR been furnished with any such evaluation or appraisal;
- has assumed that the financial forecasts (including obtaining synergies),
estimates of revenues and costs, presumed pro forma effects and analysis
of potential synergies referred to above have been reasonably prepared on
a basis reflecting the best currently available estimates and judgments
of the management of Lennox; and
- has based its opinion on economic, monetary, market and other conditions
in effect on, and the information made available to WDR, as of October
25, 1999.
ASSUMPTIONS AND LIMITATIONS
For the purposes of its opinion, with the consent of Lennox, WDR assumed
that Lennox and Service Experts will comply with all the material terms of the
merger agreement. Lennox did not place any limitations upon WDR regarding the
procedures to be followed and the factors to be considered in rendering its
opinion.
In arriving at its opinion, WDR did not assign any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments based
on its experience in providing financial opinions and on the existing economic,
monetary, market and other conditions as to the significance and relevance of
each analysis and factor. WDR believes that its analyses must be considered as a
whole and that selecting portions of its analyses and other factors considered
by it, without considering all factors and analyses, could create a misleading
or incomplete view of the processes underlying its opinion. WDR did not quantify
the effect of each factor upon its opinion. WDR made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond Lennox's and WDR's control. Any assumed
estimates contained in WDR's analyses are not
39
<PAGE> 48
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. Estimates of the financial value of companies do not purport to be
appraisals or necessarily reflect the prices at which companies actually may be
sold. Such estimates inherently are subject to uncertainty. In rendering its
opinion, WDR expressed no view as to the range of values at which the Lennox
common stock may trade following the consummation of the merger, nor did WDR
make any recommendations to the Lennox stockholders with respect to how such
stockholders should vote on the issuance of stock in the merger.
The following paragraphs summarize the material analyses performed by WDR
in arriving at its Opinion.
Acquisition Summary. WDR analyzed the enterprise value multiples and equity
value multiples of key operating statistics. With an exchange ratio of 0.67
shares of Lennox common stock per share of Service Experts common stock (or
$8.88 per share of Service Experts common stock based on the Lennox closing
stock price as of October 22, 1999), the merger would provide for a total
implied equity value of $161.6 million. With the assumption of approximately
$160 million in net debt (defined as total debt less cash and cash equivalents),
the merger would provide for an implied enterprise value (defined as market
value of equity plus net debt) of $321.6 million. WDR calculated the ratio of
implied equity value to net income and the ratio of implied enterprise value to
EBIT and EBITDA derived from the financial projections discussed above.
The following table presents the ratios of implied equity value to
forecasted 1999 and forecasted 2000 net income and the ratios of implied
enterprise value to forecasted 1999 and forecasted 2000 EBITDA and EBIT. Lennox
also derived a range of synergies that, if obtained, would have the effect of
lowering the multiples presented below.
<TABLE>
<S> <C>
EQUITY VALUE MULTIPLES:*
1999E Net income............................................ 11.5x
2000E Net income............................................ 7.8x
ENTERPRISE VALUE MULTIPLES:*
1999E EBITDA................................................ 6.7x
2000E EBITDA................................................ 5.0x
1999E EBIT.................................................. 10.1x
2000E EBIT.................................................. 6.5x
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Lennox common stock traded at levels lower than the $13.25 per share
amounts assumed in the foregoing analysis immediately following the announcement
of the merger and the price for Lennox common stock will likely continue to
fluctuate in the future. You should read "Comparative Per Share and Market Price
Information" on page 47.
Pro Forma Contribution Analysis. WDR analyzed the pro forma financial
impact of the merger on Lennox. Using earnings and synergies estimates for
Service Experts and Lennox prepared by Lennox management, the analysis showed
that the proposed transaction would be accretive to Lennox stockholders in
fiscal year 2000.
40
<PAGE> 49
The following table presents the relative contribution of Service Experts
to the combined company's balance sheet as of September 30, 1999 and to the
combined company's forecasted 1999 revenue, EBITDA, EBIT and net income,
excluding earnings and synergies estimates for Service Experts and Lennox
prepared by Lennox management.
<TABLE>
<CAPTION>
LENNOX SERVICE EXPERTS
------ ---------------
<S> <C> <C>
BALANCE SHEET DATA (AT SEPTEMBER 30, 1999):
Total Assets................................................ 79% 21%
Combined Stockholders' Equity............................... 73% 27%
PROJECTED INCOME STATEMENT DATA:*
1999E Revenue............................................... 82% 18%
1999E EBITDA................................................ 82% 18%
1999E EBIT.................................................. 78% 22%
1999E Net Income............................................ 84% 16%
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Historical Stock Trading Analysis. To provide contextual and comparative
market data, WDR examined the history of the trading prices for the shares of
Service Experts common stock in relation to an HVAC Dealer Consolidator Index
from January 1, 1998 to October 22, 1999. This index consists of Comfort Systems
USA, Inc. and Group Maintenance America Corp. WDR analyzed and compared certain
trading information of the companies in the Index and of Service Experts. This
analysis showed that based on closing stock prices as of October 22, 1999, the
Service Experts common stock traded at 23% below the average of the Index. WDR
noted that the Service Experts common stock reached an intraday low price of
$6.00 per share on October 21, 1999 and a high price of $33.25 on November 16,
1998.
Generally Comparable Company Financial and Trading Analysis. A comparable
company analysis analyzes the operating performance and outlook of a business
relative to a group of publicly traded peer companies to determine an implied
market trading value. WDR reviewed and compared certain financial information
and ratios of Service Experts with that of Comfort Systems USA, Inc. and Group
Maintenance America Corp. ("the Selected Companies"), which in WDR's judgment
were generally comparable to Service Experts for the purposes of this analysis.
However, neither company in the Selected Companies is identical to Service
Experts (including after the merger). Accordingly, any comparative analysis of
the results of WDR's comparison is not solely mathematical; rather it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors affecting the companies being
compared.
41
<PAGE> 50
WDR analyzed and compared the market multiples of enterprise value and
equity value of Service Experts to corresponding market multiples of enterprise
value and equity value for the Selected Companies. WDR calculated various
financial multiples for Service Experts and each of the Selected Companies based
on the most recent publicly available information. The following table presents
the ratios of implied equity value to forecasted 1999 and 2000 earnings per
share and book value per share for the Selected Companies and Service Experts as
well as the ratios of implied enterprise value to forecasted 1999 and 2000
revenue, EBITDA and EBIT for the Selected Companies and Service Experts.
<TABLE>
<CAPTION>
SELECTED COMPANIES SERVICE EXPERTS
------------------ ---------------
<S> <C> <C>
EQUITY VALUE MULTIPLES:*
1999E Net Income............................................ 7.5x 8.9x
2000E Net Income............................................ 6.6x 6.0x
Latest Book Value........................................... 0.9x 0.8x
ENTERPRISE VALUE MULTIPLES:*
1999E Revenue............................................... 0.5x 0.5x
2000E Revenue............................................... 0.4x 0.5x
1999E EBITDA................................................ 4.7x 6.0x
2000E EBITDA................................................ 3.7x 4.4x
1999E EBIT.................................................. 5.8x 8.9x
2000E EBIT.................................................. 4.5x 5.8x
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Generally Comparable Precedent Transactions Analysis. A comparable
precedent transactions analysis provides a valuation range based upon publicly
available financial information for companies which have been acquired in
selected recent transactions and which are in the same or similar industries as
the business being valued. WDR analyzed the most relevant acquisition
transaction in the HVAC dealer consolidator sector, in which ServiceMaster
completed a tender offer for the outstanding shares of American Residential
Services on April 27, 1999. Based upon such analysis and forecasted 1999
information, the following table presents the latest twelve months revenue,
EBITDA and EBIT multiples and the estimated one year forward revenue, EBITDA and
EBIT multiples, in each case, for the tender offer by ServiceMaster for the
outstanding shares of American Residential Services and the merger of Lennox and
Service Experts.
<TABLE>
<CAPTION>
TENDER OFFER MERGER
------------ ------
<S> <C> <C>
ENTERPRISE VALUE MULTIPLES:*
LTM revenue................................................. 0.5x 0.6x
One year forward revenue.................................... 0.5x 0.5x
LTM EBITDA.................................................. 10.3x 6.7x
One year forward EBITDA..................................... 5.9x 5.0x
LTM EBIT.................................................... 20.1x 9.7x
One year forward EBIT....................................... 8.2x 6.5x
</TABLE>
- ---------------
* "E" indicates estimate contained in the prospective financial information
described above.
Premia Analysis. WDR analyzed the premia paid per share of Service Experts
common stock over selected periods and compared it to the median historical
transaction premium of selected similarly sized transactions over similar time
periods. An offer for equity of $8.88 per share on October 22, 1999 represents a
48.0% premium to Service Experts' 52 week low stock price.
42
<PAGE> 51
The following table presents the premia paid per share of Service Experts
common stock over selected periods and compares it to the median premia paid
from June 30, 1997 to October 22, 1999 in selected transactions with equity
values between $100 and $250 million.
<TABLE>
<CAPTION>
MEDIAN
HISTORICAL
TRANSACTIONS SERVICE
PREMIA EXPERTS
------------ -------
<S> <C> <C>
PREMIA PAID:
One day prior............................................... 28.7% 30.4%
One week prior.............................................. 36.3% 26.9%
One month prior............................................. 46.8% 0.0%
</TABLE>
GENERAL INFORMATION
WDR is an internationally recognized investment banking firm which, as a
part of its investment banking business, regularly is engaged in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate, and other purposes. In the ordinary course of its business, WDR and
its affiliates may actively trade or hold Lennox common stock for its own
account and for the accounts of customers and may actively trade or hold Service
Experts common stock for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
WDR was engaged to act as financial advisor to Lennox in early October. In
the engagement letter dated October 24, 1999 between Lennox and WDR, Lennox
agreed to pay WDR a customary fee for providing financial advisory services in
connection with the merger, including providing the opinion described above. A
significant portion of such transaction fee is contingent upon the consummation
of the merger. Such fee was determined in arm's-length negotiation between
Lennox and WDR. Lennox has also agreed to reimburse WDR for the expenses
reasonably incurred by it in connection with its engagement (including
reasonable counsel fees) and to indemnify WDR and its officers, directors,
employees, agents, and controlling persons against certain expenses, losses,
claims, damages or liabilities in connection with its services, including those
arising under the federal securities laws.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The discussion below summarizes the material United States federal income
tax consequences of the merger. It is based principally on opinions of Baker &
Botts, L.L.P., counsel to Lennox, and of Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, counsel to Service Experts. These
opinions are included as exhibits to Lennox's registration statement, which
includes this joint proxy statement/prospectus. This discussion of material
federal income tax consequences is intended to provide only a general summary,
and is not a comprehensive description of all of the tax consequences that may
be relevant to any given stockholder. This discussion is based upon the Internal
Revenue Code, the regulations of the United States Treasury Department, and
court and administrative rulings and decisions in effect on the date of this
joint proxy statement/prospectus. These authorities may change, possibly
retroactively, and any change could affect the continuing validity of counsels'
opinions and of this discussion. Neither counsels' opinion, nor this discussion,
addresses any consequences arising under the laws of any state, locality or
foreign jurisdiction.
Counsels' opinions will be based upon (1) representations and covenants
made by Lennox, Service Experts and/or others, including those contained in the
tax representation letters, signed by officers of Lennox and Service Experts,
and (2) the assumptions that the merger will be effected pursuant to applicable
state law and otherwise completed according to the terms of the merger agreement
and as described in this joint proxy statement/prospectus. The validity of
counsels' opinions and of this discussion depends upon the continuing validity
of these representations, covenants and assumptions. If any of those
43
<PAGE> 52
representations, covenants or assumptions is inaccurate, the tax consequences of
the merger could differ from those discussed in this joint proxy
statement/prospectus.
This discussion is addressed to Service Experts stockholders who hold their
shares of Service Experts common stock as capital assets and does not address
the tax consequences that may be relevant to a particular stockholder receiving
special treatment under some United States federal income tax laws, such as:
- banks;
- tax-exempt organizations;
- insurance companies;
- dealers or brokers in securities or foreign currencies;
- Service Experts stockholders who received their Service Experts common
stock through the exercise of employee stock options or otherwise as
compensation;
- Service Experts stockholders who are not citizens or residents of the
United States; and
- Service Experts stockholders who hold shares of Service Experts common
stock as part of a hedge, appreciated financial position, straddle or
conversion transaction.
Subject to the assumptions and representations discussed above, the
material United States federal income tax consequences of the merger are as
follows:
- the merger will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code;
- each of Lennox, Service Experts and LII Acquisition Corporation, the
subsidiary of Lennox that will merge with and into Service Experts, will
be a party to the reorganization within the meaning of Section 368(b) of
the Internal Revenue Code;
- no gain or loss will be recognized by Lennox, Service Experts or LII
Acquisition Corporation as a result of the merger; and
- no gain or loss will be recognized by a stockholder of Service Experts
who exchanges shares of Service Experts common stock solely for shares of
Lennox common stock; except gain or loss will be recognized with respect
to cash received instead of a fractional share of Lennox common stock.
Because the merger will qualify as a reorganization, the aggregate tax
basis of the shares of Lennox common stock received by a Service Experts
stockholder who exchanges all of the stockholders' shares of Service Experts
common stock for shares of Lennox common stock in the merger will be the same as
the aggregate tax basis of the shares of Service Experts common stock
surrendered in exchange (reduced by any amount allocable to a fractional share
of Lennox common stock for which cash is received), and the holding period of
the shares of Lennox common stock received by a Service Experts stockholder will
include the holding period of shares of Service Experts common stock surrendered
in exchange.
A holder of Service Experts common stock who receives cash in the exchange
in lieu of a fractional share interest in Lennox common stock will be treated as
having received the fractional share interest and then having sold such interest
for the cash received. This sale will generally result in the recognition of
gain or loss for United States federal income tax purposes measured by the
difference between the amount of cash received and the portion of the tax basis
of Service Experts common stock allocable to such fractional share interest,
which gain or loss will be capital gain or loss, provided that Service Experts
common stock was held as a capital asset at the effective time of the exchange.
It is a condition to the merger that each of Lennox and Service Experts
receives a tax opinion from its counsel, prior to completing the merger, that
the merger will be treated for United States federal income tax purposes as a
reorganization and that each of Lennox, Service Experts and LII Acquisition
44
<PAGE> 53
Corporation will be a party to the reorganization. The opinions will be based on
customary assumptions and factual representations and will assume that the
merger will be effected pursuant to applicable state law and otherwise completed
according to the terms of the merger agreement and as described in this joint
proxy statement/prospectus. Opinions of counsel are not binding upon the
Internal Revenue Service or the courts, nor preclude the Internal Revenue
Service from adopting a contrary position. Neither Lennox nor Service Experts
has requested or will request an advance ruling from the Internal Revenue
Service as to the tax consequences of the merger. You should read "--Service
Experts' Reasons for the Merger; Recommendation of Service Experts Board" on
page 25 and "--Lennox's Reasons for the Merger; Recommendation of Lennox Board"
on page 35.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
EACH SERVICE EXPERTS STOCKHOLDER WILL DEPEND ON THE PARTICULAR FACTS OF THAT
STOCKHOLDER'S SITUATION. SERVICE EXPERTS STOCKHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER,
INCLUDING ANY FOREIGN, STATE, LOCAL OR OTHER TAX CONSEQUENCES OF THE MERGER.
CONFLICTS OF INTEREST
In considering the recommendation of the Service Experts board,
stockholders of Service Experts should be aware that Service Experts executive
officers and nine other members of management have interests in the merger that
are different from, or in addition to, the interests of Service Experts
stockholders generally, and that these interests may create potential conflicts
of interest. The Service Experts board was advised of these interests and
considered them, among other factors, in approving the merger.
Under their employment agreements with Service Experts, Alan R. Sielbeck,
Ronald L. Smith and Anthony M. Schofield are entitled to severance payments
totalling approximately $3.5 million in the event their employment is
terminated, voluntarily or by Lennox, within 24 months of the change of control
of Service Experts resulting from the merger. These executive officers will be
paid all accrued base salary, bonus compensation to the extent earned, vested
deferred compensation, any benefits under any benefit plans of Service Experts,
accelerated vesting of awards under Service Experts' stock incentive plans,
accrued vacation pay and any appropriate business expenses incurred in
connection with their duties through the date of termination. In addition, each
will receive a severance payment in a single lump sum equal to three times his
base salary and an amount equal to three times his average annual bonus in the
previous two years. Each will also continue to participate in the fringe benefit
plans of Service Experts, or its successor, for a period of three years
following termination or, if sooner, until the date of employment by a new
employer. If any payments to an officer will subject him to excise tax, the
officer shall receive an additional payment in the amount that makes him whole
for liability related to the excise tax.
In addition, nine members of management who are not executive officers of
Service Experts are entitled to severance payments totalling approximately $2.8
million if their employment is terminated as a result of the merger.
In the merger agreement, Lennox has agreed to take commercially reasonable
actions to nominate and recommend an individual proposed by Service Experts and
acceptable to Lennox who is currently a member of the Service Experts board of
directors for election to a three-year term on the Lennox board of directors.
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules of the Federal Trade Commission promulgated thereunder, the merger may not
be completed until notifications have been given and certain information has
been furnished to the FTC and the Antitrust Division of the United States
Department of Justice and specified waiting period requirements have been
satisfied. Lennox and Service Experts each filed notification and report forms
with the FTC and the Department of Justice and the statutory waiting period is
expected to end on or about January 6, 2000.
45
<PAGE> 54
At any time before or after the completion of the merger, the FTC, the
Department of Justice or any state could take any action under applicable
antitrust laws as it deems necessary or desirable. Such action could include
seeking to enjoin the completion of the merger or seeking divestiture of
particular assets or businesses of Lennox or Service Experts. Private parties
may also initiate legal actions under the antitrust laws under certain
circumstances.
STOCK EXCHANGE LISTING
The merger may not be completed until the shares of Lennox common stock to
be issued in the merger are approved for listing on The New York Stock Exchange.
NO APPRAISAL RIGHTS
Delaware law provides appraisal rights to stockholders of Delaware
corporations in certain situations. However, such appraisal rights are not
available to stockholders of a corporation, such as Service Experts:
- whose securities are listed on a national securities exchange; and
- whose stockholders are not required to accept in exchange for their stock
anything other than (a) stock in another corporation listed on a national
securities exchange or (b) cash in lieu of fractional shares.
Because of the following factors, stockholders of Service Experts will not
have appraisal rights with respect to the merger:
- Service Experts common stock is listed on The New York Stock Exchange;
and
- Service Experts stockholders are being offered only Lennox common stock,
which is also listed on The New York Stock Exchange, and cash in lieu of
fractional shares.
Delaware law does not provide appraisal rights to stockholders of a
corporation, such as Lennox, that issues shares in connection with a merger but
is not itself a constituent corporation in the merger.
46
<PAGE> 55
COMPARATIVE PER SHARE AND MARKET PRICE INFORMATION
The following table sets forth the range of high and low sales prices for
Lennox common stock and Service Experts common stock for the periods indicated,
as reported on the NYSE Composite Transaction Reporting System and the Nasdaq
National Market. Lennox common stock is listed on the New York Stock Exchange
under the symbol "LII" and Service Experts common stock is listed on the New
York Stock Exchange under the symbol "SVE." Lennox priced its initial public
offering on July 28, 1999 and Lennox common stock began trading on the New York
Stock Exchange on July 29, 1999. Service Experts common stock was traded on the
Nasdaq National Market under the symbol "SERX" from Service Experts' initial
public offering on August 16, 1996 until June 6, 1997.
<TABLE>
<CAPTION>
LENNOX COMMON SERVICE EXPERTS
STOCK COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1997:
First Quarter............................................ -- -- $28.25 $21.25
Second Quarter........................................... -- -- 30.25 21.25
Third Quarter............................................ -- -- 30.38 24.38
Fourth Quarter........................................... -- -- 30.38 24.63
1998:
First Quarter............................................ -- -- $31.44 $25.75
Second Quarter........................................... -- -- 34.50 30.69
Third Quarter............................................ -- -- 37.13 20.63
Fourth Quarter........................................... -- -- 32.38 22.00
1999:
First Quarter............................................ -- -- $29.75 $10.00
Second Quarter........................................... -- -- 21.94 13.38
Third Quarter............................................ $19.88 $14.50 23.50 7.88
Fourth Quarter (through , 1999)..............
</TABLE>
On October 26, 1999, the last full trading day before the execution of the
merger agreement and the announcement of an estimated range of Service Experts
earnings for the third quarter of 1999, the closing prices of Lennox common
stock and Service Experts common stock reported on the NYSE Composite
Transaction Reporting System were $13.25 per share and $7.56 per share,
respectively. On , 1999, the last day prior to the date of this
joint proxy statement/prospectus for which it was practicable to include prices,
the closing prices of Lennox common stock and Service Experts common stock
reported on the NYSE Composite Transaction Reporting System were $ per share
and $ per share, respectively. As of , 1999, there were
stockholders of record who held shares of Lennox common stock and
stockholders of record who held shares of Service Experts common
stock. WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS PRIOR TO MAKING ANY
DECISION WITH RESPECT TO THE MERGER.
DIVIDEND POLICY
Lennox paid cash dividends of $0.26, $0.28, $0.32 and $0.26 per share on
its common stock during 1996, 1997, 1998 and the first nine months of 1999,
respectively. Lennox anticipates that it will continue to pay cash dividends on
its common stock, but any future determination as to the payment or amount of
dividends will depend upon its future results of operations, capital
requirements, financial condition and other factors as Lennox's board of
directors may consider. In addition, Lennox's revolving credit facility and
other debt instruments prohibit the payment of dividends unless Lennox would be
permitted to incur $1.00 of additional indebtedness according to the terms of
these instruments. For more information about Lennox's debt instruments, you
should read "Information About Lennox--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
on page 58.
47
<PAGE> 56
INFORMATION ABOUT SERVICE EXPERTS
Service Experts was formed in 1996 and has become one of the leading
providers of HVAC services and replacement equipment in the United States. As of
September 30, 1999, Service Experts operated 120 HVAC service and replacement
businesses in 36 states. Service Experts also owns Contractor Success Group,
Inc., a company that provides HVAC businesses proprietary products, as well as
marketing, management, educational and advisory services. The Service Experts'
businesses install, service and maintain central air conditioners, furnaces and
heat pumps, primarily in existing homes. Management estimates that approximately
75% of the Service Experts' pro forma net revenue in 1998, giving effect to all
completed service center acquisitions, was related to replacing, maintaining and
servicing HVAC equipment at existing residences, and to the sale of ancillary
products such as indoor air quality devices and services. Service Experts
focuses on the service and replacement market of the HVAC industry rather than
the new construction market because management believes that the service and
replacement market offers higher margins and exposes Service Experts to less
credit risk. The service and replacement market offers more attractive pricing
because of customers' demands for immediate, convenient and reliable service.
Additional information concerning Service Experts is included in the
reports, proxy statements and other information of Service Experts filed with
the SEC which are incorporated by reference in this joint proxy
statement/prospectus. You should read "Where You Can Find More Information" on
page 130.
48
<PAGE> 57
INFORMATION ABOUT LENNOX
SELECTED HISTORICAL FINANCIAL AND OTHER DATA OF LENNOX
The following selected financial and other data of Lennox for each of the
years in the five-year period ended December 31, 1998 have been derived from its
financial statements which have been audited by Arthur Andersen LLP. The summary
financial and other data for each of the nine months ended September 30, 1998
and 1999 are derived from Lennox's unaudited financial statements which, in its
opinion, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such information. Lennox's
fiscal quarters are each comprised of 13 weeks. For convenience, the 39-week
periods ended October 3, 1998 and October 2, 1999 are referred to as the nine
months ended September 30, 1998 and 1999, respectively. Effective September 30,
1997 Lennox increased its ownership of Ets. Brancher, its European joint
venture, from 50% to 70% and, accordingly, changed its accounting method of
recognizing this investment from the equity method to the consolidation method.
You should read "--Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 50 and Lennox's financial statements and
notes included elsewhere in this joint proxy statement/ prospectus for a further
explanation of the financial data summarized here.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $1,168,099 $1,306,999 $1,364,546 $1,444,442 $1,821,836 $1,364,799 $1,749,953
Cost of goods sold............. 815,511 946,881 961,696 1,005,913 1,245,623 930,464 1,199,611
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 352,588 360,118 402,850 438,529 576,213 434,335 550,342
Selling, general and
administrative expenses...... 273,421 285,938 298,049 326,280 461,143 331,294 422,529
Other operating expense, net... 7,460 2,555 4,213 7,488 8,467 6,247 6,486
Product inspection charge(1)... -- -- -- 140,000 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations........... 71,707 71,625 100,588 (35,239) 106,603 96,794 121,327
Interest expense, net.......... 20,830 20,615 13,417 8,515 16,184 10,903 24,193
Other.......................... 836 (622) (943) 1,955 1,602 1,286 (403)
Minority interest.............. -- -- -- (666) (869) (583) 212
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes......... 50,041 51,632 88,114 (45,043) 89,686 85,188 97,325
Provision (benefit) for income
taxes........................ 19,286 17,480 33,388 (11,493) 37,161 35,220 39,840
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ 30,755 $ 34,152 $ 54,726 $ (33,550) $ 52,525 $ 49,968 $ 57,485
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share:
Basic........................ $ 0.93 $ 1.04 $ 1.62 $ (0.99) $ 1.50 $ 1.44 $ 1.52
Diluted...................... 0.93 1.04 1.59 (0.99) 1.47 1.40 1.48
Weighted average shares
outstanding:
Basic........................ 32,938 32,899 33,693 33,924 34,914 34,775 37,910
Diluted...................... 32,994 32,964 34,386 33,924 35,739 35,567 38,788
Dividends per share............ $ 0.20 $ 0.22 $ 0.26 $ 0.28 $ 0.32 $ 0.24 $ 0.26
OTHER DATA:
Depreciation and
amortization................. $ 32,896 $ 32,212 $ 34,149 $ 33,430 $ 43,545 $ 28,126 $ 41,825
Capital expenditures........... 36,189 26,675 31,903 34,581 52,435 30,505 53,203
Research and development
expenses..................... 22,773 22,682 23,235 25,444 33,260 24,373 29,495
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 2,980 $ 73,811 $151,877 $147,802 $ 28,389 $ 41,122
Working capital............................... 252,301 307,502 325,956 335,891 263,289 332,161
Total assets.................................. 737,528 768,517 820,653 970,892 1,152,952 1,609,434
Total debt.................................... 243,480 219,346 184,756 198,530 317,441 492,161
Stockholders' equity.......................... 286,849 315,313 361,464 325,478 376,440 587,022
</TABLE>
49
<PAGE> 58
- ---------------
(1) Represents a pre-tax charge taken in the fourth quarter of 1997 for
estimated costs of an inspection program for Lennox's Pulse furnaces
installed from 1982 to 1990 in the United States and Canada. Lennox
initiated the inspection program because it received anecdotal reports of
accelerated corrosion of a component of these products under extreme
operating conditions. The program ended on June 30, 1999 and future expenses
associated with the program are not expected to be significant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Lennox participates in four reportable business segments of the 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 North American residential segment also
includes installation, maintenance and repair services performed by Lennox-owned
dealers. The second segment is the global commercial air conditioning market, in
which Lennox manufactures and sells rooftop products and applied systems for
commercial applications. The third segment is the global commercial
refrigeration market, which consists of unit coolers, condensing units and other
commercial refrigeration products. The fourth segment is the heat transfer
market, in which 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 to numerous types of customers, including
distributors, installing dealers, homeowners, national accounts and original
equipment manufacturers. The demand for Lennox's products is cyclical and
influenced by national and regional economic and demographic factors, such as
interest rates, the availability of financing, regional population and
employment trends and general economic conditions, especially consumer
confidence. In addition to economic cycles, demand for 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 enters 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 for its needs 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.
In September 1997, Lennox increased its ownership in Ets. Brancher from 50%
to 70%. As a result, Lennox assumed control of the venture and began including
the financial position and operating results of the venture in its consolidated
financial statements for the fourth quarter of 1997. Previously, Lennox used the
equity method of accounting for its investment in this entity. In the fourth
quarter of 1998, Lennox restructured its ownership of its various European
entities to allow for more efficient transfer of funds and to provide for tax
optimization.
Lennox acquired Superior Fireplace Company, Marco Mfg., Inc. and Pyro
Industries, Inc. in the third quarter of 1998 and Security Chimneys
International, Ltd. in the first quarter of 1999 for an aggregate purchase price
of approximately $120 million. These acquisitions give Lennox one of the
broadest lines of hearth products in the industry. These businesses had
aggregate revenues of approximately $150 million in 1998, $68.6 million of which
was reflected in Lennox's 1998 net sales.
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<PAGE> 59
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 $28 million of
Kirby's debt.
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 will enable Lennox to extend its distribution directly
to the consumer and permit 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, 1999, Lennox had acquired 57 dealers in Canada and 19 in the
United States for an aggregate purchase price of approximately $164 million and
had signed letters of intent to acquire seven additional Canadian dealers and 25
United States dealers for an aggregate purchase price of approximately $82
million. As Lennox acquires more heating and air conditioning dealers, Lennox
expects that it will incur additional costs to expand its infrastructure to
effectively manage these businesses.
Lennox has assigned a 40-year life to the goodwill acquired in the
acquisitions of Kirby, the hearth products companies and the dealers acquired to
date. These companies and dealers are all profitable and all have been in
business for extended periods of time. They all operate in established
industries where the basic product technology has changed very little over time.
In addition, all of these companies and dealers have strong brand names and
market share in their respective industries or markets. Based upon these
factors, Lennox concluded that the anticipated future cash flows associated with
the goodwill recognized in the acquisitions will continue for at least 40 years.
On October 26, 1999, Lennox entered into an agreement to acquire Service
Experts, an HVAC company comprised of HVAC retail businesses across the United
States. The acquisition will be accomplished with an exchange of shares in which
a wholly-owned subsidiary of Lennox will merge into Service Experts. Each share
of Service Experts common stock will be converted into the right to receive 0.67
of a share of Lennox common stock. Service Experts will then become a
wholly-owned subsidiary of Lennox. Lennox currently expects to complete the
acquisition during the first quarter of 2000, subject to approval of governing
regulatory bodies and stockholders of both companies. Lennox expects that the
acquisition of Service Experts will be accretive in the year 2000 in the range
of $0.04 to $0.06 per share, but it can make no assurances if or to the extent
this acquisition will be accretive or the effect this acquisition will have on
its results of operations. You should read "Special Note Regarding Forward-
Looking Statements" on page 17.
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.
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<PAGE> 60
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, Lennox's
statement of income data for the years ended December 31, 1996, 1997 and 1998
and the nine months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................... 70.5 69.6 68.4 68.2 68.6
----- ----- ----- ----- -----
Gross profit............................... 29.5 30.4 31.6 31.8 31.4
----- ----- ----- ----- -----
Selling, general and administrative expenses......... 21.8 22.6 25.3 24.2 24.1
Other operating expense, net......................... 0.3 0.5 0.4 0.5 0.4
Product inspection charge............................ -- 9.7 -- -- --
----- ----- ----- ----- -----
Income (loss) from operations.............. 7.4 (2.4) 5.9 7.1 6.9
Interest expense, net................................ 1.0 0.6 0.9 0.8 1.3
Other................................................ (0.1) 0.1 0.1 0.1 (0.0)
Minority interest.................................... -- 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Income (loss) before income taxes.......... 6.5 (3.1) 4.9 6.2 5.6
Provision (benefit) for income taxes................. 2.5 (0.8) 2.0 2.5 2.3
----- ----- ----- ----- -----
Net income (loss).......................... 4.0% (2.3)% 2.9% 3.7% 3.3%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth net sales by business segment and geographic
market (dollars in millions):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------ -----------------------------------
1996 1997 1998 1998 1999
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BUSINESS SEGMENT:
North American
residential............... $ 857.1 62.8% $ 865.1 59.9% $1,013.7 55.7% $ 764.1 56.0% $1,009.4 57.7%
Commercial air
conditioning.............. 228.9 16.8 278.8 19.3 392.1 21.5 286.2 21.0 338.0 19.3
Commercial refrigeration.... 135.6 9.9 154.3 10.7 237.3 13.0 176.1 12.9 238.4 13.6
Heat transfer............... 142.9 10.5 146.2 10.1 178.7 9.8 138.4 10.1 164.2 9.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total net sales..... $1,364.5 100.0% $1,444.4 100.0% $1,821.8 100.0% $1,364.8 100.0% $1,750.0 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
GEOGRAPHIC MARKET:
U.S......................... $1,252.5 91.8% $1,274.9 88.3% $1,472.3 80.8% $1,116.2 81.8% $1,301.3 74.4%
International............... 112.0 8.2 169.5 11.7 349.5 19.2 248.6 18.2 448.7 25.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total net sales..... $1,364.5 100.0% $1,444.4 100.0% $1,821.8 100.0% $1,364.8 100.0% $1,750.0 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net sales. Net sales increased $385.2 million, or 28.2%, to $1,750.0
million for the nine months ended September 30, 1999 from $1,364.8 million for
the nine months ended September 30, 1998.
Net sales related to the North American residential segment were $1,009.4
million during the nine months ended September 30, 1999, an increase of $245.3
million, or 32.1%, from $764.1 million for the corresponding nine months in
1998. Of the $245.3 million increase, $202.5 million was due to sales from the
hearth products acquisitions, acquired dealers and acquired heating and air
conditioning distributors. The remaining $42.8 million increase in North
American residential net sales was primarily due to a 5.6% increase in sales of
Lennox's existing business, almost all of which resulted from increased sales
volumes, principally caused by two factors. First, the hot summer in 1998
depleted the inventory levels at Lennox's customers and they increased their
purchases in the first quarter of 1999 to refill their inventories. Second,
Lennox's volume increased as a result of sales to new dealers, which were added
as a result of programs to
52
<PAGE> 61
expand Lennox's dealer base. Sales to dealers in the United States and Canada
that Lennox has acquired are no longer reflected as sales in Lennox's existing
business and are instead reflected as sales due to acquisitions. If sales to
these acquired dealers were included in sales of Lennox's existing business,
sales of Lennox's existing business would have increased by 7.9%.
Commercial air conditioning net sales increased $51.8 million, or 18.1%, to
$338.0 million for the nine months ended September 30, 1999 compared to the
corresponding nine months in 1998. Of this increase, $26.7 million was due to
increased sales volumes in North America primarily due to the effectiveness of
recently established commercial sales districts and $25.1 million was due to
increased international sales, $6.5 million of which was due to acquisitions.
Net sales related to the commercial refrigeration segment were $238.4 million
during the nine months ended September 30, 1999, an increase of $62.3 million,
or 35.4%, from $176.1 million for the corresponding nine months in 1998. Of this
increase, $58.5 million was due to the international acquisitions of Heatcraft
do Brasil S.A., Lovelock Luke Pty. Limited and James N. Kirby Pty. Ltd. North
American commercial refrigeration sales increased $5.4 million primarily due to
strong sales volumes to our supermarket customers and increased activity with
our large distributors. Heat transfer revenues increased $25.8 million, or
18.6%, to $164.2 million for the nine months ended September 30, 1999 compared
to the corresponding nine months in 1998. Of this increase, $5.3 million was due
to increased sales volumes in Lennox's existing North American business and
$21.3 million was due to the acquisitions of James N. Kirby Pty. Ltd. and
Livernois Engineering Holding Company.
Domestic sales increased $185.1 million, or 16.6%, to $1,301.3 million for
the first nine months of 1999 from $1,116.2 million for the first nine months of
1998. International sales increased $200.1 million, or 80.5% to $448.7 million
for the first nine months of 1999 from $248.6 million for the first nine months
of 1998.
Gross profit. Gross profit was $550.3 million for the nine months ended
September 30, 1999 as compared to $434.3 million for the nine months ended
September 30, 1998, an increase of $116.0 million. Gross profit margin was 31.4%
for the nine months ended September 30, 1999 and 31.8% for the nine months ended
September 30, 1998. The increase of $116.0 million in gross profit was primarily
attributable to increased sales in the 1999 period as compared to 1998. The
gross profit margins of Lennox's traditional businesses increased 0.2% from the
first nine months of 1999 compared to the first nine months of 1998. The
decrease in gross profit margin for the first nine months of 1999 is due to the
acquisition of businesses with lower margins than Lennox's other businesses.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $422.5 million for the nine months ended September
30, 1999, an increase of $91.2 million, or 27.5%, from $331.3 million for the
nine months ended September 30, 1998. Selling, general and administrative
expenses represented 24.1% and 24.2% of total net revenues for the first nine
months of 1999 and 1998, respectively. Of the $91.2 million increase, $64.3
million, or 70.5%, was related to increased infrastructure associated with
acquisitions. The majority of the remaining $26.9 million increase was due to
increases in selling, general and administrative expenses for the North American
residential segment which was primarily comprised of increases in costs due to
additions of personnel, increased information technology costs and increased
sales and marketing expenses.
Other operating expense, net. Other operating expense, net totaled $6.5
million for the nine months ended September 30, 1999, an increase of $0.3
million from $6.2 million for the corresponding nine months in 1998. Other
operating expense, net is comprised of (income) loss from joint ventures,
amortization of goodwill, and other intangibles and miscellaneous items.
Domestic income from operations was $104.3 million during the nine months
ended September 30, 1999, an increase of 9.4% from $95.3 million during the
corresponding period in 1998. International income from operations was $17.1
million during the 1999 period and $4.6 million during the 1998 period.
Interest expense, net. Interest expense, net for the nine months ended
September 30, 1999 increased to $24.2 million from $10.9 million for the same
period in 1998. Of the $13.3 million increase in interest
53
<PAGE> 62
expense, $1.3 million was due to the incurrence of $75 million in additional
long-term borrowings in April 1998 and $12.0 million was due to increased usage
of Lennox's credit lines and short-term borrowings as a result of acquisitions,
payments related to the Pulse inspection program and increased working capital
for seasonal needs.
Other. Other expense (income) was $(0.4) million for the nine months ended
September 30, 1999 and $1.3 million for the nine months ended September 30,
1998. Other expense is primarily comprised of currency exchange gains or losses.
The majority of the improvement in other expense (income) was due to the
strengthening of the Canadian dollar.
Minority interest. Minority interest in subsidiaries' net losses of $(0.2)
million for the nine months ended September 30, 1999 and income of $0.6 million
for the nine months ended September 30, 1998 represents the minority interest in
Ets. Brancher and Heatcraft do Brasil.
Provision for income taxes. The provision for income taxes was $39.8
million for the nine months ended September 30, 1999 and $35.2 million for the
nine months ended September 30, 1998. The effective tax rate of 40.9% and 41.3%
for the nine months ended September 30, 1999 and 1998, 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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales increased $377.4 million, or 26.1%, to $1,821.8
million for the year ended December 31, 1998 from $1,444.4 million for the year
ended December 31, 1997. If the effect of the consolidation of Ets. Brancher is
excluded, net sales would have increased by $226.7 million, or 16.1%, to
$1,630.9 million for 1998 as compared to 1997.
Net sales related to the North American residential segment were $1,013.7
million during 1998, an increase of 17.2% from $865.1 million for 1997. This
increase was primarily due to increased unit sales of "Lennox" and "Armstrong
Air" brands of heating and air conditioning equipment and the inclusion
beginning in the third quarter of 1998 of $68.6 million of sales of the hearth
products companies. Hot weather in the spring of 1998 and an expanded dealer and
distributor base led to greater sales of the "Lennox" and "Armstrong Air"
brands. Commercial air conditioning revenues increased $113.3 million, or 40.6%,
to $392.1 million for 1998 compared to 1997. If the effect of the consolidation
of Ets. Brancher is excluded, commercial air conditioning revenues would have
increased $46.5 million, or 17.9%, to $306.1 million for 1998 as compared to
1997. This increase was primarily due to increased volumes of rooftop air
conditioner sales in the United States and Canada. Net sales related to the
commercial refrigeration segment were $237.3 million during 1998, an increase of
53.8% from $154.3 million for 1997. If the effect of the consolidation of Ets.
Brancher is excluded, net sales related to the commercial refrigeration products
segment would have increased $20.2 million, or 14.8%, to $156.8 million for 1998
as compared to 1997. This increase is primarily caused by sales volume increases
due to hot weather in North America in 1998 and the acquisition of Heatcraft do
Brasil in September 1998. Heat transfer revenues increased $32.5 million, or
22.3%, to $178.7 million for 1998 compared to 1997. If the effect of the
consolidation of Ets. Brancher is excluded, heat transfer revenues would have
increased $11.4 million, or 8.0%, to $154.3 million for 1998 as compared to
1997. This increase is primarily caused by sales volume increases due to hot
weather in North America in 1998.
Domestic sales increased $197.4 million, or 15.5%, to $1,472.3 million for
1998 from $1,274.9 million for 1997. Of this increase, $68.6 million is due to
the inclusion of the hearth products companies and the balance was caused
primarily by increased unit sales of "Lennox" and "Armstrong Air" brands due to
the hot weather in 1998 and an expanded dealer and distributor base for these
brands. International sales increased $180.0 million, or 106.2%, to $349.5
million for 1998 from $169.5 million for 1997. Of this increase, $150.7 million
is due to the consolidation of Ets. Brancher and the remainder is primarily due
to the acquisition of Heatcraft do Brasil and Lovelock Luke.
54
<PAGE> 63
Gross profit. Gross profit was $576.2 million for the year ended December
31, 1998 as compared to $438.5 million for the year ended December 31, 1997, an
increase of $137.7 million. Gross profit margin increased to 31.6% in 1998 from
30.4% for 1997. The increase of $137.7 million in gross profit was primarily
attributable to increased sales in 1998 as compared to 1997 and the effect of
the consolidation of Ets. Brancher for the full year. Ets. Brancher contributed
$47.7 million and $11.2 million to gross profit in 1998 and 1997, respectively,
and its gross profit margin was 25.0% and 27.9% in 1998 and 1997, respectively.
If the effect of the consolidation of Ets. Brancher is excluded, gross profit
margin would have been 32.4% and 30.4% for 1998 and 1997, respectively. The
improved gross profit margin for 1998 is due to lower material costs, improved
manufacturing processes and increased overhead absorption associated with the
higher volume of sales in North America.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $461.1 million for 1998, an increase of $134.8
million, or 41.3%, from $326.3 million for 1997. Selling, general and
administrative expenses represented 25.3% and 22.6% of total net revenues for
1998 and 1997, respectively. If the effect of the consolidation of Ets. Brancher
is excluded, selling, general and administrative expenses would have been $413.9
million for 1998, an increase of $99.8 million, or 31.8%, from $314.1 million
for 1997, representing 25.4% and 22.4% of total net sales for 1998 and 1997,
respectively. Approximately $16.7 million of the increase in selling, general
and administrative expenses is composed of three non-recurring items: $7.1
million associated with the settlement of a lawsuit; approximately $5.0 million
of incremental expense associated with the implementation of the SAP enterprise
business software system; and $4.6 million associated with increased expenses of
a terminated performance share plan. If the effect of these non-recurring items
and the consolidation of Ets. Brancher is excluded, selling, general and
administrative expenses would have been $397.2 million for 1998, an increase of
$83.1 million, or 26.5%, from $314.1 million for 1997, representing 24.4% and
22.4% of total net sales for 1998 and 1997, respectively. The remaining increase
in selling, general and administrative expenses is primarily due to increased
variable costs associated with sales growth in North America and costs
associated with creating infrastructure to manage international businesses, such
as the establishment of a sales office in Singapore and the business development
functions for Lennox's global operation.
Other operating expense, net. Other operating expense, net totaled $8.5
million for 1998, an increase of $1.1 million from $7.4 million for 1997. Other
operating expense, net is comprised of (income) loss from joint ventures,
amortization of goodwill and other intangibles and miscellaneous items. The $1.1
million increase is due to increases in amortization of goodwill of $1.7 million
and losses from joint ventures of $1.3 million, partially offset by a decrease
in other intangible and miscellaneous expense of $2.0 million.
Product inspection charge. In the fourth quarter of 1997, Lennox recorded a
non-recurring pre-tax charge of $140.0 million to provide for management's best
estimate of the projected expenses of the product inspection program related to
its Pulse furnace. As part of Lennox's normal warranty process, Lennox
continuously monitors the replacement rate for, among other components, heat
exchangers in its products. During 1997, it was determined that, under certain
circumstances, certain joint connections on Pulse furnace heat exchangers
manufactured between 1982 and 1988 could fail and potentially create a safety
hazard in the home. Once this was determined, Lennox publicly announced the
Pulse inspection program in 1997. Under the program, Lennox offered the owners
of all Pulse furnaces installed between 1982 and 1990 a subsidized inspection
and a free carbon monoxide detector. The inspection included a severe pressure
test to determine the serviceability of the heat exchanger. If the heat
exchanger did not pass the test, Lennox either replaced the heat exchanger or
offered a new furnace and subsidized the labor costs for installation. The cost
required for the program depended on the number of units Lennox found, the
number of units that failed the pressure test, whether consumers selected to
replace the heat exchanger or receive a new furnace and the cost of the
replacement products. Based on the results of Lennox's historical experience,
input from Lennox's dealers and consultation with the Consumer Products Safety
Commission, Lennox estimated that it could ultimately locate approximately 67%
of the Pulse furnaces that were manufactured between 1982 and 1988. In terms of
estimated failure rates, Lennox utilized the data gathered from "field
experience" tests, which indicated a failure rate of approximately 30%. In terms
55
<PAGE> 64
of consumer selection, Lennox estimated that half would elect the new heat
exchanger and half would elect the new furnace. Finally, Lennox utilized its
standard costs of heat exchangers and new furnaces, the cost of the dealer
inspection allowance and the cost of the dealer replacement allowance in
calculating the liability. Lennox believes that it had adequate information to
develop reasonable assumptions in estimating the cost of the Pulse inspection
program.
The program ended on June 30, 1999 and future expenses associated with the
program are not expected to be significant.
Income (loss) from operations. Income (loss) from operations was $106.6
million for 1998 compared to $(35.2) million for 1997. Excluding the Ets.
Brancher consolidation, the special charge for the Pulse inspection program and
the three non-recurring selling, general and administrative expense items
mentioned above, income from operations would have been $122.6 million for 1998,
or 7.5% of net sales, as compared to $106.1 million for 1997, or 7.6% of net
sales.
Domestic income from operations was $108.7 million during 1998 as compared
to a loss of $(17.8) million during 1997. International income (loss) from
operations was $(2.1) million during 1998 and $(17.4) million for 1997.
Interest expense, net. Interest expense, net for 1998 increased to $16.2
million from $8.5 million for 1997. Of the $7.7 million increase in interest
expense, $3.6 million was due to the incurrence of $75 million in additional
long-term borrowings in April 1998, $1.6 million was due to the consolidation of
Ets. Brancher for the full year and the remainder was due to less interest
income in 1998.
Other. Other expense was $1.6 million for 1998 and $2.0 million for 1997.
Other expense is primarily comprised of currency exchange gains or losses.
Minority interest. Minority interest in subsidiaries' net loss of $(0.7)
million in 1997 and $(0.9) million in 1998 represents the minority interest in
Ets. Brancher and, for 1998, Heatcraft do Brasil.
Provision (benefit) for income taxes. The effective tax rates for the 1998
provision and the 1997 benefit were 41.4% and 25.5%, respectively. The effective
tax rates differ from the federal statutory rate of 35% primarily due to state
income taxes and valuation reserves provided for foreign operating losses.
Net income (loss). Net income (loss) was $52.5 million and $(33.6) million
for the year ended December 31, 1998 and 1997, respectively. If the effects of
the consolidation of Ets. Brancher and the non-recurring charge relating to the
Pulse inspection program are excluded, net income would have been $52.9 million
and $55.2 million for 1998 and 1997, representing 3.2% and 3.9% of net sales for
1998 and 1997, respectively.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales. Net sales increased $79.9 million, or 5.9%, to $1,444.4 million
for the year ended December 31, 1997 from $1,364.5 million for the year ended
December 31, 1996. If the effect of the consolidation of Ets. Brancher is
excluded, net sales would have increased by $39.7 million, or 2.9%, to $1,404.2
million for 1997 compared to 1996.
Net sales related to the North American residential segment were $865.1
million during 1997, an increase of 0.9% from $857.1 million for 1996. This
increase was principally due to increases in the number of heating and air
conditioning units sold by Lennox, despite the fact that industry shipments were
generally down 5% for 1997. The weather in 1997 was mild with a cool spring and
modest winter over most of the United States, and inventory levels for both
dealers and distributors were higher than normal at the end of 1996. Commercial
air conditioning revenues increased $49.9 million, or 21.8%, to $278.8 million
for 1997 compared to 1996. Of the $49.9 million increase, 49.3% was due to
increased volumes of rooftop air conditioner sales in North America and the
balance was due to the consolidation of Ets. Brancher in the fourth quarter of
1997. Rooftop air conditioner business increased in 1997 principally due to
focused sales efforts through commercial districts that Lennox established early
in 1997 as well as the continued roll out of the L Series rooftop product line.
Net sales related to the commercial
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<PAGE> 65
refrigeration segment were $154.3 million during 1997, an increase of 13.8% from
$135.6 million for 1996. This increase was primarily due to the consolidation of
Ets. Brancher in the fourth quarter of 1997. Heat transfer revenues increased
$3.3 million, or 2.3%, to $146.2 million for 1997 compared to 1996. Ets.
Brancher contributed $3.3 million to heat transfer product sales in 1997.
Domestic sales increased $22.4 million, or 1.8%, to $1,274.9 million for
1997 from $1,252.5 million for 1996 primarily due to the factors discussed
above. International sales increased $57.5 million, or 51.3%, to $169.5 million
for 1997 from $112.0 million for 1996. This increase is primarily due to the
consolidation of Ets. Brancher in the last quarter of 1997.
Gross profit. Gross profit was $438.5 million for the year ended December
31, 1997 as compared to $402.9 million for the year ended December 31, 1996, an
increase of $35.6 million. Gross profit margins were 30.4% and 29.5% for 1997
and 1996, respectively. The increase of $35.6 million in gross profit was
primarily attributable to increased sales in 1997 and the effect of the
consolidation of Ets. Brancher. Ets. Brancher contributed $11.2 million to gross
profit in 1997, and its gross profit margin was 27.9%. If the effect of the
consolidation of Ets. Brancher is excluded, gross profit margin would have
remained the same for 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $326.3 million for 1997, an increase of $28.3
million, or 9.5%, from $298.0 million for 1996. Selling, general and
administrative expenses represented 22.6% and 21.8% of net sales for 1997 and
1996, respectively. Of the $28.3 million increase, $12.2 million was related to
the consolidation of Ets. Brancher. Excluding the effect of the consolidation of
Ets. Brancher, selling, general and administrative expenses would have
represented 22.4% of net sales in 1997. The remaining $16.1 million increase in
selling, general and administrative expenses related to expenses in establishing
specialized commercial sales districts in North America, increased expenses
related to a profit sharing plan and other variable cost increases associated
with increased sales.
Other operating expense, net. Other operating expense, net totaled $7.4
million for 1997, an increase of $3.2 million from $4.2 million for 1996. In
1996, Lennox recognized a non-recurring $4.6 million gain on the sale of a
portion of its interest in Alliance Compressors, a joint venture to manufacture
compressors. After the sale, Lennox owned a 24.5% interest in Alliance
Compressors.
Income (loss) from operations. Income (loss) from operations was $(35.2)
million in 1997, a decrease of $135.8 million from $100.6 million in 1996. The
$135.8 million decrease was primarily due to the $140.0 million non-recurring
pre-tax charge relating to the Pulse inspection program. Excluding the special
charge for the Pulse inspection program and the consolidation of Ets. Brancher,
income from operations would have been $106.1 million in 1997, representing 7.6%
of net sales, the same percent as in 1996.
Domestic income (loss) from operations was $(17.8) million during 1997 as
compared to $98.0 million during 1996. International income from operations was
$(17.4) million during 1997 and $2.6 million for 1996.
Interest expense, net. Interest expense, net for 1997 decreased to $8.5
million from $13.4 million for 1996. The decrease of $4.9 million in interest
expense was primarily due to higher average cash balances resulting from
improved working capital management. Lennox did not have any short-term
borrowings in 1996 or 1997 and long-term debt remained fairly consistent each
year.
Other. Other expense was $2.0 million for 1997 and $(0.9) million for 1996.
Other expense is primarily comprised of currency exchange gains or losses.
Minority interest. Minority interest in subsidiaries' net loss of $(0.7)
million in 1997 represents the minority interest in Ets. Brancher.
Provision (benefit) for income taxes. The effective tax rates for the 1997
benefit and the 1996 provision were 25.5% and 37.9%, respectively. The effective
tax rates differ from the federal statutory rate of 35% primarily due to state
income taxes and valuation reserves provided for foreign operating losses.
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<PAGE> 66
Net income (loss). There was a net loss of $(33.6) million for the year
ended December 31, 1997 compared to net income of $54.7 million for the year
ended December 31, 1996. If the non-recurring charge relating to the Pulse
inspection program and the consolidation of Ets. Brancher are excluded, net
income would have been $55.2 million for 1997, representing 3.9% of net sales,
compared to 4.0% of net sales for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Lennox has historically financed its operations and capital requirements
from internally generated funds and, to a lesser extent, borrowings from
external sources. Lennox's capital requirements have related principally to
acquisitions, the expansion of its production capacity and increased working
capital needs that have accompanied sales growth.
Net cash provided by operating activities totaled $158.8 million, $58.5
million and $5.0 million for 1996, 1997 and 1998, respectively. The reduction in
cash provided by operating activities is primarily due to the Pulse inspection
program on which Lennox spent $26.6 million and $86.1 million in 1997 and 1998,
respectively. In addition, Lennox had unusually strong sales of its "Lennox"
brand of North American air conditioning products late in 1997 and accordingly
accounts receivable in December 1997 were higher than normal. Net cash generated
by operating activities was $17.4 million for the nine months ended September
30, 1999 compared to a usage of cash of $18.2 million for the nine months ended
September 30, 1998. The increase in cash generated by operating activities is
primarily due to an increase in net income, a decrease in payments related to
the Pulse inspection program and lower inventory levels. Net cash used in
investing activities totaled $37.1 million, $44.6 million, $212.4 million,
$160.9 million and $273.7 million for 1996, 1997 and 1998 and the nine months
ended September 30, 1998 and 1999, respectively. The greater use of cash for
investing relates primarily to increased acquisition activity as Lennox spent
$14.3 million, $160.5 million, $130.6 million and $226.1 million for
acquisitions in 1997 and 1998 and the nine months ended September 30, 1998 and
1999, respectively. Net cash provided by (used in) financing activities was
($44.0) million, ($17.3) million, $89.5 million, $68.3 million and $269.6
million for 1996, 1997 and 1998 and the nine months ended September 30, 1998 and
1999, respectively. In 1998, Lennox issued $75.0 million principal amount of
notes and increased short term borrowings by $36.7 million. In the first nine
months of 1999, Lennox increased short-term borrowings by $96.6 million, which,
along with sales of Lennox common stock of $141.8 million from Lennox's initial
public offering and exercises of stock options and new long-term debt of $43.9
million, primarily funded the business acquisitions. Due to the seasonality of
the air conditioning and refrigeration businesses, Lennox typically uses cash in
the first six months and generates cash during the latter half of the year.
Accordingly, Lennox does not believe it is appropriate to compare interim
periods to the full fiscal year. Lennox's internally generated cash flow, along
with borrowings under Lennox's revolving credit facility, have been sufficient
to cover its working capital, capital expenditure and debt service requirements
over the last three years.
Lennox will continue to acquire additional heating and air conditioning
dealers in the United States and Canada. Lennox plans to finance these
acquisitions with a combination of cash, stock and debt. As of September 30,
1999, Lennox had acquired 57 dealers in Canada and 19 in the United States for
an aggregate purchase price of approximately $164 million and had signed letters
of intent to acquire seven additional Canadian dealers and 25 United States
dealers for an aggregate purchase price of approximately $82 million.
On August 3, 1999, Lennox completed the initial public offering of its
common stock. Lennox sold 8,088,490 shares of its common stock, and certain
selling stockholders sold 411,510 shares, at an initial price to the public of
$18.75 per share. Net proceeds from the offering were $139.7 million, after
deducting estimated expenses and underwriting discounts and commissions.
Proceeds from the offering were used to repay a portion of the borrowings under
Lennox's former revolving credit facility and a term credit facility which
terminated upon completion of the offering.
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On March 31, 2000, Lennox will purchase the remaining 30% interest in Ets.
Brancher for approximately $17 million. In June 1999, Lennox acquired James N.
Kirby Pty. Ltd. for approximately $65 million. In addition, approximately $28
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 Lennox common stock. The $33 million in deferred payments will be made
in installments of approximately $11 million per year over the next three years.
This amount may be prepaid. If Lennox common stock does not trade at a price
greater than $29.09 per share for five consecutive days from the period from
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 Lennox common stock.
Lennox's capital expenditures were $31.9 million, $34.6 million, $52.4
million and $53.2 million for 1996, 1997 and 1998 and the nine months ended
September 30, 1999, respectively. Capital expenditures for the remainder of 1999
will relate to production equipment (including tooling), training facilities,
leasehold improvements and information systems. The majority of these planned
capital expenditures are discretionary. These capital expenditures will be
financed using cash flow from operations and available borrowings under Lennox's
revolving credit facility.
At September 30, 1999, Lennox had long-term debt obligations outstanding of
$334.9 million. The majority of the long-term debt consists of six issues of
notes with an aggregate principal amount of $240.6 million, interest rates
ranging from 6.56% to 9.69% and maturities ranging from 2001 to 2008. The notes
contain restrictive covenants, including financial maintenance covenants and
covenants that place limitations on Lennox's ability to incur additional
indebtedness, encumber its assets, sell its assets or pay dividends. The ratio
of total funded debt to EBITDA cannot exceed 3.0 based upon a rolling four
quarter basis. The ratio of EBITDA less capital expenditures to interest expense
should be greater than 3.0 based on a rolling four quarter basis. Lennox's
ability to incur debt is limited to 60.0% of its consolidated capitalization. As
of September 30, 1999, Lennox's consolidated indebtedness as a percent of
consolidated capitalization was 39.6% as defined in the note agreements.
Generally, the aggregate sale of assets outside the ordinary course of business
cannot exceed 15% of Lennox's consolidated assets during any fiscal year and all
transfers after January 1, 1998 cannot exceed 30% of Lennox's consolidated
assets. In addition, in order to pay dividends or make a sale of assets outside
the ordinary course of business, Lennox must be able to incur $1.00 of
additional indebtedness. In addition, Lennox is required to maintain a
consolidated net worth equal to $261.0 million plus 15% of Lennox's consolidated
quarterly net income beginning April 1, 1998. At September 30, 1999, the
required consolidated net worth was $277.3 million and Lennox had a consolidated
net worth of $587.0 million. Upon a change of control, Lennox must make an offer
to repurchase the notes at a price equal to 100% of the principal amount of the
notes, plus accrued and unpaid interest. Lennox's debt service requirements
(including principal and interest payments) for its current outstanding
long-term debt are $40 million in 1999 and $53 million in 2000. As of December
31, 1998, Lennox had approximate minimum commitments on all non-cancelable
operating leases of $22 million and $19 million in 1999 and 2000, respectively.
Lennox has a $300 million revolving credit facility with a syndicate of
banks led by Chase Bank of Texas, National Association, as administrative agent,
Wachovia Bank, N.A., as syndication agent, and The Bank of Nova Scotia, as
documentation agent. The credit facility has restrictive covenants and
maintenance tests identical to those in the notes. Borrowings under this credit
facility bear interest, at Lennox's option, at a rate equal to either (a) the
greater of the administrative agent'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
1.125%, depending upon Lennox's ratio of total funded debt to EBITDA. Lennox
pays a commitment fee equal to 0.15% to 0.30% of the unused commitment,
depending upon the ratio of total funded debt to EBITDA. This credit facility
has a term of five years.
Lennox has signed an agreement with The Prudential Insurance Company of
America which will allow it to borrow up to $100 million in the form of senior
notes from time to time within the first three years of the agreement. The
minimum amount of notes that can be drawn at any one time will be
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$10 million and the maturity and interest rate will be selected from
alternatives provided by Prudential at the time the notes are issued, up to a
maximum maturity of 15 years. The agreement has customary covenants that are
substantially similar to those contained in Lennox's outstanding series of
notes.
Lennox announced a two-phase stock buy-back plan to repurchase, depending
on market conditions and other factors, up to 5 million shares of Lennox common
stock. This may include up to 2 million shares before the closing of the
acquisition of Service Experts, with the remainder to be acquired after the
closing of the acquisition. Purchases under the share repurchase program will be
made on an open-market basis at prevailing market prices in accordance with the
applicable rules and regulations governing such purchases. The timing of any
repurchases will depend on market conditions, the market price of Lennox common
stock, and management's assessment of Lennox's liquidity and cash flow needs.
Lennox intends to refinance the long-term debt of Service Experts at the
time of the merger either by expanding its current $300 million revolving credit
facility or by entering into a new credit facility.
Lennox believes that cash flow from operations, as well as available credit
facilities, will be sufficient to fund its operations and the ongoing business
enterprise endeavors for the foreseeable future. Lennox may pursue additional
debt or equity financing in connection with acquisitions.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain of Lennox's quarterly information for
the years ended December 31, 1997 and 1998 and the nine months ended September
30, 1999. Such information is derived from Lennox's unaudited financial
statements and, in the opinion of Lennox's management, includes all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of such information. Operating results for any given quarter are
not necessarily indicative of results for any future period and should not be
relied upon as an indicator of future performance. Beginning with the fourth
quarter of 1997, Lennox's results of operations reflect the consolidation of
Ets. Brancher.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
1997 1998 1999
-------------------------------------- -------------------------------------- -------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- ------- -------- ------- ------- ------- -------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $307.1 $365.4 $381.9 $ 390.0 $379.6 $456.0 $529.2 $457.0 $489.0
Cost of goods sold.......... 211.6 252.0 265.2 277.1 261.8 309.0 359.6 315.2 337.5
------ ------ ------ ------- ------ ------ ------ ------ ------
Gross profit................ 95.5 113.4 116.7 112.9 117.8 147.0 169.6 141.8 151.5
------ ------ ------ ------- ------ ------ ------ ------ ------
Selling, general and
administrative expenses... 76.1 79.8 80.1 90.3 97.3 108.4 125.7 129.8 129.3
Other operating expense,
net....................... 3.0 0.5 0.9 3.0 2.6 4.6 (1.1) 2.3 2.5
Product inspection charge... -- -- -- 140.0 -- -- -- -- --
------ ------ ------ ------- ------ ------ ------ ------ ------
Income (loss) from
operations................ 16.4 33.1 35.7 (120.4) 17.9 34.0 45.0 9.7 19.7
------ ------ ------ ------- ------ ------ ------ ------ ------
Net income (loss)........... $ 7.9 $ 17.6 $ 18.5 $ (77.6) $ 8.3 $ 17.2 $ 24.5 $ 2.5 $ 6.6
<CAPTION>
QUARTER ENDED
------------------
1999
------------------
JUNE 30 SEPT. 30
------- --------
<S> <C> <C>
Net sales................... $591.8 $669.1
Cost of goods sold.......... 405.5 456.7
------ ------
Gross profit................ 186.3 212.4
------ ------
Selling, general and
administrative expenses... 138.5 154.7
Other operating expense,
net....................... 0.9 3.1
Product inspection charge... -- --
------ ------
Income (loss) from
operations................ 46.9 54.6
------ ------
Net income (loss)........... $ 23.6 $ 27.3
</TABLE>
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The following table sets forth, as a percentage of net sales, statement of
income data by quarter for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1999.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
1997 1998 1999
-------------------------------------- -------------------------------------- -------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- ------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........... 68.9 69.0 69.4 71.1 69.0 67.8 68.0 69.0 69.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 31.1 31.0 30.6 28.9 31.0 32.2 32.0 31.0 31.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Selling, general and
administrative expenses.... 24.8 21.8 21.0 23.1 25.6 23.8 23.7 28.4 26.5
Other operating expense,
net........................ 1.0 0.2 0.2 0.8 0.7 1.0 (0.2) 0.5 0.5
Product inspection charge.... -- -- -- 35.9 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................. 5.3 9.0 9.4 (30.9) 4.7 7.4 8.5 2.1 4.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............ 2.6% 4.8% 4.8% (19.9)% 2.2% 3.8% 4.6% 0.5% 1.4%
<CAPTION>
QUARTER ENDED
------------------
1999
------------------
JUNE 30 SEPT. 30
------- --------
<S> <C> <C>
Net sales.................... 100.0% 100.0%
Cost of goods sold........... 68.5 68.2
----- -----
Gross profit................. 31.5 31.8
----- -----
Selling, general and
administrative expenses.... 23.4 23.1
Other operating expense,
net........................ 0.2 0.5
Product inspection charge.... -- --
----- -----
Income (loss) from
operations................. 7.9 8.2
----- -----
Net income (loss)............ 4.0% 4.1%
</TABLE>
Lennox's quarterly operating results have varied significantly and are
likely to vary significantly in the future. Demand for Lennox's products is
seasonal and dependent on the weather. In addition, a majority of Lennox's
revenue is derived from products whose sales peak in the summer months.
Consequently, Lennox often experiences lower sales levels in the first and
fourth quarters of each year. Because a high percentage of Lennox's overhead and
operating expenses are relatively fixed throughout the year, operating earnings
and net earnings tend to be lower in quarters with lower sales.
MARKET RISK
The estimated fair values of Lennox's financial instruments approximate
their respective carrying amounts at September 30, 1999, except as follows (in
thousands):
<TABLE>
<CAPTION>
FAIR VALUE
------------------
CARRYING INTEREST
AMOUNT AMOUNT RATE
-------- ------- --------
<S> <C> <C> <C>
9.69% promissory notes.................................... $24,600 $26,400 6.75%
9.53% promissory notes.................................... 21,000 21,700 6.75
</TABLE>
Lennox has the ability to prepay these notes within the next twelve months.
Lennox has delivered an irrevocable notice of prepayment effective December 2,
1999 in respect of the 9.69% promissory notes.
Lennox's results of operations can be affected by changes in exchange
rates. Net sales and expenses in currencies other than the United States dollar
are translated into United States dollars for financial reporting purposes based
on the average exchange rate for the period. During 1996, 1997 and 1998 and the
nine months ended September 30, 1998 and 1999, net sales from outside the United
States represented 8.2%, 11.7%, 19.2%, 18.2% and 25.6%, respectively, of total
net sales. Historically, foreign currency transaction gains (losses) have not
had a material effect on Lennox's operations.
Lennox has entered into foreign currency exchange contracts to hedge its
investment in Ets. Brancher. Lennox does not engage in currency speculation.
These contracts do not subject Lennox to risk from exchange rate movements
because the gains or losses on the contracts offset the losses or gains,
respectively, on the assets and liabilities of Ets. Brancher. As of September
30, 1999, Lennox had entered into foreign currency exchange contracts with a
nominal value of 165.5 million French francs (approximately $27.1 million).
These contracts require Lennox to exchange French francs for United States
dollars at maturity, which is in May 2003, at rates agreed to at inception of
the contracts. If the counterparties to the exchange contracts do not fulfill
their obligations to deliver the contracted currencies, Lennox could be at risk
for any currency related fluctuations.
From time to time Lennox enters into foreign currency exchange contracts to
hedge receivables and 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
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receivables or payables being hedged. As of September 30, 1999, Lennox had
obligations to deliver the equivalent of $20.3 million of various foreign
currencies at various dates through July 31, 2000, for which the counterparties
to the contracts will pay fixed contract amounts, and obligations to take the
equivalent of $3.2 million of various currencies at various dates through
December 9, 1999.
Lennox has contracts with various suppliers to purchase copper and aluminum
for use in its manufacturing processes. As of September 30, 1999, Lennox had
contracts to purchase 24.3 million pounds of copper through 2000 at fixed prices
that average $0.7337 per pound ($17.8 million) and contracts to purchase six
million pounds of copper at a variable price equal to a market price over the
next 12 months. Lennox also had contracts to purchase 6.9 million pounds of
aluminum at prices that average $0.6800 ($4.7 million) over the next 15 months.
Additionally, Lennox is committed to purchasing 7.2 million pounds of aluminum
fin stock at $1.013 per pound ($7.3 million) through 2000. The fair value of
these copper and aluminum purchase commitments was an asset of $2.4 million at
September 30, 1999.
INFLATION
Historically, inflation has not had a material effect on Lennox's results
of operations.
YEAR 2000 COMPLIANCE
The Year 2000 issue concerns the ability of information technology and
non-information technology systems and processes to properly recognize and
process date-sensitive information before, during and after December 31, 1999.
Lennox has a variety of computer software program applications, computer
hardware equipment and other equipment with embedded electronic circuits,
including applications used in its financial business systems, manufacturing
processes and administrative functions, which are collectively referred to as
the "systems". Lennox expects that its systems will be ready for the Year 2000
transition.
In order to identify and resolve Year 2000 issues affecting Lennox, it
established a Year 2000 compliance program. The Year 2000 compliance program is
administered by a task force, consisting of members of senior management as well
as personnel from Lennox's accounting, internal audit and legal departments,
which has oversight of the information systems managers and other administrative
personnel charged with implementing Lennox's Year 2000 compliance program. The
task force has established a specific compliance team for Lennox Corporate and
for each of Lennox's operating locations.
In 1994 Lennox began the replacement of all core business systems for its
domestic subsidiaries. The purpose of this replacement was to upgrade systems
architecture and functionality, improve business integration and implement
process improvements. SAP was selected as the enterprise resource for planning
("ERP") system to replace mission critical software and hardware for Lennox
Industries, Heatcraft's Heat Transfer and Refrigeration Products Divisions and
the Lennox Corporate operations. Fourth Shift was selected as the ERP system for
the Electrical Products Division of Heatcraft and is also being implemented for
various subsidiaries of Lennox Global. A new version of ROI Manage 2000 was
implemented for Armstrong. As of September 30, 1999, all replacements of core
business systems for domestic subsidiaries were complete.
SAP, Fourth Shift and ROI Manage 2000 have certified that these systems are
Year 2000 compliant. Hardware, operating systems and databases installed to
support these systems are compliant. Other smaller applications integrated with
SAP have been replaced or upgraded with Year 2000 compliant software.
The implementations of SAP, Fourth Shift and ROI Manage 2000 and the
related hardware, operating systems and databases comprise the systems that are
most critical to Lennox's operations, which are referred to as "critical
systems," and address the areas of Lennox's business which would have otherwise
been significantly affected by the Year 2000. As of September 30, 1999, Lennox
was 100% complete with the implementation of the Year 2000 compliance program
for all critical systems.
Lennox's Year 2000 Program also addresses compliance in areas in addition
to critical systems, including: voice and data networks, desktop computers,
peripherals, EDI, contracted or purchased departmental software, computer
controlled production equipment, test stations, building security, transport
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and heating and air conditioning systems, service providers, key customers and
suppliers and Lennox manufactured and purchased products. As of September 30,
1999, Lennox was more than 95% complete with the implementation of the Year 2000
compliance program for all such areas, and it expects to be 100% complete by
December 31, 1999.
Lennox believes that its most reasonably likely worst case scenario is some
short-term, localized disruptions of systems, transportation or suppliers that
will affect an individual business operation, rather than broad-based and
long-term problems that affect operating segments or its operations as a whole.
For the most part, Lennox's manufacturing processes are not affected by Year
2000 issues. The most significant uncertainties relate to critical suppliers,
particularly electrical power, water, natural gas and communications companies,
and suppliers of parts that are vital to the continuity of Lennox's operations.
Where possible, contingency plans are being formulated and put into place for
all critical suppliers. These plans include developing the necessary safety
stock levels for single source items.
Lennox's estimated cost to become Year 2000 compliant is approximately $6.4
million, of which Lennox has already spent approximately $4.7 million. All of
these expenses will reduce Lennox's net income. Of the $6.4 million in total
costs, approximately $4.1 million relates to application software, including
consulting and training relating to the software, of which approximately $3.5
million has been spent to date. The remaining $2.3 million in total estimated
costs relates to infrastructure and hardware, of which approximately $1.2
million has been spent. Of the remaining $1.1 million, $0.6 million relates to a
lease agreement and is expected to be expensed over a three-year period. The
costs of application and infrastructure changes made for reasons other than the
Year 2000 and which were not accelerated are not included in these estimates.
Lennox has not deferred any significant information technology projects because
of its response to Year 2000 issues. All Year 2000 costs are being funded from
Lennox's operating cash flows. These costs are generally not incremental to
existing information technology budgets.
The total costs, anticipated impact and the expected dates to complete the
various phases of the project are based on Lennox's best estimates using
assumptions about future events. However, no assurance can be given that actual
results will be consistent with such estimates and, therefore, actual costs,
completion dates and impact may differ materially from the plans. See "Special
Note Regarding Forward-Looking Statements" on page 17.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivatives embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Lennox does not believe that the adoption of this
pronouncement will have a significant impact on its financial statements.
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BUSINESS OF LENNOX
Lennox is a leading global provider of climate control solutions. Lennox
designs, manufactures and markets a broad range of products for the HVACR
markets. Lennox's products are sold under well-established brand names including
"Lennox", "Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. Lennox is
also one of the largest manufacturers in North America of heat transfer
products, such as evaporator coils and condenser coils. Lennox has leveraged its
expertise in heat transfer technology, which is critical to the efficient
operation of any heating or cooling system, to become an industry leader known
for its product innovation and the quality and reliability of its products. As a
result of recent acquisitions, Lennox has also become a leader in the growing
market for hearth products, which includes pre-fabricated fireplaces and related
products. Historically, Lennox has sold its "Lennox" brand of residential
heating and air conditioning products directly to a network of installing
dealers, which currently numbers approximately 6,000, making it the largest
wholesale distributor of these products in North America. In September 1998,
Lennox initiated a program to acquire dealers in metropolitan areas in the
United States and Canada so that it can provide heating and air conditioning
products and services directly to consumers.
Lennox's furnaces, heat pumps, air conditioners, pre-fabricated fireplaces
and related products are available in a variety of designs, efficiency levels
and price points that provide an extensive line of comfort systems. A majority
of Lennox's sales of residential heating and air conditioning products in the
United States and Canada are to the repair and replacement market, which is less
cyclical than the new construction market. Lennox also provides a range of air
conditioning products for commercial market applications such as mid-size office
buildings, restaurants, churches and schools. Lennox's commercial refrigeration
products are used primarily in cold storage applications for food preservation
in supermarkets, convenience stores, restaurants, warehouses and distribution
centers. Lennox's heat transfer products are used by Lennox in its HVACR
products and sold to third parties.
Shown below are Lennox's four business segments, the key products and brand
names within each segment and 1998 net sales by segment. The North American
residential segment also includes installation, maintenance and repair services
performed by Lennox-owned dealers. See Lennox's audited financial statements
included elsewhere in this prospectus for more information on its segments.
<TABLE>
<CAPTION>
SEGMENT PRODUCTS BRAND NAMES 1998 NET SALES
- ------- -------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
North American Furnaces, heat pumps, air Lennox, Armstrong Air, $1,013.7
residential conditioners, packaged heating Air-Ease, Concord, Magic-Pak,
and cooling systems and Advanced Distributor Products,
related products; Superior, Marco, Whitfield and
pre-fabricated fireplaces, Security Chimneys
free standing stoves,
fireplace inserts and
accessories
Commercial air Unitary air conditioning and Lennox, Alcair and Janka 392.1
conditioning applied systems
Commercial Chillers, condensing units, Bohn, Friga-Bohn, Larkin, 237.3
refrigeration unit coolers, fluid coolers, Climate Control and Chandler
air cooled condensers and air Refrigeration
handlers
Heat transfer Evaporator and condenser coils Heatcraft and Friga-Bohn 178.7
and equipment and tooling to
manufacture coils
Total $1,821.8
========
</TABLE>
Lennox markets and distributes its products using multiple brand names
through multiple distribution channels to penetrate different segments of the
HVACR market. The "Lennox" brand of residential heating and air conditioning
products is sold directly through installing dealers--the "one-step"
distribution system--which has created strong and long-term relationships with
dealers in North America. Lennox's
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"Armstrong Air," "Air-Ease," "Concord," "Ducane" and "Magic-Pak" residential
heating and air conditioning brands are sold to regional distributors that in
turn sell the products to installing contractors--the "two-step" distribution
system typically utilized in the heating and air conditioning industry. The
acquisition of heating and air conditioning dealers in the United States and
Canada allows Lennox to participate in the retail sale and service of heating
and air conditioning products. Lennox's hearth products, commercial air
conditioning products and refrigeration products are also sold under multiple
brand names and through a combination of wholesalers, contractors, original
equipment manufacturers, manufacturers' representatives and national accounts.
From its beginning in 1895 until the mid-1980's, Lennox focused primarily
on the North American residential heating and air conditioning market. In the
1980's, Lennox expanded its product offerings by acquiring several heat transfer
and commercial refrigeration businesses. In the mid-1990's, Lennox increased its
international presence, product offerings and brand portfolio through
acquisitions in Europe, Latin America and the Asia Pacific region. The most
significant international acquisition was the purchase in 1996 of a 50% interest
in two operating subsidiaries of Ets. Brancher for approximately $22.0 million,
which significantly expanded Lennox's geographic presence and provided it with
an entry into the commercial air conditioning and refrigeration markets in
Europe. In 1997, Lennox increased its ownership interest in Ets. Brancher to 70%
for an additional $18.4 million. In September 1998, Lennox acquired a majority
interest in Heatcraft do Brasil S.A., a Brazilian company which participates in
the commercial refrigeration and heat transfer markets in Brazil and surrounding
countries, for $20.5 million. Lennox recently expanded its product offerings to
include hearth products through the acquisitions of Superior Fireplace Company,
Marco Mfg., Inc. and Pyro Industries, Inc. in the third quarter of 1998 and
Security Chimneys International, Ltd. in the first quarter of 1999 for an
aggregate purchase price of approximately $120 million. As a result of these
acquisitions, Lennox is one of the largest manufacturers of hearth products in
the United States and Canada, offering a broad line of products through a
variety of distribution channels. In the fourth quarter of 1998, Lennox acquired
the assets of Lovelock Luke Pty. Limited, a distributor of refrigeration and
related equipment in Australia and New Zealand, for approximately $7 million. In
May 1999, Lennox acquired Livernois Engineering Holding Company and related
patents for approximately $19 million. Livernois produces heat transfer
manufacturing equipment for the HVACR and automotive industries. 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 October 1999, Lennox acquired essentially all
of the assets of the air conditioning and heating division of The Ducane
Company, Inc. based in South Carolina, for approximately $45 million, with a
contingent payment based on net assets purchased at closing. This acquisition
gives Lennox additional capacity to manufacture heating and air conditioning
products.
Lennox was founded in 1895 in Marshalltown, Iowa when Dave Lennox, who
owned a machine repair business for the railroads, successfully developed and
patented a riveted steel coal-fired furnace which was substantially more durable
than the cast iron furnaces used at the time. By 1904, the manufacture of these
furnaces had grown into a significant business and was diverting the Lennox
Machine Shop from its core business. As a result, in 1904, a group of investors
headed by D.W. Norris bought the furnace business and named it the Lennox
Furnace Company. Over the years, D.W. Norris ensured that ownership of Lennox
was distributed to all generations of his family, and currently Lennox's
ownership is broadly distributed among approximately 110 descendants of or
persons otherwise related to D.W. Norris.
INDUSTRY OVERVIEW
North American Residential
Residential Heating and Air Conditioning. The residential market in the
United States and Canada is divided into two basic categories: furnaces and air
conditioning systems. Air conditioning is further divided into two basic
categories: residential split systems and heat pumps and window and room air
conditioners. Lennox does not participate in the window and room air conditioner
category. Split system air conditioners are comprised of a condensing unit,
normally located outside of the household, and an evaporator unit,
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which is typically positioned indoors to use the blower mechanism of a furnace
or fan coil unit in the case of a heat pump.
In recent decades the functions performed by the products of this market
have become increasingly important to modern life. The advent of modern, high
efficiency air conditioning was one of the significant factors contributing to
the growth of large metropolitan areas in parts of the southern United States
According to a report published by the United States Department of Housing and
Urban Development for 1995, 98% of all new houses constructed in the southern
region of the United States and 80% of all new houses in the United States
included central air conditioning. According to the United States Census Bureau,
manufacturers' sales for all residential air conditioners and warm air furnaces
produced in 1997 for the United States market were approximately $5.5 billion,
reflecting a compound annual growth rate of approximately 7.2% from 1993 to
1997. Lennox estimates that manufacturers' sales in Canada were approximately
$200 million in 1997.
Services in the residential market in North America consist of the
installation, replacement, maintenance and repair of heating and air
conditioning systems at existing residences and the installation of heating and
air conditioning systems at newly constructed homes. This market is served by
small, owner-operated businesses operating in a single geographic area and
dealers owned by consolidators, utility companies and others, some of whom may
operate under a uniform trade name and in multiple geographic locations. The
retail sales and service market in the United States is comprised of over 30,000
dealers.
The principal factors affecting market growth in the North American
residential market are new home construction, the weather and economic
conditions, especially consumer confidence. Residential heating and air
conditioning products are sold for both the replacement and new construction
markets. The residential new construction market has historically been a more
price sensitive market because many homebuilders focus on initial price rather
than operating efficiency or ongoing service costs.
Hearth Products. The main components of the hearth products market are
pre-fabricated gas fireplaces and inserts, pre-fabricated wood burning
fireplaces and inserts, pellet stoves, gas logs, and accessories and
miscellaneous items. Lennox participates in all major aspects of the hearth
products market. According to the Hearth Products Association, an industry trade
group, there were 2.3 million unit sales in 1998, including all gas and wood
burning appliances, and this market is expected to grow at 7.5% per year through
2000. The addition of a fireplace is considered one of the best return on
investment decisions that a homeowner can make. Hearth products are distributed
and sold through many channels, ranging from contractors to specialty retailers.
Commercial Air Conditioning
The global commercial air conditioning market is divided into two basic
categories: unitary air conditioners and applied systems. Lennox primarily
participates in the unitary air conditioning market in North America and in both
the unitary and applied systems markets in Europe. Unitary products consist of
modular split systems and packaged products with up to 30 tons of cooling
capacity. One ton of cooling capacity is equivalent to 12,000 BTUs and is
generally adequate to air condition approximately 500 square feet of space.
Packaged units are self-contained heating and cooling or cooling only units that
typically fit on top of a low rise commercial building such as a shopping center
or a restaurant. Applied systems are typically larger engineered systems, which
are designed to operate in multi-story buildings and include air cooled and
water cooled chillers, air handling units and equipment to monitor and control
the entire system.
According to the Air-Conditioning & Refrigeration Institute, an industry
trade group, global manufacturers' sales for all commercial air conditioning
systems produced in 1994 (the latest available data) were approximately $14
billion. The principal factors affecting growth in this market are new
construction, economic conditions and environmental regulation of refrigerants.
Unlike residential heating and air conditioning systems, some commercial air
conditioning systems use refrigerants that have been banned or that are
currently being phased out, especially in Europe. Lennox expects that such
regulation will lead to increased growth in this market.
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Commercial Refrigeration
The global refrigeration market is a highly diversified market, including
everything from household refrigerators and walk-in coolers to large, ammonia
based flash freezing plants and process cooling equipment. Lennox defines its
served market as the design and manufacture of equipment used in cold storage,
primarily for the preservation of perishable goods. Lennox's served market
includes condensing units, unit coolers, air cooled condensers, non-supermarket
racks and packaged systems. According to the United States Census Bureau,
Lennox's served market in the United States accounted for approximately $510.9
million in revenues in 1997, reflecting a compound annual growth rate of
approximately 5.3% from 1993 to 1997.
The principal factors affecting growth in the commercial refrigeration
market are:
- new commercial construction activity, including construction of
supermarkets, restaurants, convenience stores and distribution centers;
- replacement and retrofit activity in commercial buildings such as
efficiency improvements and store design changes; and
- emergency replacement activity such as replacement of weather related
product/component breakdowns and product maintenance.
Heat Transfer
The heat transfer surface or coil is a fundamental technology employed in
the heating and cooling cycles for HVACR products. The global heat transfer
surface market is comprised not only of the traditional HVACR applications such
as furnaces, air conditioners and unit coolers, but also numerous other
applications such as ice machines, refrigerated trucks, farm equipment and
off-road vehicles, recreational vehicles, computer room air conditioners and
process cooling equipment used with sophisticated laser cutting machines. Lennox
produces heat transfer surfaces not only for traditional HVACR applications, but
also for many of these other applications. Many HVACR manufacturers produce
standard coils for their own use and generally do not sell coils to third
parties. Coils are also designed and produced by independent coil manufacturers
and sold to original equipment manufacturers for use in their products. Coils
are typically designed, developed and sold by engineers who work with customers
to produce a coil that will meet the customer's precise specifications. Factors
affecting a coil purchaser's decision are quality, delivery time, engineering
and design capability, and price.
Since heat transfer products are a fundamental part of HVACR products, the
heat transfer market is driven by the same economic factors that affect the
HVACR markets generally. Because of the fragmented nature of this market and the
fact that coils are often produced internally by HVACR manufacturers, it is
difficult to gauge the size of the worldwide served heat transfer market.
According to the United States Census Bureau, the served market in the United
States (i.e., third party sales) accounted for approximately $528.1 million in
revenues in 1997, reflecting a compound annual growth rate of approximately 6.2%
from 1993 to 1997.
COMPETITIVE STRENGTHS
Lennox has a combination of strengths that position it to continue to be a
leading provider of climate control solutions including:
Strong Brand Recognition and Reputation
Lennox believes that its well known brand names and reputation for quality
products and services positions it to compete successfully in its existing
markets and to continue to expand internationally. Lennox's studies indicate
that its "Lennox" brand is the most widely recognized brand name in the North
American residential heating and air conditioning markets. Furthermore, in a
recent survey of home builders, the "Lennox" brand received the highest overall
rating in terms of product quality for furnaces
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and unitary air conditioners. Lennox markets its other HVACR and hearth products
under the well known brand names of "Armstrong Air", "Bohn", "Larkin" and
"Superior", among others.
Breadth of Distribution
Lennox markets and distributes its products using multiple brand names
through multiple distribution channels to penetrate different segments of the
HVACR market. Lennox sells its heating and air conditioning products through
independent and company-owned installing dealers, as well as through regional
distributors. Lennox's hearth products, commercial air conditioning and
refrigeration products are also sold under multiple brand names and through a
combination of wholesalers, installing contractors, manufacturers'
representatives, original equipment manufacturers, national accounts and
specialty retailers. Lennox believes that sales growth is driven, in part, by
the level of exposure to its customers and its distribution strategy is designed
to maximize this exposure.
Proven Heat Transfer Expertise
Heat transfer surfaces, which include evaporator and condenser coils, are
critical to the operation of most HVACR products. For a given application, a
variety of factors must be evaluated, such as the size of the HVACR unit and
desired energy efficiency, while considering such additional elements as
manufacturing ease. Since its acquisition of the Heatcraft business in 1986,
Lennox has devoted significant resources to the development of heat transfer
surfaces. Lennox uses computer-aided design and other advanced software to
improve the efficiency of designs and simulate and evaluate the movement of
refrigerants even before a prototype is built. Since Lennox also produces coils
for sale to third parties, it is able to spread its research and development
costs over third party purchases of heat transfer products as well as sales of
its own HVACR products. Lennox acquired Livernois Engineering Holding Company
and related patents in May 1999 which provides it with access to additional heat
transfer technology. Livernois produces heat transfer manufacturing equipment
for the HVACR and automotive industries.
Commitment to Product Innovation and Technological Leadership
Throughout its history, Lennox has dedicated substantial resources to
research and development and product innovation. Lennox pioneered the
introduction of the forced air furnace in 1935, which resulted in new approaches
to home design for more efficient heating. Other examples of Lennox's product
innovation include:
- the multi-zone rooftop air conditioner in 1965;
- the two-speed condensing unit for more efficient air conditioning in
1973;
- the high efficiency gas furnace in 1982;
- the first commercially available high efficiency combination hot water
heater and furnace in 1994; and
- "Floating Tube" and "Thermoflex" technologies, which significantly reduce
leaks in air cooled condensers and unit coolers, in 1995.
Lennox has invested approximately $127 million over the last five years on
research and development activities, and it intends to continue to invest in
these activities to create innovative and technologically superior products.
Demonstrated Manufacturing Efficiency
Over the last several years, Lennox has implemented advanced manufacturing
techniques and created programs to incentivize its employees to reduce
production cycle lead times to a week in many of its manufacturing facilities,
compared to lead times of 90 days or more before the introduction of such
concepts. These programs have not only led to improvements in inventory
turnover, but also reductions in
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controllable working capital, which Lennox defines as inventories plus trade
accounts receivables less accounts payable. From January 1996 to December 1998,
controllable working capital as a percent of sales has declined from 36.1% to
26.7%, a reduction of 9.4%. If controllable working capital management had not
improved, Lennox estimates that its investment in working capital would have
been approximately $170 million higher at December 31, 1998, which is based on
the 9.4% improvement multiplied by 1998 net sales.
GROWTH STRATEGY
Lennox's growth strategy is designed to capitalize on its competitive
strengths in order to expand its market share and profitability in the worldwide
HVACR markets. Lennox will continue to pursue internal programs and strategic
acquisitions that broaden its product and service offerings, expand its market
opportunities and enhance its technological expertise. Lennox continually
reviews acquisition candidates but does not have any agreements or commitments
with respect to any significant acquisitions except for the merger. The key
elements of this strategy include:
Expand Market in North America
Lennox's program to acquire heating and air conditioning dealers in the
United States and Canada represents a new direction for the heating and air
conditioning industry because, to its knowledge, no other major manufacturer has
made a significant investment in retail distribution. This strategy will enable
Lennox to extend its distribution directly to the consumer, thereby permitting
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. Lennox started
this program in September 1998, and as of September 30, 1999, it had acquired 57
dealers in Canada and 19 in the United States for an aggregate purchase price of
approximately $164 million and had signed letters of intent to acquire seven
additional Canadian and 25 United States dealers for an aggregate purchase price
of approximately $82 million. Lennox believes its long history of direct
relationships with its dealers through the one-step distribution system and the
resulting knowledge of local markets will give it advantages in identifying and
acquiring suitable candidates. Lennox has assembled an experienced management
team to administer the dealer operations, and Lennox has developed a portfolio
of training programs, management procedures and goods and services that it
believes will enhance the quality, effectiveness and profitability of dealer
operations.
In addition to its acquisition program, Lennox has initiated a program to
strengthen its independent dealer network by providing all dealers with a broad
array of services and support. Participants in a newly-created associate dealer
program will receive retirement and other benefits in exchange for agreeing that
at least 75% of their residential heating and air conditioning purchases will be
of Lennox's products and for granting Lennox a right of first refusal to acquire
their businesses. As of November 15, 1999, over 1400 dealers in the United
States and Canada had joined Lennox's associate dealer program. All independent
dealers, including participants in the associate dealer program, will be
provided with access to Lennox-sponsored volume purchasing programs with third
parties for goods and services used in their businesses.
Lennox also intends to increase its market share in North America by:
- selectively expanding its "Lennox" independent dealer network;
- promoting the cross-selling of its "Armstrong Air" and other residential
heating and air conditioning brands to its existing network of "Lennox"
dealers as a second line;
- promoting the cross-selling of its hearth products to its "Lennox" dealer
base;
- expanding the geographic market for the "Armstrong Air" brand of
residential heating and air conditioning products from its traditional
presence in the Northeast and Central United States to the southern and
western portions of the United States;
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- exploiting the fragmented third-party evaporator coil market; and
- pursuing complementary acquisitions that expand its product offerings or
geographic presence.
Exploit International Opportunities
Worldwide demand for residential and commercial heating, air conditioning,
refrigeration and heat transfer products is increasing. Lennox believes that the
increasing international demand for these products presents substantial
opportunities, especially in emerging markets and particularly for heat transfer
and refrigeration products. An example is the increasing use of refrigeration
products to preserve perishables including food products in underdeveloped
countries. Refrigeration products generally have the same design and
applications globally. To take advantage of international opportunities, Lennox
has made substantial investments in manufacturing facilities in Europe, Latin
America and Asia Pacific through acquisitions, including a 70% interest in Ets.
Brancher. Lennox's international sales have grown from $112.0 million in 1996 to
$349.5 million in 1998. Lennox will continue to focus on expanding its
international operations through acquisitions and internal growth to take
advantage of international growth opportunities. Lennox is also investing
additional resources in its international operations with the goal of achieving
manufacturing and distribution efficiencies comparable to that of its North
American operations.
Increase Presence in Hearth Products Market
With its acquisitions of hearth products companies, Lennox now manufactures
and sells one of the broadest lines of hearth products in North America. Lennox
offers multiple brands of hearth products at a range of price points. Lennox
believes that this broad product line will allow it to compete successfully in
the hearth products market since many distributors prefer to concentrate their
product purchases with a limited number of suppliers. Lennox believes that it
can increase its penetration of this market by selling in the distribution
channels it acquired and through its historical distribution channels. Many of
Lennox's heating and air conditioning dealers have begun to expand their product
offerings to include hearth products.
Continue Product Innovation
An important part of Lennox's growth strategy is to continue to invest in
research and new product development. Lennox has designated a number of its
facilities as "centers for excellence" that are responsible for the research and
development of core competencies vital to its success, such as combustion
technology, vapor compression, heat transfer and low temperature refrigeration.
Technological advances are disseminated from these "centers for excellence" to
all of Lennox's operating divisions. Historically, Lennox's commitment to
research and development has resulted in product innovations such as the first
high efficiency gas furnace. More recently, Lennox was the first to manufacture
and market a complete combination high efficiency water heater and furnace, the
CompleteHeat, and also developed an integrated electronic refrigeration control
system, the Beacon control system.
PRODUCTS
North American Residential Products and Services
Heating and Air Conditioning Products. Lennox manufactures and markets a
broad range of furnaces, heat pumps, air conditioners, packaged heating and
cooling systems and related products. These products are available in a variety
of product designs and efficiency levels at a range of price points intended to
provide a complete line of home comfort systems for both the residential
replacement and new construction markets. Lennox markets these products through
multiple brand names. In addition, Lennox manufactures zoning controls,
thermostats and a complete line of replacement parts. Lennox believes that by
maintaining a broad product line with multiple brand names, it can address
different market segments and penetrate multiple distribution channels.
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Lennox's Advanced Distributor Products division builds evaporator coils,
unit heaters and air handlers under the "ADP" brand as well as the "Lennox" and
"Armstrong Air" brands. This division supplies Lennox with components for its
heating and air conditioning products and produces evaporator coils to be used
in connection with competitors' heating and air conditioning products and as an
alternative to such competitors' brand name components. Lennox started this
business in 1993 and has been able to achieve an approximate 20% share of this
market for evaporator coils through the application of its technological and
manufacturing skills.
Hearth Products. Lennox believes that it is the only North American HVACR
manufacturer that also designs, manufactures and markets residential hearth
products. Lennox's hearth products include prefabricated gas and wood burning
fireplaces, free standing pellet and gas stoves, fireplace inserts, gas logs and
accessories. Many of the fireplaces are built with a blower or fan option and
are efficient heat sources as well as attractive amenities to the home. Prior to
the hearth products acquisitions, Lennox offered a limited selection of hearth
products in Canada and, to a lesser extent, in the United States. Lennox
substantially expanded its offering of hearth products and distribution outlets
with these acquisitions. Lennox currently markets its hearth products under the
"Lennox", "Superior", "Marco", "Whitfield", and "Security Chimneys" brand names.
Lennox believes that its strong relationship with its dealers and its brand
names will assist in selling into this market.
Retail Service. With its recently initiated program of acquiring dealers in
the United States and Canada, Lennox has begun to provide installation,
maintenance, repair and replacement services for heating and air conditioning
systems directly to both residential and light commercial customers.
Installation services include the installation of heating and air conditioning
systems in new construction and the replacement of existing systems. Other
services include preventative maintenance, emergency repairs and the replacement
of parts associated with heating and air conditioning systems. Lennox also sells
a wide range of mechanical and electrical equipment, parts and supplies in
connection with these services.
Commercial Air Conditioning
Lennox manufactures and sells commercial air conditioning equipment in
North America, Europe, Asia Pacific and South America.
North America. In the North American commercial markets, Lennox's air
conditioning equipment is used in applications such as low rise office
buildings, restaurants, retail and supermarket centers, churches and schools.
Lennox's product offerings for these applications include rooftop units which
range from two to 30 tons of cooling capacity and split system/air handler
combinations which range from two to 20 tons. In North America, Lennox sells
unitary equipment as opposed to larger applied systems. Lennox's newest rooftop
unit, the L Series, was introduced in 1995 and has been well received by the
national accounts market where it is sold to restaurants, mass merchandisers and
other retail outlets. Lennox believes that this product's success is
attributable to its efficiency, design flexibility, low life cycle cost, ease of
service and advanced control technology.
International. Lennox competes in the commercial air conditioning market in
Europe through its ownership of 70% of Ets. Brancher and Ets. Brancher's
operating subsidiaries, HCF S.A. and Friga-Bohn S.A. Lennox has agreed to buy
the remaining 30% interest in Ets. Brancher on March 31, 2000 for 102.5 million
French francs, or approximately $17 million. HCF manufactures and sells unitary
products which range from two to 30 tons and applied systems which range up to
500 tons. HCF's products consist of chillers, air handlers, fan coils and large
rooftop units and serve medium high-rise buildings, institutional applications
and other field engineered applications. HCF manufactures its air conditioning
products in several locations throughout Europe, including sites in the United
Kingdom, France, Holland and Spain, and markets such products through various
distribution channels in these countries and in Italy, Germany, Belgium and the
Czech Republic.
Lennox has been active in Australia for several years, primarily in the
distribution of its residential and light commercial heating and air
conditioning products manufactured in North America. In 1997,
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Lennox acquired the assets of Alcair Industries, an Australian manufacturer of
commercial heating and air conditioning products (packaged and split systems)
ranging in size from two to 60 tons. This acquisition provided Lennox with a
manufacturing presence, doubled its revenues in Australia and added marketing,
distribution and management strength to its operations in Australia.
Through its 50% owned Fairco joint venture in Argentina, Lennox
manufactures split system heating and air conditioning products and a limited
range of L Series commercial air conditioning products for sale in Argentina,
Chile and the surrounding Mercosur trading zone, which includes Brazil,
Argentina, Bolivia, Paraguay and Uruguay.
Commercial Refrigeration
North America. Lennox is one of the leading manufacturers of commercial
refrigeration products in North America. Lennox's refrigeration products include
chillers, condensing units, unit coolers, fluid coolers, air cooled condensers
and air handlers. Lennox's refrigeration products are sold for cold storage
applications to preserve food and other perishables. These products are used by
supermarkets, convenience stores, restaurants, warehouses and distribution
centers. As part of its sale of commercial refrigeration products, Lennox
routinely provides application engineering for consulting engineers, contractors
and others. Some of Lennox's larger commercial refrigeration projects have
included the sale of custom designed systems for the Georgia Dome, Camden Yards,
Ohio University, the Boston Museum of Fine Arts and Ericsson Stadium.
International. Friga-Bohn manufactures and markets refrigeration products
through manufacturing facilities and joint ventures located in France, Italy and
Spain. Friga-Bohn's refrigeration products include small chillers, unit coolers,
air cooled condensers, fluid coolers and refrigeration racks. These products are
sold to distributors, installing contractors and original equipment
manufacturers.
Lennox also owns 50% of a joint venture in Mexico that produces unit
coolers and condensing units of the same design and quality as those
manufactured by Lennox in the United States. Since this venture produces a
smaller range of products, the product line is complemented with imports from
the United States which are sold through the joint venture's distribution
network. Sales are made in Mexico to wholesalers, installing contractors and
original equipment manufacturers. As production volumes increase, there exists
the potential to export some of the high labor content products from the joint
venture into North America and Latin America.
In the third quarter of 1998, Lennox acquired an 84% interest in Heatcraft
do Brasil S.A., a Brazilian company that manufactures condensing units and unit
coolers. Lennox believes this acquisition gives it the leading market share for
commercial refrigeration products in Brazil.
In the fourth quarter of 1998, Lennox acquired the assets of Lovelock Luke
Pty. Limited, a distributor of refrigeration and related equipment in Australia
and New Zealand. This acquisition gives Lennox an established commercial
refrigeration business in Australia and New Zealand.
In June 1999, Lennox acquired James N. Kirby Pty. Ltd. for approximately
$65 million. Kirby is an Australian company that manufactures commercial
refrigeration and heat transfer products in Australia and distributes commercial
refrigeration equipment through its and Lovelock Luke's distribution network.
Kirby also designs and manufactures precision machining stations primarily for
the automobile industry. The Kirby acquisition provides a technological and
manufacturing base for the growth of Lennox's commercial refrigeration and heat
transfer business in the Asia Pacific region.
Heat Transfer
Lennox is one of the largest manufacturers of heat transfer coils in the
United States, Europe, Mexico and Brazil. These products are used primarily by
original equipment manufacturers of residential and commercial air conditioning
products, transportation air conditioning and refrigeration systems, and
commercial refrigeration products. A portion of Lennox's original equipment
manufacturer coils are produced for use in its residential and commercial HVACR
products. Lennox also produces private label
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replacement coils for use in other manufacturers' HVACR equipment. Lennox
believes that the engineering expertise of its sales force provides it with an
advantage in designing and applying these products for its customers. Advanced
computer software enables Lennox to predict with a high degree of accuracy the
performance of complete air conditioning and refrigeration systems.
In addition to supplying the original equipment manufacturer market, Lennox
also produces replacement coils for large commercial air conditioning, heating
and industrial processing systems. Many of these coils are specially designed
for particular systems and in the event of a failure may need to be replaced
quickly. Lennox is the industry leader in this market and has designed its
manufacturing processes and systems in North America so that it can deliver
custom coils within 48 hours of receipt of an order. This premium service
enables Lennox to receive superior prices and generate attractive margins.
Lennox also designs and manufactures the equipment and tooling necessary to
produce coils. Lennox uses such equipment and tooling in its manufacturing
facilities and sells it to third parties. Typically, there is a long lead time
between the initial order and receipt for this type of equipment and tooling
from third parties. Since Lennox has the ability to quickly produce the
equipment and tooling necessary to manufacture heat transfer products and
systems, it can accelerate the international growth of its heat transfer
products segment. For example, Lennox was able to design, manufacture and
deliver the equipment necessary to produce evaporator and condenser coils for
its joint venture in Mexico in what it estimates was half the time than would
otherwise have been required to obtain the equipment from third parties. Through
its acquisition of Livernois, Lennox also supplies heat transfer manufacturing
equipment to the automotive industry.
In addition to manufacturing heat transfer products in the North American
market, Lennox produces coils for the European market through a joint venture in
the Czech Republic. Lennox's joint venture in Mexico produces evaporator and
condenser coils for use in that country and for export to the Caribbean and the
United States. Lennox's Brazilian joint venture manufactures heat transfer coils
that are sold to both HVACR manufacturers and automotive original equipment
manufacturers in Brazil.
MARKETING AND DISTRIBUTION
Lennox manages numerous distribution channels for its products in order to
better penetrate the HVACR market. Generally, Lennox's products are sold through
a combination of distributors, independent and company-owned dealers,
wholesalers, manufacturers' representatives, original equipment manufacturers
and national accounts. Lennox has also established separate distribution
networks in each country in which it conducts operations. Lennox deploys
dedicated sales forces across all its business segments and brands in a manner
designed to maximize the ability of each sales force to service its particular
distribution channel. To maximize enterprise-wide effectiveness, Lennox has
active cross-functional and cross-organizational teams working on issues such as
pricing and coordinated approaches to product design and national account
customers with interests cutting across business segments. Lennox has
approximately 1,600 persons employed in sales and marketing positions and spent
$50.2 million on advertising, promotions and related marketing activities in
1998.
One example of the competitive strength of Lennox's marketing and
distribution strategy is in the North American residential heating and air
conditioning market, in which it uses three distinctly different distribution
approaches--the one-step distribution system, the two-step distribution system
and sales made directly to consumers through Lennox-owned dealers. Lennox
markets and distributes its "Lennox" brand of heating and air conditioning
products directly to approximately 6,000 dealers that install these products.
Lennox distributes its "Armstrong Air", "Air-Ease", "Concord," "Ducane" and
"Magic-Pak" brands of residential heating and air conditioning products through
the traditional two-step distribution process whereby it sells its products to
distributors who, in turn, sell the products to a local installing dealer.
Accordingly, by using multiple brands and distribution channels, Lennox is able
to better penetrate the North American residential heating and air conditioning
market. In addition, Lennox has begun to acquire or establish distributors in
key strategic areas when a satisfactory relationship with an independent
distributor is not available.
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Lennox has initiated a program to acquire high quality dealers in
metropolitan areas in the United States and Canada so it can provide heating and
air conditioning products and services directly to consumers.
Through the years, the "Lennox" brand has become synonymous with the "Dave
Lennox" image, which is utilized in national television and print advertising as
well as in numerous locally produced dealer ads, open houses and trade events,
and is easily the best recognized advertising icon in the heating and air
conditioning industry. Lennox spent an aggregate of $40.1 million in
advertising, promotions and related marketing activities in 1998 on the "Lennox"
brand alone.
MANUFACTURING
Lennox operates 15 manufacturing facilities in the United States and Canada
and 23 outside the United States and Canada. These plants range from small
manufacturing facilities to large 1,000,000 square foot facilities in Grenada,
Mississippi and Marshalltown, Iowa. In its facilities most impacted by seasonal
demand, Lennox manufactures both heating and air conditioning products to smooth
seasonal production demands and maintain a relatively stable labor force. Lennox
is generally able to hire temporary employees to meet changes in demand.
Some of the recently acquired manufacturing facilities have not yet reached
the levels of efficiency that have been achieved at its plants which Lennox has
owned for a longer time. However, Lennox intends to bring its manufacturing and
operating expertise to these plants.
PURCHASING
Lennox relies on various suppliers to furnish the raw materials and
components used in the manufacture of its products. To maximize its buying power
in the marketplace, Lennox utilizes a "purchasing council" that consolidates
purchases of its entire domestic requirements of particular items across all
business segments. The purchasing council generally concentrates its purchases
for a given material or component with one or two suppliers, although Lennox
believes that there are alternative suppliers for all of its key raw material
and component needs. Compressors, motors and controls constitute Lennox's most
significant component purchases, while steel, copper and aluminum account for
the bulk of Lennox's raw material purchases. Although most of the compressors
used by Lennox are purchased directly from major compressor manufacturers,
Lennox owns a 24.5% interest in a joint venture to manufacture compressors in
the one and one-half to seven horsepower range. Lennox expects that this joint
venture, which began limited production in April 1998, will be capable of
providing Lennox with a substantial portion of its compressor requirements in
the residential air conditioning market after achieving full production levels,
which is expected in 2001.
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 for its needs throughout the year. In
instances where Lennox is unable to pass on to its customers increases in the
costs of copper and aluminum, Lennox enters into forward contracts for the
purchase of such materials.
INFORMATION SYSTEMS
Lennox's North American operations are supported by enterprise business
systems which support all core business processes. Enterprise business systems
are designed to enhance the continuity of operations, ensure appropriate
controls, and support timely and efficient decision making. Lennox's two largest
operating divisions, Lennox Industries and Heatcraft, began installing the SAP
enterprise business software system in 1996. A version of ROI Manage 2000 was
selected from Armstrong. At this time, all implementations of enterprise
business systems for Lennox's major North American operations are complete.
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TECHNOLOGY AND RESEARCH AND DEVELOPMENT
Lennox supports an extensive research and development program focusing on
the development of new products and improvements to its existing product lines.
Lennox spent an aggregate of $23.2 million, $25.4 million and $33.3 million on
research and development during 1996, 1997 and 1998, respectively. As of
December 31, 1998, Lennox employed approximately 480 persons dedicated to
research and development activities. Lennox has a number of research and
development facilities located around the world, including a limited number of
"centers for excellence" that are responsible for the research and development
of particular core competencies vital to its business, such as combustion
technology, vapor compression, heat transfer and low temperature refrigeration.
Lennox uses advanced, commercially available computer-aided design,
computer-aided manufacturing, computational fluid dynamics and other
sophisticated software not only to streamline the design and manufacturing
processes, but also to give it the ability to run complex computer simulations
on a product design before a working prototype is created. Lennox operates a
full line of metalworking equipment and advanced laboratories certified by
applicable industry associations.
PATENTS AND PROPRIETARY RIGHTS
Lennox holds numerous patents that relate to the design and use of its
products. Lennox considers these patents important, but no single patent is
material to the overall conduct of its business. Lennox's policy is to obtain
and protect patents whenever such action would be beneficial to it. No patent
which Lennox considers material will expire in the next five years. Lennox owns
several trademarks that it considers important in the marketing of its products,
including Lennox(R), Heatcraft(R), CompleteHeat(R), Raised Lance(TM),
Larkin(TM), Climate Control(TM), Chandler Refrigeration(R), Bohn(R), Advanced
Distributor Products(R), Armstrong Air(TM), Air-Ease(R), Concord(R),
Magic-Pak(R), Superior(TM), Marco(R), Whitfield(R), Security Chimneys(R),
Janka(TM), Alcair(TM), Ducane(TM) and Friga-Bohn(TM). These trademarks have no
fixed expiration dates and Lennox believes its rights in these trademarks are
adequately protected.
COMPETITION
Substantially all of the markets in which Lennox participates are highly
competitive. The most significant competitive factors facing Lennox are product
reliability, product performance, service and price, with the relative
importance of these factors varying among its product lines. In addition, as
Lennox acquires more heating and air conditioning dealers, Lennox will face
increasing competition from independent dealers and dealers owned by
consolidators and utility companies. Lennox's competitors may have greater
financial and marketing resources than it has. Listed below are some of the
companies that Lennox views as its main manufacturing competitors in each
segment Lennox serves, with relevant brand names, when different than the
company name, shown in parentheses.
- North American residential--United Technologies Corporation (Carrier);
Goodman Manufacturing Company (Janitrol, Amana); American Standard
Companies Inc. (Trane); York International Corporation; Hearth
Technologies Inc. (Heatilator); and CFM Majestic, Inc. (Majestic).
- Commercial air conditioning--United Technologies Corporation (Carrier);
American Standard Companies Inc. (Trane); York International Corporation;
Daikin Industries, Ltd.; and McQuay International.
- Commercial refrigeration--United Technologies Corporation (Ardco Group);
Tecumseh Products Co.; Copeland Corporation; and Hussmann International
Inc. (Krack).
- Heat transfer--Modine Manufacturing Company and Super Radiator Coils.
EMPLOYEES
As of September 30, 1999, Lennox employed approximately 16,500 employees,
approximately 3,750 of which were represented by unions. The number of hourly
workers Lennox employs during the course of
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the year may vary in order to match its labor needs during periods of
fluctuating demand. Lennox believes that its relationships with its employees
are generally good.
Within the United States, Lennox has eight manufacturing facilities and
five distribution centers, along with its North American Parts Center in Des
Moines, Iowa, with collective bargaining agreements ranging from three to eight
years in length. The five distribution centers are covered by a single contract
that expires in 2001. At Lennox's significant manufacturing facilities, one
collective bargaining agreement expires in December 1999--Lynwood, California.
Two collective bargaining agreements expire in 2000--Burlington, Washington and
Atlanta, Georgia--and three expire in 2002--Bellevue, Ohio, Danville, Illinois
and Union City, Tennessee. Following the expiration of the collective bargaining
agreement in April 1999, Lennox experienced a work stoppage at its Bellevue,
Ohio factory for three weeks in May 1999. This facility has a new collective
bargaining agreement that expires April 2002. Outside of the United States,
Lennox has 13 significant facilities that are represented by unions. The four
agreements for HCF in France have no fixed expiration date. The agreement at
Lennox's facility in Laval, Quebec expires in December 1999, the agreement at
its facility in Burgos, Spain expires in 2000 and the agreement at Lennox's
facility in Toronto, Ontario expires in April 2001. Lennox believes that its
relationships with the unions representing its employees are generally good, and
do not anticipate any material adverse consequences resulting from negotiations
to renew these agreements.
PROPERTIES
The following chart lists Lennox's major domestic and international
manufacturing, distribution and office facilities and whether such facilities
are owned or leased:
DOMESTIC FACILITIES
<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED
- -------- -------------------------------- ------------------ ------------
<S> <C> <C> <C>
Richardson, TX World headquarters and offices; N/A Owned and
Lennox Industries headquarters; Leased
230,000 square feet
Bellevue, OH Armstrong headquarters, factory Residential furnaces, Owned and
and distribution center; 800,000 residential and light Leased
square feet commercial air conditioners
and heat pumps
Grenada, MS Heatcraft Heat Transfer Division Coils and copper tubing; Owned and
headquarters and factory, evaporator coils, gas-fired Leased
1,000,000 square feet; Advanced unit heaters and residential
Distributor Products factory, air handlers; and custom
300,000 square feet; commercial order replacement coils
products factory, 217,000 square
feet
Stone Mountain, GA Heatcraft Refrigeration Products Commercial and industrial Owned
Division headquarters, R&D and condensing units, packaged
factory; 145,000 square feet chillers and custom
refrigeration racks
Marshalltown, IA Lennox Industries heating and Residential heating and Owned and
air conditioning products cooling products, gas Leased
factory, 1,000,000 square feet; furnaces, split- system
distribution center, 300,000 condensing units, split-
square feet system heat pumps and
CompleteHeat
Des Moines, IA Lennox Industries distribution Central supplier of Lennox Leased
center and light manufacturing; repair parts
352,000 square feet
</TABLE>
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<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED
- -------- -------------------------------- ------------------ ------------
<S> <C> <C> <C>
Carrollton, TX Lennox Industries heating and N/A Owned
air conditioning products
development and research
facility; 130,000 square feet
Stuttgart, AR Lennox Industries light Commercial rooftop equipment Owned and
commercial heating and air and accessories Leased
conditioning factory; 500,000
square feet
Union City, TN Superior Fireplace Company Gas and wood burning Owned
factory; 294,690 square feet fireplaces
Lynwood, CA Marco Mfg. Inc. headquarters and Gas and wood burning Leased
factory; 200,000 square feet fireplaces
Blackville, SC Excel Comfort Systems Inc. Residential heating and Owned
headquarters and factory; cooling products
375,000 square feet
</TABLE>
INTERNATIONAL FACILITIES
<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED
- -------- -------------------------------- ------------------ ------------
<S> <C> <C> <C>
Genas, France Friga-Bohn headquarters and Heat exchangers for *
factory; 16,000 square meters refrigeration and air
conditioning; refrigeration
products, condensers, fluid
coolers, pressure vessels,
liquid receivers and
refrigeration components
Mions, France HCF-Lennox headquarters and Air cooled chillers, water *
factories; 12,000 square meters cooled chillers, reversible
chillers and packaged
boilers
Burgos, Spain Lennox-Refac factory; 8,000 Comfort air conditioning *
square meters equipment, packaged and
split units (cooling or heat
pump); small and medium
capacity water cooled
chillers
Krunkel, Germany European headquarters and Process cooling systems *
factories for HYFRA GmbH
products; 6,000 square meters
Prague, Czech Republic Janka and Friga-Coil factories; Air handling equipment; heat *
30,000 square meters transfer coils
Sydney, Australia Lennox Australia Pty. Ltd. Rooftop packaged and split Leased
headquarters and factory; 20,000 commercial air conditioners
square feet
Sydney, Australia James N. Kirby Pty. Ltd. Refrigeration condensing Owned
headquarters and factory; units; machine tools
412,000 square feet
</TABLE>
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<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED
- -------- -------------------------------- ------------------ ------------
<S> <C> <C> <C>
San Jose dos Campos, Brazil Heatcraft do Brasil headquarters Refrigeration condensing *
and factory; 160,000 square feet units, unit coolers and heat
transfer coils
Etobicoke, Canada Lennox-Canada factory, 212,000 Multi-position gas furnaces, Owned
square feet gas fireplaces and
commercial unit heaters
</TABLE>
- ---------------
* Facilities owned or leased by a joint venture in which Lennox has an interest.
In addition to the properties described above and excluding dealer
facilities, Lennox leases over 55 facilities in the United States for use as
sales offices and district warehouses and a limited number of additional
facilities worldwide for use as sales and service offices and regional
warehouses. Lennox believes that its properties are in good condition and
adequate for its requirements. Lennox also believes that its principal plants
are generally adequate to meet its production needs.
REGULATION
Lennox's operations are subject to evolving and often increasingly
stringent federal, state, local and international laws and regulations
concerning the environment. Environmental laws that affect or could affect
Lennox's domestic operations include, among others, the Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substances
Control Act, any regulations promulgated under these acts and various other
Federal, state and local laws and regulations governing environmental matters.
Lennox believes it is in substantial compliance with such existing environmental
laws and regulations. Lennox's non-United States operations are also subject to
various environmental statutes and regulations. Generally, these statutes and
regulations impose operational requirements that are similar to those imposed in
the United States Lennox believes it is in substantial compliance with
applicable non-United States environmental statutes and regulations.
Refrigerants. In the past decade, there has been increasing regulatory and
political pressure to phase out the use of certain ozone depleting substances,
including hydrochlorofluorocarbons, which are sometimes referred to as "HCFCs".
This development is of particular importance to Lennox and its competitors
because of the common usage of HCFCs as refrigerants for air conditioning and
refrigeration equipment. As discussed below, Lennox does not believe that
implementation of the phase out schedule for HCFCs contained in the current
regulations will have a material adverse effect on its financial position or
results of operations. Lennox does believe, however, that there will likely be
continued pressure by the international environmental community for the United
States and other countries to accelerate the phase out schedule. Lennox has been
an active participant in the ongoing international dialogue on these issues and
believes that it is well positioned to react to any changes in the regulatory
landscape.
In September 1987, the United States became a signatory to an international
agreement titled the Montreal Protocol on Substances that Deplete the Ozone
Layer. The Montreal Protocol requires its signatories to phase out HCFCs on an
orderly basis. All countries in the developed world have become signatories to
the Montreal Protocol. The manner in which these countries implement the
Montreal Protocol and regulate HCFCs differs widely.
The 1990 U.S. Clean Air Act amendments implement the Montreal Protocol by
establishing a program to limit the production, importation and use of specified
ozone depleting substances, including HCFCs currently used as refrigerants by
Lennox and its competitors. Under the Clean Air Act and implementing
regulations, all HCFCs must be phased out between 2010 and 2030. Lennox believes
that these regulations as currently in effect will not have a material adverse
effect on its operations. It is not expected that the planned phase out of HCFCs
will have a significant impact on the sales of products utilizing these
refrigerants prior to the end of the decade. Nonetheless, as the supply of
virgin and recycled
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HCFCs falls, it will be necessary to address the need to substitute permitted
substances for HCFCs. Further, the United States is under pressure from the
international environmental community to accelerate the current 2030 deadline
for phase out of HCFCs. An accelerated phase out schedule could adversely affect
Lennox's future financial results and the industry generally.
Lennox, together with major chemical manufacturers, are continually in the
process of reviewing and addressing the potential impact of refrigerant
regulations on its products. Lennox believes that the combination of products
that presently utilize HCFCs, and products in the field which can be retrofitted
to alternate refrigerants, provide a complete line of commercial and industrial
products. Therefore, Lennox does not foresee any material adverse impact on its
business or competitive position as a result of the Montreal Protocol, the 1990
Clean Air Act amendments or their implementing regulations. However, Lennox
believes that the implementation of severe restrictions on the production,
importation or use of refrigerants Lennox employs in larger quantities or
acceleration of the current phase out schedule could have such an impact on
Lennox and its competitors.
Lennox is subject to appliance efficiency regulations promulgated under the
National Appliance Energy Conservation Act of 1987, as amended, and various
state regulations concerning the energy efficiency of its products. Lennox has
developed and is developing products which comply with National Appliance Energy
Conservation Act regulations, and does not believe that such regulations will
have a material adverse effect on its business. The United States Department of
Energy began in 1998 its review of national standards for comfort products
covered under National Appliance Energy Conservation Act. It is anticipated that
the National Appliance Energy Conservation Act regulations requiring
manufacturers to phase in new higher efficiency products will not take effect
prior to 2006. Lennox believes it is well positioned to comply with any new
standards that may be promulgated by the Department of Energy and does not
foresee any adverse material impact from a National Appliance Energy
Conservation Act standard change.
Remediation Activity. In addition to affecting Lennox's ongoing operations,
applicable environmental laws can impose obligations to remediate hazardous
substances at its properties, at properties formerly owned or operated by Lennox
and at facilities to which it sent or sends waste for treatment or disposal.
Lennox is currently involved in remediation activities at its facility in
Grenada, Mississippi and at a formerly owned site in Ft. Worth, Texas. In
addition, former hazardous waste management units at two of its facilities,
Danville, Illinois and Wilmington, North Carolina, are currently in the process
of being closed under the Resource Conservation and Recovery Act.
The Resource Conservation and Recovery Act closure process can result in
the need to conduct soil and/or groundwater remediation to address any on-site
releases. The Grenada facility is subject to an administrative order issued by
the Mississippi Department of Environmental Quality under which Lennox will
conduct groundwater remediation. Lennox has established a $1.718 million reserve
to cover costs of remediation at the Grenada facility and possible costs
associated with the Resource Conservation and Recovery Act closure at the
Danville facility. Lennox also has installed and is operating a groundwater
treatment system at its previously owned facility in Ft. Worth, Texas. Lennox
has established a reserve having a balance of approximately $180,000 to cover
the projected $50,000 annual operating costs for ongoing treatment at the Ft.
Worth site. Resource Conservation and Recovery Act closure activities at the
Wilmington facility include an ongoing groundwater remediation project. This
project is being conducted and funded by a prior owner of the facility, under an
indemnification obligation under the contract pursuant to which Lennox acquired
the facility. Lennox has no reason to believe that the prior owner will not
continue to conduct and pay for the required remediation at the Wilmington
facility. However, if the prior owner refused to meet its contractual
obligations, Lennox would be required to complete the remediation. Through soil
and groundwater sampling, usually obtained during site acquisition due
diligence, Lennox is aware of contamination at some of its other facilities.
Based on the levels of the contaminants detected, however, Lennox does not
believe it is required to remediate the contamination at these facilities under
existing environmental laws. Nonetheless, it is possible that Lennox may be
required to conduct remediation at these facilities in the future. Also, it is
possible that third parties may file property damage
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or personal injury claims against Lennox related to this contamination,
particularly if the contamination on its property has migrated offsite.
Also, during environmental due diligence for a plant Lennox acquired in
1999 in Blackville, South Carolina, Lennox learned of soil and groundwater
contamination at the site which requires further assessment and possible
remediation. These projects are being conducted and funded by the prior owners
of the facilities, under contractual obligations pursuant to which Lennox
acquired the facilities. Lennox has no reason to believe that the prior owners
will not continue to conduct and pay for the required assessments and
remediation at the Wilmington and Blackville facilities. However, if the prior
owners refuse to meet their contractual obligations, Lennox would be required to
complete the remediation. The prior owner of the Blackville site has provided a
letter of credit in the amount of $700,000 to secure its obligations for
assessment and remediation.
During environmental due diligence for a plant Lennox acquired in 1998 in
Czechoslovakia, Lennox learned of soil and groundwater contamination at the
site. The source of the contamination is not known and it is not known at this
time whether the applicable governmental authority will require Lennox to
remediate the contamination. If remediation is required, a preliminary estimate
of remediation costs prepared in 1995 is $114,000. Additional evaluation would
need to be performed to refine this estimate and it is possible that the actual
cost to remediate the plant would significantly exceed this preliminary
estimate.
From time to time Lennox has received notices that it is a potentially
responsible party along with other potentially responsible parties in Superfund
proceedings for cleanup of hazardous substances at certain sites to which the
potentially responsible parties are alleged to have sent waste. At present,
Lennox's only active Superfund involvements are at the Granville Solvents
Superfund Site located in Ohio, the Envirochem Third Site in Illinois and the
Operating Industries site in California. Since 1994, Lennox has spent an average
of $49,000 per year for costs related to the Granville Solvents site and expects
to incur similar costs at the site over the next few years. Total estimated
exposure costs at the Envirochem Third Site are approximately $30,000. Marco
Mfg., an indirect subsidiary of Lennox, is one of more than 4,000 companies
identified as potentially responsible parties for the Operating Industries site.
In June 1998, Marco Mfg. received a settlement offer from the Operating
Industries steering committee to settle its liability as a de minimis party for
approximately $60,000. Marco rejected the settlement offer and has no reason to
believe that its ultimate liability will exceed the proposed settlement amount.
In May 1999, Lennox received a settlement offer from the Gurley-Related Sites
Group, a group of potentially responsible parties for two related Superfund
sites in Arkansas--the South 8th Street Landfill and the Gurley Pit Sites--to
settle its potential liability at those sites for $10,500. Although Lennox
accepted the settlement offer and paid the settlement amount, under the terms of
the settlement agreement, there is the possibility for additional liability in
the event the Gurley-Related Sites Group is not successful in its effort to
finalize its settlement in principle with the EPA and the Arkansas Department of
Pollution Control and Technology. In the event additional liability should
arise, however, Lennox does not expect it to be material. Based on the facts
presently known, Lennox does not believe that environmental cleanup costs
associated with these Superfund sites will have a material adverse effect on its
financial position or results of operations.
Dealer operations. The heating and air conditioning dealers acquired in the
United States and Canada will be subject to various federal, state and local
laws and regulations, including:
- permitting and licensing requirements applicable to service technicians
in their respective trades;
- building, heating, ventilation, air conditioning, plumbing and electrical
codes and zoning ordinances;
- laws and regulations relating to consumer protection, including laws and
regulations governing service contracts for residential services; and
- laws and regulations relating to worker safety and protection of the
environment.
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A large number of state and local regulations governing the residential and
commercial maintenance services trades require various permits and licenses to
be held by individuals. In some cases, a required permit or license held by a
single individual may be sufficient to authorize specified activities for all of
Lennox's service technicians who work in the geographic area covered by the
permit or license.
LEGAL PROCEEDINGS
Lennox is involved in various claims and lawsuits incidental to its
business. In the opinion of Lennox's management, these claims and suits in the
aggregate will not have a material adverse effect on its business, financial
condition or results of operations.
MANAGEMENT OF LENNOX
The directors and executive officers of Lennox, their present positions and
their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John W. Norris, Jr. ............................ 63 Chairman of the Board and Chief Executive
Officer
H. E. French.................................... 58 President and Chief Operating Officer,
Heatcraft Inc.
Robert E. Schjerven............................. 56 President and Chief Operating Officer, Lennox
Industries Inc.
Michael G. Schwartz............................. 41 President and Chief Operating Officer,
Armstrong Air Conditioning Inc.
Harry J. Ashenhurst............................. 51 Executive Vice President, Human Resources
Scott J. Boxer.................................. 48 Executive Vice President, Lennox Global Ltd.
and President, European Operations
Carl E. Edwards, Jr. ........................... 58 Executive Vice President, General Counsel and
Secretary
W. Lane Pennington.............................. 44 Executive Vice President, Lennox Global Ltd.
and President, Asia Pacific Operations
Clyde W. Wyant.................................. 61 Executive Vice President, Chief Financial
Officer and Treasurer
John J. Hubbuch................................. 56 Vice President, Controller and Chief Accounting
Officer
Linda G. Alvarado............................... 48 Director
David H. Anderson............................... 58 Director
Richard W. Booth................................ 67 Director
Thomas W. Booth................................. 42 Director
David V. Brown.................................. 51 Director
James J. Byrne.................................. 63 Director
Janet K. Cooper................................. 45 Director
John E. Major................................... 53 Director
Donald E. Miller................................ 68 Director
Terry D. Stinson................................ 57 Director
Richard L. Thompson............................. 60 Director
</TABLE>
There are currently two vacancies on Lennox's board of directors which it
expects to fill with non-employee directors. The merger agreement requires
Lennox to nominate and recommend one individual proposed by Service Experts and
acceptable to Lennox who is currently a member of the board of directors of
Service Experts for election to a three-year term on the board of directors of
Lennox at Lennox's 2000 annual meeting of stockholders. See "Material Terms of
the Merger Agreement--Board of Directors and Officers" on page 103.
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The following biographies describe the business experience of Lennox's
executive officers and directors.
John W. Norris, Jr. was elected Chairman of the board of directors of
Lennox in 1991. He has served as a director of Lennox since 1966. After joining
Lennox in 1960, Mr. Norris held a variety of key positions including Vice
President of Marketing, President of Lennox Industries (Canada) Ltd., a
subsidiary of Lennox, and Corporate Senior Vice President. He became President
of Lennox in 1977 and was appointed President and Chief Executive Officer of
Lennox in 1980. Mr. Norris is on the board of directors of the Air-Conditioning
& Refrigeration Institute of which he was chairman in 1986. He is also an active
board member of the Gas Appliance Manufacturers Association, where he was
Chairman from 1980 to 1981. He also serves as a director of AmerUs Life
Holdings, Inc., a life insurance and annuity company, and Metroplex Regional
Advisory Board of Chase Bank of Texas, NA.
H. E. French is the President and Chief Operating Officer of Heatcraft
Inc., a subsidiary of Lennox. Mr. French joined Lennox in 1989 as Vice President
and General Manager of the Refrigeration Products division for Heatcraft Inc. In
1995 he was named President and Chief Operating Officer of Armstrong Air
Conditioning Inc., a subsidiary of Lennox. Mr. French was appointed to his
current role in 1997. Prior to joining Lennox, Mr. French spent 11 years in
management with Wickes/Larkin, Inc.
Robert E. Schjerven was named President and Chief Operating Officer of
Lennox Industries Inc., a subsidiary of Lennox, in 1995. In 1986, he joined
Lennox as Vice President of Marketing and Engineering for Heatcraft Inc. From
1988 to 1991 he held the position of Vice President and General Manager of that
subsidiary. From 1991 to 1995 he served as President and Chief Operating Officer
of Armstrong Air Conditioning Inc. Mr. Schjerven spent the first 20 years of his
career with the Trane Company, a HVACR manufacturer, and McQuay-Perfex Inc.
Michael G. Schwartz became the President and Chief Operating Officer of
Armstrong Air Conditioning Inc. in 1997. He joined Heatcraft in 1990 when Lennox
acquired Bohn Heat Transfer Inc. and served as Director of Sales and Marketing,
Original Equipment Manufacturer Products. Prior to his current appointment, he
served as Vice President of Commercial Products for Heatcraft Inc. where his
responsibilities included the development of Heatcraft's position in the A-Coil
market. Mr. Schwartz began his career with Bohn Heat Transfer Inc. in 1981.
Harry J. Ashenhurst was appointed Executive Vice President, Human Resources
and Administration in 1994. He joined Lennox in 1989 as Vice President of Human
Resources. Dr. Ashenhurst was named Executive Vice President, Human Resources
for Lennox in 1990 and in 1994 moved to his current position and assumed
responsibility for the Public Relations and Communications and Aviation
departments. Prior to joining Lennox, he worked as an independent management
consultant with the consulting firm of Roher, Hibler and Replogle. While at
Roher, Hibler and Replogle, Dr. Ashenhurst was assigned to work as a corporate
psychologist for Lennox.
Scott J. Boxer joined Lennox in 1998 as Executive Vice President, Lennox
Global Ltd., a subsidiary of Lennox, and President, European Operations. Prior
to joining Lennox, Mr. Boxer spent 26 years with York International Corporation,
a HVACR manufacturer, in various roles, most recently as President, Unitary
Products Group Worldwide, where he reported directly to the Chairman of that
company and was responsible for directing that company's residential and light
commercial heating and air conditioning operations worldwide.
Carl E. Edwards, Jr. joined Lennox in February 1992 as Vice President and
General Counsel. He became the Secretary of Lennox in April 1992 and was also
named Executive Vice President and General Counsel in December 1992. Prior to
joining Lennox, he was Vice President, General Counsel and Secretary for Elcor
Corporation. He also serves as a director of Kentucky Electric Steel Inc.
W. Lane Pennington was appointed to his current position of Executive Vice
President, Lennox Global Ltd. and President, Asia Pacific Operations in 1998. He
joined Lennox in 1997 as Vice President, Asia Pacific Operations. From 1988
until 1997, Mr. Pennington was with Hilti International Corp., a worldwide
supplier of specialized building products and engineering services for the
commercial
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construction industry, where he most recently served as President, Hilti Asia
Limited, based in Hong Kong.
Clyde W. Wyant joined Lennox in 1990 and was appointed Executive Vice
President, Chief Financial Officer and Treasurer, the position he still holds.
Prior to joining Lennox, he served as Executive Vice President, Chief Financial
Officer and Director of Purolator Products Co. (formerly Facet Enterprises,
Inc.), a manufacturer of filtration equipment, from 1985 to 1990. In 1965, Mr.
Wyant began his career with Helmerich & Payne Inc., an oil service company,
where he last served as Vice President, Finance.
John J. Hubbuch was named Vice President, Controller and Chief Accounting
Officer of Lennox in 1998. Mr. Hubbuch joined Lennox in 1986 as the Division
Controller for Heatcraft Inc. In 1989 he became Heatcraft's Group Controller.
From 1982 to 1986, Mr. Hubbuch was the Division Controller for McQuay-Perfex
Inc./SynderGeneral. In 1992 he became Corporate Controller of Lennox.
Linda G. Alvarado has served as a director of Lennox since 1987. She is
President of Alvarado Construction, Inc. a general contracting firm specializing
in commercial, government and industrial construction and environmental
remediation projects. She currently serves on the Board of Directors of Cyprus
Amax Minerals Company, a diversified mining company, US West, Inc., a
telecommunications company, Englehard Corporation, a commercial catalyst and
pigments company, and Pitney Bowes Inc., an office equipment and services
company, and is part owner of the Colorado Rockies Baseball Club.
David H. Anderson has served as a director of Lennox since 1973. Mr.
Anderson currently serves as the Co-Executive Director of the Santa Barbara
Museum of Natural History. He formerly had a private law practice specializing
in land use and environmental law. Mr. Anderson also serves as legal counsel for
a local land conservation organization in Santa Barbara County. He currently
serves on the Boards of the California Nature Conservancy, the Land Trust for
Santa Barbara County and the Santa Barbara Foundation.
Richard W. Booth has served as a director of Lennox since 1966. Mr. Booth
retired from Lennox in 1992 as Executive Vice President, Administration and
Secretary, a position he had held since 1983. Mr. Booth held a variety of key
positions after joining Lennox in 1954. He serves on the board of directors of
Employers Mutual Casualty Company, a casualty insurance company, and is a member
of the board of trustees of Grinnell College.
Thomas W. Booth has served as a director of Lennox since April 1999. Since
1997, Mr. Booth has been the Director, Business Development of Heatcraft Inc.
Mr. Booth joined Lennox in 1984 and has served in various capacities including
the District Manager for the Baltimore/Virginia sales branch of Lennox
Industries from 1994 to 1997.
David V. Brown has served as a director of Lennox since 1989. Dr. Brown
owns the Plantation Farm Camp, a working 500-acre ranch with livestock that
provides learning in a farm setting for children. He is currently serving on the
Strategic Planning Board of the Western Association of Independent Camps, an
educational organization for training camp advisors.
James J. Byrne has served as a director of Lennox since 1990. He has been
chairman and chief executive officer of OpenConnect Systems Incorporated, a
developer of computer software products, since May 1999. In addition, he serves
as chairman of Byrne Technology Partners, Ltd., a management services company
for technology companies, a position he has held since January 1996. Prior to
his current role, he held a number of positions in the technology industry
including President of Harris Adacom Corporation, a network products and
services company, Senior Vice President of United Technologies Corporation's
Semiconductor Operation and President of North American group of Mohawk Data
Sciences, a manufacturer of distributed computer products. Mr. Byrne began his
career with General Electric Company. Mr. Byrne is a director of STB Systems
Inc., a developer of video boards for personal computer manufacturers.
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<PAGE> 92
Janet K. Cooper has served as a director of Lennox since April 1999. Ms.
Cooper has been the Vice President and Treasurer of US West, Inc., a regional
Bell operating company, since 1998. From 1978 to 1998, Ms. Cooper served in
various capacities with The Quaker Oats Company, including its Vice President,
Treasurer & Tax from 1992 to 1998. Ms. Cooper serves on the board of directors
of The TORO Company, a manufacturer of equipment for lawn and turf care
maintenance.
John E. Major has served as a director of Lennox since 1993. Mr. Major has
been the Chief Executive Officer of Wireless Internet Solutions Group, a
consulting firm which provides advice to the telecom market, since November
1999. Mr. Major was the Chairman, Chief Executive Officer and President of
Wireless Knowledge, a QUALCOMM Incorporated and Microsoft joint venture which
operates a network operation center, from November 1998 to November 1999.
Previously he was Executive Vice President of QUALCOMM and President of its
Wireless Infrastructure Division, and was responsible for managing and guiding
the market potential for CDMA infrastructure products. Prior to joining QUALCOMM
in 1997, Mr. Major served most recently as Senior Vice President and Staff Chief
Technical Officer at Motorola, Inc., a manufacturer of telecommunications
equipment, and Senior Vice President and General Manager for Motorola's
Worldwide Systems Group of the Land Mobile Products Sector. Mr. Major currently
serves on the board of directors of Littlefuse, Inc., a manufacturer of fuses,
and Verilink Corporation, a manufacturer of network access devices.
Donald E. Miller has served as a director of Lennox since 1987. Mr. Miller
spent his 35 year career with The Gates Corporation, an industrial and
automotive rubber products manufacturer. He retired as Vice Chairman of that
company in 1996. From 1987 until 1994 he held the position of President and
Chief Operating Officer of The Gates Corporation. Mr. Miller serves on the board
of directors of Sentry Insurance Corporation, a mutual insurance company, OEA,
Inc., a company engaged in specialized automotive and aerospace technologies,
and Chateau Communities Inc., a real estate investment trust, and is the
President of the Board of Colorado School of Mines Foundation.
Terry D. Stinson has served as a director of Lennox since 1998. Mr. Stinson
has been the Chairman and Chief Executive Officer of Bell Helicopter Textron
Inc., the aircraft segment of Textron Inc., a multi-industry corporation, since
1998 and was its President from 1996 to 1998. From 1991 to 1996, Mr. Stinson
served as Group Vice President and Segment President of Textron Aerospace
Systems and Components for Textron Inc. Prior to that position, he had been the
President of Hamilton Standard Division of United Technologies Corporation, a
defense supply company, since 1986.
Richard L. Thompson has served as a director of Lennox since 1993. In 1995,
Mr. Thompson was named to his present position of Group President and member of
the Executive Office of Caterpillar Inc., a manufacturer of construction and
mining equipment. He joined Caterpillar in 1983 as Vice President, Customer
Services. In 1990, he was appointed President of Solar Turbines Inc., a wholly
owned subsidiary of Caterpillar and manufacturer of gas turbines. From 1990 to
1995, he held the role of Vice President of Caterpillar, with responsibility for
its worldwide engine business. Previously, he had held the positions of Vice
President of Marketing and Vice President and General Manager, Components
Operations with RTE Corporation, a manufacturer of electrical distribution
products. Mr. Thompson is a director of Gardner Denver, Inc., a manufacturer of
air compressors, blowers and petroleum pumps.
John W. Norris, Jr., Richard W. Booth, David H. Anderson and David V. Brown
are all grandchildren of D.W. Norris, and Thomas W. Booth is a great grandchild
of D.W. Norris. John W. Norris, Jr., David V. Brown, Richard W. Booth and David
H. Anderson are first cousins. Richard W. Booth is the father of Thomas W.
Booth.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
Lennox's board of directors is divided into three classes of directors,
with each class elected to a three-year term every third year and holding office
until their successors are elected and qualified. The class whose term of office
will expire at Lennox's 2000 Annual Meeting of Stockholders consists of Linda G.
Alvarado, Richard W. Booth, David V. Brown and John E. Major. The class whose
term of office will expire at Lennox's 2001 Annual Meeting of Stockholders
consists of Janet K. Cooper, Terry D.
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Stinson and Richard L. Thompson. The class whose term of office will expire at
Lennox's 2002 Annual Meeting of Stockholders consists of David H. Anderson,
Thomas W. Booth, James J. Byrne, Donald E. Miller and John W. Norris, Jr.
Lennox's board of directors has established an audit committee, acquisition
committee, board operations committee, human resource committee, compensation
committee and a pension and risk management committee. The audit committee is
responsible for meeting with management and Lennox's independent accountants to
determine the adequacy of internal controls and other financial reporting
matters. The following directors currently serve on the audit committee: John E.
Major (chair), Linda G. Alvarado, Janet K. Cooper, Donald E. Miller and Terry D.
Stinson.
The acquisition committee is responsible for evaluating potential
acquisitions and making recommendations on proposed acquisitions. The following
directors currently serve on the acquisition committee: Donald E. Miller
(chair), David H. Anderson, Janet K. Cooper, Terry D. Stinson and Richard L.
Thompson.
The board operations committee is responsible for making recommendations on
the election of directors and officers, the number of directors, and other
matters pertaining to the operations of Lennox's board of directors. The
following directors currently serve on the board operations committee: Richard
W. Booth (chair), David V. Brown, James J. Byrne, Janet K. Cooper and Terry D.
Stinson.
The human resource committee is responsible for succession planning,
management development programs and other human resource matters. The following
directors currently serve on the human resource committee: James J. Byrne
(chair), Linda G. Alvarado, David V. Brown, John E. Major and Richard L.
Thompson.
The compensation committee is responsible for evaluating the performance of
Lennox's chief executive officer, making recommendations with respect to the
salary of Lennox's chief executive officer, approving the compensation of
executive staff members, approving the compensation for non-employee directors
and committee members, approving incentive stock options for senior management,
approving all employee benefit plan designs and other matters relating to the
compensation of Lennox's directors, officers and employees. The following
directors currently serve on the compensation committee: Richard L. Thompson
(chair), Linda G. Alvarado, James J. Byrne and John E. Major. During 1988, the
following directors served on the compensation committee or its predecessor
committee: Linda G. Alvarado, David V. Brown, James J. Byrne, Thomas B. Howard,
Jr., a former director, and Richard L. Thompson.
The pension and risk management committee is responsible for overseeing the
administration of Lennox's pension and profit sharing plans, overseeing matters
relating to Lennox's insurance coverage, reviewing matters of legal liability
and environmental issues, and other matters relating to risk management. The
following directors currently serve on the pension and risk management
committee: David H. Anderson (chair), Richard W. Booth, Thomas W. Booth and
Donald E. Miller.
COMPENSATION OF DIRECTORS
In 1999, non-employee directors will receive an annual retainer of $21,000
in cash and $5,000 in Lennox common stock for board of directors and committee
service, an annual retainer of $4,000 in cash for serving as a committee chair
and a fee of $1,000, or $500 in the event of a telephonic meeting, in cash for
attending each meeting day of the board of directors or any committee of the
board. Board members may elect to receive the cash portion of their annual
retainer in cash or shares of Lennox common stock. All directors receive
reimbursement for reasonable out-of-pocket expenses incurred in connection with
attendance at meetings of the board of directors or any committee of the board.
In addition, each non-employee director may receive, under Lennox's 1998
incentive plan, options to purchase shares of common stock at an exercise price
equal to the fair market value of such shares at the date of grant.
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EXECUTIVE COMPENSATION
The following table sets forth information on compensation earned in 1998
by Lennox's Chief Executive Officer and its four other most highly compensated
executive officers, such individuals sometimes being referred to as the "named
executive officers". In the third quarter of 1998, Lennox terminated the Lennox
International Inc. performance share plan in connection with the adoption of the
1998 incentive plan. Lennox terminated the performance share plan to reduce
potential earnings volatility associated with the application of variable price
accounting rules to the provisions of the plan. The amounts in the LTIP Payouts
column in the Summary Compensation Table below consists of the value of Lennox
common stock issued to the named executive officers in connection with the
termination of the performance share plan and in full settlement of Lennox's
obligations under that plan. Performance awards are now granted under Lennox's
1998 incentive plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
AWARDS PAYOUTS
------------------------- ----------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
--------------------- STOCK OPTIONS/SARS LTIP ALL OTHER
NAME SALARY BONUS(1) AWARDS(2) GRANTED PAYOUTS(3) COMPENSATION(4)
- ---- -------- ---------- ---------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John W. Norris,
Jr. ................. $648,660 $1,130,003 $1,960,304 $148,500 $2,043,909 $146,600
Robert L.
Jenkins(5)......... 361,200 370,158 288,206 0 859,815 91,425
Robert E.
Schjerven.......... 335,400 323,562 739,038 49,500 750,994 86,656
H.E. French.......... 309,852 328,902 502,320 36,300 595,940 80,389
Clyde W. Wyant....... 291,300 348,639 516,762 36,300 718,883 67,645
</TABLE>
- ---------------
(1) Includes annual incentive payments for the respective year from two annual
variable pay plans.
(2) Represents performance share awards of the following number of shares of
restricted Lennox common stock granted pursuant to the 1998 incentive plan
in December 1998 multiplied by the stock price on the grant date, $19.03 per
share: Mr. Norris--103,026; Mr. Jenkins--15,147; Mr. Schjerven--38,841; Mr.
French--26,400; and Mr. Wyant--27,159. Such shares represent all of such
individual's holdings of restricted Lennox common stock at December 31,
1998. For the named executive officers, 27,423 shares will vest at December
31, 1999, 75,900 shares will vest at December 31, 2000 and the remainder
will vest at December 31, 2001, in each case if performance targets are met.
Shares which do not vest in any performance period due to failure to achieve
such goals will vest in 2006, 2007 and 2008, respectively. Information about
performance share awards made under the 1998 incentive plan in December 1998
which do not vest unless certain performance goals are met is set forth in
the table titled "Long-Term Incentive Plans--Awards in Last Fiscal Year" on
page 88.
(3) Represents awards of shares of Lennox common stock multiplied by the stock
price on the award date, $19.03 per share, in connection with the
termination of the performance share plan.
(4) Composed of contributions by Lennox to its profit sharing retirement plan
and to profit sharing restoration plan and the dollar value of term life
insurance premiums paid by Lennox for the benefit of the named executive
officers. Contributions to the plans for the named executive officers were
as follows: Mr. Norris--$139,730; Mr. Jenkins--$86,223; Mr.
Schjerven--$81,369; Mr. French--$73,833; and Mr. Wyant--$62,619.
(5) On December 31, 1998, Mr. Jenkins retired from his position as the Assistant
to the Chairman of the Board--Business Development.
Lennox maintains pay-for-performance compensation philosophy to pay
market-competitive base salaries, while also delivering variable pay which is
directly linked to the achievement of performance measurements and to the
performance and contribution of the individual.
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Executive compensation is composed of three primary components: base
salary, variable pay and benefits and perquisites. In order to evaluate the
competitiveness of Lennox's total compensation programs, Lennox has periodically
engaged Hewitt Associates LLC, a human resources consulting firm, to conduct
market analyses of the compensation programs for executive level jobs within its
organization. In doing so, Lennox emphasizes delivering competitive total
compensation opportunities, while maintaining the flexibility to design
individual compensation components to support critical business objectives.
The following table provides information concerning stock options granted
to the named executive officers in 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/SARS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS/SARS EMPLOYEES IN EXERCISE OR PRESENT
NAME GRANTED FISCAL YEAR BASE PRICE EXPIRATION DATE VALUE(1)
- ---- ------------ ------------------ ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
John W. Norris,
Jr................... 148,500 16.7% $19.03 December 11, 2008 $755,325
Robert L. Jenkins.... 0 -- -- -- --
Robert E.
Schjerven.......... 49,500 5.6 19.03 December 11, 2008 251,775
H. E. French......... 36,300 4.1 19.03 December 11, 2008 184,635
Clyde W. Wyant....... 36,300 4.1 19.03 December 11, 2008 184,635
</TABLE>
- ---------------
(1) The grant date present values shown in the table were determined using the
Black-Scholes option valuation model using the following assumptions: stock
price volatility of 35.4% which represents an average volatility among
general industry companies; expected option life of 10.0 years; dividend
yield of 1.66%; risk free interest rate of 4.53%; Hewitt Associates Modified
Derived Value: $5.09 which includes the following additional assumptions:
discounts for the probability of termination for death, disability,
retirement and voluntary/involuntary terminations.
The following table provides for each of the named executive officers the
options exercised during 1998 and the number of options and the value of
unexercised options held by the named executive officers as of December 31,
1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Norris,
Jr. .................. -- -- 249,150 148,500 $1,872,771 0
Robert L. Jenkins..... 160,380 $ 812,648 -- -- -- --
Robert E. Schjerven... 166,980 1,042,300 -- 49,500 -- 0
H. E. French.......... 147,906 1,363,807 -- 36,300 -- 0
Clyde W. Wyant........ 33,660 360,121 126,720 36,300 1,106,297 0
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying
securities as of December 31, 1998, $19.03 per share, minus the exercise
price of "in-the-money" options.
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<PAGE> 96
The following table provides information concerning performance share
awards made under the 1998 incentive plan to the named executive officers in
1998. The named executive officers are awarded a number of shares of Lennox
common stock subject to achievement of performance targets based on the average
return on equity for a three year period. Information about the portion of the
award that becomes vested regardless of whether the performance goals are met is
presented under the Restricted Stock Awards column in the table titled "Summary
Compensation Table" on page 86. Presented below is the maximum number of shares
of Lennox common stock that may be payable to each of the named executive
officers that is subject to achievement of the performance goals. The actual
number of shares awarded depends on the level of achievement of the performance
objectives.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES, UNITS PERFORMANCE OR OTHER PERIOD
NAME OR OTHER RIGHTS UNTIL MATURATION OR PAYOUT
- ---- ----------------------- ---------------------------
<S> <C> <C>
John W. Norris, Jr............................... 103,026 3 years
Robert L. Jenkins................................ 15,147 3 years
Robert E. Schjerven.............................. 38,841 3 years
H. E. French..................................... 26,400 3 years
Clyde W. Wyant................................... 27,159 3 years
</TABLE>
1998 INCENTIVE PLAN
General
Lennox's board of directors has adopted, and Lennox's stockholders have
approved, the 1998 incentive plan. The 1998 incentive plan amends and restates
the 1994 stock option and restricted stock plan. Any outstanding awards under
the 1994 stock option and restricted stock plan will remain outstanding. The
objectives of the 1998 incentive plan are to attract and retain employees, to
attract and retain qualified directors and to stimulate the active interest of
such persons in our development and financial success. Awards provide
participants with a proprietary interest in Lennox's growth and performance. The
description below represents a summary of the principal terms and conditions of
the 1998 incentive plan.
Awards to Lennox's employees or independent contractors under the 1998
incentive plan may be made in the form of grants of stock options, stock
appreciation rights, restricted or non-restricted stock or units denominated in
stock, cash awards or performance awards or any combination of these awards.
Awards to non-employee directors under the 1998 incentive plan will be in the
form of grants of stock options.
The 1998 incentive plan provides for awards to be made in respect of a
maximum of 4,603,500 shares of Lennox common stock, of which 3,943,500 shares
will be available for awards to Lennox's employees and independent contractors
and the remainder of which will be available for awards to non-employee
directors. No participant under the 1998 incentive plan may be granted in any
12-month period awards consisting of stock options or stock appreciation rights
for more than 165,000 shares of Lennox common stock, stock awards for more than
165,000 shares of Lennox common stock or cash awards in excess of $5,000,000.
Shares of common stock which are the subject of awards that are forfeited or
terminated or expire unexercised will again immediately become available for
awards under the 1998 incentive plan.
Lennox's compensation committee will have the exclusive authority to
administer the 1998 incentive plan as it relates to employee awards and to take
all actions which are specifically contemplated by the plan or are necessary or
appropriate in connection with the administration thereof. The compensation
committee may, in its discretion:
- provide for the extension of the exercisability of an award;
- accelerate the vesting or exercisability of an award to Lennox's
employees;
- eliminate or make less restrictive any restrictions contained in an award
to Lennox's employees;
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<PAGE> 97
- waive any restriction or other provision of the 1998 incentive plan or in
any award to Lennox's employees; or
- otherwise amend or modify an award to Lennox's employees in any manner
that is either not adverse to the employee holding the award or consented
to by such employee.
Employee Awards
The compensation committee will determine the type or types of awards made
under the 1998 incentive plan and will designate the employees who are to be
recipients of such awards. Each award may be embodied in an agreement, which
will contain such terms, conditions and limitations as are determined by the
compensation committee. Awards to Lennox's employees may be granted singly, in
combination or in tandem. Awards to Lennox's employees may also be made in
combination or in tandem with, in replacement of, or as alternatives to, grants
or rights under the 1998 incentive plan or any other employee plan or program of
Lennox, including any acquired entity. All or part of an award to Lennox's
employees may be subject to conditions established by the compensation
committee, which may include continuous service with Lennox, achievement of
specific business objectives, increases in specified indices, attainment of
specified growth rates and other comparable measurements of performance.
The types of awards to Lennox's employees that may be made under the 1998
incentive plan are as follows:
Options: Options are rights to purchase a specified number of shares of
Lennox common stock at a specified price. An option granted under the 1998
incentive plan may consist of either an incentive stock option that complies
with the requirements of Section 422 of the Internal Revenue Code of 1986, or a
non-qualified stock option that does not comply with such requirements.
Incentive stock options must have an exercise price per share that is not less
than the fair market value of the Lennox common stock on the date of grant. To
the extent that the aggregate fair market value, measured at the time of grant,
of Lennox common stock subject to incentive stock options that first become
exercisable by an employee in any one calendar year exceeds $100,000, such
options shall be treated as non-qualified stock options and not as incentive
stock options. Non-qualified stock options must have an exercise price per share
that is not less than, but may exceed, the fair market value of the Lennox
common stock on the date of grant. In either case, the exercise price must be
paid in full at the time an option is exercised in cash or, if the employee so
elects, by means of tendering common stock or surrendering another award.
Stock Appreciation Rights: Stock appreciation rights are rights to receive
a payment, in cash or Lennox common stock, equal to the excess of the fair
market value or other specified valuation of a specified number of shares of
Lennox common stock on the date the rights are exercised over a specified strike
price. A stock appreciation right may be granted in tandem under the 1998
incentive plan to the holder of an option with respect to all or a portion of
the shares of Lennox common stock subject to such option or may be granted
separately. The terms, conditions and limitations applicable to any stock
appreciation rights, including the term of any stock appreciation rights and the
date or dates upon which they become exercisable, will be determined by Lennox's
compensation committee.
Stock Awards: Stock awards consist of grants of restricted common stock or
non-restricted Lennox common stock or units denominated in Lennox common stock.
The terms, conditions and limitations applicable to any stock awards will be
determined by Lennox's compensation committee. The compensation committee may
remove any restrictions on stock awards, at its discretion. Rights to dividends
or dividend equivalents may be extended to and made part of any stock award in
the discretion of the compensation committee.
Cash Awards: Cash awards consist of grants denominated in cash. The terms,
conditions and limitations applicable to any cash awards will be determined by
Lennox's compensation committee.
Performance Awards: Performance awards consist of grants made to an
employee subject to the attainment of one or more performance goals. A
performance award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
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<PAGE> 98
established by Lennox's compensation committee prior to the earlier of (a) 90
days after the commencement of the period of service to which the performance
goals relate and (b) the elapse of 25% of the period of service, and in any
event while the outcome is substantially uncertain. A performance goal may be
based upon one or more business criteria that apply to the employee, one or more
business units of Lennox or Lennox as a whole. The terms, conditions and
limitations applicable to any performance awards will be determined by Lennox's
compensation committee.
Director Awards
Lennox's board of directors will administer the 1998 incentive plan as it
relates to awards to non-employee directors. The board will have the right to
determine on an annual basis, or at any other time in its sole discretion, to
award options which are non-qualified stock options to non-employee directors.
No such options awarded in any year shall provide for the purchase of more than
16,500 shares of Lennox common stock. All options awarded to directors shall
have a term of 10 years and shall vest and become exercisable in increments of
one-third on each of the three succeeding anniversaries after the date of grant.
Unvested options awarded to directors shall be forfeited if a director resigns
without the consent of the majority of Lennox's board of directors.
Other Provisions
Lennox's board of directors may amend, modify, suspend or terminate the
1998 incentive plan for the purpose of addressing any changes in legal
requirements or for any other purpose permitted by law, except that:
- no amendment that would impair the rights of any employee or non-employee
director to any award may be made without the consent of such employee or
non-employee director; and
- no amendment requiring stockholder approval under any applicable legal
requirements will be effective until such approval has been obtained.
In the event of any subdivision or consolidation of outstanding shares of
Lennox common stock, declaration of a stock dividend payable in shares of Lennox
common stock or other stock split, the 1998 incentive plan provides for Lennox's
board of directors to make appropriate adjustments to:
- the number of shares of Lennox common stock reserved under the 1998
incentive plan;
- the number of shares of Lennox common stock covered by outstanding awards
in the form of Lennox common stock or units denominated in Lennox common
stock;
- the exercise or other price in respect of such awards;
- the appropriate fair market value and other price determinations for
awards in order to reflect such transactions; and
- the limitations in the 1998 incentive plan regarding the number of awards
which may be made to any employee in a given year.
Furthermore, in the event of any other recapitalization or capital
reorganization of Lennox, any consolidation or merger of Lennox with another
corporation or entity, or the adoption by Lennox of any plan of exchange
affecting the common stock or any distribution to holders of common stock or
securities or property, other than normal cash dividends or stock dividends,
Lennox's board of directors will make appropriate adjustments to the amounts or
other items referred to above to give effect to such transactions, to the extent
necessary to maintain the proportionate interest of the holders of the awards
and to preserve, without exceeding, the value of the awards.
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RETIREMENT PLANS
The named executive officers participate in four Lennox-sponsored
retirement plans. The plans are as follows: the pension plan for salaried
employees, the profit sharing retirement plan, the supplemental retirement plan,
and the profit sharing restoration plan. The supplemental retirement plan and
the profit sharing restoration plan are non-qualified plans. Lennox pays the
full cost of all these plans.
The pension plan for salaried employees is a floor offset plan. A target
benefit is calculated using credited service and final average pay during the
five highest consecutive years. The benefit is currently based on 1.00% of final
average pay, plus .60% of final average pay above Social Security covered
compensation, times the number of years of credited service, not to exceed 30
years. Employees vest after five years of service and may commence unreduced
benefits at age 65. If specified age and service requirements are met, benefits
may commence earlier on an actuarially reduced basis. At time of retirement, a
participant may choose one of five optional forms of payment. The supplemental
retirement plan permits income above Internal Revenue Service limitations to be
considered in determining final average pay, doubles the rate of benefit
accrual, limits credited service to 15 years and permits early retirement on
somewhat more favorable terms than the pension plan.
The profit sharing retirement plan is a defined contribution plan. Profit
sharing contributions, as determined by Lennox's board of directors, are
credited annually to participants' accounts based on pay. Participants are fully
vested after 6 years. The assets of the plan are employer directed.
Distributions may occur at separation of employment and can be paid directly to
the participant. The restoration plan permits accruals that otherwise could not
occur because of Internal Revenue Service limitations on compensation.
The estimates of annual retirement benefits shown in the following table
are the targets established by the supplemental retirement plan.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ---------------------------------------------------------------
EARNINGS(1) 5 10 15 20 25 30
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 250,000..................... $ 35,896 $ 71,792 $107,688 $107,688 $107,688 $107,688
425,000.................... 63,896 127,792 191,688 191,688 191,688 191,688
600,000.................... 91,896 183,792 275,688 275,688 275,688 275,688
775,000.................... 119,896 239,792 359,688 359,688 359,688 359,688
950,000.................... 147,896 295,792 443,688 443,688 443,688 443,688
1,125,000.................... 175,896 351,792 527,688 527,688 527,688 527,688
</TABLE>
- ---------------
(1) Final Average Earnings are the average of the five highest consecutive years
of includible earnings. Compensation for these purposes includes salary and
bonuses, and excludes extraordinary compensation such as benefits from the
1998 incentive plan or its predecessor plans. Bonus numbers used in these
calculations, as per plan requirements, are the bonuses actually paid in
those years. In the Summary Compensation Table, the 1998 bonus reported is
the bonus earned in 1998, but not paid until 1999.
As of December 31, 1998, the final average pay and the eligible years of
credited service for each of the named executive officers was as follows: Mr.
Norris, $855,001--38.25 years; Mr. Jenkins, $483,948--14.00 years; Mr. Wyant,
$402,391--8.30 years; Mr. Schjerven, $411,416--12.80 years; Mr. French,
$340,666--9.80 years.
EMPLOYMENT AGREEMENTS
Lennox has entered into an employment agreement with each of the named
executive officers who are currently employees of Lennox. Each of the employment
agreements is identical except for the name of the named executive officer who
is a party to the agreement and the date of the agreement. These employment
agreements establish the basis of compensation and assignments; and
post-employment covenants covering confidential information, the diverting of
employees, vendors and contractors and the solicitation of customers. These
agreements also establish binding arbitration as the mechanism for
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resolving disputes and provide benefits and income in the event employment
terminates under specified circumstances.
The agreements commence on the date they are signed by both parties and
remain in effect until December 31 of that year and afterwards for a series of
one-year terms. On January 1 of each year after the end of the first term and
for each year afterwards, the agreements automatically renew for an additional
year, unless either party notifies the other, in writing, at least 30 days prior
to such date, of a decision not to renew the agreement.
If Lennox terminates the employee prior to the expiration of the term of
the agreement or if Lennox does not renew the agreement for any reason other
than for cause, the employee will be entitled to receive monthly payments of the
greater of the employee's base salary for the remainder of the agreement's term
or three months of the employee's base salary in addition to any other
compensation or benefits applicable to an employee at the employee's level.
If Lennox terminates the employee other than for cause, including Lennox's
non-renewal of the agreement, and the employee agrees to execute a written
general release of any and all possible claims against Lennox existing at the
time of termination, Lennox will provide the employee with an enhanced severance
package. That package includes payment of the employee's base monthly salary for
a period of twenty-four months following the date of termination, a lump sum
payment of $12,000 in lieu of perquisites lost, and forgiveness of COBRA
premiums due for group health insurance coverage for up to eighteen months while
the employee remains unemployed. If the employee remains unemployed at the end
of eighteen months, the equivalent of the COBRA premium will be paid to the
employee on a month to month basis for up to six additional months while the
employee remains unemployed. Outplacement services are provided or, at the
employee's election, a lump-sum payment of 10% of the employee's annual base
salary will be made to the employee in lieu of those services. Additionally, the
employee's beneficiary will receive a lump-sum death benefit equivalent to six
months of the employee's base salary should the employee die while entitled to
enhanced severance payments.
CHANGE OF CONTROL EMPLOYMENT AGREEMENTS
Lennox has entered into a change of control employment agreement with each
of the named executive officers who are currently employees of Lennox. Each of
the change of control agreements is identical except for the name of the named
executive officer who is a party to the agreement and the date of the agreement.
The change of control agreements provide for certain benefits under specified
circumstances if the officer's employment is terminated following a change of
control transaction involving Lennox. The change of control agreements are
intended to provide protections to the officers that are not afforded by their
existing employment agreements, but not to duplicate benefits provided by the
existing employment agreements. The term of the change of control agreements is
generally two years from the date of a potential change of control, as discussed
below, or a change of control. If the officer remains employed at the conclusion
of such term, the officer's existing employment agreement will continue to
apply. The employment rights of the named executive officers under the change of
control agreements would be triggered by either a change of control or a
potential change of control. Following a potential change of control, the term
of the change of control agreement may terminate but the change of control
agreement will remain in force and a new term of the agreement will apply to any
future change of control or potential change of control, if either (a) Lennox's
board of directors determines that a change of control is not likely or (b) the
named executive officer, upon proper notice to Lennox, elects to terminate his
term of the change of control agreement as of any anniversary of the potential
change of control.
A "change of control" generally includes the occurrence on or after the
date of the offering of any of the following:
(a) any person, other than specified exempt persons, including Lennox
and its subsidiaries and employee benefit plans, becoming a beneficial
owner of 35% or more of the shares of Lennox common stock or voting stock
of Lennox then outstanding;
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<PAGE> 101
(b) a change in the identity of a majority of the persons serving as
members of Lennox's board of directors, unless such change was approved by
a majority of the incumbent members of Lennox's board of directors;
(c) the approval by the stockholders of a reorganization, merger or
consolidation in which:
(1) existing stockholders would not own more than 65% of the common
stock and voting stock of the resulting company;
(2) a person, other than specified exempt persons, would own 35% or
more of the common stock or voting stock of the resulting company; or
(3) less than a majority of the board of the resulting company
would consist of the then incumbent members of Lennox's board of
directors; or
(d) the approval by the stockholders of a liquidation or dissolution
of Lennox, unless such liquidation or dissolution is part of a plan of
liquidation or dissolution involving a sale to a company of which following
such transaction:
(1) more than 65% of the common stock and voting stock would be
owned by existing stockholders;
(2) no person, other than specified exempt persons, would own 35%
or more of the common stock or voting stock of such company; and
(3) at least a majority of the board of directors of such company
would consist of the then incumbent members of Lennox's board of
directors.
A "potential change in control" generally includes any of the following:
- the commencement of a tender or exchange offer for voting stock that, if
consummated, would result in a change of control;
- Lennox entering into an agreement which, if consummated, would constitute
a change of control;
- the commencement of a contested election contest subject to proxy rules;
or
- the occurrence of any other event that Lennox's board of directors
determines could result in a change of control.
During the term of the change of control agreement, an officer's position,
authority, duties and responsibilities may not be diminished, and all forms of
compensation, including salary, bonus, regular salaried employee plan benefits,
stock options, restricted stock and other awards, must continue on a basis no
less favorable than at the beginning of the term of the change of control
agreement and, in the case of specified benefits, must continue on a basis no
less favorable in the aggregate than the most favorable application of such
benefits to any of Lennox's employees.
If an officer terminates employment during the term of the change of
control agreement for good reason and Lennox fails to honor the terms of the
change of control agreement, Lennox will pay the officer:
- his then unpaid current salary and a pro rata portion of the highest
bonus earned during the three preceding years, as well as previously
deferred compensation and accrued vacation time;
- a lump-sum benefit equal to the sum of three times the officer's annual
base salary and three times the annual bonus he would have earned in the
year of termination;
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<PAGE> 102
- for purposes of Lennox's supplemental retirement plan and Lennox's profit
sharing restoration plan, three additional years added to both his
service and age criteria; and
- continued coverage under Lennox's employee welfare benefits plans for up
to four and one-half years.
In addition, all options, restricted stock and other compensatory awards held by
the officer will immediately vest and become exercisable, and the term of these
awards will be extended for up to one year following termination of employment.
The officer may also elect to cash out equity-based compensatory awards at the
highest price per share paid by specified persons during the term of the change
of control agreement or the six-month period prior to the beginning of the term
of the change of control agreement.
In the event of any contest concerning a change of control agreement in
which the officer is successful, in whole or in part, on the merits:
- Lennox has no right of offset;
- the officer is not required to mitigate damages; and
- Lennox agrees to pay any legal fees incurred by the officer in connection
with such contest.
Lennox also agrees to pay all amounts owing to the officer during any
period of dispute, subject only to the officer's agreement to repay any amounts
to which he is determined not to be entitled. The change of control agreements
provide for a tax gross-up in the event that specified excise taxes are
applicable to payments made by us under a change of control agreement or
otherwise. The change of control agreements require the officer to maintain the
confidentiality of Lennox's information, and, for a period of 24 months
following his termination of employment, to avoid any attempts to induce
Lennox's employees to terminate their employment with Lennox.
INDEMNIFICATION AGREEMENTS
Lennox has entered into indemnification agreements with its directors and a
number of its executive officers. Each of the indemnification agreements is
identical except for the name of the director or executive officer who is a
party to the agreement and the date of the agreement. Under the terms of the
indemnification agreements, Lennox has generally agreed to indemnify, and
advance expenses to, each indemnitee to the fullest extent permitted by
applicable law on the date of the agreements and to such greater extent as
applicable law may at a future time permit. In addition, the indemnification
agreements contain specific provisions pursuant to which Lennox has agreed to
indemnify each indemnitee:
- if such person is, by reason of his or her status as a director, nominee
for director, officer, agent or fiduciary of Lennox or of any other
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise with which such person was serving at Lennox's request,
any such status being referred to as a "corporate status," made or
threatened to be made a party to any threatened, pending or completed
action, suit, arbitration, alternative dispute resolution mechanism,
investigation or other proceeding, other than a proceeding by or in the
right of Lennox;
- if such person is, by reason of his or her corporate status, made or
threatened to be made a party to any proceeding brought by or in the
right of Lennox to procure a judgment in its favor, except that no
indemnification shall be made in respect of any claim, issue or matter in
such proceeding as to which such indemnitee shall have been adjudged to
be liable to Lennox if applicable law prohibits such indemnification,
unless and only to the extent that a court shall otherwise determine;
- against expenses actually and reasonably incurred by such person or on
his or her behalf in connection with any proceeding to which such
indemnitee was or is a party by reason of his or her corporate status and
in which such indemnitee is successful, on the merits or otherwise;
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<PAGE> 103
- against expenses actually and reasonably incurred by such person or on
his or her behalf in connection with a proceeding to the extent that such
indemnitee is, by reason of his or her corporate status, a witness or
otherwise participates in any proceeding at a time when such person is
not a party in the proceeding; and
- against expenses actually and reasonably incurred by such person in
certain judicial adjudications of or awards in arbitration to enforce his
or her rights under the indemnification agreements.
In addition, under the terms of the indemnification agreements, Lennox has
agreed to pay all reasonable expenses incurred by or on behalf of an indemnitee
in connection with any proceeding, whether brought by or in the right of Lennox
or otherwise, in advance of any determination with respect to entitlement to
indemnification and within 15 days after the receipt by Lennox of a written
request from such indemnitee for such payment. In the indemnification
agreements, each indemnitee has agreed that he or she will reimburse and repay
Lennox for any expenses so advanced to the extent that it shall ultimately be
determined that he or she is not entitled to be indemnified by Lennox against
such expenses.
The indemnification agreements also include provisions that specify the
procedures and presumptions which are to be employed to determine whether an
indemnitee is entitled to indemnification. In some cases, the nature of the
procedures specified in the indemnification agreements varies depending on
whether Lennox has undergone a change in control.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
John W. Norris, Jr., Lennox's Chairman and Chief Executive Officer, and
David H. Anderson, Richard W. Booth and David V. Brown, each one of Lennox's
directors, as well as some of Lennox's stockholders, are members of AOC Land
Investment, LLC. AOC Land Investment, LLC owns 70% of AOC Development II, LLC.
AOC Development II, LLC is building a new office building and Lennox has agreed
to lease part of it for use as its corporate headquarters. The lease will have a
term of 25 years and the annual lease payments are expected to be approximately
$2.1 million per year for the first five years. Lennox believes that the terms
of its lease with AOC Development II, LLC are at least as favorable as could be
obtained from unaffiliated third parties.
From time to time Lennox has entered into stock disposition agreements
which allowed its executives, directors and stockholders to borrow money and use
its capital stock held by them as collateral. The stock disposition agreements
provide that in the event of a default on the underlying loan, Lennox will do
one of several things, including registering the capital stock under the
Securities Act of 1933, finding a buyer to purchase the stock or purchasing the
stock itself. There were never any defaults under these agreements. Currently,
there are stock disposition agreements in existence covering 1,632,646 shares of
Lennox common stock. Lennox will not enter into these type of agreements in the
future.
These transactions were not the result of arms-length negotiations.
Accordingly, certain of the terms of these transactions may be more or less
favorable to Lennox than might have been obtained from unaffiliated third
parties. Lennox does not intend to enter into any future transactions in which
its directors, executive officers or principal stockholders and their affiliates
have a material interest unless such transactions are approved by a majority of
the disinterested members of its board of directors and are on terms that are no
less favorable to it than those that it could obtain from unaffiliated third
parties.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following statements set forth unaudited pro forma consolidated
financial data which give effect to the merger between Lennox and Service
Experts. In the merger, Lennox will issue approximately 12.2 million shares of
its common stock to the stockholders of Service Experts in order to acquire all
of the outstanding common stock of Service Experts.
The merger will be accounted for in accordance with the purchase method of
accounting. Accordingly, the assets and liabilities of Service Experts, Inc.
will be recorded at fair market value and the excess of the purchase price over
the fair market value of the assets and liabilities acquired will be recorded as
goodwill. The following statements have been prepared on the basis of the
assumptions described in the accompanying notes, which include assumptions
relating to the allocation of the consideration paid. The actual allocation of
such consideration may differ from those assumptions reflected in the unaudited
pro forma consolidated financial statements after the valuations and other
procedures to be performed after the merger are completed.
The balance sheet data as of September 30, 1999 assume that the merger was
completed on September 30, 1999. The income statement data for the nine months
ended September 30, 1999, and the year ended December 31, 1998, assume that the
merger and the initial public offering of Lennox were both completed on January
1, 1998. Lennox completed an initial public offering of its common stock on
August 3, 1999, in which 8,088,490 shares of common stock were issued at an
offering price of $18.75 per share. The proceeds from the initial public
offering of approximately $140 million were used to retire outstanding loans
under revolving credit and short-term credit facilities.
The unaudited pro forma consolidated financial data are not necessarily
indicative of the results of operations or the financial position that would
have occurred had the merger been consummated on the dates, or at the beginning
of the periods, for which the merger is being given effect, nor are they
necessarily indicative of future results of operations or financial position.
The financial data does not reflect synergies that might be achieved from
combining the operations of Lennox and Service Experts. The unaudited pro forma
consolidated financial data should be read in conjunction with the historical
financial statements of Lennox and Service Experts, including the notes thereto,
included or incorporated by reference in this joint proxy statement/prospectus.
You should read "Where You Can Find More Information" on page 130 and
"Information About Lennox--Selected Historical Financial and Other Data of
Lennox" on page 49.
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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(UNAUDITED, IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
ADJUSTMENT
SERVICE TO GIVE
LENNOX EXPERTS EFFECT TO PRO FORMA
HISTORICAL HISTORICAL ACQUISITION BALANCE SHEET
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 41,122 $ 16,402 $ -- $ 57,524
Accounts and notes receivable, net..... 484,420 72,075 (6,043)(a) 550,452
Inventories............................ 327,067 31,864 -- 358,931
Deferred income taxes.................. 38,406 3,970 8,600(b) 50,976
Other assets........................... 40,081 16,346 -- 56,427
---------- -------- -------- ----------
Total current assets........... 931,096 140,657 2,557 1,074,310
INVESTMENTS IN JOINT VENTURES............ 12,479 -- -- 12,479
PROPERTY, PLANT AND EQUIPMENT, net....... 302,285 46,372 -- 348,657
GOODWILL, net............................ 323,103 255,306 (73,947)(c) 504,462
OTHER ASSETS............................. 40,471 2,077 -- 42,548
---------- -------- -------- ----------
TOTAL ASSETS................... $1,609,434 $444,412 $(71,390) $1,982,456
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt........................ $ 157,270 $ -- $ -- $ 157,270
Current maturities of long-term debt... 25,424 3,761 -- 29,185
Accounts payable and accrued
expenses............................ 416,241 38,088 (6,043)(a) 469,786
21,500(b)
---------- -------- -------- ----------
Total current liabilities...... 598,935 41,849 15,457 656,241
LONG-TERM DEBT........................... 309,467 157,066 -- 466,533
DEFERRED INCOME TAXES.................... 12,726 3,939 -- 16,665
POSTRETIREMENT BENEFITS, OTHER THAN
PENSIONS............................... 15,735 -- -- 15,735
OTHER LIABILITIES........................ 70,336 14,411 -- 84,747
---------- -------- -------- ----------
Total liabilities.............. 1,007,199 217,265 15,457 1,239,921
MINORITY INTEREST........................ 15,213 -- -- 15,213
STOCKHOLDERS' EQUITY:
Common stock........................... 450 182 (60)(c) 572
Additional paid-in capital............. 199,302 173,821 (33,643)(c) 339,480
Retained earnings...................... 398,412 53,362 (53,362)(c) 398,412
Deferred compensation.................. -- (218) 218(c) --
Currency translation adjustment........ (11,142) -- -- (11,142)
---------- -------- -------- ----------
Total stockholders' equity..... 587,022 227,147 (86,847) 727,322
---------- -------- -------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY......... $1,609,434 $444,412 $(71,390) $1,982,456
========== ======== ======== ==========
</TABLE>
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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS SERVICE ADJUSTMENTS PRO FORMA
LENNOX TO GIVE EFFECT LENNOX EXPERTS TO GIVE EFFECT STATEMENT OF
HISTORICAL TO IPO AS ADJUSTED HISTORICAL TO ACQUISITION INCOME
---------- -------------- ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES....................... $1,821,836 $ -- $1,821,836 $407,835 $(35,910)(a) $2,193,761
COST OF GOODS SOLD.............. 1,245,623 -- 1,245,623 261,670 (35,910)(a) 1,471,383
---------- ------ ---------- -------- -------- ----------
Gross Profit........... 576,213 -- 576,213 146,165 -- 722,378
OPERATING EXPENSES:
Selling, general and
administrative.............. 461,143 -- 461,143 104,627 (1,849)(d) 563,921
Other operating expenses,
net......................... 8,467 -- 8,467 -- -- 8,467
---------- ------ ---------- -------- -------- ----------
Income from
operations........... 106,603 -- 106,603 41,538 1,849 149,990
OTHER EXPENSE................... 16,917 (8,770)(e) 8,147 2,853 -- 11,000
---------- ------ ---------- -------- -------- ----------
Income before income
taxes................ 89,686 8,770 98,456 38,685 1,849 138,990
PROVISION FOR INCOME TAXES...... 37,161 3,508(f) 40,669 15,260 -- 55,929
---------- ------ ---------- -------- -------- ----------
Net Income............. $ 52,525 $5,262 $ 57,787 $ 23,425 $ 1,849 $ 83,061
========== ====== ========== ======== ======== ==========
EARNINGS PER SHARE:
Basic......................... $ 1.50 -- $ 1.34 -- -- $ 1.50
Diluted....................... $ 1.47 -- $ 1.32 -- -- $ 1.48
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic......................... 34,914 8,088(g) 43,002 -- 12,200(g) 55,202
Diluted....................... 35,739 8,088(g) 43,827 -- 12,200(g) 56,027
</TABLE>
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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS SERVICE ADJUSTMENTS PRO FORMA
LENNOX TO GIVE EFFECT LENNOX EXPERTS TO GIVE EFFECT STATEMENT OF
HISTORICAL TO IPO AS ADJUSTED HISTORICAL TO ACQUISITION INCOME
---------- -------------- ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES.......................... $1,749,953 $ -- $1,749,953 $429,876 $(25,319)(a) $2,154,510
COST OF GOODS SOLD................. 1,199,611 -- 1,199,611 291,852 (25,319)(a) 1,466,144
---------- ------- ---------- -------- -------- ----------
Gross Profit............... 550,342 -- 550,342 138,024 -- 688,366
OPERATING EXPENSES:
Selling, general and
administrative................. 422,529 -- 422,529 114,359 (1,378)(d) 535,510
Other operating expenses, net.... 6,486 -- 6,486 -- -- 6,486
---------- ------- ---------- -------- -------- ----------
Income from operations..... 121,327 -- 121,327 23,665 1,378 146,370
OTHER EXPENSE...................... 24,002 (5,142)(e) 18,860 5,678 -- 24,538
---------- ------- ---------- -------- -------- ----------
Income before income
taxes.................... 97,325 5,142 102,467 17,987 1,378 121,832
PROVISION FOR INCOME TAXES......... 39,840 2,057(f) 41,897 8,492 -- 50,389
---------- ------- ---------- -------- -------- ----------
Net Income................. $ 57,485 $ 3,085 $ 60,570 $ 9,495 $ 1,378 $ 71,443
========== ======= ========== ======== ======== ==========
EARNINGS PER SHARE
Basic............................ $ 1.52 -- $ 1.37 -- -- $ 1.27
Diluted.......................... $ 1.48 -- $ 1.34 -- -- $ 1.25
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic............................ 37,910 6,363(g) 44,273 -- 12,200(g) 56,473
Diluted.......................... 38,788 6,363(g) 45,151 -- 12,200(g) 57,351
</TABLE>
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LENNOX INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
(a) To eliminate intercompany transactions between Lennox and Service Experts.
(b) To record liabilities incurred in conjunction with the merger and the
related deferred income taxes, using an effective rate of approximately
40%:
<TABLE>
<S> <C>
Increase in accrued liabilities (including transaction
costs)...................................................... $21,500
Increase in deferred income tax assets...................... (8,600)
-------
Net adjustment.................................... $12,900
=======
</TABLE>
(c) To record the fair value of shares issued and goodwill:
<TABLE>
<S> <C>
Fair value of shares issued ($11.50 per share).............. $ 140,300
Transaction costs........................................... 8,000
---------
Total consideration............................... 148,300
Add: Net book value of liabilities assumed.................. 217,265
Less: Net book value of identifiable assets acquired........ (189,106)
Adjustment to record liabilities incurred net of deferred
taxes..................................................... 4,900
---------
Goodwill recorded................................. 181,359
---------
Historical goodwill of Service Experts............ (255,306)
---------
Pro forma adjustment to goodwill................ $ (73,947)
=========
</TABLE>
The fair value per share of the shares issued in the merger ($11.50 per
share) was calculated based on the average of Lennox's closing stock price
on October 25, 26, 27 and 28, 1999.
(d) To recognize a reduction in goodwill amortization.
(e) To recognize the reduction in interest expense as a result of repaying,
from the proceeds of the initial public offering, approximately $140
million of borrowings under Lennox's revolving credit facility and term
credit agreements with a weighted average interest rate of 6.25%.
(f) To recognize the increase in federal and state income taxes resulting from
the reduction in interest expense, using an effective rate of approximately
40%.
(g) To recognize the additional shares outstanding assuming that the merger and
the initial public offering of Lennox were both completed on January 1,
1998.
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MATERIAL TERMS OF THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS ANNEX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF
LENNOX AND SERVICE EXPERTS ARE URGED TO READ THE MERGER AGREEMENT IN ITS
ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER. IN THE EVENT OF ANY
DISCREPANCY BETWEEN THE TERMS OF THE MERGER AGREEMENT AND THE FOLLOWING SUMMARY,
THE MERGER AGREEMENT WILL CONTROL.
STRUCTURE OF THE MERGER
Following the approval of the stockholders of Lennox and Service Experts
and the satisfaction or waiver of the other conditions to the merger, LII
Acquisition Corporation, a wholly-owned subsidiary of Lennox, will merge with
and into Service Experts. As a consequence of the merger, Service Experts will
become a wholly-owned subsidiary of Lennox.
TIMING OF CLOSING AND EFFECTIVE TIME
The closing of the merger will occur within two business days after the
conditions to closing provided in the merger agreement are satisfied or waived,
unless Lennox and Service Experts agree to another time or date. See
"--Conditions to the Completion of the Merger" on page 110.
On the date of the closing of the merger, we will file a certificate of
merger with the Secretary of State of the State of Delaware, at which time the
merger will become effective.
MERGER CONSIDERATION
At the effective time of the merger, each share of Service Experts common
stock that is outstanding immediately prior to the effective time of the merger
will be converted automatically into the right to receive 0.67 of a validly
issued, fully paid and non-assessable share of Lennox common stock.
CANCELLATION OF SHARES
Any shares of Service Experts common stock and any other shares of capital
stock of Service Experts that are held by Service Experts as treasury stock will
be canceled automatically, and we will not exchange those shares for any
securities of Lennox or other consideration.
PROCEDURES FOR SURRENDER OF CERTIFICATES; FRACTIONAL SHARES
ChaseMellon Shareholder Services, L.L.C. will serve as the exchange agent
to handle the exchange of Service Experts stock certificates for stock
certificates of Lennox and the payment of cash for fractional shares unless
Lennox, with Service Experts' approval, designates another exchange agent. At
the closing of the merger, Lennox will deposit with the exchange agent
certificates representing the shares of Lennox common stock into which the
shares of Service Experts common stock will be converted. After the closing of
the merger, the exchange agent will send a letter of transmittal, which is to be
used to exchange Service Experts stock certificates for stock certificates of
Lennox, to each former Service Experts stockholder. The letter of transmittal
will contain instructions explaining the procedure for surrendering Service
Experts stock certificates. YOU SHOULD NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD.
Service Experts stockholders who surrender their stock certificates,
together with a properly completed letter of transmittal, will receive stock
certificates representing the shares of Lennox common stock into which the
shares of Service Experts common stock, which were represented by the Service
Experts stock certificates, have been converted in the merger.
After the merger, each certificate that previously represented shares of
Service Experts common stock will represent only the right to receive the shares
of Lennox common stock into which those shares of Service Experts common stock
have been converted.
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Lennox will not pay dividends to holders of Service Experts stock
certificates in respect of the shares of Lennox common stock into which the
Service Experts shares represented by those certificates have been converted
until the Service Experts stock certificates are surrendered to the exchange
agent.
After the merger becomes effective, Service Experts will not register any
further transfers of Service Experts shares. Any certificates for Service
Experts shares that you present for registration after the effective time will
be exchanged for shares of Lennox.
Lennox will not issue fractional shares in the merger. Instead, the
exchange agent will pay to each of those stockholders otherwise entitled to a
fractional share of Lennox common stock an amount in cash determined by
multiplying the fractional share interest to which the stockholder would
otherwise be entitled by the sum of the gross proceeds received by the exchange
agent from the sale of all shares of Lennox common stock not exchanged for
Service Experts common stock on account of Lennox not issuing fractional shares
in the merger.
TREATMENT OF SERVICE EXPERTS STOCK OPTIONS, WARRANTS, RESTRICTED STOCK AND
CONVERTIBLE NOTES
At the effective time of the merger, each outstanding employee option to
purchase shares of Service Experts common stock granted under any Service
Experts option plan will be assumed by Lennox regardless of whether or not they
are exercisable. Each Service Experts stock option that is assumed by Lennox
will continue to have the same terms and be subject to the same conditions as
were applicable to the stock option before the effective time, except that:
- each Service Experts stock option will be exercisable for shares of
Lennox common stock, and the number of shares of Lennox common stock
issuable upon exercise of any given option will be determined by
multiplying 0.67 by the number of shares of Service Experts common stock
underlying such option;
- the per share exercise price of any given option will be determined by
dividing the exercise price of the option by 0.67;
- a cash payment based on the value of Lennox common stock on the date of
exercise will be made instead of the issuance of fractional shares unless
otherwise provided in the company plan under which the option was
granted; and
- the option price, number of shares purchasable and terms of exercise may
be adjusted, in some cases, to the extent necessary to comply with
applicable provisions of the Internal Revenue Code providing favorable
tax treatment to options issued under an "incentive stock option plan".
At the effective time of the merger, each warrant to purchase shares of
Service Experts common stock will be assumed by Lennox. Each Service Experts
warrant that is assumed by Lennox will continue to have the same terms and be
subject to the same conditions as were applicable to the Service Experts
warrants before the effective time, except that:
- each Service Experts warrant will be exercisable for shares of Lennox
common stock, and the number of shares of Lennox common stock issuable
upon exercise of any given warrant will be determined by multiplying 0.67
by the number of shares of Service Experts common stock underlying such
warrant;
- the per share exercise price of any given warrant will be determined by
dividing the exercise price of the warrant by 0.67; and
- a cash payment based on the value of Lennox common stock on the date of
exercise will be made instead of the issuance of fractional shares unless
otherwise provided in the warrant.
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At the effective time of the merger, each restricted stock award granted by
Service Experts, whether vested or unvested, will continue to have the same
terms and be subject to the same conditions as were applicable to the Service
Experts restricted stock awards before the effective time, except that:
- each Service Experts restricted stock award will represent the right to
receive Lennox common stock, and the number of shares of Lennox common
stock which such restricted stock award represents the right to receive
will be determined by multiplying 0.67 by the number of shares of Service
Experts common stock underlying such restricted stock award; and
- the vesting strike price of any given restricted stock award will be
determined by dividing the vesting strike price of the award by 0.67.
At the effective time of the merger, each note of Service Experts that is
convertible into shares of Service Experts common stock will be convertible into
shares of Lennox common stock and will continue to have the same terms and be
subject to the same conditions as were applicable to the Service Experts notes
before the effective time, except that:
- each Service Experts convertible note will be convertible into shares of
Lennox common stock, and the number of shares of Lennox common stock
issuable upon the conversion of any given note will be determined by
multiplying 0.67 by the number of shares of Service Experts common stock
underlying such note; and
- the conversion price of any given convertible note will be determined by
dividing the conversion price of the note by 0.67.
BOARD OF DIRECTORS AND OFFICERS
At the effective time of the merger, the directors of Lennox's merger
subsidiary will become the new directors of Service Experts and the officers of
Lennox's merger subsidiary will become the new officers of Service Experts.
After the effective time, Lennox will cause those officers of Service Experts
prior to the effective time that Lennox deems appropriate to be appointed
officers of Service Experts.
Lennox has agreed to take all reasonable action necessary to nominate and
recommend one individual, proposed by Service Experts and acceptable to Lennox
who is currently a member of the board of directors of Service Experts, for
election to a three-year term on the board of directors of Lennox at Lennox's
2000 annual meeting of stockholders. After the effective time of the merger and
prior to the proposed individual's election to the board of directors of Lennox,
the individual will be invited to meetings of the board of directors of Lennox
as a non-voting participant.
COVENANTS
We have each undertaken a number of covenants in the merger agreement. The
following summarizes the more significant of these covenants:
NO SOLICITATION
Service Experts has agreed not to, and not to authorize or permit any of
its subsidiaries or any of Service Experts' or its subsidiaries' respective
officers, directors, employees or representatives to:
- initiate, solicit, or encourage, or take any other action to facilitate,
any inquiries or make any proposal that constitutes any "acquisition
proposal" of the type described below; or
- engage in any discussions or negotiations regarding any acquisition
proposal, enter into an agreement with respect to any acquisition
proposal or agree to or endorse any acquisition proposal.
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In the event that Service Experts receives an unsolicited acquisition
proposal in writing of the type described below, however, Service Experts may
provide information to the person and enter into discussions and negotiations
with the person regarding the proposal if:
- the board of directors of Service Experts, after receiving the advice of
outside legal counsel, determines in good faith that it would be in
violation of its fiduciary duties under applicable law if the board of
directors failed to do so;
- before furnishing information to the party and before entering into
discussions and negotiations with the party, Service Experts gives
written notice to Lennox and enters into a customary confidentiality
agreement with the party; and
- Service Experts determines in good faith after consultation with its
financial advisor that the proposal, if accepted, is reasonably likely to
be completed and, if completed, would result in a more favorable
transaction than the merger between Lennox and Service Experts.
An "acquisition proposal" means any of the following involving Service
Experts or its significant subsidiaries:
- any merger, consolidation, share exchange, business combination or other
similar transaction, other than the merger between Lennox and Service
Experts;
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 15% or more of the assets of Service Experts and its
subsidiaries;
- any tender offer or exchange offer for 15% or more of the outstanding
capital stock of Service Experts or the filing of a registration
statement in connection with the tender offer or exchange offer;
- the acquisition by any person or group of 15% or more of the outstanding
capital stock of Service Experts; or
- any public announcement of a proposal, plan or intention to do any of the
actions described above.
Service Experts has agreed to promptly notify Lennox of the relevant terms
of any proposal received by Service Experts, any of its subsidiaries or any of
Service Experts' or any of its subsidiaries' officers, directors, investment
bankers, financial advisors or attorneys. If the proposal is in writing, Service
Experts has agreed to deliver to Lennox a copy of the proposal and promptly
inform Lennox of the status of any discussions or negotiations with the party
and any changes to the terms of the proposal.
BOARD OF DIRECTORS' COVENANT TO RECOMMEND
Service Experts board of directors has agreed to recommend the approval of
the merger to the Service Experts stockholders and the Lennox board of directors
has agreed to recommend the approval of the issuance of Lennox common stock in
the merger to the Lennox stockholders. However, Service Experts is not obligated
to take any action that would cause its board of directors to act inconsistently
with their fiduciary duties as determined by the board of directors of Service
Experts in good faith after consultation with independent legal counsel.
OPERATIONS OF SERVICE EXPERTS PENDING CLOSING
Service Experts has undertaken a covenant that restricts its operations,
and those of its subsidiaries, until the merger is completed or the merger
agreement is terminated. In general, Service Experts and its subsidiaries have
agreed to conduct businesses in the usual, regular and ordinary course
consistent with past practices and to use reasonable efforts to preserve intact
its business organizations and relationships
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with third parties. Before the effective time of the merger, Service Experts
will not and will not permit any of its subsidiaries to:
- declare or pay dividends;
- split, combine or reclassify its stock;
- repurchase, redeem or otherwise acquire any of its capital stock, other
than as required by securities that are currently outstanding or as
contemplated by the Service Experts stock plans;
- issue, deliver or sell any capital stock, voting debt or other voting
securities, or any securities convertible into or exercisable for capital
stock, voting debt or other voting securities, except the issuance of
Service Experts common stock to employees or directors upon the exercise
of stock options granted under the Service Experts stock plans that are
currently outstanding and the issuance of Service Experts common stock
upon the exercise of warrants or the conversion of convertible notes that
are currently outstanding;
- amend any organizational documents;
- enter into any merger, consolidation or acquisition of a substantial
equity interest in or a substantial portion of the assets of an entity in
which the purchase price exceeds $1.0 million or in which the purchase
price in a series of transactions exceeds $15.0 million;
- sell, lease, encumber or otherwise dispose of a material amount of
assets, except in the ordinary course of business consistent with past
practices;
- authorize, recommend, propose or announce an intention to adopt a plan of
liquidation or dissolution of Service Experts or any of its significant
subsidiaries;
- grant any increases in the compensation of any of its directors, officers
or employees, except increases or bonuses to general managers and to
employees who are not directors or officers made in the ordinary course
of business;
- pay any material pension, retirement allowance or other employee benefit
not required or contemplated by any of the Service Experts benefit plans
or pension plans;
- amend or modify any Service Experts pension plan;
- enter into any new, or amend any existing, employment or severance or
termination agreement with any director, officer or employee;
- become obligated under any new employee benefit plan or pension plan;
- incur or guarantee any new indebtedness or issue, sell or guarantee any
debt securities;
- enter into any material lease or create any material mortgages, liens,
security interests or other encumbrances on the property of Service
Experts or its subsidiaries, except in the ordinary course of business;
- make or commit to make aggregate capital expenditures in excess of $2.5
million;
- change any accounting policies;
- enter into any agreement or arrangement with any affiliate of Service
Experts or its subsidiaries on terms less favorable to Service Experts or
such subsidiary than could reasonably be expected to have been obtained
with a non-affiliate;
- modify, amend, terminate, renew or fail to use reasonable business
efforts to renew any material contract or agreement, or enter into any
contract, except in the ordinary course of business consistent with past
practices;
- fail to maintain customary insurance;
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- fail to maintain all permits that are material to the operations of
Service Experts;
- make or rescind any material tax election, settle or compromise any
material claim, action, suit, litigation, proceeding, arbitration,
investigation, audit or controversy audit, or change in any material
respect any of its methods of reporting income or deductions for federal
income tax purposes from those employed in years past except as required
by applicable law or except for changes that would not reasonably be
expected to materially and adversely affect Service Experts;
- pay, discharge or satisfy any material claims, liabilities or
obligations, except for payment of liabilities reflected or reserved
against in the financial statements of Service Experts for the quarter
ended June 30, 1999 or incurred in the ordinary course of business
consistent with past practices; and
- take or fail to take any other action that would reasonably be expected
to prevent or materially impede, interfere with or delay the merger.
OPERATIONS OF LENNOX PENDING CLOSING
Lennox has undertaken a covenant that restricts its operations, and those
of its subsidiaries, until either the effective time of the merger or the
termination of the merger agreement. Before the effective time of the merger,
Lennox will not and will not permit any of its subsidiaries to:
- engage in any material repurchase, recapitalization, restructuring or
reorganization with respect to its capital stock, including any
extraordinary dividends or distributions;
- engage in any repurchase of Lennox common stock, other than pursuant to
any employee benefit plan, during the period beginning 45 days before the
effective time of the merger and ending at the effective time of the
merger;
- split, combine or reclassify any of its stock;
- issue any other securities in respect of, in lieu of or in substitution
for shares of Lennox common stock;
- amend any material term or provision of Lennox common stock;
- amend any organizational documents; and
- take or fail to take any other action that would reasonably be expected
to prevent or materially impede, interfere with or delay the merger.
ACTIONS TO COMPLETE THE MERGER
We have agreed to cooperate with each other to take all actions and do all
things necessary or advisable under the merger agreement and applicable laws to
complete the merger and the other transactions contemplated by the merger
agreement, including the following:
- promptly prepare and file with the SEC the joint proxy statement;
- prepare and, in the case of Lennox, file with the SEC the registration
statement pursuant to which the Lennox common stock will be issued in
connection with the merger;
- use reasonable best efforts to obtain letters from our respective
independent public accountants in customary scope and substance in
connection with the filing of the registration statement;
- provide access to information;
- call meetings of our respective shareholders, recommend to our respective
shareholders the matters to be presented for such shareholders' approval
and use best efforts to obtain the necessary approval and to hold the
meeting as soon as practicable after the registration statement becomes
effective;
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- promptly prepare and file all necessary documents with governmental
entities, including notification under the Hart-Scott-Rodino Antitrust
Improvements Act;
- cooperate and defend against any proceedings that question the validity
or legality of the merger;
- consult with each other before issuing any press releases or making any
public announcements with respect to the merger;
- advise each other regarding operational matters, including any changes
that could be foreseen to have a material adverse effect on either
company;
- promptly provide each other with copies of all filings made by the other
party with the SEC or any other state or federal governmental entity in
connection with the merger; and
- cooperate in the preparation, execution and filing of applicable tax
documents.
EMPLOYEE MATTERS
Service Experts and Lennox agree that:
- all employees of Service Experts immediately before the effective time of
the merger will be employed by the surviving company immediately after
the effective time of the merger, but Lennox and the surviving company
will have no obligation to continue employing the employees for any
length of time after the merger;
- Service Experts employee benefit plans in effect immediately before the
effective time of the merger agreement will remain in effect until
otherwise determined after the effective time of the merger;
- to the extent that any Service Experts employee benefit plans are not
continued, Service Experts employees will be covered by Lennox employee
benefit plans applicable to similarly situated employees of Lennox or
Lennox will maintain for a period of one year after the effective time of
the merger benefit plans that are not less favorable, in the aggregate,
to the employees covered by Service Experts employee benefit plans than
are the Service Experts employee benefit plans;
- in the case of Service Experts pension plans that are continued and under
which the employees' interests are based upon Service Experts common
stock, the interests shall be based on Lennox common stock in an
equitable manner;
- any present employees of Service Experts will be credited for their
service with Service Experts and its predecessor entities for purposes of
eligibility and vesting in the plans provided by Lennox and the surviving
company; and
- the employees' benefits under Lennox's and the surviving company's
medical benefit plan will not be subject to any exclusions for any
pre-existing conditions and credit will be received for any deductibles
or out-of-pocket amounts previously paid during the current year.
You should read "The Merger Transaction--Conflicts of Interest," beginning
on page 45, for additional information on employee benefits matters covered in
the merger agreement.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains substantially reciprocal representations and
warranties made by each of us to the other. The representations and warranties
relate to:
- corporate organization and existence, qualification to conduct business
and corporate standing and power;
- ownership of subsidiaries;
- capitalization;
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- corporate authorization to enter into and carry out obligations under the
merger agreement and the enforceability of the merger agreement;
- absence of a conflict with or violation of the certificate of
incorporation, bylaws, any applicable law or any agreements, including
any joint venture or other ownership arrangement, as a result of the
merger;
- governmental consents, approvals, orders and authorizations required in
connection with the merger;
- filings with the SEC;
- financial statements;
- information provided for inclusion in this joint proxy
statement/prospectus;
- absence of certain material changes or events since December 31, 1998;
- absence of undisclosed material liabilities;
- absence of a default or violation of the certificate of incorporation,
bylaws, any applicable law or any agreements;
- compliance with applicable laws;
- pending or threatened litigation;
- tax matters;
- employee benefits matters;
- labor matters;
- intellectual property matters;
- environmental matters;
- opinions of financial advisors;
- vote required of the company's stockholders;
- beneficial ownership of the other company's common stock;
- payment of fees to finders and financial advisors in connection with the
merger agreement; and
- treatment of the merger as a reorganization under the Internal Revenue
Code in which Service Experts stockholders generally will not recognize
any gain or loss, except for any gain or loss recognized in connection
with cash received for a fractional share of Lennox common stock.
In addition, Service Experts represents and warrants to Lennox that it
maintains adequate insurance coverage and that no state takeover or other
similar statutes apply to the merger. On the other hand, Lennox represents and
warrants to Service Experts that it owns all of the outstanding capital stock of
LII Acquisition Corporation and that LII Acquisition Corporation has incurred no
obligations or liabilities other than with respect to the merger and has no
assets.
The representations and warranties contained in the merger agreement do not
survive the effective time of the merger.
ADDITIONAL AGREEMENTS
INDEMNIFICATION AND INSURANCE
After the effective time of the merger, Lennox will be obligated, to the
fullest extent permitted under applicable laws, to indemnify and hold harmless
each person who is, or has been an officer, director or employee of Service
Experts or any of its subsidiaries with respect to acts or omissions by them in
their
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capacities as officers, directors or employees or taken at the request of
Service Experts or any of its subsidiaries at any time on or before the
effective time of the merger. Service Experts is obligated to provide this
indemnification until the effective time of the merger.
Lennox is obligated, for six years after the merger, to maintain in effect
Service Experts current directors' and officers' liability insurance covering
acts or omissions occurring before the effective time of the merger or replace
such insurance with policies that are no less advantageous in any material
respect to the covered parties. Lennox will not be required to pay an annual
premium for this insurance in excess of 200% of the last annual premium paid by
Service Experts before the effective date of the merger agreement. If the annual
premiums of that insurance coverage exceed that amount, however, Lennox will be
obligated to provide coverage for a cost equal to 200% of the current annual
premium.
EXPENSES
We have each agreed to pay our own costs and expenses incurred in
connection with the merger and the merger agreement. We will, however, share
equally the expenses incurred in connection with the printing and mailing of
this joint proxy statement.
SEC CLEARANCE AND NEW YORK STOCK EXCHANGE LISTING
Before the effective time of the merger, Lennox is obligated to take all
action necessary to permit it to issue the number of shares of its common stock
as required by the merger. Lennox is also obligated to use all reasonable
efforts to cause the shares of its common stock to be issued in the merger and
the shares of its common stock to be reserved for issuance upon exercise of the
Service Experts stock options and warrants and issuances under the Service
Experts stock plans to be approved for listing on the New York Stock Exchange,
subject to official notice of issuance, prior to the effective time of the
merger. As soon as practicable after the merger, Lennox will file with the SEC a
registration statement with respect to the shares of Lennox common stock subject
to the Service Experts stock options and will use its reasonable efforts to
maintain the effectiveness of the registration statement.
ACCOUNTING TREATMENT
Lennox will account for the merger as a purchase. Under this method of
accounting, Lennox will allocate the purchase price based on the fair value of
the assets acquired and the liabilities assumed.
TAX TREATMENT
We have each agreed not to take any action or fail to take any action that
would prevent the merger from qualifying as a reorganization under the Internal
Revenue Code.
SERVICE EXPERTS STOCK PURCHASE PLANS
Service Experts has terminated its employee stock purchase plan and
nonqualified stock purchase plan effective on December 31, 1999. On that date,
Service Experts will apply the funds credited as of the date under the
appropriate stock purchase plan within each participant's contribution account
to the purchase of whole shares of Service Experts common stock according to the
terms of the stock purchase plan. Any cash balance remaining in a participant's
account that is insufficient to purchase an additional whole share will be
refunded to the participant.
CREDIT AGREEMENT
At or before closing, Lennox will refinance, arrange for the continuation
of, or repay all of Service Experts' debt under its $200 million bank credit
facility.
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CONDITIONS TO THE COMPLETION OF THE MERGER
Our respective obligations to complete the merger are subject to the
satisfaction or, to the extent legally permissible, the waiver of various
conditions which include, in addition to other customary closing conditions, the
following:
- approval of the merger agreement and the merger by the stockholders of
Service Experts;
- approval of the issuance of Lennox common stock in the merger by
stockholders of Lennox;
- approval of the shares of Lennox common stock issuable in the merger for
listing on the New York Stock Exchange, subject to official notice of
issuance;
- expiration or termination of the relevant waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act;
- receipt of all other governmental and regulatory approvals necessary to
complete the merger unless failure to obtain those approvals would not
have a material adverse effect on Lennox and those approvals are obtained
on terms that would not have a material adverse effect on Lennox;
- effectiveness of the registration statement relating to the issuance of
the shares of Lennox common stock to be issued in the merger, of which
this joint proxy statement/prospectus forms a part, and the absence of a
stop order with respect to the registration statement; and
- the absence of any order, injunction or other legal restraint prohibiting
the completion of the merger.
Individually, our respective obligations to effect the merger are subject
to the satisfaction or, to the extent legally permissible, the waiver of the
following additional conditions:
- the representations and warranties of the other company contained in the
merger agreement being true and correct on the closing date of the
merger, as if they were made on that date (unless they were by their
express provisions made as of a specific date, in which case they need be
true and correct only as of that specific date), unless their failure to
be true and correct would not have a material adverse effect on the other
party;
- the performance in all material respects by the other company of all
obligations that it is required to perform before the closing of the
merger;
- the receipt of an opinion of counsel to the effect that the merger will
qualify as a reorganization under the Internal Revenue Code and that no
gain or loss will be recognized by Lennox or Service Experts as a result
of the merger or by any Service Experts stockholder upon the conversion
of shares of Service Experts common stock into shares of Lennox common
stock, except gain will be recognized with respect to cash received
instead of a fractional share of Lennox common stock; and
- with respect to the obligation of Lennox to close only, the receipt by
Lennox from each affiliate of Service Experts of an executed copy of an
agreement in which the affiliate agrees to not sell, pledge, transfer or
otherwise dispose of any shares of Lennox common stock issued to the
affiliate in the merger except in compliance with federal securities
laws.
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TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE
The merger agreement may be terminated at any time before the closing in
any of the following ways:
(1) by our mutual written consent, or by mutual action of our boards
of directors;
(2) by either one of us
(a) if any order, injunction or other legal restraint permanently
prohibits the completion of the merger;
(b) if Service Experts stockholders do not approve the merger
agreement and the merger at its special meeting;
(c) if Lennox stockholders do not approve the issuance of Lennox
common stock at its special meeting; or
(d) if the merger is not completed on or before April 30, 2000;
except that a company may not terminate the agreement on such date if
the cause of the merger not being completed is its failure to fulfill
its obligations under the merger agreement;
(3) by Lennox:
(a) if Service Experts has failed to comply in any material
respects with any of its covenants or agreements contained in the merger
agreement and its breach has not been cured within 30 days following
notice of the breach;
(b) if any representation or warranty of Service Experts contained
in the merger agreement is not true in all material respects when made
or at the time of termination as if made on that date of termination
(unless they were by their express provisions made as of a specific
date, in which case they need be true and correct only as of that
specific date) and the breach has not been cured within 30 days
following notice of such breach, except when the failure to be true and
correct would not have a material adverse effect on Service Experts; or
(c) if there has been a material adverse change with respect to
Service Experts;
(4) by Service Experts:
(a) if Lennox has failed to comply in any material respects with
any of its covenants or agreements contained in the merger agreement and
its breach has not been cured within 30 days following notice of the
breach;
(b) if any representation or warranty of Lennox contained in the
merger agreement is not true in all material respects when made or at
the time of termination as if made on that date of termination (unless
they were by their express provisions made as of a specific date, in
which case they need be true and correct only as of that specific date)
and the breach has not been cured within 30 days following notice of
such breach, except when the failure to be true and correct would not
have a material adverse effect on Lennox; or
(c) if there has been a material adverse change with respect to
Lennox;
(5) by Lennox, if the Service Experts board of directors withdraws or
modifies its approval or recommendation of the merger in any manner adverse
to Lennox, fails to call a special meeting and recommend the approval of
the merger agreement and the merger to its stockholders, fails to mail the
joint proxy statement to its stockholders within a reasonable period of
time after it becomes available for mailing or fails to include its
approval and recommendation of the merger in the joint proxy statement, or
recommends an acquisition proposal; or
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<PAGE> 120
(6) by Service Experts, if the Service Experts board of directors
enters into discussions or negotiations with any person or entity in
connection with an unsolicited bona fide proposal in writing by the person
or entity to acquire Service Experts and the following conditions are met:
(a) the board of directors of Service Experts, after receiving the
advice of outside legal counsel, determines that it would be in
violation of its fiduciary duties under applicable law if the board of
directors failed to do so;
(b) before furnishing information to the party and before entering
into discussions and negotiations with the party Service Experts gives
written notice to Lennox and enters into a customary confidentiality
agreement with the party;
(c) Service Experts determines in good faith after consultation
with its financial advisor that the proposal, if accepted, is reasonably
likely to be completed and, if completed, would result in a more
favorable transaction than the merger between Lennox and Service
Experts;
(d) Lennox receives at least two days' prior written notice from
Service Experts of its intention to terminate the merger agreement and,
during the two-day period, Service Experts and its financial and legal
advisors shall have considered any adjustment in the terms and
conditions of the merger agreement that Lennox may propose; and
(e) Service Experts pays the termination fee as required under the
merger agreement.
TERMINATION FEES PAYABLE BY SERVICE EXPERTS
Service Experts has agreed to pay Lennox a termination fee of:
$5.0 million, if:
- Lennox terminates the merger agreement for the reason described in
paragraph (3)(a) under "--Right to Terminate" above and, at the time of
the termination, an acquisition proposal is pending or Service Experts
agrees to or completes an acquisition proposal within six months of the
termination;
- Lennox terminates the merger agreement for the reasons described in
paragraph (5) under "--Right to Terminate" above; or
- Service Experts terminates the merger agreement for the reasons
described in paragraph (6) under "--Right to Terminate" above; and
$4.0 million, if:
- Lennox terminates the merger agreement for the reason described in
paragraph 2(b), Lennox is not entitled to a termination fee under any
other provision of the merger agreement and, if prior to the event
giving rise to such termination by Lennox, Service Experts was not
entitled to terminate the merger agreement for any of the reasons
described in paragraphs (2)(a), (2)(d) or (4) under "--Right to
Terminate" above.
TERMINATION FEES PAYABLE BY LENNOX
Lennox has agreed to pay Service Experts a termination fee of $4.0 million,
if Service Experts terminates the merger agreement for the reason described in
paragraph 2(c) and, if prior to the event giving rise to such termination by
Service Experts, Lennox was not entitled to terminate the merger agreement for
any of the reasons described in paragraphs (2)(a), (2)(d), (3) or (5) under
"--Right to Terminate" above.
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<PAGE> 121
AMENDMENTS AND WAIVER
Any provision of the merger agreement may be amended or waived at any time
before the effective time of the merger, provided that any such amendment or
waiver complies with applicable laws. Any amendment must be signed by all
parties to the merger agreement. Any waiver or extension must be signed by the
party against whom the waiver is to be effective.
MATERIAL TERMS OF THE STOCK OPTION AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE STOCK
OPTION AGREEMENT, A COPY OF WHICH IS ATTACHED AS ANNEX B TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF
LENNOX AND SERVICE EXPERTS ARE URGED TO READ THE STOCK OPTION AGREEMENT IN ITS
ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE STOCK OPTION. IN THE EVENT OF
ANY DISCREPANCY BETWEEN THE TERMS OF THE STOCK OPTION AGREEMENT AND THE
FOLLOWING SUMMARY, THE STOCK OPTION AGREEMENT WILL CONTROL.
THE STOCK OPTION
At the same time we entered into the merger agreement, we also entered into
a stock option agreement. Under the terms of the stock option agreement; Service
Experts granted Lennox the right to purchase up to 3,618,491 shares of Service
Experts common stock at an exercise price of $8.94 per share. The terms of the
stock option agreement are summarized below.
EXERCISE OF THE STOCK OPTION
Lennox can exercise the option granted to it, in whole or in part, at any
time after the occurrence of the events that would entitle it to receive a
termination fee of $5.0 million under the merger agreement (see "Material Terms
of the Merger Agreement--Termination of the Merger Agreement--Termination Fees
Payable by Service Experts" on page 112) and prior to the termination of the
option.
The option terminates upon the earliest to occur of the effective time of
the merger or the first anniversary of the date of termination of the merger
agreement.
CASH ELECTION
If the stock option becomes exercisable, Lennox may elect to receive a cash
payment as to all or part of the option shares subject to the option. This cash
payment would terminate Lennox's right to purchase those shares upon the
exercise of the option. The cash to be paid would be equal to the difference
between the exercise price of the option and the higher of:
- the highest price per share paid by any person in connection with an
acquisition proposal; or
- the average closing price of the Service Experts common stock for the
five consecutive days preceding the election to receive cash.
LISTING AND REGISTRATION RIGHTS
If the stock option becomes exercisable, Service Experts will apply to list
the shares subject to the stock option on the New York Stock Exchange and will
use its reasonable best efforts to have those shares listed as soon as
practicable. Service Experts granted Lennox customary rights to require
registration of shares purchased under an option to permit a resale of those
shares under the securities laws.
LIMITATION ON TOTAL PROFIT
The stock option agreement provides that, notwithstanding any other
provision of that agreement or the merger agreement, the total profit, as
defined below, that Lennox shall be permitted to receive will not exceed $7.0
million in the aggregate. If the total profit of Lennox would otherwise exceed
this amount,
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<PAGE> 122
Lennox may, at its sole election, do any of the following so that Lennox's
actually realized total profit does not exceed $7.0 million:
- pay cash to Service Experts;
- deliver to Service Experts for cancellation option shares previously
acquired; or
- pay cash to Service Experts and deliver to Service Experts for
cancellation option shares previously acquired.
Total profit means the total amount, before taxes, of the following:
- the cash amount actually received by Lennox in payment of the termination
fee under the merger agreement, less
- any repayment of cash by Lennox to Service Experts on account of the
total profit exceeding $7.0 million;
- the net cash amounts or the fair market value of property received by
Lennox from the sale of option shares, less the purchase price for those
option shares; and
- the aggregate amount received by Lennox as a result of a cash election
described under "--Cash Election" on page 113.
The stock option agreement also provides that Lennox may not exercise any
option for a number of option shares that would, as of the date of exercise,
result in a notional total profit exceeding $7.0 million. For purposes of the
stock option agreement, the notional total profit with respect to the option
shares for which Lennox may propose to exercise the option granted to it means
the total profit received by it determined as of the date it notifies Service
Experts of its intent to exercise the option and assuming that the applicable
option shares, together with all other option shares previously acquired upon
exercise of the option and held by Lennox or its affiliates as of such date,
were sold for cash at the closing price on the New York Stock Exchange on the
preceding trading day.
EFFECT OF THE STOCK OPTION AGREEMENT
The stock option agreement is intended to increase the likelihood that the
merger will be completed in accordance with the terms of the merger agreement.
The option agreement makes an acquisition or other business combination of
Service Experts by or with a third party more costly because of the need in any
transaction to acquire the shares held by Lennox pursuant to the option
agreement. Accordingly, the option agreement may discourage a third party from
proposing another transaction, including one that might be more favorable from a
financial point of view to the stockholders of Service Experts than the merger.
STANDSTILL PROVISION
At any time after the date of exercise of the stock option (other than an
exercise as described under "--Cash Election" on page 113) by Lennox with
respect to more than ten percent of the then outstanding shares of Service
Experts common stock, and until the earlier of two years from the date of
exercise or the date Lennox beneficially owns less than five percent of the then
outstanding shares of Service Experts common stock, Lennox and its affiliates
may not:
- attempt to acquire ownership of more than 15% of any class of voting
securities of Service Experts, including any rights or options to acquire
that ownership;
- propose a merger, consolidation or similar transaction involving Service
Experts;
- offer or propose to acquire all or a substantial portion of the assets of
Service Experts;
- solicit or participate in the solicitation of any proxies or consents
involving the securities of Service Experts;
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<PAGE> 123
- enter into any agreement or arrangement with a third party involving any
of the matters described above; or
- publicly announce that Lennox requested the consent of the board of
directors of Service Experts to do any of the matters described above
except as required by law.
VOTING AGREEMENTS
WE BELIEVE THIS SUMMARY DESCRIBES ALL MATERIAL TERMS OF THE SHAREHOLDER
AGREEMENTS. HOWEVER, WE RECOMMEND THAT YOU READ CAREFULLY THE COMPLETE TEXT OF
THE SHAREHOLDER AGREEMENTS FOR THE PRECISE LEGAL TERMS OF THE SHAREHOLDER
AGREEMENTS AND OTHER INFORMATION THAT MAY BE IMPORTANT TO YOU. THE FORM
SHAREHOLDER AGREEMENTS ARE INCLUDED IN THIS DOCUMENT AS ANNEXES C AND D.
LENNOX SHAREHOLDER AGREEMENTS
In connection with the merger agreement, Service Experts required the
following Lennox stockholders, who are also directors or executive officers of
Lennox or trusts controlled by directors of Lennox, to enter into a shareholder
agreement: John W. Norris, Jr., H. E. French, Robert E. Schjerven, Michael G.
Schwartz, Harry J. Ashenhurst, Carl E. Edwards, Jr., W. Lane Pennington, Clyde
W. Wyant, John J. Hubbuch, David H. Anderson, Richard W. Booth, Thomas W. Booth,
James J. Byrne, Janet K. Cooper, John E. Major, Donald E. Miller, Richard L.
Thompson, the Leo E. Anderson Trust, the David H. Anderson Trust, the Betty Oaks
Trust and the 1996 Anderson GST Exempt Trust. See "Information About
Lennox--Management of Lennox" on page 81 and "Ownership of Lennox Common Stock"
on page 116 for more information about these stockholders. These Lennox
stockholders agreed to vote an aggregate of 8,565,879 shares of Lennox common
stock, which represented approximately 19.1% of the issued and outstanding
shares of Lennox common stock, and any shares of Lennox common stock that they
may acquire after the date of the shareholder agreement in favor of the approval
of the issuance of Lennox common stock in the merger. The shareholder agreements
will remain in effect until completion of the merger or termination of the
merger agreement.
SERVICE EXPERTS SHAREHOLDER AGREEMENTS
In connection with the merger agreement, Lennox required the following
Service Experts stockholders, who are executive officers of Service Experts, to
enter into a shareholder agreement: Alan R. Sielbeck, Ronald L. Smith and
Anthony M. Schofield. These Service Experts stockholders agreed to vote an
aggregate of 808,551 shares of Service Experts common stock, which represented
approximately 4.4% of the issued and outstanding shares of Service Experts
common stock, and any shares of Service Experts common stock that they may
acquire after the date of the shareholder agreement in favor of the adoption of
the merger, the merger agreement and the transactions contemplated by the merger
agreement. The shareholder agreements will remain in effect until completion of
the merger or termination of the merger agreement.
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<PAGE> 124
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
The Lennox common stock to be issued in the merger will be registered under
the Securities Act of 1933, thereby allowing such shares to be freely traded
without restriction by all former holders of Service Experts common stock who
are not "affiliates" of Service Experts at the time of the Service Experts
special meeting and who do not become "affiliates" of Lennox after the merger.
Persons who may be deemed to be affiliates of Lennox or Service Experts
generally include individuals or entities that control, are controlled by or are
under common control with, such party and may include certain officers and
directors of Lennox and Service Experts, as well as significant stockholders.
Shares of Lennox common stock received by those stockholders of Service
Experts who are deemed to be affiliates of Service Experts may be resold without
additional registration under the Securities Act only in the manner permitted by
Rule 145 under the Securities Act or as otherwise permitted under the Securities
Act. The merger agreement requires Service Experts to use its reasonable best
efforts to cause its affiliates to enter into agreements not to make any public
sale of any Lennox common stock received in the merger, except in compliance
with the Securities Act and the rules and regulations thereunder.
This document does not cover resales of Lennox common stock received by any
person who may be deemed to be an affiliate of Lennox or Service Experts.
OWNERSHIP OF LENNOX COMMON STOCK
The following table contains information regarding the beneficial ownership
of Lennox common stock as of November 1, 1999 by the following individuals:
- each person known by Lennox to own more than 5% of the outstanding shares
of Lennox common stock;
- each of Lennox's directors;
- each named executive officer of Lennox; and
- all executive officers and directors of Lennox as a group.
All persons listed have an address in care of Lennox's principal executive
offices.
The information contained in this table reflects "beneficial ownership" as
defined in Rule 13d-3 of the Securities Exchange Act of 1934. In computing the
number of shares beneficially owned by a person and the percentage ownership of
that person, shares of Lennox common stock subject to options held by that
person that were exercisable on November 1, 1999 or became exercisable within 60
days following November 1, 1999 are considered outstanding. However, such shares
are not considered outstanding for the purpose of computing the percentage
ownership of any other person. To Lennox's knowledge and unless otherwise
indicated, each stockholder has sole voting and investment power over the shares
listed as
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<PAGE> 125
beneficially owned by such stockholder, subject to community property laws where
applicable. Percentage of ownership is based on 45,041,133 shares of common
stock outstanding as of November 1, 1999.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE
- ---------------- ----------- -----------
<S> <C> <C>
John W. Norris, Jr.(1)...................................... 4,046,725 9.0%
H. E. French................................................ 104,599 *
Robert E. Schjerven(2)...................................... 231,726 *
Robert L. Jenkins........................................... 242,220 *
Clyde W. Wyant(3)........................................... 238,942 *
Linda G. Alvarado(4)........................................ 120,450 *
David H. Anderson(5)........................................ 4,268,354 9.5
Richard W. Booth(6)......................................... 5,000,914 11.1
Thomas W. Booth(7).......................................... 2,953,379 6.6
David V. Brown(8)........................................... 1,331,235 3.0
James J. Byrne(9)........................................... 153,079 *
Janet K. Cooper............................................. 1,719 *
John E. Major(10)........................................... 139,601 *
Donald E. Miller(11)........................................ 124,590 *
Terry D. Stinson............................................ 6,016 *
Richard L. Thompson(12)..................................... 149,130 *
All executive officers and directors as a group (21
persons)(13).............................................. 17,424,309 38.7
A.O.C. Corporation(14)...................................... 2,695,770 6.0
Robert W. Norris(15)........................................ 2,456,289 5.5
Frank E. Zink(16)........................................... 2,487,210 5.5
Phillip L. Zink(17)......................................... 4,215,882 9.4
</TABLE>
- ---------------
* Less than 1%
(1) Includes:
(a) 321,750 shares held by the Robert W. Norris Trust A of which John W.
Norris, Jr. is a co-trustee;
(b) 321,750 shares held by the John W. Norris, Jr. Trust A of which John W.
Norris, Jr. is a co-trustee;
(c) 663,135 shares held by the Megan E. Norris Trust A of which John W.
Norris, Jr. is a co-trustee;
(d) 120,120 shares of the Robert W. Norris Irrevocable Descendants' Trust
of which John W. Norris, Jr. is the trustee; and
(e) 254,100 shares subject to options.
(2) Includes 16,500 shares subject to options.
(3) Includes 138,820 shares subject to options.
(4) Includes 120,450 shares subject to options.
(5) Includes:
(a) 41,910 shares held by the Leo E. Anderson Trust of which David H.
Anderson is the trustee;
(b) 199,881 shares held by the Kristin H. Anderson Trust of which David H.
Anderson is a co-trustee;
(c) 3,751,508 shares held by the David H. Anderson Trust of which David H.
Anderson is the trustee;
(d) 66,825 shares held by the Betty Oakes Trust of which David H. Anderson
is the trustee;
(e) 87,780 shares held by David H. Anderson's child; and
(f) 120,450 shares subject to options.
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<PAGE> 126
(6) Includes:
(a) 52,470 shares held by the 1996 Anderson GST Exempt Trust of which
Richard W. Booth is the trustee;
(b) 2,029,731 shares held by trusts for the benefit of Richard W. Booth of
which Richard W. Booth is a co-trustee;
(c) 2,036,364 shares held by trusts for the benefit of Anne Zink of which
Richard W. Booth is a co-trustee;
(d) 53,333 shares held by The Richard W. and Anne C. Booth Charitable
Remainder Unitrust of which Richard W. Booth is a co-trustee; and
(e) 120,450 shares subject to options.
(7) Includes:
(a) 2,029,731 shares held by trusts for the benefit of Richard W. Booth of
which Thomas W. Booth is a co-trustee;
(b) 40,062 shares held by the Thomas W. Booth Trust of which Thomas W.
Booth is a co-trustee.
(c) 160,000 shares held by The Booth Family Charitable Lead Annuity Trust
of which Thomas W. Booth is a co-trustee;
(d) 71,181 shares held by Thomas W. Booth's children; and
(e) 3,575 shares subject to options.
(8) Includes:
(a) 315,117 shares held by David V. Brown's children; and
(b) 120,450 shares subject to options.
(9) Includes 120,450 shares subject to options.
(10) Includes 120,450 shares subject to options.
(11) Includes 120,450 shares subject to options.
(12) Includes 120,450 shares subject to options.
(13) Includes 1,624,942 shares subject to options.
(14) John W. Norris, Jr., David H. Anderson, Richard W. Booth and David V. Brown
are members of the board of directors of A.O.C. Corporation.
(15) Includes:
(a) 321,750 shares held by the Robert W. Norris Trust A of which Robert W.
Norris is a co-trustee;
(b) 321,750 shares held by the John W. Norris, Jr. Trust A of which Robert
W. Norris is a co-trustee;
(c) 1,148,169 shares held by the Robert W. Norris Revocable Trust of which
Robert W. Norris is the trustee;
(d) 140,514 shares held by the Christine Marie Dammann 1991 Revocable Trust
of which Robert W. Norris is the trustee;
(e) 196,812 shares held by the Stefan Robert Norris Revocable Trust of
which Robert W. Norris is the trustee;
(f) 169,488 shares held by the Nicholas W. Norris 1991 Revocable Trust of
which Robert W. Norris is the trustee; and
(g) 127,050 shares subject to options.
(16) Includes 2,036,364 shares held by trusts for the benefit of Anne Zink of
which Frank E. Zink is a co-trustee.
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(17) Includes:
(a) 2,029,731 shares held by trusts for the benefit of Richard W. Booth of
which Phillip L. Zink is a co-trustee;
(b) 2,036,364 shares held by trusts for the benefit of Anne Zink of which
Phillip L. Zink is a co-trustee; and
(c) 94,578 shares held by the Zink Family Grandchildren's Education Trust
of which Phillip L. Zink is the trustee.
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<PAGE> 128
COMPARISON OF STOCKHOLDER RIGHTS
Both Service Experts and Lennox are Delaware corporations governed by
Delaware law. In addition, the rights of Service Experts stockholders are
currently governed by Service Experts' certificate of incorporation and bylaws,
and the rights of Lennox stockholders are governed by Lennox's certificate of
incorporation and bylaws. After the effective time of the merger, the rights of
the holders of shares of Service Experts common stock who become holders of
shares of Lennox common stock will be governed by the current certificate of
incorporation and bylaws of Lennox and Delaware law. In most respects, the
rights of holders of shares in Service Experts common stock are similar to the
rights of holders of shares of Lennox common stock. The following is a summary
of the material differences between these rights. This summary does not purport
to be a complete discussion of, and is qualified in its entirety by reference
to, Delaware law as well as to Service Experts' certificate of incorporation and
bylaws and to Lennox's certificate of incorporation and bylaws, copies of which
are on file with the SEC.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF SERVICE
EXPERTS STOCKHOLDERS AND RIGHTS OF STOCKHOLDERS OF THE COMBINED
COMPANY FOLLOWING THE MERGER
<TABLE>
<CAPTION>
LENNOX STOCKHOLDER RIGHTS SERVICE EXPERTS STOCKHOLDER RIGHTS
----------------------------- ----------------------------------
<S> <C> <C>
AUTHORIZED CAPITAL STOCK: The authorized capital stock The authorized capital stock of
of Lennox consists of 200 Service Experts consists of 30
million shares of common million shares of common stock and
stock and 25 million shares 10 million shares of preferred
of preferred stock. stock.
NUMBER OF DIRECTORS: Lennox's bylaws provide that Service Experts' certificate of
the number of directors may incorporation and bylaws provide
not be less than three nor that the number of directors may
more than 15. The board of not be less than two nor more than
directors of Lennox currently 11. Service Experts' board of
consists of 12 directors and directors currently consists of 6
there are currently two directors.
vacancies on Lennox's board
of directors.
REMOVAL OF DIRECTORS: Stockholders of Lennox may Stockholders of Service Experts
remove directors only for may remove directors only for
cause by the affirmative vote cause by the affirmative vote of
of the owners of at least 80% the owners of a majority of the
of the outstanding shares outstanding shares entitled to
entitled to vote. vote.
</TABLE>
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<TABLE>
<CAPTION>
LENNOX STOCKHOLDER RIGHTS SERVICE EXPERTS STOCKHOLDER RIGHTS
----------------------------- ----------------------------------
<S> <C> <C>
AMENDMENT OF CORPORATE Lennox's certificate of Service Experts' certificate of
CHARTER: incorporation may be amended incorporation may be amended by
by a board resolution and the the affirmative vote of owners of
affirmative vote of owners of a majority of the Service Experts
a majority of the Lennox shares, except with respect to
shares, except with respect amending the provision of the
to amending the provision of certificate of incorporation
the certificate of relating to (a) the board of
incorporation relating to (a) directors in general, (b) the
the board of directors in limitation on personal liability
general, (b) the prohibition of directors, (c) the
on preemptive rights and indemnification of directors and
cumulative voting, (c) the officers, (d) the removal of
limitation on personal directors, (e) the prohibition on
liability of directors, (d) stockholders action by written
the calling of special consent, and (f) amending the
meetings of stockholders, (e) certificate of incorporation, each
the fair price provision, and of which require the affirmative
(f) amending the certificate vote of the owners of at least
of incorporation, each of two-thirds of the outstanding
which require the affirmative Service Experts shares.
vote of owners of at least
80% of the outstanding Lennox
shares. Notwithstanding the
above, the 80% vote does not
apply to the fair price
provision if the amendment is
recommended to Lennox
stockholders by two-thirds of
the board.
AMENDMENT OF BYLAWS: Lennox's bylaws may be Service Experts bylaws may be
altered, amended, or repealed amended or repealed by the
by the affirmative vote of a affirmative vote of a majority of
majority of the board or by the board or by the affirmative
the affirmative vote of the vote of the owners of two-thirds
owners of a majority of the of the outstanding Service Experts
outstanding Lennox shares. shares.
</TABLE>
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<TABLE>
<CAPTION>
LENNOX STOCKHOLDER RIGHTS SERVICE EXPERTS STOCKHOLDER RIGHTS
----------------------------- ----------------------------------
<S> <C> <C>
FAIR PRICE PROVISION: Lennox's certificate of Service Experts has no similar
incorporation provides that provision in its certificate of
the affirmative vote of the incorporation.
owners of 80% of all
outstanding Lennox stock is
necessary to approve a
business combination
transaction with any party
owning 10% or more of the
outstanding shares of Lennox
common stock. This
requirement does not apply if
the business combination with
the 10% stockholder is
approved by two-thirds of the
"continuing directors," which
are those directors who were
members of the board
immediately prior to the time
the 10% stockholder reached
the 10% threshold or was
designated, prior to
election, as a continuing
director by two-thirds of the
then continuing directors.
This requirement also does
not apply if the
consideration offered to
stockholders of Lennox in the
business combination meets
minimum price requirements
set forth in Lennox's
certificate of incorporation.
STOCKHOLDER RIGHTS PLAN: Lennox does not have a Service Experts does not have a
stockholder rights plan. stockholder rights plan.
While Lennox has no intention
to adopt a stockholder rights
plan, the Lennox board could
do so without stockholder
approval at any future time.
</TABLE>
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<TABLE>
<CAPTION>
LENNOX STOCKHOLDER RIGHTS SERVICE EXPERTS STOCKHOLDER RIGHTS
----------------------------- ----------------------------------
<S> <C> <C>
ADVANCE NOTICE: Lennox's bylaws permit any Service Experts bylaws do not
stockholder of record to contain procedures restricting or
introduce business that is a regulating the introduction of
proper matter for stockholder business or the nomination of
action, in connection with candidates at meetings of Service
any annual or special meeting Experts stockholders.
of Lennox's stockholders, if,
in the case of an annual
meeting, the stockholder
gives notice of his or her
proposal to Lennox's
secretary no earlier than 60
days and no later than 90
days before the meeting and,
in the case of a special
meeting, the stockholder
notifies the secretary no
later than ten days following
the announcement of the
meeting.
Lennox's bylaws also permit
any stockholder of record
entitled to vote in the
election to nominate
candidates for election to
the Lennox board in
connection with any annual
meeting or special meeting at
which directors are to be
elected if, in the case of an
annual meeting, the
stockholder gives notice of
his or her nomination to
Lennox's secretary no earlier
than 60 days and no later
than 90 days before the
meeting and, in the case of a
special meeting, the
stockholder notifies the
secretary no later than ten
days following the
announcement of the meeting.
</TABLE>
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DESCRIPTION OF LENNOX CAPITAL STOCK
Lennox's authorized capital stock consists of 200,000,000 shares of common
stock and 25,000,000 shares of preferred stock, par value $.01 per share. At
November 1, 1999, 45,041,133 shares of Lennox common stock were outstanding.
None of the preferred stock is outstanding.
COMMON STOCK
The holders of Lennox common stock are entitled to one vote per share on
all matters to be voted on by Lennox stockholders. Generally, all matters to be
voted on by Lennox stockholders must be approved by a majority (or, in the case
of election of directors, by a plurality) of the votes entitled to be cast by
all shares of Lennox common stock present in person or represented by proxy,
voting together as a single class, except as may be required by law and subject
to any voting rights granted to holders of any preferred stock. However, the
removal of a director from office, the approval and authorization of specified
business combinations and amendments to specified provisions of Lennox's
certificate of incorporation each require the approval of not less than 80% of
the combined voting power of Lennox's outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single class.
See "--Certificate of Incorporation and Bylaw Provisions" on page 126. Lennox
common stock does not have cumulative voting rights.
Subject to the rights of the holders of any shares of Lennox's preferred
stock, the holders of Lennox common stock shall be entitled to receive, to the
extent permitted by law, such dividends as may be declared from time to time by
Lennox's board of directors. On Lennox's liquidation, dissolution or winding up,
after payment in full of the amounts required to be paid to holders of preferred
stock, if any, all holders of Lennox common stock are entitled to share ratably
in any assets available for distribution to holders of shares of Lennox common
stock.
The outstanding shares of Lennox common stock are legally issued, fully
paid and nonassessable. Lennox common stock does not have any preemptive,
subscription or conversion rights. Additional shares of authorized Lennox common
stock may be issued, as authorized by Lennox's board of directors from time to
time, without Lennox stockholder approval, except as may be required by
applicable stock exchange requirements.
PREFERRED STOCK
As of the date of this joint proxy statement/prospectus, no shares of
preferred stock are outstanding. Lennox's board of directors may authorize the
issuance of preferred stock in one or more series and may determine, for the
series, the designations, powers, preferences and rights of such series, and the
qualifications, limitations and restrictions of the series, including:
- the designation of the series;
- the consideration for which the shares of any such series are to be
issued;
- the rate or amount per annum, if any, at which holders of the shares of
such series shall be entitled to receive dividends, the dates on which
such dividends shall be payable, whether the dividends shall be
cumulative or noncumulative, and if cumulative, the date or dates from
which such dividends shall be cumulative;
- the redemption rights and price or prices, if any, for shares of the
series;
- the amounts payable on and the preferences, if any, of shares of the
series in the event of dissolution or upon distribution of our assets;
- whether the shares of the series will be convertible into or exchangeable
for other of Lennox's securities, and the price or prices or rate or
rates at which conversion or exchange shall be exercised;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
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- the voting rights, if any, of the holders of shares of the series; and
- such other preferences and rights, privileges and restrictions applicable
to any such series as may be permitted by law.
Lennox believes that the ability of its board of directors to issue one or
more series of preferred stock will provide it with flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
that might arise. The authorized shares of preferred stock will be available for
issuance without further action by Lennox stockholders, unless such action is
required by applicable law or the rules of any stock exchange on which Lennox's
securities may be listed or traded.
Although Lennox's board of directors has no intention at the present time
of doing so, it could issue a series of preferred stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. Lennox's board of directors will make any determination
to issue such shares based on its judgment as to Lennox's best interests and the
best interests of Lennox's stockholders. Lennox's board of directors, in so
acting, could issue preferred stock having terms that could discourage a
potential acquiror from making, without first negotiating with the board of
directors, an acquisition attempt through which such acquiror may be able to
change the composition of Lennox's board of directors, including a tender offer
or other transaction that some, or a majority, of Lennox's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock.
BUSINESS COMBINATION STATUTE
As a corporation organized under the laws of the State of Delaware, Lennox
is subject to Section 203 of the Delaware General Corporation Law, which
restricts specified business combinations between Lennox and an "interested
stockholder" or its affiliates or associates for a period of three years
following the time that the stockholder becomes an "interested stockholder." In
general, an "interested stockholder" is defined as a stockholder owning 15% or
more of Lennox's outstanding voting stock. The restrictions do not apply if:
- prior to an interested stockholder becoming such, Lennox's board of
directors approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
- upon completion of the transaction which resulted in any person becoming
an interested stockholder, such interested stockholder owns at least 85%
of Lennox's voting stock outstanding at the time the transaction
commenced, excluding shares owned by employee stock ownership plans and
persons who are both directors and officers of Lennox; or
- at or subsequent to the time an interested stockholder becomes such, the
business combination is both approved by Lennox's board of directors and
authorized at an annual or special meeting of Lennox's stockholders, not
by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.
Under some circumstances, Section 203 makes it more difficult for a person
who would be an "interested stockholder" to effect various business combinations
with a corporation for a three-year period, although the stockholders may elect
to exclude a corporation from the restrictions imposed under Section 203.
Lennox's certificate of incorporation does not exclude Lennox from the
restrictions imposed under Section 203. It is anticipated that the provisions of
Section 203 may encourage companies interested in acquiring Lennox to negotiate
in advance with its board of directors since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves, prior to the date on which a stockholder becomes an interested
stockholder, either the business combination or the transaction which results in
the stockholder becoming an interested stockholder.
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CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The summary below describes provisions of Lennox's certificate of
incorporation and bylaws. The provisions of Lennox's certificate of
incorporation and bylaws discussed below may have the effect, either alone or in
combination with the provisions of Section 203 discussed above, of making more
difficult or discouraging a tender offer, proxy contest or other takeover
attempt that is opposed by Lennox's board of directors but that a stockholder
might consider to be in such stockholder's best interest. Those provisions
include:
- restrictions on the rights of stockholders to remove directors;
- prohibitions against stockholders calling a special meeting of
stockholders or acting by unanimous written consent in lieu of a meeting;
- requirements for advance notice of actions proposed by stockholders for
consideration at meetings of the stockholders; and
- restrictions on business combination transactions with "related persons."
CLASSIFIED BOARD OF DIRECTORS; REMOVAL; NUMBER OF DIRECTORS; FILLING VACANCIES
Lennox's certificate of incorporation and bylaws provide that the board of
directors shall be divided into three classes, designated Class I, Class II and
Class III, with the classes to be as nearly equal in number as possible. The
term of office of each class shall expire at the third annual meeting of
stockholders for the election of directors following the election of such class.
See "Information About Lennox--Management of Lennox--Information Regarding the
Board of Directors and Committees" on page 84 for a discussion of the directors
in each class. Each director is to hold office until his or her successor is
duly elected and qualified, or until his or her earlier resignation or removal.
Lennox's bylaws provide that the number of directors will be fixed from
time to time by a resolution adopted by the board of directors; provided that
the number so fixed shall not be more than 15 nor less than three directors.
Lennox's bylaws also provide that any vacancies will be filled only by the
affirmative vote of a majority of the remaining directors, even if less than a
quorum. Accordingly, absent an amendment to the bylaws, Lennox's board of
directors could prevent any stockholder from enlarging the board of directors
and filling the new directorships with such stockholder's own nominees.
Moreover, Lennox's certificate of incorporation and bylaws provide that
directors may be removed only for cause and only upon the affirmative vote of
holders of at least 80% of Lennox's voting stock at a special meeting of
stockholders called expressly for that purpose.
The classification of directors could have the effect of making it more
difficult for stockholders to change the composition of Lennox's board of
directors. At least two annual meetings of stockholders, instead of one, are
generally required to effect a change in a majority of the board of directors.
Such a delay may help ensure that Lennox's directors, if confronted by a holder
attempting to force a proxy contest, a tender or exchange offer, or an
extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the board of directors
would be beneficial to Lennox and its stockholders and whether or not a majority
of its stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Lennox, even though such an attempt might be
beneficial to Lennox and its stockholders. The classification of the board of
directors could thus increase the likelihood that incumbent directors will
retain their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of Lennox's stock by purchasers whose
objective is to take control of Lennox and remove a majority of the board of
directors, the classification of the board of directors could tend to reduce the
likelihood of fluctuations in the market
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price of Lennox common stock that might result from accumulations of large
blocks. Accordingly, stockholders could be deprived of opportunities to sell
their shares of Lennox common stock at a higher market price than might
otherwise be the case.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Lennox's certificate of incorporation and bylaws provide that stockholder
action can be taken only at an annual or special meeting of stockholders and
stockholder action may not be taken by written consent in lieu of a meeting.
Special meetings of stockholders can be called only by Lennox's board of
directors by a resolution adopted by a majority of the board of directors, or by
the chairman of the board, vice chairman or the president. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting under the notice of meeting
given by Lennox.
The provisions of Lennox's certificate of incorporation and bylaws
prohibiting stockholder action by written consent and permitting special
meetings to be called only by the chairman, vice chairman or president, or at
the request of a majority of the board or directors, may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting.
The provisions would also prevent the holders of a majority of Lennox's voting
stock from unilaterally using the written consent procedure to take stockholder
action. Moreover, a Lennox stockholder could not force stockholder consideration
of a proposal over the opposition of the chairman, vice chairman or president,
or a majority of the board of directors, by calling a special meeting of
stockholders prior to the time such parties believe such consideration to be
appropriate.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
Lennox's bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or bring other business
before an annual meeting of stockholders.
The stockholder notice procedure provides that only persons who are
nominated by, or at the direction of, the board of directors, or by a
stockholder who has given timely written notice containing specified information
to Lennox's secretary prior to the meeting at which directors are to be elected,
will be eligible for election as Lennox's directors. The stockholder notice
procedure also provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of, the
chairman of the board of directors, or in the absence of the chairman of the
board, the president, or by a stockholder who has given timely written notice
containing specified information to Lennox's secretary of such stockholder's
intention to bring such business before such meeting. Under the stockholder
notice procedure, for notice of stockholder nominations or proposals to be made
at an annual meeting to be timely, such notice must be received by Lennox not
less than 60 days nor more than 90 days in advance of such meeting. For notice
of stockholder nominations or proposals to be made at a special meeting of
stockholders to be timely, such notice must be received by Lennox not later than
the close of business on the tenth day following the date on which notice of
such meeting is first given to stockholders. However, in the event that less
than 70 days notice or prior public disclosure of the date of the meeting of
stockholders is given or made to the stockholders, to be timely, notice of a
nomination or proposal delivered by the stockholder must be received by Lennox's
secretary not later than the close of business on the tenth day following the
day on which notice of the date of the meeting of stockholders was mailed or
such public disclosure was made to the stockholders. If Lennox's board of
directors or, alternatively, the presiding officer at a meeting, in the case of
a stockholder proposal, or the chairman of the meeting, in the case of a
stockholder nomination to the board of directors, determines at or prior to the
meeting that business was not brought before the meeting or a person was not
nominated in accordance with the stockholder notice procedure, such business
will not be conducted at such meeting, or such person will not be eligible for
election as a director, as the case may be.
By requiring advance notice of nominations by stockholders, the stockholder
notice procedure will afford Lennox's board of directors an opportunity to
consider the qualifications of the proposed nominees
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and, to the extent considered necessary or desirable by the board of directors,
to inform stockholders about such qualifications. By requiring advance notice of
other proposed business, the stockholder notice procedure will also provide a
more orderly procedure for conducting annual meetings of stockholders and, to
the extent considered necessary or desirable by Lennox's board of directors,
will provide the board of directors with an opportunity to inform stockholders,
prior to such meetings, of any business proposed to be conducted at such
meetings, together with any recommendations as to the board of directors'
position regarding action to be taken regarding such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although Lennox's bylaws do not give the board of directors any power to
approve or disapprove stockholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
Lennox and its stockholders.
FAIR PRICE PROVISION
Lennox's certificate of incorporation contains a "fair price" provision
that applies to specified business combination transactions involving any
person, entity or group that beneficially owns at least 10% of Lennox's
aggregate voting stock--such person, entity or group is sometimes referred to as
a "related person." This provision requires the affirmative vote of the holders
of not less than 80% of Lennox's voting stock to approve specified transactions
between a related person and Lennox or its subsidiaries, including:
- any merger, consolidation or share exchange;
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of Lennox's assets, or the assets of any of Lennox's
subsidiaries having a fair market value of more than 10% of Lennox's
total consolidated assets, or assets representing more than 10% of
Lennox's earning power and its subsidiaries taken as a whole, which is
referred to as a "substantial part";
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with Lennox or any of its subsidiaries of all or a
substantial part of the assets of a related person;
- the issuance or transfer of any of Lennox's securities or any of Lennox's
subsidiaries by Lennox or any of its subsidiaries to a related person;
- any reclassification of securities, recapitalization, or any other
transaction involving Lennox or any of its subsidiaries that would have
the effect of increasing the voting power of a related person;
- the adoption of a plan or proposal for Lennox's liquidation or
dissolution proposed by or on behalf of a related person;
- the acquisition by or on behalf of a related person of shares
constituting a majority of Lennox's voting power; and
- the entering into of any agreement, contract or other arrangement
providing for any of the transactions described above.
This voting requirement will not apply to certain transactions, including:
(a) any transaction approved by a two-thirds vote of the continuing
directors; or
(b) any transaction in which:
(1) the consideration to be received by the holders of Lennox
common stock, other than the related person involved in the business
combination, is not less in amount than the highest per share price paid
by the related person in acquiring any of its holdings of Lennox common
stock; and
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(2) if necessary, a proxy statement complying with the requirements
of the Securities Exchange Act of 1934 shall have been mailed at least
30 days prior to any vote on such business combination to all of
Lennox's stockholders for the purpose of soliciting stockholder approval
of such business combination.
This provision could have the effect of delaying or preventing a change in
control of Lennox in a transaction or series of transactions that did not
satisfy the "fair price" criteria.
LIABILITY OF DIRECTORS; INDEMNIFICATION
Lennox's certificate of incorporation provides that a director will not be
personally liable for monetary damages to Lennox or its stockholders for breach
of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to Lennox or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for paying a dividend or approving a stock repurchase in violation of
Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
Any amendment or repeal of such provision shall not adversely affect any
right or protection of a director existing under such provision for any act or
omission occurring prior to such amendment or repeal.
Lennox's bylaws provide that each person who at any time serves or served
as one of Lennox's directors or officers, or any person who, while one of
Lennox's directors or officers, is or was serving at Lennox's request as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, shall be entitled to indemnification and the advancement of
expenses from Lennox, and to the fullest extent, permitted by Section 145 of the
Delaware General Corporation Law or any successor statutory provision. Lennox
will indemnify any person who was or is a party to any threatened, pending or
completed action, suit or proceeding because he or she is or was one of its
directors or officers, or is or was serving at its request as a director or
officer of another corporation, partnership or other enterprise. However, as
provided in Section 145, this indemnification will only be provided if the
indemnitee acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, Lennox's best interests.
AMENDMENTS
Lennox's certificate of incorporation provides that Lennox reserves the
right to amend, alter, change, or repeal any provision contained in its
certificate of incorporation, and all rights conferred to stockholders are
granted subject to such reservation. The affirmative vote of holders of not less
than 80% of Lennox's voting stock, voting together as a single class, shall be
required to alter, amend, adopt any provision inconsistent with or repeal
specified provisions of Lennox's certificate of incorporation, including those
provisions discussed in this section. In addition, the 80% vote described in the
prior sentence shall not be required for any alteration, amendment, adoption of
inconsistent provision or repeal of the "fair price" provision discussed under
"--Fair Price Provision" on page 128 which is recommended to the stockholders by
two-thirds of the continuing directors of Lennox and such alteration, amendment,
adoption of inconsistent provision or repeal shall require the vote, if any,
required under the applicable provisions of the Delaware General Corporation Law
and Lennox's certificate of incorporation. In addition, Lennox's certificate of
incorporation provides that stockholders may only adopt, amend or repeal
Lennox's bylaws by the affirmative vote of holders of not less than 80% of
Lennox's voting stock, voting together as a single class. Lennox's bylaws may be
amended by its board of directors.
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RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
Lennox's certificate of incorporation authorizes the board of directors to
create and issue rights, warrants and options entitling the holders of them to
purchase from Lennox shares of any class or classes of Lennox's capital stock or
other securities or property upon such terms and conditions as the board of
directors may deem advisable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of Lennox common stock is
ChaseMellon Shareholder Services, L.L.C.
LEGAL MATTERS
The validity of the issuance of the shares of Lennox common stock offered
by this joint proxy statement/prospectus and certain tax matters with respect to
the merger will be passed upon for Lennox by Baker & Botts, L.L.P., Dallas,
Texas. Certain tax matters with respect to the merger will be passed upon for
Service Experts by Waller Lansden Dortch & Davis, A Professional Limited
Liability Company, Nashville, Tennessee.
EXPERTS
The financial statements and schedule of Lennox as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998
included in this joint proxy statement/prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports on the financial statements,
and are included in this joint proxy statement/prospectus in reliance on the
authority of that firm as experts in giving these reports.
Ernst & Young LLP, independent auditors, have audited Service Experts'
consolidated financial statements included in Service Experts' Annual Report on
Form 10-K for the year ended December 31, 1998, as set forth in their report,
which is incorporated by reference in this joint proxy statement and elsewhere
in the registration statement. Service Experts' financial statements are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Lennox and Service Experts file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
filed by either company at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at any of the SEC's other public reference rooms
in New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Lennox's
and Service Experts' SEC filings are also available to the public from
commercial document retrieval services and at the Web site maintained by the SEC
at http://www.sec.gov.
Lennox filed a registration statement to register the Lennox common stock
to be issued to Service Experts stockholders in the merger. This joint proxy
statement/prospectus is a part of that registration statement and constitutes a
prospectus of Lennox in addition to being a joint proxy statement for the
meetings of Lennox and Service Experts stockholders. As allowed by the SEC's
rules, this joint proxy statement/prospectus does not contain all the
information you can find in the Lennox registration statement or the exhibits to
the registration statement.
The SEC allows Service Experts to "incorporate by reference" information
into this joint proxy statement/prospectus, which means important information
may be disclosed to you by referring you to another document filed separately
with the SEC. The information of Service Experts incorporated by
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reference is deemed to be part of this joint proxy statement/prospectus, except
for information superseded by information in (or incorporated by reference in)
this joint proxy statement/prospectus. This joint proxy statement/prospectus
incorporates by reference the documents set forth below that have been
previously filed with the SEC. The following documents contain important
information about Service Experts and its finances that are not included in or
delivered with this joint proxy statement/prospectus:
1. Service Experts' Annual Report on Form 10-K for the year ended
December 31, 1998;
2. Service Experts' Quarterly Reports on Form 10-Q for the quarterly
period ended March 31, 1999, June 30, 1999 and September 30, 1999; and
3. Service Experts' Current Reports on Form 8-K dated January 28,
1999, February 5, 1999, February 24, 1999, March 9, 1999 and October 28,
1999.
Service Experts is also incorporating by reference additional documents
that it may file with the SEC pursuant to the Exchange Act between the date of
this joint proxy statement/prospectus and the date of the Service Experts
special meeting.
Lennox has supplied all information contained in this joint proxy
statement/prospectus relating to Lennox, and Service Experts has supplied all
information contained or incorporated by reference in this joint proxy
statement/prospectus relating to Service Experts.
If you are a stockholder of Service Experts, you may have been sent some of
the documents incorporated by reference, but you can obtain any of them through
Service Experts or the SEC. Documents incorporated by reference are available
from Service Experts without charge, excluding any exhibits which are not
specifically incorporated by reference as exhibits in this joint proxy
statement/prospectus.
Lennox stockholders may obtain documents incorporated by reference in this
joint proxy statement/prospectus by requesting them in writing or by telephone
from the appropriate party at the following address:
<TABLE>
<S> <C>
Lennox International Inc. Service Experts, Inc.
2140 Lake Park Blvd. Six Cadillac Drive, Suite 400
Richardson, Texas 75080 Brentwood, Tennessee 37027
Attention: Carl E. Edwards, Jr. Attention: Investor Relations
(972) 497-5000 (615) 371-9990
</TABLE>
If you would like to request documents from either company, please do so by
(five business days prior to the special meetings) to receive them
before the special meetings.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. NEITHER LENNOX NOR SERVICE
EXPERTS HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
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SUBMISSION OF STOCKHOLDER PROPOSALS
As a result of the contemplated completion of the merger, Service Experts
does not currently intend to hold a 2000 annual meeting of stockholders. In the
event such a meeting is held, any proposals of stockholders intended to be
presented at the 2000 annual meeting of stockholders must have been received by
the secretary of Service Experts no later than December 12, 1999. In addition,
the proxy for the 2000 annual meeting of stockholders, if any, will confer
discretionary authority to vote on any stockholder proposal received by Service
Experts after February 25, 2000.
Lennox's 2000 annual meeting of stockholders is expected to be held on
April 28, 2000. Any Lennox stockholder who intended to submit a proposal for
inclusion in the proxy materials for Lennox's 2000 annual meeting of
stockholders must have submitted such proposal to the secretary of Lennox by
November 22, 1999. Lennox's bylaws require stockholders who intend to propose
business to be considered by stockholders at an annual meeting, other than
stockholder proposals included in the proxy statement, to give written notice to
the secretary of Lennox not less than 60 days nor more than 90 days prior to
such annual meeting. Matters to be raised by a stockholder at Lennox's 2000
annual meeting of stockholders must be submitted on or after , 2000
but no later than , 2000. The written notice should be sent to the
address under "Where You Can Find More Information" on page 130 and must include
a brief description of the business, the reasons for conducting such business,
any material interest in such business by the stockholder, the name and address
of the stockholder, and any other stockholders known to be supporting the
proposal, as they appear in Lennox's books and the number of shares of Lennox
common stock beneficially owned by the stockholder on the date of the notice.
SEC rules set forth standards as to what stockholder proposals are required
to be included in a proxy statement for an annual meeting.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INTERIM FINANCIAL STATEMENTS OF LENNOX INTERNATIONAL INC.
(Unaudited)
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999..................................... F-2
Consolidated Statements of Income for the Nine Months
Ended September 30, 1998 and 1999...................... F-3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1999...................... F-4
Notes to Consolidated Financial Statements for the Nine
Months Ended September 30, 1998 and 1999............... F-5
ANNUAL FINANCIAL STATEMENTS OF LENNOX INTERNATIONAL INC.
Report of Independent Public Accountants.................. F-10
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-11
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998....................... F-12
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998........... F-13
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998....................... F-14
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1997 and 1998................. F-15
</TABLE>
F-1
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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 28,389 $ 41,122
Accounts and notes receivable, net........................ 318,858 484,420
Inventories............................................... 274,679 327,067
Deferred income taxes..................................... 37,426 38,406
Other assets.............................................. 36,183 40,081
---------- ----------
Total current assets.............................. 695,535 931,096
INVESTMENTS IN JOINT VENTURES............................... 17,261 12,479
PROPERTY, PLANT AND EQUIPMENT, net.......................... 255,125 302,285
GOODWILL, net............................................... 155,290 323,103
OTHER ASSETS................................................ 29,741 40,471
---------- ----------
TOTAL ASSETS...................................... $1,152,952 $1,609,434
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt........................................... $ 56,070 $ 157,270
Current maturities of long-term debt...................... 18,778 25,424
Accounts payable.......................................... 149,824 200,088
Accrued expenses.......................................... 207,040 206,882
Income taxes payable...................................... 534 9,271
---------- ----------
Total current liabilities......................... 432,246 598,935
LONG-TERM DEBT.............................................. 242,593 309,467
DEFERRED INCOME TAXES....................................... 11,628 12,726
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS................ 16,511 15,735
OTHER LIABILITIES........................................... 60,845 70,336
---------- ----------
Total liabilities................................. 763,823 1,007,199
MINORITY INTEREST........................................... 12,689 15,213
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, 44,958,240 shares and 35,546,940 shares
issued and outstanding for 1999 and 1998,
respectively........................................... 355 450
Additional paid-in capital................................ 32,889 199,302
Retained earnings......................................... 350,851 398,412
Currency translation adjustments.......................... (7,655) (11,142)
---------- ----------
Total stockholders' equity........................ 376,440 587,022
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,152,952 $1,609,434
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 143
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
NET SALES................................................... $1,364,799 $1,749,953
COST OF GOODS SOLD.......................................... 930,464 1,199,611
---------- ----------
Gross Profit...................................... 434,335 550,342
OPERATING EXPENSES:
Selling, general and administrative....................... 331,294 422,529
Other operating expenses, net............................. 6,247 6,486
---------- ----------
Income from operations............................ 96,794 121,327
INTEREST EXPENSE, net....................................... 10,903 24,193
OTHER....................................................... 1,286 (403)
MINORITY INTEREST........................................... (583) 212
---------- ----------
Income before income taxes........................ 85,188 97,325
PROVISION FOR INCOME TAXES.................................. 35,220 39,840
---------- ----------
Net income........................................ $ 49,968 $ 57,485
========== ==========
EARNINGS PER SHARE:
Basic..................................................... $ 1.44 $ 1.52
Diluted................................................... $ 1.40 $ 1.48
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 144
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 49,968 $ 57,485
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Minority interest.................................... (583) 212
Joint venture losses................................. 2,514 2,409
Depreciation and amortization........................ 28,126 41,825
Loss on disposal of equipment........................ 51 701
Other................................................ (385) (994)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures --
Accounts and notes receivable........................ (75,569) (94,086)
Inventories.......................................... (54,723) (11,873)
Other current assets................................. (2,618) (3,682)
Accounts payable..................................... 54,605 18,718
Accrued expenses..................................... (12,215) (9,946)
Deferred income taxes................................ (3,375) 2,184
Income taxes payable and receivable.................. 17,087 17,014
Long-term warranty, deferred income and other
liabilities.......................................... (21,102) (2,559)
--------- ---------
Net cash provided by (used in) operating
activities....................................... (18,219) 17,408
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and
equipment............................................... 284 746
Purchases of property, plant and equipment................ (30,505) (53,203)
Sale of operating unit.................................... -- 5,490
Investments in joint ventures............................. -- (567)
Acquisitions, net of cash acquired........................ (130,630) (226,127)
--------- ---------
Net cash used in investing activities.............. (160,851) (273,661)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings..................................... (956) 96,554
Repayments of long-term debt.............................. (1,223) (2,619)
Long-term borrowings...................................... 75,000 43,917
Sales of common stock..................................... 8,611 141,799
Repurchases of common stock............................... (5,306) (152)
Cash dividends paid....................................... (7,781) (9,924)
--------- ---------
Net cash provided by financing activities.......... 68,345 269,575
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (110,725) 13,322
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS....... (1,377) (589)
CASH AND CASH EQUIVALENTS, beginning of period.............. 147,802 28,389
--------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 35,700 $ 41,122
========= =========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 10,227 $ 20,830
========= =========
Income taxes............................................ $ 21,508 $ 21,637
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 145
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION
The accompanying unaudited consolidated balance sheet as of September 30,
1999, and the consolidated statements of income and cash flows for the nine
months ended September 30, 1998 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, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included elsewhere herein.
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. PRODUCT INSPECTION CHARGE
During 1997, the Company recorded a pre-tax charge of $140 million to
provide for projected expenses of the product inspection program related to its
Pulse furnace. The Company offered the owners of all Pulse furnaces installed
between 1982 and 1990 a subsidized inspection and a free carbon monoxide
detector. The inspection included a severe pressure test to determine the
serviceability of the heat exchanger. If the heat exchanger did not pass the
test, the Company either replaced the heat exchanger or offered a new furnace
and subsidized the labor costs for installation. The cost required for the
program was a function of the number of furnaces located, the percentage of
those located that did not pass the pressure test, and the replacement option
chosen by the homeowner.
The program ended June 1999 and future expenses associated with the program
are not expected to be significant.
3. REPORTABLE BUSINESS SEGMENTS
As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, which requires disclosure of business
segment data in accordance with the "management approach." The management
approach is based on the way segments are organized within
F-5
<PAGE> 146
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company for making operating decisions and assessing performance. The
Company's business operations are organized within the following four reportable
business segments as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
NET SALES 1998 1999
--------- ---------- ----------
<S> <C> <C>
North American residential.................................. $ 764,124 $1,009,411
Commercial air conditioning................................. 286,209 337,985
Commercial refrigeration.................................... 176,058 238,351
Heat transfer(1)............................................ 138,408 164,206
---------- ----------
$1,364,799 $1,749,953
========== ==========
</TABLE>
- ---------------
(1) In addition to the sales described above, the Heat Transfer segment had
affiliate intersegment sales of $21,133 and $17,696 for the nine months
ended September 30, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
INCOME (LOSS) FROM OPERATIONS 1998 1999
----------------------------- -------- --------
<S> <C> <C>
North American residential.................................. $100,683 $109,441
Commercial air conditioning................................. (3,303) 6,285
Commercial refrigeration.................................... 17,092 19,095
Heat transfer............................................... 11,274 10,308
Corporate and other......................................... (28,952) (23,802)
-------- --------
$ 96,794 $121,327
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
IDENTIFIABLE ASSETS 1998 1999
------------------- ------------------ -------------------
<S> <C> <C>
North American residential......................... $ 528,660 $ 789,016
Commercial air conditioning........................ 198,982 274,376
Commercial refrigeration........................... 194,601 247,960
Heat transfer...................................... 88,633 162,530
Corporate and other................................ 142,076 135,552
---------- ----------
$1,152,952 $1,609,434
========== ==========
</TABLE>
4. INVENTORIES:
Components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1998 1999
------------------ -------------------
<S> <C> <C>
Finished goods..................................... $177,490 $206,231
Repair parts....................................... 31,674 35,176
Work in process.................................... 15,574 34,127
Raw materials...................................... 102,876 99,975
-------- --------
327,614 375,509
Reduction for last-in, first-out................... 52,935 48,442
-------- --------
$274,679 $327,067
======== ========
</TABLE>
F-6
<PAGE> 147
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LINES OF CREDIT AND SHORT-TERM DEBT:
The Company has bank lines of credit and short-term facilities that provide
for aggregate borrowings of $337 million, of which $157 million was outstanding
at September 30, 1999 with a weighted average interest rate of 6.1%. The
unsecured note agreements and lines of credit provide for restrictions with
respect to additional borrowings and maintenance of capital.
On July 29, 1999 the Company entered into a new Revolving Credit Facility
Agreement with a syndicate of banks providing a revolving credit line of up to
$300 million. The facility contains certain financial covenants and bears
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 1.125%, depending upon our
ratio of total funded debt to EBITDA. The agreement provides for restrictions on
additional debt, maintenance of capital and limitations on interest expense.
6. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the sum of the
weighted average number of shares and the number of equivalent shares assumed
outstanding, if dilutive, under the Company's stock-based compensation plans.
Diluted earnings per share are computed as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1999
------- -------
<S> <C> <C>
Net income.................................................. $49,968 $57,485
======= =======
Weighted average shares outstanding......................... 34,775 37,910
Effect of assumed exercise of options....................... 792 878
------- -------
Weighted average shares outstanding, as adjusted.......... 35,567 38,788
======= =======
Diluted earnings per share.................................. $ 1.40 $ 1.48
======= =======
</TABLE>
7. INVESTMENTS IN SUBSIDIARIES
Livernois
In May 1999, the Company acquired Livernois Engineering Holding Company,
its operating subsidiary and its licensed patents for $18.9 million. Livernois
produces heat transfer manufacturing equipment for the HVACR and automotive
industries. The purchase price, consisting of cash of $13.2 million and $5.7
million in shares of the Company's common stock (304,953 shares), has been
allocated, based on fair value, to identifiable assets totaling $16.0 million
and to liabilities totaling $3.0 million, with $5.9 million being allocated to
goodwill. This goodwill is being amortized over 40 years. The acquisition was
accounted for in accordance with the purchase method of accounting. The results
of the operations of Livernois have been fully consolidated with those of the
Company since the date of acquisition.
Dealers
In September 1998, the Company initiated a program to acquire high quality
heating and air conditioning dealers (the "Dealers") in metropolitan areas in
the United States and Canada to market "Lennox" and other brands of heating and
air conditioning products. During the first nine months of 1999,
F-7
<PAGE> 148
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company acquired 62 additional Dealers in Canada and the United States. The
aggregate purchase price for the Dealers acquired was $141.2 million, consisting
of cash of $140.2 million and $1.0 million in shares of the Company's common
stock (59,970 shares). These acquisitions were accounted for in accordance with
the purchase method of accounting. The purchase price of each Dealer has been
allocated, based on fair values, to identifiable assets totaling $64.4 million
and to liabilities totaling $40.4 million with $117.2 million being allocated to
goodwill, which is being amortized over 40 years. The results of the operations
of the Dealers have been fully consolidated with those of the Company since the
dates of acquisition.
Kirby
In June 1999, the Company acquired the outstanding stock of James N. Kirby
Pty. Ltd., an Australian manufacturer and distributor of refrigeration and heat
transfer technology. The purchase price of $65.4 million was paid in cash and in
shares of the Company's common stock (650,430 shares) in the amounts of $49.3
million and $16.1 million, respectively. The acquisition was accounted for in
accordance with the purchase method of accounting, and accordingly, the purchase
price was allocated, based on fair value, to identifiable assets totaling $76.0
million and to liabilities totaling $50.2 million, with $39.6 million being
allocated to goodwill. In order to finance the cash portion of the purchase
price, the Company borrowed approximately $49.3 million in the form of three
promissory notes. The first promissory note of $16.1 million bears interest at
5.68% and is payable December 31, 1999 at which time permanent financing will be
arranged. The second promissory note of $11.6 million is payable in June 2000 at
no interest charge. The third promissory note of $21.6 million is payable $11.1
million in 2001 and $10.5 million in 2002. The stated interest rate on the third
promissory note escalates from no interest in year one to 4% in year three.
Accordingly, the Company recorded a discount on the third promissory note of
$1.6 million, which is being amortized over three years, to record the
promissory note at fair value. The goodwill is being amortized over 40 years. In
conjunction with the acquisition, the Company assumed a $20.5 million promissory
note bearing interest at 5.5% which is payable upon the arranging of permanent
financing. The results of the operations of this acquired company have been
fully consolidated with those of the Company since the date of acquisition.
The following table presents the pro forma results as if the above
companies had been acquired on January 1, 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Net sales................................................... $1,621,750 $1,941,933
Net income.................................................. 61,465 66,417
Basic earnings per share.................................... 1.72 1.71
Diluted earnings per share.................................. 1.68 1.67
</TABLE>
Ets. Brancher
The Company has entered into an agreement to purchase the remaining 30%
interest in Ets. Brancher for 102.5 million French francs (approximately $17
million) on March 31, 2000.
8. INITIAL PUBLIC OFFERING
On August 3, 1999, the Company completed an initial public offering of its
common stock in which 8,088,490 shares of common stock were issued at an
offering price of $18.75 per share. The Company borrowed $67 million under the
revolving credit agreement on August 3, 1999, using these proceeds and
F-8
<PAGE> 149
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the proceeds from the initial public offering of approximately $140 million to
retire all outstanding loans under the previous United States based revolving
credit and short-term credit facilities.
9. SUBSEQUENT EVENTS
Between September 30, 1999 and October 30, 1999, the Company acquired nine
additional Dealers for approximately $29 million in cash and $1.1 million in
shares of the Company's common stock (82,893 shares). As of October 30, 1999,
the Company had signed letters of intent to acquire six additional Dealers in
Canada and 19 Dealers in the United States for an aggregate purchase price of
approximately $52 million.
On October 29, 1999 the Company purchased certain assets and assumed
certain related liabilities of The Ducane Company, Inc. and a related company.
The purchase price was approximately $45 million, with a contingent payment
based on net assets purchased at the closing.
The Company has entered into a definitive agreement to acquire the common
stock of Service Experts, Inc., a heating, ventilation and air conditioning
service company comprised of retail businesses within the United States. The
agreement provides for an exchange of shares wherein each share of common stock
of Service Experts, Inc. will be exchanged for 0.67 of a share of Company common
stock. Service Experts, Inc. will then become a wholly-owned subsidiary of the
Company. The Company will issue approximately 12.2 million shares of Company
common stock in the acquisition valued at approximately $140 million, plus
assume certain stock options, warrants and convertible securities. The Company
will also assume approximately $160 million of debt in the acquisition. The
acquisition will be accounted for in accordance with the purchase method of
accounting and is expected to be completed during the first quarter of 2000,
subject to approval of governing regulatory bodies and shareholders at both
companies.
The Company announced a two-phase stock buy-back plan to repurchase,
depending on market conditions and other factors, up to 5 million shares of
Lennox common stock. This may include up to 2 million shares before the closing
of the acquisition of Service Experts, Inc., with the remainder to be acquired
after the closing of the acquisition. Purchases under the share repurchase
program will be made on an open-market basis at prevailing market prices. The
timing of any repurchases will depend on market conditions, the market price of
Lennox's common stock, and management's assessment of the Company's liquidity
and cash flow needs.
Labor agreements have been reached between the Company and the labor unions
representing employees in the Marshalltown, Iowa and Toronto, Ontario factories.
The Marshalltown agreement has a term of five years and is effective November
1999. The Toronto agreement has a term of two years and is retroactive to April
1999.
The Company has signed an agreement with The Prudential Insurance Company
of America which will allow the Company to borrow up to $100 million in the form
of senior notes from time to time within the first three years of the agreement.
Currently, there are no funds borrowed under this agreement.
The Company elected to exercise its option to prepay, in December 1999,
$19.7 million of Series H Senior Promissory Notes due in 2003 with an interest
rate at 9.69%. In the fourth quarter of 1999, an interest premium will be paid
to make this election. The amount of the premium is not significant.
F-9
<PAGE> 150
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Lennox International Inc.:
We have audited the accompanying consolidated balance sheets of Lennox
International Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lennox International Inc.
and Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 18, 1999
F-10
<PAGE> 151
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1997 1998
-------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $147,802 $ 28,389
Accounts and notes receivable, net........................ 273,229 318,858
Inventories............................................... 183,077 274,679
Deferred income taxes..................................... 51,137 37,426
Other assets.............................................. 15,260 36,183
-------- ----------
Total current assets.............................. 670,505 695,535
INVESTMENTS IN JOINT VENTURES............................... 14,803 17,261
PROPERTY, PLANT, AND EQUIPMENT, net......................... 215,333 255,125
GOODWILL, net............................................... 42,620 155,290
OTHER ASSETS................................................ 27,631 29,741
-------- ----------
TOTAL ASSETS...................................... $970,892 $1,152,952
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt........................................... $ 6,021 $ 56,070
Current maturities of long-term debt...................... 8,926 18,778
Accounts payable.......................................... 104,679 149,824
Accrued expenses.......................................... 210,668 207,040
Income taxes payable...................................... 4,320 534
-------- ----------
Total current liabilities......................... 334,614 432,246
LONG-TERM DEBT.............................................. 183,583 242,593
DEFERRED INCOME TAXES....................................... 2,690 11,628
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS................ 17,288 16,511
OTHER LIABILITIES........................................... 92,471 60,845
-------- ----------
Total liabilities................................. 630,646 763,823
-------- ----------
MINORITY INTEREST........................................... 14,768 12,689
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $.01 par value, 200,000,000 shares
authorized, 34,407,384 shares and 35,546,940 shares
issued and outstanding for 1997 and 1998,
respectively........................................... 344 355
Additional paid-in capital................................ 19,260 32,889
Retained earnings......................................... 309,610 350,851
Currency translation adjustments.......................... (3,736) (7,655)
-------- ----------
Total stockholders' equity........................ 325,478 376,440
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $970,892 $1,152,952
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 152
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES................................................ $1,364,546 $1,444,442 $1,821,836
COST OF GOODS SOLD....................................... 961,696 1,005,913 1,245,623
---------- ---------- ----------
Gross profit................................... 402,850 438,529 576,213
OPERATING EXPENSES:
Selling, general and administrative.................... 298,049 326,280 461,143
Other operating expense, net........................... 4,213 7,488 8,467
Product inspection charge.............................. -- 140,000 --
---------- ---------- ----------
Income (loss) from operations.................. 100,588 (35,239) 106,603
INTEREST EXPENSE, net.................................... 13,417 8,515 16,184
OTHER.................................................... (943) 1,955 1,602
MINORITY INTEREST........................................ -- (666) (869)
---------- ---------- ----------
Income (loss) before income taxes.............. 88,114 (45,043) 89,686
PROVISION (BENEFIT) FOR INCOME TAXES..................... 33,388 (11,493) 37,161
---------- ---------- ----------
Net income (loss).............................. $ 54,726 $ (33,550) $ 52,525
========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic.................................................. $ 1.62 $ (0.99) $ 1.50
Diluted................................................ $ 1.59 $ (0.99) $ 1.47
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 153
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
SHARES ADDITIONAL CURRENCY TOTAL
ISSUED AND PAID-IN RETAINED TRANSLATION STOCKHOLDERS' COMPREHENSIVE
OUTSTANDING AMOUNT CAPITAL EARNINGS ADJUSTMENTS EQUITY INCOME
----------- ------ ---------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995......... 32,956 $330 $ 3,758 $313,044 $(1,819) $315,313 $ --
Net income......................... -- -- -- 54,726 -- 54,726 54,726
Dividends, $0.26 per share......... -- -- -- (8,845) -- (8,845) --
Stock dividend -- 2%............... 660 6 6,091 (6,097) -- -- --
Foreign currency translation
adjustments...................... -- -- -- -- (156) (156) (156)
Common stock repurchased........... (138) (1) (1,459) -- -- (1,460) --
Common stock issued................ 225 2 1,884 -- -- 1,886 --
--------
Comprehensive income............... -- -- -- -- -- -- 54,570
------ ---- ------- -------- ------- -------- ========
BALANCE AT DECEMBER 31, 1996......... 33,703 337 10,274 352,828 (1,975) 361,464 --
Net loss........................... -- -- -- (33,550) -- (33,550) (33,550)
Dividends, $0.28 per share......... -- -- -- (9,668) -- (9,668) --
Foreign currency translation
adjustments...................... -- -- -- -- (1,761) (1,761) (1,761)
Common stock repurchased........... (369) (4) (4,888) -- -- (4,892) --
Common stock issued................ 1,073 11 13,874 -- -- 13,885 --
--------
Comprehensive income (loss)........ -- -- -- -- -- -- (35,311)
------ ---- ------- -------- ------- -------- ========
BALANCE AT DECEMBER 31, 1997......... 34,407 344 19,260 309,610 (3,736) 325,478 --
Net income......................... -- -- -- 52,525 -- 52,525 52,525
Dividends, $0.32 per share......... -- -- -- (11,284) -- (11,284) --
Foreign currency translation
adjustments...................... -- -- -- -- (3,919) (3,919) (3,919)
Common stock repurchased........... (506) (5) (8,505) -- -- (8,510) --
Common stock issued................ 1,646 16 22,134 -- -- 22,150 --
--------
Comprehensive income............... -- -- -- -- -- -- $ 48,606
------ ---- ------- -------- ------- -------- ========
BALANCE AT DECEMBER 31, 1998......... 35,547 $355 $32,889 $350,851 $(7,655) $376,440
====== ==== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 154
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 54,726 $(33,550) $ 52,525
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest.................................... -- (666) (869)
Joint venture losses................................. 1,118 1,782 3,111
Depreciation and amortization........................ 34,149 33,430 43,545
Loss (gain) on disposal of equipment................. 1,315 (251) 570
Other................................................ (962) 2,112 (130)
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts and notes receivable........................ 13,269 (25,878) (20,567)
Inventories.......................................... 28,539 17,258 (52,445)
Other current assets................................. (3,239) 3,622 (4,739)
Accounts payable..................................... (3,018) (4,774) 29,851
Accrued expenses..................................... 38,774 64,400 (17,040)
Deferred income taxes................................ (5,103) (42,195) 26,424
Income taxes payable and receivable.................. 4,166 (2,361) (18,610)
Long-term warranty, deferred income and other
liabilities....................................... (4,890) 45,557 (36,662)
-------- -------- ---------
Net cash provided by operating activities......... 158,844 58,486 4,964
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and
equipment.............................................. 547 4,205 538
Purchases of property, plant and equipment................ (31,903) (34,581) (52,435)
Investments in joint ventures............................. (23,395) (3,735) (458)
Acquisitions, net of cash acquired........................ -- (10,527) (160,063)
Proceeds from the sale of businesses...................... 17,633 -- --
-------- -------- ---------
Net cash used in investing activities............. (37,118) (44,638) (212,418)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings..................................... -- (3,732) 36,724
Repayments of long-term debt.............................. (34,588) (5,712) (12,499)
Long-term borrowings...................................... -- 5,572 75,044
Sales of common stock..................................... 630 729 9,607
Repurchases of common stock............................... (1,460) (4,892) (8,510)
Cash dividends paid....................................... (8,560) (9,312) (10,820)
-------- -------- ---------
Net cash provided by (used in) financing
activities...................................... (43,978) (17,347) 89,546
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 77,748 (3,499) (117,908)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS....... 318 (576) (1,505)
CASH AND CASH EQUIVALENTS, beginning of year................ 73,811 151,877 147,802
-------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $151,877 $147,802 $ 28,389
======== ======== =========
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 18,481 $ 15,016 $ 20,351
======== ======== =========
Income taxes........................................... $ 34,198 $ 33,938 $ 29,347
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 155
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. NATURE OF OPERATIONS:
Lennox International Inc. and subsidiaries (the "Company"), a Delaware
corporation, is a global designer, manufacturer, and marketer of a broad range
of products for the heating, ventilation, air conditioning, and refrigeration
("HVACR") markets. The Company participates in four reportable business segments
of the HVACR industry. The first is North American residential heating, air
conditioning and hearth products in which the Company manufactures and markets a
full line of these products for the residential replacement and new construction
markets in North America. The second reportable segment is the global commercial
air conditioning market in which the Company manufactures and sells rooftop
products and applied systems for commercial applications. The third is the
global commercial refrigeration market which consists of unit coolers,
condensing units and other commercial refrigeration products. The fourth
reportable segment is heat transfer products in which the Company designs,
manufactures and sells evaporator and condenser coils, copper tubing, and
related equipment to original equipment manufacturers ("OEMs") and other
specialty purchasers on a global basis. See Note 4 for financial information
regarding the Company's reportable segments.
The Company sells its products to numerous types of customers, including
distributors, installing dealers, national accounts and OEMs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Lennox
International Inc. and its subsidiaries. All intercompany transactions and
balances have been eliminated. Investments in joint ventures where the Company
has a 50% or less ownership interest are being accounted for using the equity
method of accounting.
As discussed in Note 7, the Company increased its ownership in Ets.
Brancher from 50% to 70% in September 1997. As a result, the Company assumed
control of the venture and began consolidating the financial position and
results of operations in the fourth quarter of 1997. Previously, the Company
used the equity method of accounting for its investment in this entity.
Cash Equivalents
The Company considers all highly liquid temporary investments with original
maturity dates of three months or less to be cash equivalents. Cash equivalents
consist of investment grade securities and are stated at cost which approximates
fair value. The Company earned interest income of $4.8 million, $6.4 million and
$4.5 million for the years ended December 31, 1996, 1997 and 1998, respectively,
which is included in interest expense, net on the accompanying consolidated
statements of income.
Accounts and Notes Receivable
Accounts and notes receivable have been shown net of an allowance for
doubtful accounts of $16.9 million and $18.5 million as of December 31, 1997 and
1998, respectively. The Company has no significant credit risk concentration
among its diversified customer base.
Inventories
Inventory costs include applicable material, labor, depreciation, and plant
overhead. Inventories of $125.5 million and $169.6 million in 1997 and 1998,
respectively, are valued at the lower of cost or market using the last-in,
first-out (LIFO) cost method. The remaining portion of the inventory is valued
at the lower of cost or market with cost being determined on the first-in,
first-out (FIFO) basis.
F-15
<PAGE> 156
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for renewals
and betterments are capitalized, and expenditures for maintenance and repairs
are charged to expense as incurred. Gains and losses resulting from the
dispositions of property, plant and equipment are included in other operating
expense. Depreciation is computed using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10 to 39 years
Machinery and equipment..................................... 3 to 10 years
</TABLE>
Goodwill and Other Intangible Assets
Goodwill and other intangible assets have been recorded based on their fair
value at the date of acquisition and are being amortized on a straight-line
basis over periods generally ranging from thirty to forty years. As of December
31, 1997 and 1998, accumulated amortization was $26.5 million and $34.4 million,
respectively.
The Company periodically reviews long-lived assets and identifiable
intangibles for impairment as events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. In order to assess
recoverability, the Company compares the estimated expected future cash flows
(undiscounted and without interest charges) identified with each long-lived
asset or related asset grouping to the carrying amount of such assets. For
purposes of such comparisons, portions of goodwill are attributed to related
long-lived assets and identifiable intangible assets based upon relative fair
values of such assets at acquisition. If the expected future cash flows do not
exceed the carrying value of the asset or assets being reviewed, an impairment
loss is recognized based on the excess of the carrying amount of the impaired
assets over their fair value. As a result of these periodic reviews, there have
been no adjustments to the carrying value of long-lived assets, identifiable
intangibles, or goodwill in 1996, 1997 and 1998.
Product Warranties
A liability for estimated warranty expense is established by a charge
against operations at the time products are sold. The subsequent costs incurred
for warranty claims serve to reduce the product warranty liability. The Company
recorded warranty expense of $14.6 million, $17.7 million and $15.6 million for
the years ended December 31, 1996, 1997, and 1998, respectively.
The Company's estimate of future warranty costs is determined for each
product line. The number of units that are expected to be repaired or replaced
is determined by applying the estimated failure rate, which is generally based
on historical experience, to the number of units that have been sold and are
still under warranty. The estimated units to be repaired under warranty are
multiplied by the average cost (undiscounted) to repair or replace such products
to determine the Company's estimated future warranty cost. The Company's
estimated future warranty cost is subject to adjustment from time to time
depending on actual experience.
F-16
<PAGE> 157
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total liabilities for estimated warranty expense are $155.7 million and
$83.2 million as of December 31, 1997 and 1998, respectively, and are included
in the following captions on the accompanying consolidated balance sheets (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
-------- -------
<S> <C> <C>
Current accrued expenses................................. $ 94,042 $48,467
Other non-current liabilities............................ 61,617 34,707
-------- -------
$155,659 $83,174
======== =======
</TABLE>
Liabilities for estimated warranty expense as of December 31, 1997 and
1998, include approximately $113.4 million and $27.3 million, respectively, in
remaining estimated liabilities associated with a product inspection program
initiated in 1997 (see Note 3).
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Revenue Recognition
Sales are recorded when products are shipped or when services are rendered.
Research and Development Expenses
Research and development costs are expensed as incurred. The Company
expended approximately $23.2 million, $25.4 million, and $33.3 million for the
years ended December 31, 1996, 1997, and 1998, respectively, for research and
product development activities. Research and development costs are included in
selling, general and administrative expense on the accompanying consolidated
statements of income.
Advertising
Production costs of commercials and programming are charged to operations
in the period first aired. The costs of other advertising, promotion and
marketing programs are charged to operations in the period incurred. Advertising
expense was $36.4 million, $37.9 million, and $50.2 million for the years ended
December 31, 1996, 1997, and 1998, respectively.
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries and joint ventures are
translated into United States dollars using rates of exchange in effect at the
balance sheet date. Revenues and expenses are translated at average exchange
rates during the respective years. The unrealized translation gains and losses
are accumulated in a separate component of stockholders' equity. Transaction
gains (losses) included in the accompanying statements of income were $943,000,
$(1,955,000), and $(1,602,000) for the years ended December 31, 1996, 1997, and
1998, respectively.
F-17
<PAGE> 158
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Contracts
The Company has entered into foreign currency exchange contracts to hedge
its investment in Ets. Brancher S.A. (see Note 7) and not to engage in currency
speculation. These contracts do not subject the Company to risk from exchange
rate movements because the gains or losses on the contracts offset the losses or
gains, respectively, on the assets and liabilities of the subsidiary. The
Company has entered into contracts to sell 165.5 million French francs on May 7,
2003 for $31.7 million. The fair value of these contracts was approximately $4.1
million and $2.1 million as of December 31, 1997 and 1998, respectively.
These contracts require the Company to exchange French francs for United
States dollars at maturity (May 2003), at rates agreed to at inception of the
contracts. If the counterparty to the exchange contracts does not fulfill their
obligations to deliver the contracted currencies, the Company could be at risk
for any currency related fluctuations. The gains and losses associated with
these contracts, net of tax, are recorded as a component of currency translation
adjustments on the accompanying 1996, 1997 and 1998 consolidated statements of
stockholders' equity.
The Company from time to time enters into foreign currency exchange
contracts to hedge receivables from its foreign subsidiaries, and not to engage
in currency speculation. These contracts do not subject the Company to risk from
exchange rate movements because the gains or losses on the contracts offset
losses or gains, respectively, on the receivables being hedged. As of December
31, 1998, the Company had obligations to deliver $33.2 million of various
foreign currencies within the next three months, for which the counterparties to
the contracts will pay fixed contract amounts. The fair values of such contracts
were insignificant as of December 31, 1998.
Purchase Commitments
The Company has contracts with various suppliers to purchase copper and
aluminum for use in its manufacturing processes. As of December 31, 1998, the
Company had contracts to purchase 19.8 million pounds of copper over the next 24
months at fixed prices that average $0.76 per pound ($15.1 million) and
contracts to purchase 6 million pounds of copper at a variable price equal to
the COMEX copper price ($0.72 per pound at December 31, 1998) over the next 12
months. The Company also had contracts to purchase 23.4 million pounds of
aluminum at $0.68 per pound ($15.9 million) over the next 12 months. The fair
value of the copper and aluminum purchase commitments was insignificant as of
December 31, 1997 and was a liability of $2.6 million at December 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
3. PRODUCT INSPECTION CHARGE:
During 1997, the Company recorded a pre-tax charge of $140.0 million to
provide for projected expenses of the product inspection program related to its
Pulse furnace. The Company has offered the owners of Pulse furnaces installed
between 1982 and 1990 a subsidized inspection and a free carbon monoxide
detector. The inspection includes a severe pressure test to determine the
serviceability of the heat exchanger. If the heat exchanger does not pass the
test, the Company will either replace the heat exchanger or offer a new furnace
and subsidize the labor costs for installation. The cost required for the
F-18
<PAGE> 159
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
program depends on the number of furnaces located, the percentage of those
located that do not pass the pressure test, and the replacement option chosen by
the homeowner.
As of December 31, 1998, the Company had incurred approximately $112.7
million in costs related to the product inspection program. Consequently, there
is a current liability of $27.3 million recorded on the accompanying
consolidated balance sheet as of December 31, 1998, to accrue for the estimated
remaining costs of the program. The product inspection program ends in June 1999
and the Company believes its current liability of $27.3 million is adequate to
cover the remaining costs of the program.
4. REPORTABLE BUSINESS SEGMENTS:
As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, which requires disclosure of business
segment data in accordance with the "management approach." The management
approach is based on the way segments are organized within the Company for
making operating decisions and assessing performance. The Company's business
operations are organized within the following four reportable business segments
as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales
North American residential............. $ 857,131 $ 865,147 $1,013,747
Commercial air conditioning............ 228,935 278,837 392,053
Commercial refrigeration............... 135,566 154,247 237,264
Heat transfer(1)....................... 142,914 146,211 178,772
---------- ---------- ----------
$1,364,546 $1,444,442 $1,821,836
========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Income (Loss) from Operations
North American residential(2)........ $ 99,658 $ (47,516) $ 123,426
Commercial air conditioning.......... (9,477) 4,521 (6,579)
Commercial refrigeration............. 13,717 15,407 20,383
Heat transfer........................ 17,311 16,857 12,700
Corporate and other(3)............... (20,621) (24,508) (43,327)
---------- ---------- ----------
$ 100,588 $ (35,239) $ 106,603
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1997 1998
-------- ----------
<S> <C> <C>
Identifiable Assets
North American residential.......................... $330,864 $ 528,660
Commercial air conditioning......................... 175,748 198,982
Commercial refrigeration............................ 146,118 194,601
Heat transfer....................................... 69,272 88,633
Corporate and other(4).............................. 248,890 142,076
-------- ----------
$970,892 $1,152,952
======== ==========
</TABLE>
- ---------------
(1) The Heat transfer segment had intersegment sales of $34,911, $23,571, and
$32,307 in 1996, 1997, and 1998, respectively.
(2) Includes a $140.0 million charge in 1997 related to a product inspection
program (see Note 3).
(3) The increase in corporate and other from 1997 to 1998 is primarily due to
$7.1 million of expense for the settlement of a lawsuit in 1998 and $4.6
million associated with increased expenses of the Company's Performance
Plan.
(4) The decrease in corporate and other is primarily due to a reduction in cash
and cash equivalents of approximately $120 million.
F-19
<PAGE> 160
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Capital Expenditures
North American residential.................... $18,561 $12,914 $14,942
Commercial air conditioning................... 2,577 5,677 6,180
Commercial refrigeration...................... 3,779 6,798 7,367
Heat transfer................................. 6,453 6,907 12,136
Corporate and other(1)........................ 533 2,285 11,810
------- ------- -------
$31,903 $34,581 $52,435
======= ======= =======
</TABLE>
- ---------------
(1) The increase in corporate and other is primarily due to an increase in
expenditures related to the implementation of SAP.
<TABLE>
<S> <C> <C> <C>
Depreciation and Amortization
North American residential.................... $15,170 $14,892 $15,437
Commercial air conditioning................... 4,447 4,048 5,802
Commercial refrigeration...................... 6,428 6,390 9,376
Heat transfer................................. 3,963 3,991 5,912
Corporate and other........................... 4,141 4,109 7,018
------- ------- -------
$34,149 $33,430 $43,545
======= ======= =======
</TABLE>
The following table sets forth certain financial information relating to
the Company's operations by geographic area (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales to External Customers
United States.......................... $1,252,515 $1,274,875 $1,472,342
International.......................... 112,031 169,567 349,494
---------- ---------- ----------
Total net sales to external
customers.................... $1,364,546 $1,444,442 $1,821,836
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Long-Lived Assets
United States......................................... $246,133 $344,137
International......................................... 54,254 113,280
-------- --------
Total long-lived assets....................... $300,387 $457,417
======== ========
</TABLE>
F-20
<PAGE> 161
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES:
Components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Finished goods.......................................... $116,052 $177,490
Repair parts............................................ 37,248 31,674
Work in process......................................... 15,755 15,574
Raw materials........................................... 70,223 102,876
-------- --------
239,278 327,614
Reduction for last-in, first-out........................ 56,201 52,935
-------- --------
$183,077 $274,679
======== ========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
Components of property, plant and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Land.................................................. $ 9,478 $ 18,531
Buildings and improvements............................ 150,866 162,916
Machinery and equipment............................... 325,392 404,848
--------- ---------
Total....................................... 485,736 586,295
Less -- accumulated depreciation...................... (270,403) (331,170)
--------- ---------
Property, plant and equipment, net.................... $ 215,333 $ 255,125
========= =========
</TABLE>
7. INVESTMENTS IN JOINT VENTURES AND SUBSIDIARIES:
Alliance
In 1994, the Company acquired a 50% interest in a joint venture, Alliance
Compressors, with American Standard Inc.'s Trane subsidiary ("Trane") to
develop, manufacture, and market both reciprocating and scroll compressor
products.
In December 1996, Alliance Compressors was restructured to admit a new
partner, Copeland Corporation, and to focus solely on the development,
manufacturing, and marketing of scroll compressors. In connection with the
restructuring, the net assets associated with the reciprocating compressor
business were distributed equally to the Company and Trane. The Company
subsequently sold its share of the reciprocating compressor net assets to Trane.
In addition, the Company and Trane sold portions of their interests in Alliance
Compressors to Copeland Corporation. As a result, Alliance Compressors is now
owned 51% by Copeland Corporation, 24.5% by the Company, and 24.5% by Trane.
During 1996, the Company recognized a pretax gain of $4.6 million as a result of
the restructuring, which is included in other operating expense, net on the
accompanying 1996 consolidated statement of income. The Company's investment in
Alliance Compressors at December 31, 1998, is $6.1 million and is being
accounted for using the equity method of accounting.
Ets. Brancher
In May 1996, the Company's subsidiary, Lennox Global Ltd., acquired a 50%
interest in HCF-Lennox, a manufacturer of air conditioning and refrigeration
equipment. In addition to acquiring an
F-21
<PAGE> 162
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest in HCF-Lennox, the Company increased its ownership of an existing joint
venture, Friga-Bohn, from 20% to 50%. The aggregate purchase price for these
acquisitions was approximately $22 million in cash. The aggregate purchase price
exceeded the Company's interests in the underlying equity in the ventures at the
date of acquisition. As a result, the Company recorded goodwill of approximately
$2.9 million, which is being amortized on a straight-line basis over a 30-year
period.
Effective September 30, 1997, Lennox Global Ltd. acquired an additional 20%
interest in HCF-Lennox and Friga-Bohn. In conjunction with the purchase, the
stock of HCF-Lennox and Friga-Bohn was combined into an existing holding
company, Ets. Brancher S.A. Ets. Brancher also owns certain land and buildings
that were leased to HCF-Lennox and Friga-Bohn. As a result of the acquisition,
Lennox Global Ltd. owns 70% of HCF-Lennox and Friga-Bohn as well as a 70%
interest in the land and buildings through its ownership of 70% of the stock of
Ets. Brancher S.A. The aggregate purchase price for this acquisition was $18.4
million, of which $10 million was in cash and $8.4 million was in Company stock
(631,389 shares). The acquisition was accounted for in accordance with the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets and liabilities based upon their estimated fair values
at the date of acquisition. As a result, the Company recorded additional
goodwill of approximately $6.4 million, which is being amortized on a
straight-line basis over a 30-year period.
The Company has entered into an agreement to acquire the remaining 30%
interest in Ets. Brancher S.A. on March 31, 2000 for 102.5 million French
francs, or approximately $17 million.
The Company obtained control of Ets. Brancher S.A. on September 30, 1997,
and, accordingly, began consolidating the financial position and operating
results of the subsidiary. The 30% interest in Ets. Brancher S.A. not owned by
the Company is reflected as minority interest on the accompanying consolidated
balance sheets and statements of income.
The following table presents the pro forma results as if the Company's 70%
interest in Ets. Brancher had been consolidated beginning January 1, 1996 (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Net sales............................................ $1,576,418 $1,588,985
Net income (loss).................................... 54,605 (33,381)
Basic earnings per share............................. 1.62 (0.98)
Diluted earnings per share........................... 1.59 (0.98)
</TABLE>
Canadian Dealers
In the fourth quarter of 1998, the Company's Lennox Industries (Canada)
Ltd. subsidiary, which is included in the North American residential segment,
purchased for cash fourteen dealers (the "Dealers") in Canada that had been
independent retail outlets of the Company's products. The aggregate purchase
price of the Dealers was $22.9 million in cash. These acquisitions were
accounted for in accordance with the purchase method of accounting. The purchase
price of each Dealer has been allocated to the assets and liabilities of the
Dealers, and the excess of $19.0 million has been allocated to goodwill, which
is being amortized on a straight-line basis over 40 years. The results of
operations of the Dealers, including sales of $8.2 million and net income of
$139,000, have been fully consolidated with those of the Company since the dates
of acquisition.
F-22
<PAGE> 163
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hearth Companies
During June and July 1998, the Company's Hearth Products Inc. subsidiary,
which is included in the North American residential segment, purchased
substantially all of the assets and certain liabilities of Superior Fireplace
Co. and all of the outstanding stock of Marco Mfg. Inc. and Pyro Industries Inc.
The aggregate purchase price for these acquisitions was $102.9 million, of which
$99.1 million was in cash and $3.8 million was in the form of a note payable.
These acquisitions were accounted for in accordance with the purchase method of
accounting. Accordingly, the aggregate purchase price has been allocated to
assets totaling $131.5 million and to liabilities totaling $28.6 million of the
acquired companies based upon the fair value of those assets and liabilities. As
a result, the Company recorded goodwill of approximately $73.8 million which is
being amortized on a straight-line basis over 40 years. The results of
operations of the acquired Hearth companies, including sales of $68.6 million
and net income of $1.9 million, have been fully consolidated with those of the
Company since the dates of acquisition.
Heatcraft do Brasil
During August 1998, the Company's Lennox Global Ltd. subsidiary purchased
84% of the outstanding stock of Heatcraft do Brasil (formerly McQuay do Brasil)
a Brazilian company engaged in the manufacture and sale of refrigeration,
automotive air conditioning equipment, and heat transfer products. The purchase
price of $20.5 million in cash has been allocated to the acquired assets and
liabilities based upon the fair value of those assets and liabilities, and the
excess of $11.3 million has been allocated to goodwill, which is being amortized
on a straight-line basis over 40 years. The results of operations of Heatcraft
do Brasil have been consolidated with those of the Company since the date of
acquisition.
The following table presents the pro forma results as if the Dealers, the
Hearth companies, and Heatcraft do Brasil had been acquired on January 1, 1997
(in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net sales............................................ $1,648,642 $1,944,036
Net income (loss).................................... (37,750) 47,325
Basic earnings per share............................. (1.11) 1.36
Diluted earnings per share........................... (1.11) 1.32
</TABLE>
F-23
<PAGE> 164
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT AND LINES OF CREDIT:
Long-term debt at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
6.73% promissory notes, payable $11,111 annually 2000
through 2008............................................ $100,000 $100,000
9.69% promissory notes, payable $4,900 annually 1998
through 2002 and $5,000 in 2003....................... 29,500 24,600
5.75% promissory note, payable in 1999.................. 1,596 951
5.84% promissory note, payable in 2000.................. 2,146 2,275
4.80% promissory note, payable annually through 2004.... 1,197 1,119
6.50% promissory note, payable annually 1999 through
2005.................................................. 1,334 1,382
5.50% promissory note, payable annually through 2004.... -- 639
6.50% promissory note, payable annually through 2003.... -- 371
9.53% promissory notes, payable $10,000 in 1999, $8,000
in 2000, and $3,000 in 2001........................... 21,000 21,000
7.06% promissory note, payable $10,000 annually in 2004
and 2005.............................................. 20,000 20,000
6.56% promissory note, payable in 2005.................. -- 25,000
6.75% promissory note, payable in 2008.................. -- 50,000
11.10% mortgage note, payable semiannually through
2000.................................................. 8,306 7,547
Texas Housing Opportunity Fund, Ltd. note, payable in
1999.................................................. 205 109
Capitalized lease obligations and other................. 7,225 6,378
-------- --------
192,509 261,371
Less current maturities................................. 8,926 18,778
-------- --------
$183,583 $242,593
======== ========
</TABLE>
At December 31, 1998, the aggregate amounts of required payments on
long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 18,778
2000........................................................ 35,354
2001........................................................ 20,712
2002........................................................ 17,534
2003........................................................ 17,424
Thereafter.................................................. 151,569
--------
$261,371
========
</TABLE>
The Company has bank lines of credit aggregating $164 million, of which $56
million was outstanding at December 31, 1998. Included in the bank lines is a
$135 million revolving credit facility. The revolving credit facility provides
for both "standby loans" and "offered rate loans." Standby loans are made
ratably by all lenders under the revolving credit facility, while offered rate
loans are, subject to the terms and conditions of the credit facility,
separately negotiated between the Company and one or more members of the lending
syndicate. Standby loans bear interest at a rate equal to either (a) the London
Interbank Offered Rate plus a margin equal to 0.150% to 0.405% depending on the
ratio of debt to total capitalization, or (b) the greater of (1) the Federal
Funds Effective Rate plus 0.5%, and (2) the Prime Rate. Offered rate loans bear
interest at a fixed rate negotiated with the lender or lenders making such
loans. Under the revolving credit facility, the Company is obligated to pay
certain fees, including (a) a quarterly facility fee to each lender under the
credit facility equal to a percentage, varying from 0.100% to 0.220% (depending
on the ratio of debt to total capitalization), of each lender's total
commitment,
F-24
<PAGE> 165
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
whether used or unused, under the revolving credit facility and (b) certain
administrative fees to the administrative agent and documentation agent under
the revolving credit facility. The revolving credit facility will expire on July
13, 2001, unless earlier terminated pursuant to its terms and conditions. The
unsecured promissory note agreements and lines of credit provide for
restrictions with respect to additional borrowings, maintenance of minimum
working capital and payment of dividends.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments
approximate their respective carrying amounts at December 31, 1997 and 1998,
except as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------
1997 1998
-------------------------------- --------------------------------
CARRYING INTEREST CARRYING INTEREST
AMOUNT FAIR VALUE RATE AMOUNT FAIR VALUE RATE
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
9.69% promissory
notes................ $29,500 $32,068 6.75% $24,600 $26,601 6.75%
9.53% promissory
notes.............. 21,000 22,375 6.75% 21,000 21,923 6.75%
11.10% mortgage
note............... 8,306 8,498 9.00% 7,547 7,739 9.00%
</TABLE>
The fair values presented above are based on the amount of future cash
flows associated with each instrument, discounted using the Company's current
borrowing rate for similar debt instruments of comparable maturity. The fair
values are estimates as of December 31, 1997 and 1998, and are not necessarily
indicative of amounts for which the Company could settle currently or indicative
of the intent or ability of the Company to dispose of or liquidate such
instruments.
10. INCOME TAXES:
The income tax provision (benefit) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
--------- ---------- ---------
<S> <C> <C> <C>
Current --
Federal...................................... $33,615 $ 24,673 $15,820
State........................................ 3,950 790 944
Foreign...................................... 926 5,239 (6,027)
------- -------- -------
Total current........................ 38,491 30,702 10,737
------- -------- -------
Deferred --
Federal...................................... (5,135) (31,144) 30,946
State........................................ 32 (1,917) 2,237
Foreign...................................... -- (9,134) (6,759)
------- -------- -------
Total deferred....................... (5,103) (42,195) 26,424
------- -------- -------
Total income tax provision
(benefit).......................... $33,388 $(11,493) $37,161
======= ======== =======
</TABLE>
F-25
<PAGE> 166
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the income tax provision (benefit) computed at the
statutory federal income tax rate and the financial statement provision
(benefit) for taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Provision (benefit) at the U.S. statutory rate
of 35%......................................... $30,840 $(15,765) $31,390
Increase (reduction) in tax expense resulting
from --
State income tax, net of federal income tax
benefit...................................... 2,437 (350) 705
Foreign losses not providing a current
benefit...................................... -- 1,044 3,572
Other.......................................... (111) 3,578 1,494
------- -------- -------
Total income tax provision
(benefit).......................... $33,388 $(11,493) $37,161
======= ======== =======
</TABLE>
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax basis of assets and liabilities and their
financial reporting basis and are reflected as current or noncurrent depending
on the timing of the expected realization. The deferred tax provision (benefit)
for the periods shown represents the effect of changes in the amounts of
temporary differences during those periods.
Deferred tax assets (liabilities), as determined under the provisions of
SFAS No. 109, "Accounting for Income Taxes," were comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Gross deferred tax assets --
Warranties............................................ $ 60,421 $ 28,281
Foreign operating losses.............................. 14,537 12,652
Postretirement and pension benefits................... 7,799 7,852
Inventory reserves.................................... 4,907 6,383
Receivable allowance.................................. 3,420 3,950
Other................................................. 3,518 9,253
-------- --------
Total deferred tax assets..................... 94,602 68,371
Valuation allowance........................... (14,543) (12,652)
-------- --------
Net deferred tax assets....................... 80,059 55,719
-------- --------
Gross deferred tax liabilities --
Depreciation.......................................... (19,241) (17,999)
Intangibles........................................... (1,873) (1,674)
Other................................................. (10,498) (10,248)
-------- --------
Total deferred tax liabilities................ (31,612) (29,921)
-------- --------
Net deferred tax asset.................................. $ 48,447 $ 25,798
======== ========
</TABLE>
The Company has net foreign operating loss carryforwards, mainly in Europe,
which expire at various dates in the future. All such loss carryforwards have a
full valuation allowance. The net change in the deferred tax asset valuation
reserve for the year ended December 31, 1998, was a decrease of $1,891. The
decrease is a result of operating loss carryforwards which have expired.
No provision has been made for income taxes which may become payable upon
distribution of the foreign subsidiaries' earnings since management considers
substantially all of these earnings permanently invested. As of December 31,
1998, the unrecorded deferred tax liability related to the undistributed
earnings of the Company's foreign subsidiaries was insignificant.
F-26
<PAGE> 167
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CURRENT ACCRUED EXPENSES:
Significant components of current accrued expenses are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Accrued product inspection charge....................... $ 71,956 $ 27,336
Accrued wages........................................... 46,685 52,915
Accrued warranties...................................... 22,086 21,131
Other................................................... 69,941 105,658
-------- --------
Total current accrued expenses................ $210,668 $207,040
======== ========
</TABLE>
12. EMPLOYEE BENEFIT PLANS:
Profit Sharing Plans
The Company maintains noncontributory profit sharing plans for its salaried
employees. These plans are discretionary as the Company's contributions are
determined annually by the Board of Directors. Provisions for contributions to
the plans amounted to $12.0 million, $11.5 million, and $13.6 million in 1996,
1997, and 1998, respectively.
401(k) Plan
The Company provides a 401(k) plan to substantially all eligible hourly and
salary employees of the Company, as defined. Participants may contribute up to
12% of their compensation to a 401(k) plan under Internal Revenue Code Section
401(k).
Long-Term Incentive Plan
The Company provided a long-term incentive plan, the Lennox International
Inc. Performance Share Plan (the "Performance Plan") to certain employees.
During 1998, the Company terminated the Performance Plan. Under the Performance
Plan, participants earned shares of the Company's common stock in accordance
with a discretionary formula established by the Board of Directors based on the
Company's performance over a three-year period. The value of the shares earned
was determined using an independent appraisal. Under the Performance Plan 66,297
shares, 239,019 shares, and 174,669 shares earned in fiscal 1995, 1996, and
1997, respectively, were issued in 1996, 1997, and 1998, respectively. During
1998, 358,974 shares were earned and issued in the same year. Compensation
expense recognized under the Performance Plan was $1,900,000, $2,259,616, and
$6,876,335 for the years ended December 31, 1996, 1997, and 1998, respectively,
based on the fair value of the shares earned.
Employee Benefits Trust
The Company also has an Employee Benefits Trust (the "Trust") to provide
eligible employees of the Company, as defined, with certain medical benefits.
Trust contributions are made by the Company as defined by the Trust agreement.
Pension and Postretirement Benefit Plans
The Company has domestic and foreign pension plans covering substantially
all employees. The Company makes annual contributions to the plans equal to or
greater than the statutory required minimum. The Company also maintains an
unfunded postretirement benefit plan which provides certain medical and life
insurance benefits to eligible employees. The pension plans are accounted for
under provisions of SFAS No. 87, "Employers' Accounting for Pensions." The
postretirement benefit plan is
F-27
<PAGE> 168
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounted for under the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." The following table sets forth
amounts recognized in the Company's financial statements and the plans' funded
status (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation --
Benefit obligation at beginning of
year.............................. $113,942 $119,835 $ 15,679 $ 16,055
Service cost......................... 3,439 3,875 457 494
Interest cost........................ 8,411 9,128 1,166 1,128
Plan participants' contributions..... 304 189 1,274 1,452
Amendments........................... 93 2,132 -- --
Actuarial (gain)/loss................ 993 7,471 40 (449)
Exchange rate changes................ -- 83 -- --
Benefits paid........................ (7,347) (7,892) (2,561) (2,382)
-------- -------- -------- --------
Benefit obligation at end of year.... $119,835 $134,821 $ 16,055 $ 16,298
======== ======== ======== ========
Changes in plan assets --
Fair value of plan assets at
beginning of year................. $112,588 $131,376 $ -- $ --
Actual return on plan assets......... 21,510 17,466 -- --
Employer contribution................ 4,610 3,792 1,287 930
Plan participants' contributions..... 304 189 1,274 1,452
Expenses............................. (664) (549) (79) (34)
Benefits paid........................ (6,972) (7,405) (2,482) (2,348)
-------- -------- -------- --------
Fair value of plan assets at end of
year.............................. 131,376 144,869 -- --
-------- -------- -------- --------
Funded status.......................... 11,541 10,048 (16,055) (16,298)
Unrecognized actuarial (gain)/loss... (16,151) (14,420) (2,158) (1,311)
Unrecognized prior service cost...... 747 641 -- --
Unrecognized net
obligation/(asset)................ 6,248 7,420 (520) (347)
-------- -------- -------- --------
Net amount recognized................ $ 2,385 $ 3,689 $(18,733) $(17,956)
======== ======== ======== ========
Amounts recognized in the consolidated
balance sheets consist of --
Prepaid benefit cost................. $ 13,588 $ 13,303 $ -- $ --
Accrued benefit liability............ (12,742) (12,540) (18,733) (17,956)
Intangible assets.................... 1,539 2,926 -- --
-------- -------- -------- --------
Net amount recognized................ $ 2,385 $ 3,689 $(18,733) $(17,956)
======== ======== ======== ========
Weighted-average assumptions as of
December 31 --
Discount rate........................ 7.50% 7.25% 7.50% 7.25%
Expected return on plan assets....... 9.50 9.50 -- --
Rate of compensation increase........ 4.00 4.00 -- --
</TABLE>
F-28
<PAGE> 169
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For measurement purposes, an 8.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998. The rate was assumed to
decrease gradually to 5.0% by 2003 and remain at that level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------- --------------------------
1996 1997 1998 1996 1997 1998
------- ------- -------- ------ ------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost --
Service cost.............. $ 3,344 $ 3,439 $ 3,875 $ 268 $ 457 $ 494
Interest cost............. 8,153 8,411 9,128 1,161 1,166 1,128
Expected return on plan
assets................. (8,655) (9,844) (10,931) -- -- --
Amortization of prior
service cost........... 716 716 880 (173) (173) (173)
Recognized actuarial
loss................... -- -- -- (961) (1,129) (1,297)
------- ------- -------- ------ ------- -------
Net periodic benefit
cost................... $ 3,558 $ 2,722 $ 2,952 $ 295 $ 321 $ 152
======= ======= ======== ====== ======= =======
</TABLE>
The benefit obligation and fair value of plan assets for the pension plans with
benefit obligations in excess of plan assets were approximately $10,770,000 and
$0, respectively, as of December 31, 1997, and $12,478,000 and $3,607,000,
respectively, as of December 31, 1998.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost
components........................................ $ 230 $ (187)
Effect on the post-retirement benefit
obligation...................................... 1,882 (1,605)
</TABLE>
13. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company has various leases relating principally to the use of operating
facilities. Rent expense for 1996, 1997 and 1998 was approximately $18.6
million, $23.2 million and $28.2 million, respectively.
The approximate minimum commitments under all noncancelable leases at
December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 22,244
2000........................................................ 18,825
2001........................................................ 13,241
2002........................................................ 10,977
2003........................................................ 10,049
Thereafter.................................................. 33,386
--------
$108,722
========
</TABLE>
F-29
<PAGE> 170
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and suits in the aggregate
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
14. STOCK-BASED COMPENSATION PLAN:
The Company has a Stock Option and Restricted Stock Plan, which was amended
in September 1998 (the "1998 Incentive Plan"). The 1998 Incentive Plan is
accounted for under APB Opinion No. 25, under which no compensation cost has
been recognized. If the 1998 Incentive Plan had been accounted for under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income (loss) would have been adjusted to the following pro forma
amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss): As reported............. $54,726 $(33,550) $52,525
Pro forma............... 52,557 (35,595) 52,525
Basic earnings (loss) per share: As reported............. $ 1.62 $ (0.99) $ 1.50
Pro forma............... 1.56 (1.05) 1.50
Diluted earnings (loss) per share: As reported............. $ 1.59 $ (0.99) $ 1.47
Pro forma............... 1.53 (1.05) 1.47
</TABLE>
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Under the 1998 Incentive Plan, the Company is authorized to issue options
for 8,216,571 shares of common stock. As of December 31, 1998, options for
5,462,457 shares of common stock have been granted and options for 821,436
shares have been cancelled or repurchased. Consequently, as of December 31,
1998, there are options for 3,575,550 shares available for grant. Under the 1998
Incentive Plan, the option exercise price equals the stock's fair value on the
date of grant. 1998 Incentive Plan options granted prior to 1998 vest on the
date of grant. 1998 Incentive Plan options granted in 1998 vest over three
years. All 1998 Incentive Plan options expire after ten years.
The Plan's status is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1997 1998
----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.............................. 2,218 $ 7.19 3,039 $ 9.02 3,822 $10.13
Granted........................... 946 13.05 877 13.88 1,071 18.87
Exercised......................... (122) 7.13 (71) 7.67 (1,048) 9.04
Forfeited......................... (3) 7.68 (23) 13.31 (47) 8.64
------ ------ ------- ------ ------- ------
Outstanding at end of year........ 3,039 $ 9.02 3,822 $10.13 3,798 $12.92
====== ====== ======= ====== ======= ======
Exercisable at end of year........ 3,039 $ 9.02 3,822 $10.13 2,737 $12.92
====== ====== ======= ====== ======= ======
Fair value of options granted..... $ 3.86 $ 3.76 $ 5.83
====== ====== ======
</TABLE>
F-30
<PAGE> 171
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE(YEARS) EXERCISE PRICE
--------------- ----------------- ----------------------- ----------------
<S> <C> <C> <C>
$ 7.28-$ 7.53 1,338 6 $ 7.45
$13.21-$13.90 1,399 7 13.60
$15.59-$19.03 1,061 9.5 18.92
----- --- ------
3,798 8 $12.92
===== === ======
</TABLE>
As of December 31, 1998, options to purchase 1,337,622 shares of common
stock with exercise prices ranging from $7.28 to $7.53 and options to purchase
1,399,497 shares of common stock with exercise prices ranging from $13.21 to
$13.90 were exercisable. The fair value of each option is estimated on the date
of grant based on a risk-free interest rate of 6%, expected life of ten years,
and an expected dividend yield of 2% in 1996, 1997 and 1998.
15. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the sum of the
weighted average number of shares and the number of equivalent shares assumed
outstanding, if dilutive, under the Company's stock-based compensation plans.
Diluted earnings per share are computed as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Net income (loss).............................. $54,726 $(33,550) $52,525
======= ======== =======
Weighted average shares outstanding............ 33,693 33,924 34,914
Effect of assumed exercise of options.......... 693 -- 825
------- -------- -------
Weighted average shares outstanding, as
adjusted.................................. 34,386 33,924 35,739
------- -------- -------
Diluted earnings (loss) per share.............. $ 1.59 $ (0.99) $ 1.47
======= ======== =======
</TABLE>
Options to purchase 904,200 shares of common stock at $13.31 per share,
3,822,324 shares of common stock at prices ranging from $5.14 per share to
$13.90 per share and 1,037,850 shares of common stock at $19.03 per share were
outstanding for the years ended December 31, 1996, 1997, and 1998, respectively,
but were not included in the diluted earnings per share calculation because the
assumed exercise of such options would have been antidilutive.
16. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivatives
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company does not believe that
the adoption of this pronouncement will have a significant impact on the
Company's financial statements.
17. RELATED PARTY TRANSACTIONS:
John W. Norris, Jr., the Company's Chairman and Chief Executive Officer,
and David H. Anderson, Richard W. Booth, David V. Brown, Loraine B. Millman,
Robert W. Norris and Lynn B. Storey, directors
F-31
<PAGE> 172
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company, as well as certain stockholders, are members of AOC Land
Investment, LLC. AOC Land Investment, LLC owns 70% of AOC Development II, LLC.
AOC Development II, LLC is building a new office building and the Company has
agreed to lease part of it for use in conjunction with the Company's corporate
headquarters. The lease will have a term of 25 years and the annual lease
payments are expected to be approximately $2.1 million per year for the first
five years. The Company believes that the terms of the lease with AOC
Development II, LLC are at least as favorable as could be obtained from
unaffiliated third parties.
18. SUBSEQUENT EVENTS (UNAUDITED):
The Company is filing a registration statement for an initial public
offering of its common stock, the proceeds of which will be used to repay a
portion of the borrowings under the Company's revolving credit facility and term
credit agreement.
F-32
<PAGE> 173
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Stockholders and Board of Directors of
Lennox International Inc.
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of Lennox International Inc. and
subsidiaries included in this registration statement on Form S-1 and have issued
our report thereon dated February 18, 1999. Our audits were made for the purpose
of forming an opinion on the basic consolidated financial statements taken as a
whole. Schedule II, Valuation and Qualifying Accounts and Reserves, is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 18, 1999
F-33
<PAGE> 174
LENNOX INTERNATIONAL INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
---------- ---------- ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Allowance for doubtful accounts................ $ 9,611 $7,041 $(4,537) $12,115
1997:
Allowance for doubtful accounts................ $12,115 $8,997 $(4,164) $16,948
1998:
Allowance for doubtful accounts................ $16,948 $6,224 $(4,647) $18,525
</TABLE>
- ---------------
(1) Uncollectable accounts charged off, net of recoveries.
F-34
<PAGE> 175
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
LENNOX INTERNATIONAL INC.,
LII ACQUISITION CORPORATION,
AND
SERVICE EXPERTS, INC.
DATED AS OF OCTOBER 26, 1999
<PAGE> 176
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I THE MERGER.................................................... A-1
1.1 The Merger; Effective Time of the Merger......................... A-1
1.2 Closing.......................................................... A-1
1.3 Effects of the Merger............................................ A-2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES.................... A-2
2.1 Effect on Capital Stock.......................................... A-2
(a) Capital Stock of Merger Sub................................. A-2
(b) Cancellation of Treasury Stock.............................. A-2
(c) Exchange Ratio for Company Common Stock..................... A-2
Treatment of Company Stock Options, Warrants and Restricted
(d) Stock Awards................................................ A-3
(e) Company Convertible Notes................................... A-3
2.2 Exchange of Certificates......................................... A-3
(a) Exchange Agent.............................................. A-3
(b) Exchange Procedures......................................... A-3
(c) Distributions with Respect to Unexchanged Shares............ A-4
(d) No Further Ownership Rights................................. A-4
(e) No Fractional Shares........................................ A-4
(f) Termination of Exchange Fund................................ A-5
(g) No Liability................................................ A-5
(h) Lost, Stolen, or Destroyed Certificates..................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES.............................. A-5
3.1 Representations and Warranties of the Company.................... A-5
(a) Organization, Standing and Power............................ A-5
(b) Capital Structure........................................... A-6
(c) Authority; No Violations; Consents and Approvals............ A-7
(d) SEC Documents............................................... A-8
(e) Information Supplied........................................ A-9
(f) Absence of Certain Changes or Events........................ A-9
(g) No Undisclosed Material Liabilities......................... A-9
(h) No Default.................................................. A-10
(i) Compliance with Applicable Laws............................. A-10
(j) Litigation.................................................. A-10
(k) Taxes....................................................... A-10
(l) Pension and Benefit Plans; ERISA............................ A-12
(m) Labor Matters............................................... A-13
(n) Intangible Property......................................... A-14
(o) Environmental Matters....................................... A-14
(p) Insurance................................................... A-16
(q) Opinion of Financial Advisor................................ A-16
(r) Vote Required............................................... A-16
(s) Beneficial Ownership of Parent Common Stock................. A-16
(t) Brokers..................................................... A-16
(u) Tax Matters................................................. A-16
(v) State Takeover Statutes..................................... A-16
3.2 Representations and Warranties of Parent......................... A-17
(a) Organization, Standing and Power............................ A-17
(b) Capital Structure........................................... A-17
(c) Authority; No Violations, Consents and Approvals............ A-18
</TABLE>
i
<PAGE> 177
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(d) SEC Documents............................................... A-19
(e) Information Supplied........................................ A-19
(f) Absence of Certain Changes or Events........................ A-20
(g) No Undisclosed Material Liabilities......................... A-20
(h) No Default.................................................. A-20
(i) Compliance with Applicable Laws............................. A-20
(j) Litigation.................................................. A-20
(k) Taxes....................................................... A-21
(l) Pension and Benefit Plans; ERISA............................ A-21
(m) Labor Matters............................................... A-23
(n) Intangible Property......................................... A-23
(o) Environmental Matters....................................... A-24
(p) Opinion of Financial Advisor................................ A-24
(q) Vote Required............................................... A-25
(r) Beneficial Ownership of Company Common Stock................ A-25
(s) Brokers..................................................... A-25
(t) Tax Matters................................................. A-25
(u) Interim Operations of Merger Sub............................ A-25
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS PENDING THE
MERGER................................................................ A-25
4.1 Conduct of Business by the Company Pending the Merger............ A-25
(a) Ordinary Course............................................. A-25
(b) Dividends; Changes in Stock................................. A-25
(c) Issuance of Securities...................................... A-25
(d) Governing Documents......................................... A-26
(e) No Acquisitions............................................. A-26
(f) No Dispositions............................................. A-26
(g) No Dissolution, Etc......................................... A-26
(h) Certain Employee Matters.................................... A-26
(i) Indebtedness; Leases; Capital Expenditures.................. A-26
(j) Accounting.................................................. A-27
(k) Affiliate Transactions...................................... A-27
(l) Contracts................................................... A-27
(m) Insurance................................................... A-27
(n) Permits..................................................... A-27
(o) Tax Matters................................................. A-27
(p) Discharge of Liabilities.................................... A-27
(q) Other Actions............................................... A-28
(r) Agreements.................................................. A-28
(s) 368(a) Reorganization....................................... A-28
4.2 Conduct of Business by Parent Pending the Merger................. A-28
(a) Dividends; Changes in Stock................................. A-28
(b) Governing Documents......................................... A-28
(c) Other Actions............................................... A-28
(d) Agreements.................................................. A-28
(e) 368(a) Reorganization....................................... A-28
4.3 No Solicitation.................................................. A-28
4.4 Board of Directors............................................... A-29
ARTICLE V ADDITIONAL AGREEMENTS......................................... A-30
5.1 Preparation of S-4 and the Joint Proxy Statement................. A-30
5.2 Letter of the Company's Accountants.............................. A-30
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
5.3 Letter of Parent's Accountants................................... A-30
5.4 Access to Information............................................ A-30
5.5 Stockholders Meetings............................................ A-30
(a) Company Stockholders' Meeting............................... A-30
(b) Parent Stockholders' Meeting................................ A-31
5.6 HSR and Other Approvals.......................................... A-31
(a) HSR Act..................................................... A-31
(b) Other Regulatory Approvals.................................. A-31
5.7 Agreements of Rule 145 Affiliates................................ A-31
5.8 Authorization for Shares and Stock Exchange Listing.............. A-32
5.9 Employee Matters................................................. A-32
Stock Options and Warrants; Restricted Stock Awards; and Stock
5.10 Purchase Plans................................................... A-32
5.11 Indemnification; Directors' and Officers' Insurance.............. A-33
5.12 Agreement to Defend.............................................. A-34
5.13 Public Announcements............................................. A-34
5.14 Other Actions.................................................... A-34
5.15 Advice of Changes; SEC Filings................................... A-34
5.16 Reorganization................................................... A-35
5.17 Conveyance Taxes................................................. A-35
5.18 Other Agreements................................................. A-35
5.19 Company Credit Agreement......................................... A-35
ARTICLE VI CONDITIONS PRECEDENT......................................... A-35
6.1 Conditions to Each Party's Obligation to Effect the Merger....... A-35
(a) The Company Stockholder Approval............................ A-35
(b) Parent Stockholder Approval................................. A-35
(c) NYSE Listing................................................ A-35
(d) Other Approvals............................................. A-35
(e) S-4......................................................... A-36
(f) No Injunctions or Restraints................................ A-36
6.2 Conditions of Obligations of Parent.............................. A-36
(a) Representations and Warranties of the Company............... A-36
(b) Performance of Obligations of the Company................... A-36
(c) Letters from Rule 145 Affiliates............................ A-36
(d) Tax Opinion................................................. A-36
6.3 Conditions of Obligations of the Company......................... A-37
(a) Representations and Warranties of Parent and Merger Sub..... A-37
(b) Performance of Obligations of Parent and Merger Sub......... A-37
(c) Tax Opinion................................................. A-37
ARTICLE VII TERMINATION AND AMENDMENT................................... A-37
7.1 Termination...................................................... A-37
7.2 Effect of Termination............................................ A-38
7.3 Amendment........................................................ A-39
7.4 Extension; Waiver................................................ A-39
ARTICLE VIII GENERAL PROVISIONS......................................... A-40
8.1 Payment of Expenses.............................................. A-40
8.2 Nonsurvival of Representations, Warranties and Agreements........ A-40
8.3 Notices.......................................................... A-40
8.4 Interpretation................................................... A-41
8.5 Counterparts..................................................... A-41
8.6 Entire Agreement; No Third Party Beneficiaries................... A-41
8.7 Governing Law.................................................... A-41
</TABLE>
iii
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
8.8 Jurisdiction..................................................... A-41
8.9 No Remedy in Certain Circumstances............................... A-41
8.10 Assignment....................................................... A-42
</TABLE>
<TABLE>
<S> <C>
EXHIBITS:
Exhibit 3.1(i) Senior Managers
Exhibit 5.18 Voting Agreements
SCHEDULES:
COMPANY DISCLOSURE SCHEDULE:
Schedule 3.1(a)(i) Company Significant Subsidiaries
Schedule 3.1(a)(ii) Company Material Adverse Effect
Schedule 3.1(b)(iv) Company Warrants
Schedule 3.1(b)(v) Company Restricted Stock
Schedule 3.1(b)(viii) Company Convertible Subordinated Notes
Schedule 3.1(b)(ix) Company Subsidiaries
Schedule 3.1(b)(x) Company Capital Stock Liens and Rights
Schedule 3.1(c) Company Conflicts
Schedule 3.1(f) Company Changes or Events
Schedule 3.1(g) Company Undisclosed Liabilities
Schedule 3.1(h) Company Defaults
Schedule 3.1(j) Company Litigation
Schedule 3.1(k) Company Tax Information
Schedule 3.1(l) Company Pension and Benefit Plan and Related Information
Schedule 3.1(m) Company Labor Matters
Schedule 3.1(o) Company Environmental Matters
Schedule 4.1 Conduct of Business
PARENT DISCLOSURE SCHEDULE:
Schedule 3.2(a)(i) Parent Significant Subsidiaries
Schedule 3.2(a)(ii) Parent Material Adverse Effect
Schedule 3.2(b)(i) Parent Subsidiaries
Schedule 3.2(b)(ii) Parent Capital Stock Liens and Rights
Schedule 3.2(c) Parent Conflicts
Schedule 3.2(f) Parent Changes or Events
Schedule 3.2(k) Parent Tax Information
Schedule 3.2(l) Parent Pension and Benefit Plan and Related Information
Schedule 3.2(m) Parent Labor Matters
Schedule 3.2(o) Parent Environmental Matters
</TABLE>
iv
<PAGE> 180
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM DEFINED IN SECTION
- ------------ ------------------
<S> <C>
Acquisition Proposal........................................ 4.3(b)
Affiliate................................................... 4.1(k)
Agreement................................................... Preamble
Antitrust Division.......................................... 5.6(a)
Bank Credit Facility........................................ 5.19
Certificate................................................. 2.2(b)
Certificate of Merger....................................... 1.1
Closing..................................................... 1.1
Closing Date................................................ 1.2
Code........................................................ Recitals
Company..................................................... Preamble
Company Common Stock........................................ 2.1
Company Convertible Notes................................... 3.1(b)
Company Counsel............................................. 6.3(c)
Company Disclosure Schedule................................. 3.1(a)
Company Employee Benefit Plans.............................. 3.1(l)(i)
Company ERISA Affiliate..................................... 3.1(l)(i)
Company Intangible Property................................. 3.1(n)
Company Litigation.......................................... 3.1(j)
Company Option.............................................. Recitals
Company Option Agreement.................................... Recitals
Company Order............................................... 3.1(j)
Company Pension Plan........................................ 3.1(l)(i)
Company Permits............................................. 3.1(i)
Company Preferred Stock..................................... 3.1(b)
Company SEC Documents....................................... 3.1(d)
Company Stock Option........................................ 5.10
Company Stock Plans......................................... 3.1(b)
Company Stockholders' Meeting............................... 5.5(a)
Company Warrants............................................ 3.1(b)
Confidentiality Agreements.................................. 5.4
Constituent Corporations.................................... 1.3(a)
Conversion Number........................................... 2.1(c)
DGCL........................................................ 1.1
Effective Time.............................................. 1.1
Environmental Laws.......................................... 3.1(o)(A)
ERISA....................................................... 3.1(l)(i)
Excess Securities........................................... 2.2(e)
Exchange Act................................................ 3.1(c)(iii)
Exchange Agent.............................................. 2.2(a)
Exchange Fund............................................... 2.2(a)
Final Purchase Date......................................... 5.10(b)
Fractional Dividends........................................ 2.2(e)
FTC......................................................... 5.6(a)
GAAP........................................................ 3.1(d)
Governmental Entity......................................... 3.1(c)(iii)
Hazardous Materials......................................... 3.1(o)(B)
HSR Act..................................................... 3.1(c)(iii)
Indemnified Liabilities..................................... 5.11(a)
</TABLE>
v
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<TABLE>
<CAPTION>
DEFINED TERM DEFINED IN SECTION
- ------------ ------------------
<S> <C>
Indemnified Parties......................................... 5.11(a)
Injunction.................................................. 6.1(f)
IRS......................................................... 3.1(k)(v)
Joint Proxy Statement....................................... 3.1(c)(iii)
Knowledge................................................... 3.1(i)
Letter of Transmittal....................................... 2.2(b)
Material Adverse Change..................................... 3.1(a)
Material Adverse Effect..................................... 3.1(a)
Merger...................................................... Recitals
Merger Sub.................................................. Preamble
NYSE........................................................ 2.2(e)
Parent...................................................... Preamble
Parent Common Stock......................................... 2.1(c)
Parent Counsel.............................................. 6.2(d)
Parent Disclosure Schedule.................................. 3.2
Parent Employee Benefit Plans............................... 3.2(l)(i)
Parent ERISA Affiliate...................................... 3.2(l)(i)
Parent Intangible Property.................................. 3.2(n)
Parent Litigation........................................... 3.2(j)
Parent Order................................................ 3.2(j)
Parent Pension Plan......................................... 3.2(l)(i)
Parent Permits.............................................. 3.2(i)
Parent Preferred Stock...................................... 3.2(b)
Parent SEC Documents........................................ 3.2(d)
Parent Stock Plan........................................... 3.2(b)
Parent Stockholders' Meeting................................ 5.5(b)
Purchase Plans.............................................. 5.10(b)
Reincorporation Agreement................................... 4.1(d)
Release..................................................... 3.1(o)(C)
Remedial Action............................................. 3.1(o)(D)
Restricted Stock Award...................................... 3.1(b)
Rule 145 Affiliates......................................... 5.7
S-4......................................................... 3.1(e)
SEC......................................................... 3.1(a)
Securities Act.............................................. 3.1(d)
Significant Subsidiary...................................... 3.1(a)
Subsidiary.................................................. 3.1(a)
Surviving Corporation....................................... 1.3(a)
SVE Tennessee............................................... 4.1(d)
Tax or Taxes................................................ 3.1(k)
Tax Return.................................................. 3.1(k)
Voting Debt................................................. 3.1(b)
</TABLE>
vi
<PAGE> 182
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 26, 1999 (this
"Agreement"), among Lennox International Inc., a Delaware corporation
("Parent"), LII Acquisition Corporation, a Delaware corporation and a direct
wholly owned subsidiary of Parent ("Merger Sub"), and Service Experts, Inc., a
Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company each have determined that it is in the best interests of their
respective stockholders for Merger Sub to merge with and into the Company (the
"Merger") upon the terms and subject to the conditions of this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and that this Agreement
shall be and is hereby adopted as a plan of reorganization for purposes of
Section 368 of the Code;
WHEREAS, as a condition of the willingness of Parent to enter into this
Agreement, certain stockholders of the Company will, simultaneously with the
execution of this Agreement, enter into stockholder voting agreements pursuant
to which each such stockholder will agree to vote in favor of this Agreement and
the Merger at the Company Stockholder Meeting (as hereinafter defined);
WHEREAS, as a condition of the willingness of the Company to enter into
this Agreement, certain stockholders of Parent will, simultaneously with the
execution of this Agreement, enter into stockholder voting agreements pursuant
to which each such stockholder will agree to vote in favor of the issuance of
Parent Common Stock (as hereinafter defined) in connection with the Merger at
the Parent Stockholder Meeting (as hereinafter defined);
WHEREAS, as a condition of the willingness of Parent to enter into this
Agreement, the Company will, simultaneously with the execution of this
Agreement, enter into a stock option agreement (the "Company Option Agreement"),
pursuant to which the Company will grant Parent the option (the "Company
Option") to purchase shares of Company Common Stock (as hereinafter defined),
upon the terms and subject to the conditions set forth therein; and
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger; Effective Time of the Merger. Upon the terms and
conditions of this Agreement and in accordance with the Delaware General
Corporation Law (the "DGCL"), Merger Sub shall be merged with and into the
Company at the Effective Time (as hereinafter defined). As soon as practicable
at or after the closing of the Merger (the "Closing"), a certificate of merger,
prepared and executed in accordance with the relevant provisions of the DGCL,
with respect to the Merger (the "Certificate of Merger") shall be filed with the
Delaware Secretary of State. The Merger shall become effective at such time as
is provided in the Certificate of Merger (the "Effective Time").
1.2 Closing. The Closing shall take place at 10:00 a.m. on a date to be
specified by the parties, which shall be no later than the second business day
after satisfaction (or waiver in accordance with this Agreement) of the
conditions set forth in Article VI (other than those conditions that by their
nature are to be satisfied at the Closing) (the "Closing Date"), at the offices
of Baker & Botts, L.L.P., 2001 Ross Avenue, Dallas, Texas 75201, unless another
date or place is agreed to by the parties.
A-1
<PAGE> 183
1.3 Effects of the Merger.
(a) At the Effective Time: (i) Merger Sub shall be merged with and
into the Company, the separate existence of Merger Sub shall cease and the
Company shall continue as the surviving corporation (Merger Sub and the
Company are sometimes referred to herein as the "Constituent Corporations"
and the Company is sometimes referred to herein as the "Surviving
Corporation"); (ii) the Certificate of Incorporation of Merger Sub as in
effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law provided that Article I of
the Certificate of Incorporation of the Surviving Corporation shall be
amended to read in its entirety as "Article I. The name of the corporation
is Service Experts, Inc. (the "Corporation")"; and (iii) the Bylaws of
Merger Sub as in effect immediately prior to the Effective Time shall be
the Bylaws of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law.
(b) The directors and officers of Merger Sub at the Effective Time
shall, from and after the Effective Time, be the initial directors and
officers of the Surviving Corporation and shall serve until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Restated Certificate of Incorporation and Bylaws. After the
Effective Time, Parent will cause such officers of the Company as Parent
deems appropriate to be appointed officers of Surviving Corporation.
(c) The Merger shall have the effects set forth in this Section 1.3
and the applicable provisions of the DGCL.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of common
stock, par value $.01 per share, of the Company ("Company Common Stock"), or
capital stock of Merger Sub:
(a) Capital Stock of Merger Sub. Each share of common stock, par value
$0.01 per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into and exchanged for one validly
issued, fully paid and nonassessable share of common stock, par value $0.01
per share, of the Surviving Corporation. Each stock certificate of Merger
Sub evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Company Common Stock
and all other shares of capital stock of the Company that are owned by the
Company as treasury stock shall be canceled and retired and shall cease to
exist and no stock of Parent or other consideration shall be delivered or
deliverable in exchange therefor.
(c) Exchange Ratio for Company Common Stock. Subject to the provisions
of Section 2.2(e) hereof, each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares to
be canceled in accordance with Section 2.1(b)) shall be converted into the
right to receive 0.67 (the "Conversion Number") of a share of common stock,
par value $.01 per share ("Parent Common Stock"), of Parent. All such
shares of Company Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate representing any such shares
shall cease to have any rights with respect thereto, except the right to
receive the shares of Parent Common Stock and cash in lieu of fractional
shares of Parent Common Stock, as contemplated by Section 2.2(e), to be
issued or paid in consideration therefor upon the surrender of such
certificate in accordance with Section 2.2, without interest.
A-2
<PAGE> 184
(d) Treatment of Company Stock Options, Warrants and Restricted Stock
Awards. Each outstanding Company Stock Option (as hereinafter defined),
Company Warrants (as hereinafter defined) and each Restricted Stock Award
(as hereinafter defined) shall be assumed by Parent as provided in Section
5.10.
(e) Company Convertible Notes. Parent shall agree to be bound by the
conversion provisions of the Company Convertible Notes (as hereinafter
defined), such that the Company Convertible Notes shall be convertible into
Parent Common Stock in accordance with the terms of the Company Convertible
Notes.
2.2 Exchange of Certificates
(a) Exchange Agent. As of the Effective Time, Parent shall deposit
with ChaseMellon Shareholder Services, L.L.C. or such other bank or trust
company designated by Parent and reasonably acceptable to the Company (the
"Exchange Agent"), for the benefit of the holders of shares of Company
Common Stock, for exchange in accordance with this Article II, through the
Exchange Agent, certificates representing the shares of Parent Common Stock
(such shares of Parent Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund"), issuable pursuant to Section 2.1 in exchange for
outstanding shares of Company Common Stock. The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the Parent Common Stock
contemplated to be issued pursuant to Section 2.1 out of the Exchange Fund.
The Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which, immediately prior to the Effective Time,
represented outstanding shares of Company Common Stock (the
"Certificates"), which holder's shares of Company Common Stock were
converted into the right to receive shares of Parent Common Stock pursuant
to Section 2.1: (i) a letter of transmittal ("Letter of Transmittal") which
shall specify that delivery shall be effected and risk of loss and title to
the Certificates shall pass only upon delivery of the Certificates to the
Exchange Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify; and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
shares of Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with the Letter of
Transmittal, duly executed, and any other documents reasonably required by
Parent or the Exchange Agent, (A) the holder of a Certificate shall receive
in exchange therefore a certificate representing that number of whole
shares of Parent Common Stock which such holder has the right to receive
pursuant to the provisions of this Article II, cash in lieu of fractional
shares of Parent Common Stock as contemplated by Section 2.2(e), and any
unpaid dividends and distributions that such holder has the right to
receive pursuant to Section 2.2(c); and (B) the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of
Company Common Stock which is not registered in the transfer records of the
Company, a certificate representing the appropriate number of shares of
Parent Common Stock may be issued to a transferee if the Certificate
representing such Company Common Stock is presented to the Exchange Agent
accompanied by all documents required to evidence and effect such transfer
and by evidence that any applicable stock transfer taxes have been paid.
Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of
Parent Common Stock and cash in lieu of any fractional shares of Parent
Common Stock as contemplated by this Section 2.2 and any unpaid dividends
and distributions that such holder has the right to receive pursuant to
Section 2.2(c). The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the Parent Common Stock
held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect
thereto for the account of persons entitled thereto.
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(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock declared or made
after the Effective Time with a record date after the Effective Time shall
be paid to the holder of any unsurrendered Certificate with respect to the
right to receive shares of Parent Common Stock represented thereby and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.2(e) until the holder of such Certificate shall
surrender such Certificate. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the
holder thereof, without interest: (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of Parent Common
Stock to which such holder is entitled pursuant to Section 2.2(e) and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock; and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective
Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Parent Common Stock.
(d) No Further Ownership Rights. All shares of Parent Common Stock
issued upon the surrender for exchange of shares of Company Common Stock in
accordance with the terms hereof (including any cash paid pursuant to
Section 2.2(e)) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Company Common Stock subject,
however, to the Surviving Corporation's obligation to pay any dividends or
make any other distributions with a record date prior to the Effective Time
that may have been declared or made by the Company on such shares of
Company Common Stock in accordance with the terms of this Agreement or
prior to the date hereof and which remain unpaid at the Effective Time, and
after the Effective Time there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the
shares of Company Common Stock that were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Article II.
(e) No Fractional Shares. No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender
for exchange of Certificates pursuant to this Article II, and, except as
provided in this Section 2.2(e), no dividend or other distribution, stock
split or interest shall relate to any such fractional security, and such
fractional interests shall not entitle the owner thereof to vote or to any
rights of a security holder of Parent. In lieu of any fractional security,
each holder of shares of Company Common Stock who would otherwise have been
entitled to a fraction of a share of Parent Common Stock upon surrender of
Certificates for exchange pursuant to this Article II will be paid an
amount in cash (without interest) equal to such holder's proportionate
interest in the sum of (i) the gross proceeds from the sale or sales by the
Exchange Agent in accordance with the provisions of this Section 2.2(e), on
behalf of all such holders of the aggregate fractional shares of Parent
Common Stock issued pursuant to this Article II and (ii) the aggregate
dividends or other distributions that are payable with respect to such
shares of Parent Common Stock pursuant to Section 2.2(c) (such dividends
and distributions being herein called the "Fractional Dividends"). As soon
as practicable following the Effective Time, the Exchange Agent shall
determine the excess of the aggregate of (x) the number of full shares of
Parent Common Stock delivered to the Exchange Agent by Parent pursuant to
Section 2.2(a) over (y) the aggregate number of full shares of Parent
Common Stock to be distributed to holders of Company Common Stock pursuant
to Section 2.2(b) (such excess being herein called the "Excess Securities")
and the Exchange Agent, as agent for the former holders of Company Common
Stock, shall sell the Excess Securities at the prevailing prices on the New
York Stock Exchange ("NYSE"). The sale of the Excess Securities by the
Exchange Agent shall be executed on the NYSE through one or more member
firms of the NYSE. Parent shall pay all commissions, transfer taxes and
other out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent, incurred in connection with such sale
of Excess Securities. Until the gross proceeds of such sale of Excess
Securities and the Fractional Dividends have been distributed to the former
stockholders of the Company, the Exchange Agent will hold such proceeds and
dividends in trust for such former
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stockholders. As soon as practicable after the determination of the amount
of cash to be paid to former stockholders of the Company in lieu of any
fractional interests, the Exchange Agent shall make available in accordance
with this Agreement such amounts to such former stockholders.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and
any cash in lieu of fractional shares of Parent Common Stock made available
to the Exchange Agent that remain undistributed to the former stockholders
of the Company on the first anniversary of the Effective Time shall be
delivered to Parent, upon demand, and any stockholders of the Company who
have not theretofore complied with this Article II shall thereafter look
only to Parent for payment of their claim for Parent Common Stock, any cash
in lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock. Parent shall cause the
Surviving Corporation to pay all charges and expenses of the Exchange
Agent.
(g) No Liability. None of Parent, the Company or Merger Sub shall be
liable to any holder of shares of Parent Common Stock or Company Common
Stock, as the case may be, for such shares (or dividends or distributions
with respect thereto) or cash in lieu of fractional shares of Parent Common
Stock delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. Any amounts remaining unclaimed by
holders of any such shares at such date as is immediately prior to the time
at which such amounts would otherwise escheat to or become property of any
governmental entity shall, to the extent permitted by applicable law,
become the property of Parent, free and clear of any claims or interest of
any such holders or their successors, assigns or personal representatives
previously entitled thereto.
(h) Lost, Stolen, or Destroyed Certificates. If any Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Certificate to be lost, stolen or
destroyed and, if required by Parent, the posting by such person of a bond
in such reasonable amount as Parent may direct as indemnity against any
claim that may be made against it with respect to such Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificate the certificate representing that number of whole shares of
Parent Common Stock which such holder has the right to receive pursuant to
the provisions of this Article II, cash in lieu of fractional shares of
Parent Common Stock as contemplated by Section 2.2(e), and any unpaid
dividends and distributions that such holder has the right to receive
pursuant to Section 2.2(c).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company represents
and warrants to Parent and Merger Sub as follows:
(a) Organization, Standing and Power. Each of the Company and the
Company's Significant Subsidiaries (as defined below) is a corporation,
partnership or limited liability company duly organized, validly existing
and in good standing under the laws of its state of incorporation or
organization, has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted,
and is duly qualified and in good standing to do business in each
jurisdiction in which the business it is conducting, or the operation,
ownership or leasing of its properties, makes such qualification necessary,
other than in such jurisdictions where the failure so to qualify would not
have a Material Adverse Effect (as defined below) on the Company. The
Company has heretofore delivered to Parent complete and correct copies of
its Restated Certificate of Incorporation and Bylaws, each as amended to
date. All Significant Subsidiaries of the Company and their respective
jurisdictions of incorporation or organization are identified on Schedule
3.1(a)(i) of the disclosure schedule dated as of the date hereof and signed
by an authorized officer of the Company and delivered to Parent on or prior
to the date hereof (the "Company Disclosure Schedule"). As used in this
Agreement: (i) a "Significant Subsidiary" means any Subsidiary of the
Company or Parent, as the case may be, that would constitute a Significant
Subsidiary of such party
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within the meaning of Rule 1-02 of Regulation S-X of the Securities and
Exchange Commission (the "SEC"); (ii) a "Material Adverse Effect" or
"Material Adverse Change" shall mean, in respect of the Company or Parent,
as the case may be, any effect or change that is or would reasonably be
expected to be materially adverse to the business, operations, assets,
condition (financial or otherwise) or results of operations of such party
and its Subsidiaries taken as a whole, other than any change, circumstance
or effect to the extent it results from or arises out of (1) changes in the
economy in general, (2) changes or circumstances affecting in general the
industries in which such party operates, (3) in the case of the Company,
the failure of the Company to retain its general managers and other key
employees or any material disruption in supplier relationships as a result
of the transaction contemplated by this Agreement or the public
announcement thereof or policies or other actions adopted or taken by
Parent or any of its affiliates or Subsidiaries (it being understood that
the Company shall be responsible for the control of its business prior to
the Effective Time), (4) in the case of the Company, matters disclosed on
Schedule 3.1(a)(ii) of the Company Disclosure Schedule or (5) in the case
of Parent, matters disclosed on Schedule 3.2(a)(ii) of the Parent
Disclosure Schedule (as hereinafter defined); and (iii) "Subsidiary" means,
with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which: (1) such party or any other
Subsidiary of such party is a general partner (excluding partnerships, the
general partnership interests of which are held by such party or any
Subsidiary of such party that do not have a majority of the voting interest
in such partnership) or (2) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority
of the Board of Directors or others performing similar functions with
respect to such corporation or other organization is, directly or
indirectly, owned or controlled by such party or by any one or more of its
Subsidiaries, or by such party and any one or more of its Subsidiaries.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of the Company consists of 30,000,000 shares of Company Common Stock
and 10,000,000 shares of preferred stock, par value $.01 per share, of the
Company ("Company Preferred Stock"). At the close of business on October
22, 1999 (except as otherwise indicated): (i) 18,183,374 shares of Company
Common Stock were issued and outstanding; (ii) 100,000, 333,224, 1,300,000,
350,000, 150,000, and 427,420 shares of Company Common Stock were reserved
for issuance pursuant to the Company's 1996 Non-Employee Director Stock
Option Plan, the Company's Service Center Stock Option Plan, the Company's
1996 Incentive Stock Plan, the Company's 1996 Employee Stock Purchase Plan,
the Company's 1997 Non-Qualified Stock Purchase Plan and the Company's 1997
Non-Qualified Stock Option Plan (collectively, the "Company Stock Plans"),
respectively; (iii) as of September 30, 1999, 2,166,451 shares of Company
Common Stock were subject to issuance pursuant to outstanding options under
the Company Stock Plans; (iv) 365,527 shares of Company Common Stock are
reserved for issuance pursuant to warrants (the "Company Warrants") to
purchase shares of Company Common Stock upon the terms and conditions set
forth on Schedule 3.1(b)(iv) of the Company Disclosure Schedule; (v) 20,000
shares of Company Common Stock are reserved for issuance pursuant to
restricted stock awards ("Restricted Stock Awards") having the terms and
conditions set forth on Schedule 3.1(b)(v) of the Company Disclosure
Schedule; (vi) no shares of Company Common Stock were held by the Company
in its treasury or by its wholly owned Subsidiaries; (vii) no shares of
Company Preferred Stock were issued and outstanding; and (viii) except for
the $13,801,853 aggregate principal amount of the Company's convertible
subordinated notes identified on Schedule 3.1(b)(viii) of the Company
Disclosure Schedule (the "Company Convertible Notes"), which is convertible
into an aggregate of 410,831 shares of Company Common Stock upon the terms
and conditions set forth on Schedule 3.1(b)(viii) of the Company Disclosure
Schedule, no Voting Debt (as defined below) was issued and outstanding. The
term "Voting Debt" means bonds, debentures, notes or other indebtedness
having the right to vote (or convertible into securities having the right
to vote) on any matters on which stockholders of the Company or Parent, as
the case may be, may vote. All outstanding shares of Company Common Stock
are validly issued, fully paid and nonassessable and are not subject to
preemptive rights. Except as set forth on Schedule 3.1(b)(ix) of the
Company Disclosure Schedule, all outstanding shares of
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capital stock of the Subsidiaries of the Company are owned by the Company,
or a direct or indirect wholly owned Subsidiary of the Company, free and
clear of all liens, charges, encumbrances, claims and options of any
nature. Except as set forth in this Section 3.1(b) or Schedule 3.1(b)(x) of
the Company Disclosure Schedule and except for changes since October 22,
1999 resulting from the exercise of stock options granted pursuant to, or
from issuances or purchases under, the Company Stock Plans, the Company
Warrants or the Company Convertible Notes or as contemplated by this
Agreement, there are outstanding: (i) no shares of capital stock, Voting
Debt or other voting securities of the Company; (ii) no securities of the
Company or any Subsidiary of the Company convertible into or exchangeable
for shares of capital stock, Voting Debt or other voting securities of the
Company or any Subsidiary of the Company; and (iii) no options, warrants,
calls, rights (including preemptive rights), commitments or agreements to
which the Company or any Subsidiary of the Company is a party or by which
it is bound in any case obligating the Company or any Subsidiary of the
Company to issue, deliver, sell, purchase, redeem or acquire, or cause to
be issued, delivered, sold, purchased, redeemed or acquired, additional
shares of capital stock or any Voting Debt or other voting securities of
the Company or of any Subsidiary of the Company, or obligating the Company
or any Subsidiary of the Company to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement. Except as
contemplated by this Agreement, there are not as of the date hereof and
there will not be at the Effective Time any stockholder agreements, voting
trusts or other agreements or understandings to which the Company is a
party or by which it is bound relating to the voting of any shares of the
capital stock of the Company that will limit in any way the solicitation of
proxies by or on behalf of the Company from, or the casting of votes by,
the stockholders of the Company with respect to the Merger. There are no
restrictions on the Company to vote the stock of any of its Subsidiaries.
(c) Authority; No Violations; Consents and Approvals.
(i) The Boards of Directors of the Company has (A) approved the
Merger, this Agreement and the Company Option Agreement, (B) declared
the Merger, this Agreement and the Company Option Agreement to be
advisable and in the best interests of the stockholders of the Company,
and (C) resolved to recommend that the Company stockholders vote for the
approval and adoption of the Merger and this Agreement. The directors of
the Company have advised the Company and Parent that they intend to vote
or cause to be voted all of the shares of Company Common Stock
beneficially owned by them and their affiliates in favor of approval of
the Merger and this Agreement. The Company has all requisite corporate
power and authority to enter into this Agreement and the Company Option
Agreement and, subject, with respect to consummation of the Merger, to
approval of this Agreement and the Merger by the stockholders of the
Company in accordance with the DGCL and the Restated Certificate of
Incorporation and Bylaws of the Company, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this
Agreement and the Company Option Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate action on the part of the Company, subject,
with respect to consummation of the Merger, to approval of this
Agreement and the Merger by the stockholders of the Company in
accordance with the DGCL and the Restated Certificate of Incorporation
and Bylaws of the Company. This Agreement and the Company Option
Agreement have been duly executed and delivered by the Company and,
subject, with respect to consummation of the Merger, to approval of this
Agreement and the Merger by the stockholders of the Company in
accordance with the DGCL and the Restated Certificate of Incorporation
and Bylaws of the Company, and assuming this Agreement and the Company
Option Agreement constitutes the valid and binding obligation of Parent
and Merger Sub, as applicable, constitute valid and binding obligations
of the Company enforceable in accordance with their terms, subject, as
to enforceability, to bankruptcy, insolvency, reorganization and other
laws of general applicability relating to or affecting creditors' rights
and to general principles of equity.
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(ii) Except as set forth on Schedule 3.1(c) of the Company
Disclosure Schedule, the execution and delivery of this Agreement and
the Company Option Agreement does not, and the consummation of the
transactions contemplated hereby and thereby and compliance with the
provisions hereof and thereof will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any material obligation or to the loss of a material
benefit under, or give rise to a right of purchase under, result in the
creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of the Company or any of its Subsidiaries
under, or otherwise result in a material detriment to the Company or any
of its Subsidiaries under, any provision of (i) the Restated Certificate
of Incorporation or Bylaws of the Company or any provision of the
comparable charter or organizational documents of any of its
Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Company or any of its
Subsidiaries, (iii) any joint venture or other ownership arrangement or
(iv) assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in Section 3.1(c)(iii) are duly and
timely obtained or made and the approval of the Merger and this
Agreement by the stockholders of the Company has been obtained, any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any of its Subsidiaries or any of their
respective properties or assets, other than, in the case of clause (ii)
or (iii), any such conflicts, violations, defaults, rights, liens,
security interests, charges, encumbrances or detriments that,
individually or in the aggregate, would not have a Material Adverse
Effect on the Company, materially impair the ability of the Company to
perform its obligations hereunder or prevent the consummation of any of
the transactions contemplated hereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any court,
governmental, regulatory or administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign (a
"Governmental Entity"), is required by or with respect to the Company or
any of its Subsidiaries in connection with the execution and delivery of
this Agreement and the Company Option Agreement by the Company or the
consummation by the Company of the transactions contemplated hereby and
thereby, as applicable, as to which the failure to obtain or make would
have a Material Adverse Effect on the Company, except for: (A) the
filing of a premerger notification report by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the expiration or termination of the applicable waiting
period with respect thereto; (B) the filing with the SEC of (x) a joint
proxy statement in preliminary and definitive form relating to the
meeting of the stockholders of the Company and Parent to be held in
connection with the Merger (the "Joint Proxy Statement") and (y) such
reports under Section 13(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such other compliance with the
Exchange Act and the rules and regulations thereunder, as may be
required in connection with this Agreement and the transactions
contemplated hereby; (C) the filing of a Certificate of Merger with the
Delaware Secretary of State; (D) filings with, and approval of, the
NYSE; (E) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws, or
environmental laws; and (F) such filings and approvals as may be
required by any foreign premerger notification, securities, corporate or
other law, rule or regulation.
(d) SEC Documents. The Company has made available to Parent a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the SEC since December
31, 1996 and prior to the date of this Agreement (the "Company SEC
Documents") which are all the documents (other than preliminary material)
that the Company was required to file with the SEC since such date. As of
their respective dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the case may be, and the
rules and
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regulations of the SEC thereunder applicable to such Company SEC Documents,
and none of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents complied as
to form in all material respects with the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Rule
10-01 of Regulation S-X of the SEC) and fairly present in accordance with
applicable requirements of GAAP (subject, in the case of the unaudited
statements, to normal, recurring adjustments, none of which are material)
the consolidated financial position of the Company and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of the Company and its
consolidated Subsidiaries for the periods presented therein.
(e) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger
(the "S-4") will, at the time the S-4 becomes effective under the
Securities Act or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
none of the information supplied or to be supplied by the Company and
included or incorporated by reference in the Joint Proxy Statement will, at
the date mailed to stockholders of the Company or Parent, as the case may
be, or at the time of the meeting of such stockholders to be held in
connection with the Merger or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time, any event with respect to the Company
or any of its Subsidiaries, or with respect to other information supplied
by the Company for inclusion in the Joint Proxy Statement or S-4, shall
occur which is required to be described in an amendment of, or a supplement
to, the Joint Proxy Statement or the S-4, such event shall be so described,
and such amendment or supplement shall be promptly filed with the SEC and,
as required by law, disseminated to the stockholders of the Company. The
Joint Proxy Statement, insofar as it relates to the Company or the other
Subsidiaries of the Company or other information supplied by the Company
for inclusion therein, will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations
thereunder.
(f) Absence of Certain Changes or Events. Except as set forth in
Schedule 3.1(f) of the Company Disclosure Schedule or disclosed in, or
reflected in the financial statements included in, the Company SEC
Documents, or except as contemplated by this Agreement, since December 31,
1998, there has not been: (i) any declaration, setting aside or payment of
any dividend or other distribution (whether in cash, stock or property)
with respect to any of the Company's capital stock; (ii) any amendment of
any term of any outstanding equity security of the Company or any
Significant Subsidiary of the Company; (iii) any repurchase, redemption or
other acquisition by the Company or any Subsidiary of the Company of any
outstanding shares of capital stock or other equity securities of, or other
ownership interests in, the Company or any Subsidiary of the Company,
except as contemplated by the Company Stock Plans; (iv) any material change
in any method of accounting or accounting practice or any tax method,
practice or election by the Company or any Significant Subsidiary of the
Company; or (v) any other transaction, commitment, dispute or other event
or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) that would have a Material Adverse Effect
on the Company.
(g) No Undisclosed Material Liabilities. Except as disclosed in the
Company SEC Documents or as set forth in Schedule 3.1(g) of the Company
Disclosure Schedule, as of the date hereof, there
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are no liabilities of the Company or any of its Subsidiaries of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, that would have a Material Adverse Effect on the Company,
other than: (i) liabilities adequately provided for on the balance sheet of
the Company dated as of June 30, 1999 (including the notes thereto)
contained in the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 and (ii) liabilities under this Agreement.
(h) No Default. Neither the Company nor any of its Subsidiaries is in
default or violation (and no event has occurred which, with notice or the
lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) the Restated Certificate of
Incorporation or Bylaws of the Company or the comparable charter or
organizational documents of any of its Subsidiaries, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license to which
the Company or any of its Subsidiaries is now a party or by which the
Company or any of its Subsidiaries or any of their respective properties or
assets is bound except as set forth on Schedule 3.1(h) of the Company
Disclosure Schedule or (iii) any order, writ, injunction, decree, statute,
rule or regulation applicable to the Company or any of its Subsidiaries,
except in the case of (ii) and (iii) for defaults or violations which in
the aggregate would not have a Material Adverse Effect on the Company.
(i) Compliance with Applicable Laws. The Company and its Subsidiaries
hold all permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses as they are now being conducted (the "Company
Permits"), except where the failure so to hold would not have a Material
Adverse Effect on the Company. The Company and its Subsidiaries are in
compliance with the terms of the Company Permits, except where the failure
so to comply would not have a Material Adverse Effect on the Company.
Except as disclosed in the Company SEC Documents, the businesses of the
Company and its Subsidiaries are not being conducted in violation of any
law, ordinance or regulation of any Governmental Entity, except for
possible violations which would not have a Material Adverse Effect on the
Company. As of the date of this Agreement, no investigation or review by
any Governmental Entity with respect to the Company or any of its
Subsidiaries is pending or, to the knowledge (as hereinafter defined) of
the Company as of the date hereof, threatened, other than those the outcome
of which would not have a Material Adverse Effect on the Company. For
purposes of this Agreement "knowledge" means the actual knowledge of the
officers or directors of Parent or the Company, as the case may be, and the
senior managers identified on Exhibit 3.1(i)(a) (in the case of Parent) or
Exhibit 3.1(i)(b) (in the case of the Company), in each case after due
inquiry.
(j) Litigation. Except as disclosed in the Company SEC Documents or as
set forth on Schedule 3.1(j) of the Company Disclosure Schedule, there is
no suit, action or proceeding pending, or, to the knowledge of the Company,
threatened against or affecting the Company or any Subsidiary of the
Company ("Company Litigation"), and the Company and its Subsidiaries have
no knowledge of any facts that are likely to give rise to any Company
Litigation, that (in any case) is reasonably likely to have a Material
Adverse Effect on the Company, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against the Company or any Subsidiary of the Company ("Company
Order") that is reasonably likely to have a Material Adverse Effect on the
Company or its ability to consummate the transactions contemplated by this
Agreement.
(k) Taxes. Except as set forth on Schedule 3.1(k) or 3.1(l)(ii) of the
Company Disclosure Schedule:
(i) Each of the Company and its Subsidiaries and any affiliated,
consolidated, combined, unitary or similar group of which the Company or
any of its Subsidiaries is or was a member has (A) duly filed on a
timely basis (taking into account any extensions) all Tax Returns (as
hereinafter defined) required to be filed or sent by or with respect to
it other than Tax Returns that would report immaterial Tax liability and
as to which the failure to file would not itself give
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rise to material Tax liability, (B) duly paid or deposited on a timely
basis all material Taxes (as hereinafter defined) that are shown to be
due and payable on or with respect to such Tax Returns, and all material
Taxes that are otherwise due and payable (except for audit adjustments
not material in the aggregate or to the extent that liability therefor
is reserved for in the Company's most recent audited financial
statements) for which the Company or any of its Subsidiaries may be
liable, (C) established reserves that are adequate for the payment of
all material Taxes not yet due and payable with respect to the results
of operations of the Company and its Subsidiaries through the date
hereof, and (D) complied in all material respects with all applicable
laws, rules and regulations relating to the reporting, payment and
withholding of material Taxes that are required to be withheld from
payments to employees, independent contractors, creditors, shareholders
or any other third party and has in all material respects timely
withheld from employee wages and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over;
(ii) Except to the extent being contested in good faith, all
material deficiencies asserted as a result of such examinations and any
examination by any applicable taxing authority have been paid, fully
settled or adequately provided for in the Company's most recent audited
financial statements. No audits or other administrative proceedings or
court proceedings are presently pending, or to the knowledge of the
Company, threatened, with regard to any Taxes for which the Company or
any of its Subsidiaries would be liable in an amount reasonably expected
to exceed $100,000, and no material deficiency (to the extent remaining
unsatisfied) for any Taxes has been proposed, asserted or assessed
(whether by examination report or prior to completion of examination by
means of notices of proposed adjustment or other similar requests or
notices) pursuant to such examination against the Company or any of its
Subsidiaries by any taxing authority with respect to any period;
(iii) Except as set forth in Schedule 3.1(k) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is
a party to an agreement that provides for the payment of any amount that
would constitute a "parachute payment" within the meaning of Section
280G of the Code or that would constitute compensation whose
deductibility is limited under Section 162(m) of the Code;
(iv) To the knowledge of the Company, no material reassessments
(for property or ad valorem Tax purposes) of any assets or any property
owned or leased by the Company or any of its Subsidiaries have been
proposed in written form;
(v) Neither the Company nor any of its Subsidiaries has agreed to
make any adjustment pursuant to section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of the Company or any of its Subsidiaries, and neither the Company nor
any of its Subsidiaries has any application pending with any taxing
authority requesting permission for any changes in any accounting method
of the Company or any of its Subsidiaries. To the knowledge of the
Company, neither the Internal Revenue Service ("IRS") nor any other
taxing authority has proposed in writing, and neither the Company nor
any of its Subsidiaries is otherwise required to make, any such
adjustment or change in accounting method; and
(vi) Neither the Company, nor, to the knowledge of the Company, any
member of its affiliated group that joins in the consolidated federal
income tax return (i) has been a member of any other affiliated group
that filed a consolidated federal income tax return or (ii) has assumed,
or agreed to indemnify against, the liability for Taxes of any person
other than a person that is a present or former member (or predecessor
of such a member in the case of the acquisition of such predecessor by
such member) of the affiliated group of which the Company is the common
parent.
For purposes of this Agreement, "Tax" (and, with correlative meaning,
"Taxes") means any net income, alternative or add-on minimum tax, gross income,
gross receipts, sales, use, ad valorem, value
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added, transfer, franchise, profits, license, withholding, payroll, employment,
excise, production, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest and/or any penalty, addition to tax or additional amount imposed by any
taxing authority.
"Tax Return" (and with correlative meaning, "Tax Returns") means all
returns, declarations, reports, estimates, information returns and statements
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereto.
(l) Pension and Benefit Plans; ERISA.
(i) Schedule 3.1(l)(i) of the Company Disclosure Schedule contains
a list of each "employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (hereinafter a "Company Pension Plan"), "employee welfare
benefit plan" (as defined in Section 3(l) of ERISA), stock option, stock
purchase, deferred compensation plan or arrangement, and other employee
fringe benefit plan or arrangement maintained, contributed to or
required to be maintained or contributed to by the Company, any of its
Significant Subsidiaries or any other person or entity that, together
with the Company, is treated as a single employer under Section 414(b),
(c), (m) or (o) of the Code (each a "Company ERISA Affiliate") for the
benefit of any present or former officers, employees, directors or
independent contractors of the Company or any Company ERISA Affiliate
(all the foregoing being herein called "Company Employee Benefit
Plans"). The Company has made available to Parent true, complete and
correct copies of (1) each Company Employee Benefit Plan and amendments
thereto, (2) the most recent annual report on Form 5500 filed with the
Internal Revenue Service with respect to each Company Employee Benefit
Plan (if any such report was required by applicable law), (3) the most
recent summary plan description for each Company Employee Benefit Plan
for which such a summary plan description is required by applicable law
and (4) each trust agreement and insurance or annuity contract relating
to any Company Employee Benefit Plan.
(ii) Each Company Employee Benefit Plan has been administered in
accordance with its terms except as would not have a Material Adverse
Effect. The Company, the Company ERISA Affiliates and all Company
Employee Benefit Plans are in compliance in all material respects with
the applicable provisions of ERISA and the Code. Except as disclosed in
Schedule 3.1(l)(ii) of the Company Disclosure Schedule or except as
would not have a Material Adverse Effect, all reports, returns and
similar documents with respect to Company Employee Benefit Plans
required to be filed with any governmental agency or distributed to any
Company Employee Benefit Plan participant have been duly, timely and
accurately filed or distributed. Except as disclosed in Schedule
3.1(l)(ii) of the Company Disclosure Schedule or except as would not
have a Material Adverse Effect, there are no investigations by any
governmental agency, termination proceedings or other claims (except
claims for benefits payable in the normal operation of the Company
Employee Benefit Plans), suits or proceedings against or involving any
Company Employee Benefit Plan or asserting any rights or claims to
benefits under any Company Employee Benefits Plan that could give rise
to any liability, and there are not any facts to the Company's knowledge
that could give rise to any material liability in the event of any such
investigation, claim, suit or proceeding.
(iii) Except as disclosed in Schedule 3.1(l)(iii) of the Company
Disclosure Schedule, no Company Pension Plan is subject to Title IV of
ERISA and none of the Company or any Company ERISA affiliate has
maintained or been required to contribute to a plan that is subject to
Title IV of ERISA during the past six years.
(iv) Except as disclosed in Schedule 3.1(l)(iv) of the Company
Disclosure Schedule, each Company Pension Plan intended to be qualified
has been the subject of a determination letter from the Internal Revenue
Service to the effect that such Company Pension Plan is qualified and
exempt from Federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code;
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no such determination letter has been revoked, and, to the knowledge of
the Company, revocation has not been threatened; and such Company
Pension Plan has not been amended since the effective date of its most
recent determination letter in any respect that might adversely affect
its qualification or materially increase its cost. The Company has made
available to Parent a copy of the most recent determination letter
received from the Internal Revenue Service with respect to each Company
Pension Plan for which such a letter has been issued, as well as a copy
of any pending application for a determination letter.
(v) Except as disclosed on Schedule 3.1(l)(v) of the Company
Disclosure Schedule or except as would not have a Material Adverse
Effect, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in
any payment becoming due to any employee or group of employees of the
Company or any of its Subsidiaries; (ii) increase any benefits otherwise
payable under any Company Employee Benefit Plan or Company Pension Plan
or (iii) result in the acceleration of the time of payment or vesting of
any such benefits. Except as disclosed on Schedule 3.1(l)(v) of the
Company Disclosure Schedule or in the Company SEC Documents, there are
no severance agreements or employment agreements between the Company or
any of its Subsidiaries and any employee of the Company or such
Subsidiary. True and correct copies of all such severance agreements and
employment agreements have been made available to Parent. Except as set
forth on Schedule 3.1(l)(v) of the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries has any consulting agreement or
arrangement with any natural person involving compensation in excess of
$50,000, except as are terminable upon one month's notice or less.
(vi) Except as disclosed on Schedule 3.1(l)(vi) of the Company
Disclosure Schedule, no stock or other security issued by the Company or
any of its subsidiaries forms or has formed a material part of the
assets of any Company Employee Benefit Plan or Company Pension Plan.
(m) Labor Matters. Except as set forth on Schedule 3.1(m) of the
Company Disclosure Schedule or in the Company SEC Documents:
(i) Neither the Company nor any of its Subsidiaries is a party to
any collective bargaining agreement or other current labor agreement
with any labor union or organization, and to the Company's knowledge
currently there is no union that claims to represent employees of the
Company or any of its Subsidiaries, nor does the Company or any of its
Subsidiaries know of any activity or proceeding of any labor
organization (or representative thereof) or employee group (or
representative thereof) to organize any such employees;
(ii) There is no unfair labor practice charge or grievance arising
out of a collective bargaining agreement or other grievance procedure
against the Company or any of its Subsidiaries pending, or, to the
knowledge or the Company or any of its Subsidiaries, threatened, that
has, or is reasonably likely to have, a Material Adverse Effect on the
Company;
(iii) There is no complaint, lawsuit or proceeding in any forum by
or on behalf of any present or former employee, any applicant for
employment or any classes of the foregoing alleging breach of any
express or implied contract of employment, any law or regulation
governing employment or the termination thereof or other discriminatory,
wrongful or tortious conduct in connection with the employment
relationship against the Company or any of its Subsidiaries pending, or,
to the knowledge of the Company or any of its Subsidiaries, threatened,
that has, or is reasonably likely to have, a Material Adverse Effect on
the Company;
(iv) There is no strike, dispute, slowdown, work stoppage or
lockout pending, or, to the knowledge of the Company or any of its
Subsidiaries, threatened, against or involving the Company or any of its
Subsidiaries that has, or is reasonably likely to have, a Material
Adverse Effect on the Company;
(v) The Company and each of its Subsidiaries are in compliance with
all applicable laws respecting employment and employment practices,
terms and conditions of employment, wages,
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hours of work and occupational safety and health, except for
non-compliance that does not have, and is not reasonably likely to have,
a Material Adverse Effect on the Company; and
(vi) As of the date hereof, there is no proceeding, claim, suit,
action or governmental investigation pending or, to the knowledge of the
Company or any of its Subsidiaries, threatened, in respect to which any
current or former director, officer, employee or agent of the Company or
any of its Subsidiaries is or may be entitled to claim indemnification
from the Company or any of its Subsidiaries pursuant to the Restated
Certificate of Incorporation or Bylaws of the Company or any provision
of the comparable charter or organizational documents of any of its
Subsidiaries, as provided in any indemnification agreement to which the
Company or any Subsidiary of the Company is a party or pursuant to
applicable law that has, or is reasonably likely to have, a Material
Adverse Effect on the Company.
(n) Intangible Property. The Company and its Subsidiaries possess,
have adequate rights to use, or have adequate licenses to all material
trademarks, trade names, patents, service marks, brand marks, brand names,
domain names, computer programs, databases, industrial designs and
copyrights necessary for the operation of the businesses of each of the
Company and its Subsidiaries (collectively, the "Company Intangible
Property"), except where the failure to possess or have adequate rights to
use such properties would not reasonably be expected to have a Material
Adverse Effect on the Company. All of the Company Intangible Property that
is owned by the Company or its Subsidiaries in whole or in part is owned
free and clear of any and all liens, claims or encumbrances, except those
that are not reasonably likely to have a Material Adverse Effect on the
Company, and neither the Company nor any such Subsidiary has forfeited or
otherwise relinquished any Company Intangible Property which forfeiture
would result in a Material Adverse Effect on the Company. The Company and
its Subsidiaries are not in violation of or in default under any contract
or license giving the Company and its Subsidiaries rights to use or
licenses to the Company Intangible Property, unless such violation or
default would not reasonably be expected to have a Material Adverse Effect
on the Company. To the knowledge of the Company, the operation of the
Company's business has not, does not, and will not in any material respect,
conflict with, infringe upon, violate or interfere with or constitute a
misappropriation or dilution of any right, title, interest or goodwill,
including, without limitation, any intellectual property right, trademark,
trade name, patent, service mark, brand mark, brand name, computer program,
database, industrial design, copyright or any pending application therefor
of any other person and there have been no claims made and neither the
Company nor any of its Subsidiaries has received any notice of any claim or
otherwise knows that any of the Company Intangible Property is invalid or
conflicts with the asserted rights of any other person or has not been used
or enforced or has been failed to be used or enforced in a manner that
would result in the abandonment, cancellation or unenforceability of any of
the Company Intangible Property, except for any such conflict,
infringement, violation, interference, claim, invalidity, abandonment,
cancellation or unenforceability that would not reasonably be expected to
have a Material Adverse Effect on the Company. To the knowledge of the
Company, no other person has, is or is planning to infringe upon, violate
or interfere with or misappropriate or dilute any of the Company Intangible
Property, except where the foregoing would not reasonably be expected to
have a Material Adverse Effect on the Company.
(o) Environmental Matters.
For purposes of this Agreement:
(A) "Environmental Laws" means all federal, state and local laws,
rules and regulations relating to pollution or the protection of human
health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws and regulations relating to Releases
or threatened Releases of Hazardous Materials or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials and including,
without limitation,
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the Comprehensive Environmental Response, Compensation and Liability Act
and any state law counterparts;
(B) "Hazardous Materials" means (x) any petroleum or petroleum
products, radioactive materials, hydrochlorofluorocarbons asbestos in
any form that is or could become friable, urea formaldehyde foam
insulation and transformers or other equipment that contain dielectric
fluid containing polychlorinated biphenyls, (y) any chemicals, materials
or substances which are now defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances" or "toxic pollutants," or words of similar import, under any
Environmental Law and (z) any other chemical, material, substance or
waste, exposure to which is now prohibited, limited or regulated under
any Environmental Law in a jurisdiction in which the Company or any of
its Subsidiaries operates (for purposes of Section 3.1(o)) or in which
Parent or any of its Subsidiaries operates (for purposes of Section
3.2(n)).
(C) "Release" means any release, spill, effluent, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration into the indoor or outdoor environment, or into or
out of any property owned, operated or leased by the applicable party or
its Subsidiaries; and
(D) "Remedial Action" means all actions, including, without
limitation, any capital expenditures, required by a Governmental Entity
or required under any Environmental Law, or voluntarily undertaken to
(w) clean up, remove, treat, or in any other way ameliorate or address
any Hazardous Materials or other substance in the indoor or outdoor
environment; (x) prevent the Release or threat of Release, or minimize
the further Release of any Hazardous Material so it does not endanger or
threaten to endanger the public health or welfare of the indoor or
outdoor environment; (y) perform pre-remedial studies and investigations
or post-remedial monitoring and care pertaining or relating to a
Release; or (z) bring the applicable party into compliance with any
Environmental Law.
Except as disclosed on Schedule 3.1(o) of the Company Disclosure
Schedule or in the Company SEC Documents:
(i) The operations of the Company and its Subsidiaries have been
and, as of the Closing Date, will be, in compliance with all
Environmental Laws, except where the failure to so comply would not
reasonably be expected to have a Material Adverse Effect on the Company;
(ii) The Company and its Subsidiaries have obtained and will
maintain all permits, licenses and registrations, or applications
relating thereto, and have made and will make all filings, reports and
notices required under applicable Environmental Laws for the continued
operations of their respective businesses, except such matters the lack
or failure of which would not lead to a Material Adverse Effect on the
Company;
(iii) The Company and its Subsidiaries are not subject to any
outstanding written orders or material contracts with any Governmental
Entity or other person respecting (A) Environmental Laws, (B) Remedial
Action or (C) any Release or threatened Release of a Hazardous Material,
except such orders or contracts the compliance with which would not
reasonably be expected to have a Material Adverse Effect on the Company;
(iv) The Company and its Subsidiaries have not received any written
communication alleging, with respect to any such party, the violation of
or liability under any Environmental Law, which violation or liability
would reasonably be expected to have a Material Adverse Effect on the
Company;
(v) Neither the Company nor any of its Subsidiaries has any
contingent liability in connection with the Release of any Hazardous
Material into the indoor or outdoor environment
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(whether on-site or off-site) that would reasonably be expected to lead
to a Material Adverse Effect on the Company;
(vi) The operations of the Company or its Subsidiaries involving
the generation, transportation, treatment, storage or disposal of
hazardous waste, as defined and regulated under 40 C.F.R. Parts 260-270
(in effect as of the date of this Agreement) or any state equivalent,
are in compliance with applicable Environmental Laws, except where the
failure to so comply would not reasonably be expected to have a Material
Adverse Effect on the Company; and
(vii) There is not now on or in any property of the Company or its
Subsidiaries any of the following: (A) any underground storage tanks or
surface impoundments, (B) any asbestos-containing materials, or (C) any
polychlorinated biphenyls, any of which ((A), (B), or (C) preceding)
could have a Material Adverse Effect on the Company.
(p) Insurance. The Company has delivered to Parent an insurance
schedule of the Company's and each of its Subsidiaries' directors' and
officers' liability insurance, primary and excess casualty insurance
policies, providing coverage for bodily injury and property damage to third
parties, including products liability and completed operations coverage,
and worker's compensation, in effect as of the date hereof. The Company
maintains insurance coverage reasonably adequate for the operation of the
business of the Company and each of its Subsidiaries (taking into account
the cost and availability of such insurance), and the transactions
contemplated by this Agreement will not materially adversely affect such
coverage.
(q) Opinion of Financial Advisor. The Board of Directors of the
Company has received the opinions of each of SunTrust Equitable Securities
Corporation and Wasserstein Perella & Co., Inc. (copies of which have been
delivered to Parent) to the effect that, as of the date hereof, the
Conversion Number is fair from a financial point of view to the holders of
Company Common Stock.
(r) Vote Required. The affirmative vote of the holders of at least a
majority of the outstanding shares of Company Common Stock is the only vote
of the holders of any class or series of the Company capital stock
necessary to approve this Agreement and the transactions contemplated
hereby.
(s) Beneficial Ownership of Parent Common Stock. As of the date
hereof, neither the Company nor its Subsidiaries "beneficially owns" (as
defined in Rule 13d-3 under the Exchange Act) any of the outstanding Parent
Common Stock or any of Parent's outstanding debt securities.
(t) Brokers. Except for the fees and expenses payable to each of
SunTrust Equitable Securities Corporation and Wasserstein Perella & Co.,
Inc., which fees are reflected in its agreement with the Company (copies of
which have been delivered to Parent), no broker, investment banker, or
other person is entitled to any broker's, finder's or other similar fee or
commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company.
(u) Tax Matters. Neither the Company nor any of the officers of the
Company is aware of any reason why the Merger could fail to qualify as a
tax-free reorganization pursuant to section 368(a) of the Code.
(v) State Takeover Statutes. The Board of Directors of the Company has
approved the Merger and this Agreement, and such approval is sufficient to
render the provisions of Section 203 of the DGCL inapplicable to the
Merger, this Agreement and the other transactions contemplated hereby. No
other state takeover statute or similar statute or regulation applies or
purports to apply to the Merger, this Agreement or the other transactions
contemplated hereby.
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3.2 Representations and Warranties of Parent. Parent and Merger Sub
jointly and severally represent and warrant to the Company as follows:
(a) Organization, Standing and Power. Each of Parent and its
Significant Subsidiaries is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has all requisite power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted, and is duly qualified and in good standing
to do business in each jurisdiction in which the business it is conducting,
or the operation, ownership or leasing of its properties, makes such
qualification necessary, other than in such jurisdictions where the failure
so to qualify would not have a Material Adverse Effect on Parent. Parent
has heretofore delivered to the Company complete and correct copies of its
Restated Certificate of Incorporation and Amended and Restated Bylaws, each
as amended to date. All Significant Subsidiaries of Parent and their
respective jurisdictions of incorporation or organization are identified on
Schedule 3.2(a)(i) of the disclosure schedule dated as of the date hereof
and signed by an authorized officer of Parent and delivered to the Company
on or prior to the date hereof (the "Parent Disclosure Schedule").
(b) Capital Structure. As of the date hereof, the authorized capital
stock of Parent consists of 200,000,000 shares of Parent Common Stock and
25,000,000 shares of preferred stock, par value $.01 per share, of Parent
("Parent Preferred Stock"). At the close of business on October 22, 1999
(i) 44,958,240 shares of Parent Common Stock were issued and outstanding;
(ii) 4,603,500, 40,000 and 825,000 shares of Parent Common Stock were
reserved for issuance pursuant to Parent's 1998 Incentive Plan, Parent's
Nonemployee Director's Compensation and Deferral Plan and Parent's Employee
Stock Purchase Plan (collectively, the "Parent Stock Plans"); (iii)
3,667,653 shares of Parent Common Stock were subject to issuance pursuant
to outstanding awards under the Parent Stock Plans; (iv) no shares of
Parent Common Stock were held by Parent in its treasury or by its wholly
owned Subsidiaries; (v) no shares of Parent Preferred Stock were issued and
outstanding; and (vi) no Voting Debt was issued and outstanding. All
outstanding shares of Parent capital stock are validly issued, fully paid
and nonassessable and not subject to preemptive rights. Except as set forth
on Schedule 3.2(b)(i) of the Parent Disclosure Schedule, all outstanding
shares of capital stock of the Subsidiaries of Parent are owned by Parent
or a direct or indirect wholly owned Subsidiary of Parent, free and clear
of all liens, charges, encumbrances, claims and options of any nature.
Except as set forth in this Section 3.2(b) or Schedule 3.2(b)(ii) of the
Parent Disclosure Schedule and except for changes since October 22, 1999
resulting from the exercise of employee stock options granted pursuant to,
or from issuances or purchases under, the Parent Stock Plans or as
contemplated by this Agreement, there are outstanding: (i) no shares of
capital stock, Voting Debt or other voting securities of Parent; (ii) no
securities of Parent or any Subsidiary of Parent convertible into or
exchangeable for shares of capital stock, Voting Debt or other voting
securities of Parent or any Subsidiary of Parent; and (iii) no options,
warrants, calls, rights (including preemptive rights), commitments or
agreements to which Parent or any Subsidiary of Parent is a party or by
which it is bound in any case obligating Parent or any Subsidiary of Parent
to issue, deliver, sell, purchase, redeem or acquire, or cause to be
issued, delivered, sold, purchased, redeemed or acquired, additional shares
of capital stock or any Voting Debt or other voting securities of Parent or
of any Subsidiary of Parent, or obligating Parent or any Subsidiary of
Parent to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement. Except as contemplated by this Agreement,
there are not as of the date hereof and there will not be at the Effective
Time any stockholder agreements, voting trusts or other agreements or
understandings to which Parent is a party or by which it is bound relating
to the voting of any shares of the capital stock of Parent that will limit
in any way the solicitation of proxies by or on behalf of Parent from, or
the casting of votes by, the stockholders of Parent with respect to the
Merger. There are no restrictions on Parent to vote the stock of any of its
Subsidiaries. As of the date hereof, the authorized capital stock of Merger
Sub consists of 1,000 shares of common stock, par value $.01 per share,
1,000 shares of which are validly issued, fully paid and nonassessable and
are owned by Parent and the balance of which are not issued or outstanding.
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(c) Authority; No Violations, Consents and Approvals.
(i) The Boards of Directors of Parent and Merger Sub have (A)
approved the Merger and this Agreement, (B) declared the Merger and this
Agreement to be advisable and in the best interests of the stockholders
of Parent and Merger Sub, respectively, and (C) in the case of the Board
of Directors of Parent, resolved to recommend that Parent stockholders
vote for the approval of the issuance of Parent Common Stock pursuant to
the Merger. The directors of Parent have advised the Company and Parent
that they intend to vote or cause to be voted all of the shares of
Parent Common Stock beneficially owned by them and their affiliates in
favor of approval of the issuance of Parent Common Stock pursuant to the
Merger. Parent has all requisite corporate power and authority to enter
into this Agreement subject with respect to consummation of the Merger,
to approval of the issuance of Parent Common Stock pursuant to the
Merger by the stockholders of Parent in accordance with the DGCL, the
Restated Certificate of Incorporation and Amended and Restated Bylaws of
Parent and the NYSE listing requirements, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and
Merger Sub, subject, with respect to the consummation of the Merger, to
approval of the issuance of Parent Common Stock pursuant to the Merger
by the stockholders of Parent in accordance with the DGCL, the Restated
Certificate of Incorporation and Amended and Restated Bylaws of Parent
and the NYSE listing requirements. This Agreement has been duly executed
and delivered by Parent and Merger Sub and, subject with respect to
consummation of the Merger, to approval of the issuance of Parent Common
Stock pursuant to the Merger by the stockholders of Parent in accordance
with the DGCL, the Restated Certificate of Incorporation and Amended and
Restated Bylaws of Parent and the NYSE listing requirements, and
assuming this Agreement constitutes the valid and binding obligation of
the Company, constitutes a valid and binding obligation of Parent and
Merger Sub enforceable in accordance with its terms, subject as to
enforceability, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors' rights and
to general principles of equity.
(ii) Except as set forth in Schedule 3.2(c) of the Parent
Disclosure Schedule, the execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, conflict with, or result
in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any material obligation or to the loss
of a material benefit under, or give rise to a right of purchase under,
result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Parent or any of its
Subsidiaries under, or otherwise result in a material detriment to
Parent or any of its Subsidiaries under, any provision of (i) the
Restated Certificate of Incorporation or Amended and Restated Bylaws of
Parent or any provision of the comparable charter or organizational
documents of any of its Subsidiaries, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument,
permit, concession, franchise or license applicable to Parent or any of
its Subsidiaries, (iii) any joint venture or other ownership arrangement
or (iv) assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in Section 3.2(c)(iii) are duly and
timely obtained or made and the approval of the issuance of Parent
Common Stock pursuant to the Merger by the stockholders of Parent has
been obtained, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Parent or any of its Subsidiaries or
any of their respective properties or assets, other than, in the case of
clause (ii) or (iii), any such conflicts, violations, defaults, rights,
liens, security interests, charges, encumbrances or detriments that,
individually or in the aggregate, would not have a Material Adverse
Effect on Parent, materially impair the ability of Parent to perform its
obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby.
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(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, or permit from any
Governmental Entity is required by or with respect to Parent or any of
its Subsidiaries in connection with the execution and delivery of this
Agreement by Parent or Merger Sub or the consummation by Parent or
Merger Sub of the transactions contemplated hereby, as to which the
failure to obtain or make would have a Material Adverse Effect on
Parent, except for: (A) the filing of a premerger notification report by
Parent under the HSR Act and the expiration or termination of the
applicable waiting period with respect thereto; (B) the filing with the
SEC of the Joint Proxy Statement, the S-4, such reports under Section
13(a) of the Exchange Act and such other compliance with the Securities
Act and the Exchange Act and the rules and regulations thereunder as may
be required in connection with this Agreement and the transactions
contemplated hereby, and the obtaining from the SEC of such orders as
may be so required; (C) the filing of a Certificate of Merger with the
Delaware Secretary of State; (D) filings with, and approval of, the
NYSE; (E) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws or
environmental laws; and (F) such filings and approvals as may be
required by any foreign premerger notification, securities, corporate or
other law, rule or regulation.
(d) SEC Documents. Parent has made available to the Company a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Parent with the SEC since July 28, 1999
and prior to the date of this Agreement (the "Parent SEC Documents"), which
are all the documents (other than preliminary material) that Parent was
required to file with the SEC since such date. As of their respective
dates, the Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Documents, and none of the Parent SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements of Parent included in the Parent SEC Documents
complied as to form in all material respects with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and
fairly present in accordance with applicable requirements of GAAP (subject,
in the case of the unaudited statements, to normal, recurring adjustments,
none of which will be material) the consolidated financial position of
Parent and its consolidated Subsidiaries as of their respective dates and
the consolidated results of operations and the consolidated cash flows of
Parent and its consolidated Subsidiaries for the periods presented therein.
(e) Information Supplied. None of the information supplied or to be
supplied by Parent for inclusion or incorporation by reference in the S-4
will, at the time the S-4 becomes effective under the Securities Act or at
the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and none of the information
supplied or to be supplied by Parent and included or incorporated by
reference in the Joint Proxy Statement will, at the date mailed to
stockholders of the Company or Parent, as the case may be, or at the time
of the meeting of such stockholders to be held in connection with the
Merger or at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time
prior to the Effective Time, any event with respect to Parent or any of its
Subsidiaries, or with respect to other information supplied by Parent for
inclusion in the Joint Proxy Statement or the S-4, shall occur which is
required to be described in an amendment of, or a supplement to, the Joint
Proxy Statement or the S-4, such event shall be so described, and, in the
case of the S-4, such amendment or supplement shall be promptly filed with
the SEC. The Joint Proxy Statement, insofar as it relates to Parent or its
Subsidiaries of Parent or other information supplied by Parent for
inclusion therein,
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will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
(f) Absence of Certain Changes or Events. Except as set forth in
Schedule 3.2(f) of the Parent Disclosure Schedule or disclosed in, or
reflected in the Parent SEC Documents, or except as contemplated by this
Agreement, since December 31, 1998, there has not been: (i) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of Parent's
capital stock (other than quarterly dividends of approximately $0.085 per
share of Parent Common Stock); (ii) any amendment of any term of any
outstanding equity security of Parent or any Significant Subsidiary of
Parent; (iii) any repurchase, redemption or other acquisition by Parent or
any Subsidiary of Parent of any outstanding shares of capital stock or
other equity securities of, or other ownership interests in, Parent or any
Subsidiary of Parent, except as contemplated by the Parent Stock Plans;
(iv) any material change in any method of accounting or accounting practice
or any tax method, practice or election by Parent or any Significant
Subsidiary of Parent; or (v) any other transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether
or not in the ordinary course of business) that would have a Material
Adverse Effect on Parent.
(g) No Undisclosed Material Liabilities. Except as set forth in the
Parent SEC Documents, as of the date hereof, there are no liabilities of
Parent or any of its Subsidiaries of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise, that would
have a Material Adverse Effect on Parent, other than: (i) liabilities
adequately provided for on the balance sheet of Parent dated as of June 30,
1999 (including the notes thereto) contained in the Parent's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999 and (ii)
liabilities under this Agreement.
(h) No Default. Neither Parent nor any of its Subsidiaries is in
default or violation (and no event has occurred which, with notice or the
lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) the Restated Certificate of
Incorporation or Amended and Restated Bylaws of Parent or any provision of
the comparable charter or organizational documents of any of its
Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession,
franchise or license to which Parent or any of its Subsidiaries is now a
party or by which Parent or any of its Subsidiaries or any of their
respective properties or assets is bound or (iii) any order, writ,
injunction, decree, statute, rule or regulation applicable to Parent or any
of its Subsidiaries, except in the case of (ii) and (iii) for defaults or
violations which in the aggregate would not have a Material Adverse Effect
on Parent.
(i) Compliance with Applicable Laws. Parent and its Subsidiaries hold
all permits, licenses, variances, exemptions, orders, franchises and
approvals of all Governmental Entities necessary for the lawful conduct of
their respective businesses as they are now being conducted (the "Parent
Permits"), except where the failure so to hold would not have a Material
Adverse Effect on Parent. Parent and its Subsidiaries are in compliance
with the terms of the Parent Permits, except where the failure so to comply
would not have a Material Adverse Effect on Parent. Except as disclosed in
the Parent SEC Documents, the businesses of Parent and its Subsidiaries are
not being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which would not have a
Material Adverse Effect on Parent. As of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to Parent
or any of its Subsidiaries is pending or, to the knowledge of Parent as of
the date hereof, threatened, other than those the outcome of which would
not have a Material Adverse Effect on Parent.
(j) Litigation. Except as disclosed in the Parent SEC Documents, there
is no suit, action or proceeding pending, or, to the knowledge of Parent,
threatened against or affecting Parent or any Subsidiary of Parent ("Parent
Litigation"), and Parent and its Subsidiaries have no knowledge of any
facts that are likely to give rise to any Parent Litigation, that (in any
case) is reasonably likely to have a Material Adverse Effect on Parent, nor
is there any judgment, decree, injunction, rule or order
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of any Governmental Entity or arbitrator outstanding against Parent or any
Subsidiary of Parent ("Parent Order") that is reasonably likely to have a
Material Adverse Effect on Parent or its ability to consummate the
transactions contemplated by this Agreement.
(k) Taxes. Except as set forth on Schedule 3.2(k) or 3.2(l)(ii) of the
Parent Disclosure Schedule:
(i) Each of Parent, each of its Subsidiaries and any affiliated,
consolidated, combined, unitary or similar group of which Parent or any
of its Subsidiaries is or was a member has (A) duly filed on a timely
basis (taking into account any extensions) all U.S. federal income Tax
Returns, and all other material Tax Returns required to be filed or sent
by or with respect to it other than Tax Returns that would report
immaterial Tax liability and as to which the failure to file would not
itself give rise to material Tax liability, (B) duly paid or deposited
on a timely basis all material Taxes (as hereinafter defined) that are
shown to be due and payable on or with respect to such Tax Returns, and
all material Taxes that are otherwise due and payable (except for audit
adjustments not material in the aggregate or to the extent that
liability therefor is reserved for in Parent's most recent audited
financial statements) for which Parent or any of its Subsidiaries may be
liable, (C) established reserves that are adequate for the payment of
all material Taxes not yet due and payable with respect to the results
of operations of Parent and its Subsidiaries through the date hereof,
and (D) complied in all material respects with all applicable laws,
rules and regulations relating to the reporting, payment and withholding
of material Taxes that are required to be withheld from payments to
employees, independent contractors, creditors, shareholders or any other
third party and has in all material respects timely withheld from
employee wages and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over;
(ii) Except to the extent being contested in good faith, all
material deficiencies asserted as a result of such examinations and any
examination by any applicable taxing authority have been paid, fully
settled or adequately provided for in Parent's most recent audited
financial statements. No audits or other administrative proceedings or
court proceedings are presently pending, or to the knowledge of Parent,
threatened, with regard to any Taxes for which Parent or any of its
Subsidiaries would be liable in an amount reasonably expected to exceed
$100,000, and no material deficiency (to the extent remaining
unsatisfied) for any Taxes has been proposed, asserted or assessed
(whether by examination report or prior to completion of examination by
means of notices of proposed adjustment or other similar requests or
notices) pursuant to such examination against Parent or any of its
Subsidiaries by any taxing authority with respect to any period;
(iii) To the knowledge of Parent, no material reassessments (for
property or ad valorem Tax purposes) of any assets or any property owned
or leased by Parent or any of its Subsidiaries have been proposed in
written form; and
(iv) Neither Parent nor any of its Subsidiaries has agreed to make
any adjustment pursuant to section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of Parent or any of its Subsidiaries, and neither Parent nor any of its
Subsidiaries has any application pending with any taxing authority
requesting permission for any changes in any accounting method of Parent
or any of its Subsidiaries. To the knowledge of Parent, neither the IRS
nor any other taxing authority has proposed in writing, and neither
Parent nor any of its Subsidiaries is otherwise required to make, any
such adjustment or change in accounting method.
(l) Pension and Benefit Plans; ERISA.
(i) Schedule 3.2(l)(i) of the Parent Disclosure Schedule contains a
list of each "employee pension benefit plan" (as defined in Section 3(2)
of (ERISA)) (hereinafter a "Parent Pension Plan"), "employee welfare
benefit plan" (as defined in Section 3(l) of ERISA), stock option,
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stock purchase, deferred compensation plan or arrangement, and other
employee fringe benefit plan or arrangement maintained, contributed to
or required to be maintained or contributed to by Parent, any of its
Significant Subsidiaries or any other person or entity that, together
with Parent, is treated as a single employer under Section 414(b), (c),
(m) or (o) of the Code (each a "Parent ERISA Affiliate") for the benefit
of any present or former officers, employees, directors or independent
contractors of Parent or any Parent ERISA Affiliate (all the foregoing
being herein called "Parent Employee Benefit Plans"). Parent has made
available to the Company true, complete and correct copies of (1) each
Parent Employee Benefit Plan and amendments thereto, (2) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with
respect to each Parent Employee Benefit Plan (if any such report was
required by applicable law), (3) the most recent summary plan
description for each Parent Employee Benefit Plan for which such a
summary plan description is required by applicable law and (4) each
trust agreement and insurance or annuity contract relating to any Parent
Employee Benefit Plan.
(ii) Each Parent Employee Benefit Plan has been administered in
accordance with its terms except as would not have a Material Adverse
Effect. Parent, the Parent ERISA Affiliates and all the Parent Employee
Benefit Plans are in compliance in all material respects with the
applicable provisions of ERISA and the Code. Except as disclosed in
Schedule 3.2(l)(ii) of the Parent Disclosure Schedule or except as would
not have a Material Adverse Effect, all reports, returns and similar
documents with respect to the Parent Employee Benefit Plans required to
be filed with any governmental agency or distributed to any Parent
Employee Benefit Plan participant have been duly, timely and accurately
filed or distributed. Except as disclosed in Schedule 3.2(l)(ii) of the
Parent Disclosure Schedule or except as would not have a Material
Adverse Effect, there are no investigations by any governmental agency,
termination proceedings or other claims (except claims for benefits
payable in the normal operation of the Parent Employee Benefit Plans),
suits or proceedings against or involving any Parent Employee Benefit
Plan or asserting any rights or claims to benefits under any Parent
Employee Benefits Plan that could give rise to any material liability,
and there are not any facts to Parent's knowledge that could give rise
to any material liability in the event of any such investigation, claim,
suit or proceeding.
(iii) Except as disclosed on Schedule 3.2(l)(iii) of the Parent
Disclosure Schedule, there has been no "reportable event" as that term
is defined in Section 4043 of ERISA and the regulations thereunder with
respect to the Parent Pension Plans subject to Title IV of ERISA that
would require the giving of notice or any event requiring disclosure
under Section 4041(c)(3)(C) or 4063(a) of ERISA.
(iv) Except as disclosed in Schedule 3.2(l)(iv) of the Parent
Disclosure Schedule, each Parent Pension Plan intended to be qualified
has been the subject of a determination letter from the Internal Revenue
Service to the effect that such Parent Pension Plan is qualified and
exempt from Federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code; no such determination letter has been
revoked, and, to the knowledge of Parent, revocation has not been
threatened; and such Parent Pension Plan has not been amended since the
effective date of its most recent determination letter in any respect
that might adversely affect its qualification or materially increase its
cost. Parent has made available to the Company a copy of the most recent
determination letter received from the Internal Revenue Service with
respect to each Parent Pension Plan for which such a letter has been
issued, as well as a copy of any pending application for a determination
letter. Parent has also provided to the Company a list of all Parent
Pension Plan amendments as to which a favorable determination letter has
not yet been received.
(v) Except as disclosed on Schedule 3.2(l)(v) of the Parent
Disclosure Schedule, no stock or other security issued by Parent or any
of its subsidiaries forms or has formed a material part of the assets of
any Parent Employee Benefit Plan or Parent Pension Plan.
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(m) Labor Matters. Except as set forth on Schedule 3.2(m) of the
Parent Disclosure Schedule or in the Parent SEC Documents:
(i) Neither Parent nor any of its Subsidiaries is a party to any
collective bargaining agreement or other current labor agreement with
any labor union or organization, and to Parent's knowledge currently
there is no union that claims to represent employees of Parent or any of
its Subsidiaries, nor does Parent or any of its Subsidiaries know of any
activity or proceeding of any labor organization (or representative
thereof) or employee group (or representative thereof) to organize any
such employees;
(ii) There is no unfair labor practice charge or grievance arising
out of a collective bargaining agreement or other grievance procedure
against Parent or any of its Subsidiaries pending, or, to the knowledge
or Parent or any of its Subsidiaries, threatened, that has, or is
reasonably likely to have, a Material Adverse Effect on Parent;
(iii) There is no complaint, lawsuit or proceeding in any forum by
or on behalf of any present or former employee, any applicant for
employment or any classes of the foregoing alleging breach of any
express or implied contract of employment, any law or regulation
governing employment or the termination thereof or other discriminatory,
wrongful or tortious conduct in connection with the employment
relationship against Parent or any of its Subsidiaries pending, or, to
the knowledge of Parent or any of its Subsidiaries, threatened, that
has, or is reasonably likely to have, a Material Adverse Effect on
Parent;
(iv) There is no strike, dispute, slowdown, work stoppage or
lockout pending, or, to the knowledge of Parent or any of its
Subsidiaries, threatened, against or involving Parent or any of its
Subsidiaries that has, or is reasonably likely to have, a Material
Adverse Effect on Parent;
(v) Parent and each of its Subsidiaries are in compliance with all
applicable laws respecting employment and employment practices, terms
and conditions of employment, wages, hours of work and occupational
safety and health, except for non-compliance that does not have, and is
not reasonably likely to have, a Material Adverse Effect on Parent; and
(vi) There is no proceeding, claim, suit, action or governmental
investigation pending or, to the knowledge of Parent or any of its
Subsidiaries, threatened, in respect to which any current or former
director, officer, employee or agent of Parent or any of its
Subsidiaries is or may be entitled to claim indemnification from Parent
or any of its Subsidiaries pursuant to the Restated Certificate of
Incorporation or Amended and Restated Bylaws of Parent or any provision
of the comparable charter or organizational documents of any of its
Subsidiaries, as provided in any indemnification agreement to which
Parent or any Subsidiary of Parent is a party or pursuant to applicable
law that has, or is reasonably likely to have, a Material Adverse Effect
on Parent.
(n) Intangible Property. Parent and its Subsidiaries possess, have
adequate rights to use, or have adequate licenses to all material
trademarks, trade names, patents, service marks, brand marks, brand names,
domain names, computer programs, databases, industrial designs and
copyrights necessary for the operation of the businesses of each of Parent
and its Subsidiaries (collectively, the "Parent Intangible Property"),
except where the failure to possess or have adequate rights to use such
properties would not reasonably be expected to have a Material Adverse
Effect on Parent. All of the Parent Intangible Property that is owned by
Parent or its Subsidiaries in whole or in part is owned free and clear of
any and all liens, claims or encumbrances, except those that are not
reasonably likely to have a Material Adverse Effect on Parent and neither
Parent nor any such Subsidiary has forfeited or otherwise relinquished any
Parent Intangible Property which forfeiture would result in a Material
Adverse Effect on Parent. Parent and its Subsidiaries are not in violation
of or in default under any contract or license giving Parent and its
Subsidiaries rights to use or licenses to the Parent Intangible Property,
unless such violation or default would not reasonably be expected to have a
Material Adverse Effect on Parent. To the knowledge of Parent, the
operation of Parent's business has not, does not, and will not in any
material respect, conflict with, infringe upon, violate or interfere with
or
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constitute a misappropriation or dilution of any right, title, interest or
goodwill, including, without limitation, any intellectual property right,
trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person and there have been no claims made
and neither Parent nor any of its Subsidiaries has received any notice of
any claim or otherwise knows that any of the Parent Intangible Property is
invalid or conflicts with the asserted rights of any other person or has
not been used or enforced or has been failed to be used or enforced in a
manner that would result in the abandonment, cancellation or
unenforceability of any of the Parent Intangible Property, except for any
such conflict, infringement, violation, interference, claim, invalidity,
abandonment, cancellation or unenforceability that would not reasonably be
expected to have a Material Adverse Effect on Parent. To the knowledge of
Parent, no other person has, is or is planning to infringe upon, violate or
interfere with or misappropriate or dilute any of the Parent Intangible
Property, except where the foregoing would not reasonably be expected to
have a Material Adverse Effect on the Company.
(o) Environmental Matters. Except as disclosed on Schedule 3.2(o) of
the Parent Disclosure Schedule or in the Parent SEC Documents:
(i) The operations of Parent and its Subsidiaries have been and, as
of the Closing Date, will be, in compliance with all Environmental Laws,
except where the failure to so comply would not reasonably be expected
to have a Material Adverse Effect on Parent;
(ii) Parent and its Subsidiaries have obtained and will maintain
all permits, licenses and registrations, or applications relating
thereto, and have made and will make all filings, reports and notices
required under applicable Environmental Laws for the continued
operations of their respective businesses, except such matters the lack
or failure of which would not lead to a Material Adverse Effect on
Parent;
(iii) Parent and its Subsidiaries are not subject to any
outstanding written orders or material contracts with any Governmental
Entity or other person respecting (A) Environmental Laws, (B) Remedial
Action or (C) any Release or threatened Release of a Hazardous Material,
except such orders or contracts the compliance with which would not
reasonably be expected to have a Material Adverse Effect on Parent;
(iv) Parent and its Subsidiaries have not received any written
communication alleging, with respect to any such party, the violation of
or liability under any Environmental Law, which violation or liability
would reasonably be expected to have a Material Adverse Effect on
Parent;
(v) Neither Parent nor any of its Subsidiaries has any contingent
liability in connection with the Release of any Hazardous Material into
the indoor or outdoor environment (whether on-site or off-site) that
would reasonably be expected to lead to a Material Adverse Effect on
Parent;
(vi) The operations of Parent or its Subsidiaries involving the
generation, transportation, treatment, storage or disposal of hazardous
waste, as defined and regulated under 40 C.F.R. Parts 260-270 (in effect
as of the date of this Agreement) or any state equivalent, are in
compliance with applicable Environmental Laws, except where the failure
to so comply would not reasonably be expected to have a Material Adverse
Effect on Parent; and
(vii) There is not now on or in any property of Parent or its
Subsidiaries any of the following: (A) any underground storage tanks or
surface impoundments, (B) any asbestos-containing materials, or (C) any
polychlorinated biphenyls, which ((A), (B), or (C) preceding) could have
a Material Adverse Effect on Parent.
(p) Opinion of Financial Advisor. The Board of Directors of Parent has
received the opinion of Warburg Dillon Read LLC (a copy of which has been
delivered to the Company) to the effect that, as of the date hereof, the
Conversion Number is fair from a financial point of view to the holders of
Parent Common Stock.
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(q) Vote Required. The affirmative vote of the holders of Parent
Common Stock required by the rules and regulations of the NYSE is the only
vote of the holders of any class or series of Parent capital stock
necessary to approve the issuance of the Parent Common Stock pursuant to
the Merger. No other vote of the holders of any class or series of Parent
capital stock is necessary to approve this Agreement and the transactions
contemplated hereby.
(r) Beneficial Ownership of Company Common Stock. As of the date
hereof and except for the Company Option, neither Parent nor any of its
Subsidiaries beneficially own any shares of outstanding Company Common
Stock.
(s) Brokers. Except for the fees and expenses payable to Warburg
Dillon Read LLC, which fees are reflected in its agreement with Parent, no
broker, investment banker or other person is entitled to any broker's,
finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Parent.
(t) Tax Matters. Neither Parent nor any of the officers of Parent is
aware of any reason why the Merger could fail to qualify as a tax-free
reorganization pursuant to section 368(a) of the Code.
(u) Interim Operations of Merger Sub. Merger Sub was formed by Parent
solely for the purpose of engaging in the transactions contemplated hereby,
has engaged in no other business or activities, has incurred no other
obligations or liabilities, has no other assets and has conducted its
operations only as contemplated hereby. All of the outstanding capital
stock of Merger Sub is owned directly by Parent.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PENDING THE MERGER
4.1 Conduct of Business by the Company Pending the Merger. Prior to
the Effective Time, The Company agrees as to itself and its Subsidiaries
that (except as expressly contemplated or permitted by this Agreement or
set forth in Section 4.1 of the Company Disclosure Schedule, or to the
extent that Parent shall otherwise consent in writing):
(a) Ordinary Course. Each of the Company and its Subsidiaries shall
carry on its businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and shall use its
reasonable efforts to preserve intact its present business organizations,
keep available the services of its current officers and key employees and
endeavor to preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect at the Effective
Time.
(b) Dividends; Changes in Stock. Except for transactions solely among
the Company and its Subsidiaries, the Company shall not and it shall not
permit any of its Subsidiaries to: (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock; (ii)
split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of
or in substitution for shares of the Company capital stock; or (iii)
repurchase, redeem or otherwise acquire, or permit any of its Subsidiaries
to purchase, redeem or otherwise acquire, any shares of its capital stock,
except as required by the terms of its securities outstanding on the date
hereof or as contemplated by any existing employee benefit plan.
(c) Issuance of Securities. The Company shall not and it shall not
permit any of its Subsidiaries to, issue, deliver or sell, or authorize or
propose to issue, deliver or sell, any shares of its capital stock of any
class, any Voting Debt or other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, Voting Debt, other voting securities or convertible securities,
other than: (i) the issuance of Company Common Stock upon the exercise of
stock options granted under the Company Stock Plans (except for the
Purchase Plans (as hereinafter defined)) that are outstanding on the date
hereof, or in satisfaction of stock grants or stock based awards made prior
to the date hereof pursuant to the Company Stock Plans, (ii) the issuance
of
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Company Common Stock upon the exercise of the Company Warrants or the
conversion of the Company Convertible Notes that are outstanding on the
date hereof and (iii) issuances by a wholly owned Subsidiary of its capital
stock to its parent.
(d) Governing Documents. Except as contemplated hereby or in
connection herewith, the Company shall not amend or propose to amend its
Restated Certificate of Incorporation or Bylaws. The Company shall not take
any steps to change its state of incorporation and the Company shall not,
and it shall cause Service Experts, Inc., a Tennessee corporation and a
direct, wholly owned subsidiary of the Company ("SVE Tennessee"), not to
consummate the transactions contemplated by the Agreement and Plan of
Merger, dated as of April 9, 1999 (the "Reincorporation Agreement"),
between the Company and SVE Tennessee. The Company agrees to and agrees to
cause SVE Tennessee to, abandon and terminate the Reincorporation Agreement
immediately prior to the Effective Time.
(e) No Acquisitions. The Company shall not and it shall not permit any
of its Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof in any individual transaction where the aggregate
purchase price exceeds $1.0 million or in transactions where the aggregate
purchase price exceeds $15.0 million.
(f) No Dispositions. Other than sales, leases, encumbrances or
dispositions in the ordinary course of business consistent with past
practice that are not material, individually or in the aggregate, to the
Company and its Subsidiaries taken as a whole, the Company shall not and it
shall not permit any of its Subsidiaries to sell, lease, encumber or
otherwise dispose of, or agree to sell, lease (whether such lease is an
operating or capital lease), encumber or otherwise dispose of, any of its
assets.
(g) No Dissolution, Etc. Except as otherwise permitted or contemplated
by this Agreement, the Company shall not authorize, recommend, propose or
announce an intention to adopt a plan of complete or partial liquidation or
dissolution of the Company or any of its Significant Subsidiaries.
(h) Certain Employee Matters. The Company shall not and it shall not
permit any of its Subsidiaries to: (i) grant any increases in the
compensation of any of its directors, officers or employees, including the
grant of bonuses, except increases or bonuses to employees who are not
directors or officers made in the ordinary course of business and in
accordance with past practice, provided that the Company may pay bonuses to
general managers (or any employees who are junior to general managers) that
are officers only of Subsidiaries of the Company and that are made in the
ordinary course of business consistent with past practice; (ii) pay or
agree to pay any material pension, retirement allowance or other employee
benefit not required or contemplated by any of the existing Company
Employee Benefit Plans or Company Pension Plans as in effect on the date
hereof to any such director, officer or employee, whether past or present;
(iii) amend or modify in any material respect any Company Pension Plan in
each case, except as required by law; (iv) enter into any new, or amend any
existing, employment or severance or termination agreement with any
director, officer or employee; or (v) become obligated under any new
Company Employee Benefit Plan or Company Pension Plan, which was not in
existence or approved by the Board of Directors of the Company prior to or
on the date hereof, or, except as required by law, amend any such plan or
arrangement in existence on the date hereof if such amendment would have
the effect of materially enhancing any benefits thereunder. Notwithstanding
the foregoing, nothing in this Section 4.1(h) shall prevent the Company
from employing general managers (or any employees junior to general
managers) and entering into employment agreements with persons in each case
in the ordinary course of business consistent with past practice.
(i) Indebtedness; Leases; Capital Expenditures. The Company shall not,
nor shall the Company permit any of its Subsidiaries to, (i) incur any
indebtedness for borrowed money (except for working capital under the
Company's existing credit facilities, and (x) refinancings of existing debt
and (y) other immaterial borrowings that, in the case of either (x) or (y),
permit prepayment of such
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debt without penalty (other than LIBOR breakage costs)) or guarantee any
such indebtedness or issue or sell any debt securities or rights to acquire
any debt securities of the Company or any of its Subsidiaries (other than
debt securities in connection with transactions permitted by Section
4.1(e)) or guarantee any debt securities of others, (ii) except in the
ordinary course of business, enter into any material lease (whether such
lease is an operating or capital lease) or create any material mortgages,
liens, security interests or other encumbrances on the property of the
Company or any of its Subsidiaries in connection with any indebtedness
thereof, or (iii) make or commit to make aggregate capital expenditures in
excess of $2.5 million.
(j) Accounting. The Company shall not, nor shall it permit any of its
Subsidiaries to, make any changes in their accounting methods which would
be required to be disclosed under the rules and regulations of the SEC,
except as required by law or GAAP.
(k) Affiliate Transactions. The Company shall not, nor shall it permit
any of its Subsidiaries to, enter into any agreement or arrangement with
any of their respective affiliates (as such term is defined in Rule 405
under the Securities Act, an "Affiliate"), other than with wholly owned
Subsidiaries of the Company, on terms less favorable to the Company or such
Subsidiary, as the case may be, than could be reasonably expected to have
been obtained with an unaffiliated third party on an arm's-length basis.
(l) Contracts. The Company shall not, nor shall it permit any of its
Subsidiaries to, except in the ordinary course of business consistent with
past practice, modify, amend, terminate, renew or fail to use reasonable
business efforts to renew any material contract or agreement to which it or
any of its Subsidiaries is a party or waive, release or assign any material
rights or claims. Except as permitted under Section 4.1(e), the Company
shall not, nor shall it permit any of its Subsidiaries to, enter into any
contract except in the ordinary course of business consistent with past
practice.
(m) Insurance. The Company shall, and shall cause its Subsidiaries to,
maintain with financially responsible insurance companies insurance in such
amounts and against such risks and losses as are customary for companies
engaged in their respective businesses.
(n) Permits. The Company shall, and shall cause its Subsidiaries to,
use reasonable efforts to maintain in effect all existing Company Permits
which are material to their respective operations.
(o) Tax Matters. The Company shall not (i) make or rescind any
material express or deemed election relating to Taxes unless it is
reasonably expected that such action will not materially and adversely
affect the Company or Parent, including elections for any and all joint
ventures, partnerships, limited liability companies, working interests or
other investments where the Company has the capacity to make such binding
election, (ii) settle or compromise any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, except where such settlement or compromise will not
materially and adversely affect the Company or Parent or (iii) change in
any material respect any of its methods of reporting income or deductions
for federal income tax purposes from those employed in the preparation of
its federal income Tax Returns that have been filed for prior taxable
years, except as may be required by applicable law or except for changes
that are reasonably expected not to materially and adversely affect the
Company or Parent.
(p) Discharge of Liabilities. The Company shall not, nor shall it
permit any of its Subsidiaries to, pay, discharge or satisfy any material
claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business consistent with past
practice (which includes the payment of final and unappealable judgments)
or in accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of the Company included in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, or
incurred in the ordinary course of business consistent with past practice.
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(q) Other Actions. The Company shall not, and shall not permit any of
its Subsidiaries to, take or fail to take any other action which would
reasonably be expected to prevent or materially impede, interfere with or
delay the Merger.
(r) Agreements. The Company shall not, nor shall it permit any of its
Subsidiaries to, agree in writing or otherwise to take any action
inconsistent with any of the foregoing.
(s) 368(a) Reorganization. From the date hereof through the Closing
Date, the Company shall not take any action, or cause any action to be
taken, which would prevent the transactions contemplated hereby from
qualifying as a reorganization described in Section 368(a) of the Code.
4.2 Conduct of Business by Parent Pending the Merger. Prior to the
Effective Time, Parent agrees as to itself and its Subsidiaries that (except as
expressly contemplated or permitted by this Agreement or to the extent that the
other parties shall otherwise agree in writing):
(a) Dividends; Changes in Stock. Parent shall not (i) engage in any
material repurchase, recapitalization, restructuring or reorganization with
respect to its capital stock (other than in connection with the Merger),
including, without limitation, by way of any extraordinary dividends on or
other extraordinary distributions in respect of any of its capital stock,
(ii) engage in any repurchase of Parent Common Stock (other than pursuant
to any existing employee benefit plan) during the period beginning 45 days
prior to the Effective Time and ending at the Effective Time, (iii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of Parent Common Stock or (iv) amend any
material term or provision of the Parent Common Stock.
(b) Governing Documents. Parent shall not amend or propose to amend
its Restated Certificate of Incorporation or Bylaws with respect to the
rights of the holders of Parent Common Stock except as contemplated herein.
(c) Other Actions. Parent shall not, and shall not permit any of its
Subsidiaries to, take or fail to take any other action which would
reasonably be expected to prevent or materially impede, interfere with or
delay the Merger.
(d) Agreements. Parent shall not, nor shall it permit any of its
Subsidiaries to, agree in writing or otherwise to take any action
inconsistent with the foregoing.
(e) 368(a) Reorganization. From the date hereof through the Closing
Date, Parent shall not take any action, or cause any action to be taken,
which would prevent the transactions contemplated hereby from qualifying as
a reorganization described in Section 368(a) of the Code.
4.3 No Solicitation.
(a) Except as expressly contemplated by this Agreement or otherwise
consented to in writing by Parent, from the date of this Agreement until
the Effective Time, the Company will not directly or indirectly, and will
not permit any of its Subsidiaries to directly or indirectly, initiate,
solicit or encourage (including by way of furnishing information or
assistance), or take any other action to facilitate, any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal (as defined below), or enter into
discussions or negotiate with any person or entity in furtherance of such
inquires to obtain an Acquisition Proposal, or enter into an agreement with
respect to any Acquisition Proposal or agree to or endorse any Acquisition
Proposal, or authorize or permit any of the officers, directors or
employees of the Company or any of its Subsidiaries or any investment
banker, financial advisor, attorney, accountant or other representative
retained by the Company or any of its Subsidiaries to take any such action,
and the Company shall promptly notify Parent of all relevant terms of any
such inquiries and proposals received by the Company or any of its
Subsidiaries or by any such officer, director, investment banker, financial
advisor or attorney, and if such inquiry or proposal is in writing, the
Company shall deliver or cause to be delivered to Parent a copy of such
inquiry or proposal and the Company shall inform Parent on a
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prompt basis of the status of any discussions or negotiations with such
person or entity and any changes to the terms and conditions of such
Acquisition Proposal; provided, however, that nothing contained in this
Agreement shall prohibit the Board of Directors of the Company from (i)
complying with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal; or (ii) at any time prior to the
vote of the Company's stockholders contemplated hereby, furnishing
information to, or entering into discussions or negotiations with, any
persons or entity in connection with an unsolicited bona fide proposal in
writing by such person or entity to acquire the Company pursuant to a
merger, consolidation, share exchange, business combination or other
similar transaction or to acquire all or substantially all of the assets of
the Company or any of its Significant Subsidiaries or recommending the same
to the Company's stockholders, if, and only to the extent that (A) the
Board of Directors of the Company, after consultation with independent
legal counsel (which may include its regularly engaged independent legal
counsel), determines in good faith that such action is required for the
Board of Directors of the Company to comply with its fiduciary duties to
its stockholders imposed by Delaware law; (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such
person or entity the Company (x) provides written notice to Parent to the
effect that it is furnishing information to, or entering into discussions
or negotiations with, such person or entity and (y) obtains from such
person or entity a customary confidentiality agreement; and (C) the Company
determines in good faith (after consultation with its financial advisor)
that such Acquisition Proposal, if accepted, is reasonably likely to be
consummated, taking into account all legal, financial and regulatory
aspects of the proposal and the person making the proposal and would, if
consummated, result in a more favorable transaction than the transaction
contemplated by this Agreement, taking into account the long-term prospects
and interests of the Company and its stockholders. The Company will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing. The Company agrees that it will take the
necessary steps to promptly inform its officers, directors and advisors of
the obligations undertaken in this Section 4.3.
(b) "Acquisition Proposal" means any of the following involving the
Company or any of its Significant Subsidiaries: (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction (other than the transactions contemplated by this Agreement);
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 15% or more of the assets of the Company and its
Subsidiaries, taken as a whole, in a single transaction or series of
transactions; (iii) any tender offer or exchange offer for 15% or more of
the outstanding shares of capital stock of the Company or the filing of a
registration statement under the Securities Act in connection therewith;
(iv) the acquisition by any person of "beneficial ownership" or the right
to acquire beneficial ownership of, or the formation of any "group" (as
such terms are defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder) which beneficially owns, or
has the right to acquire beneficial ownership of 15% or more of the then
outstanding shares of capital stock of the Company; or (v) any public
announcement of a proposal, plan or intention to do any of the foregoing.
4.4 Board of Directors. Parent will take commercially reasonable actions
as may be necessary or advisable to nominate and recommend one individual
proposed by the Company and acceptable to Parent who is currently a member of
the Board of Directors of the Company for election to a three-year term on the
Board of Directors of Parent at Parent's next annual meeting following the
Effective Time. After the Effective Time and prior to such individual's election
to the Board of Directors of Parent, such individual shall be invited to
meetings of the Board of Directors of Parent as a non-voting participant.
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Joint Proxy Statement. Parent and the
Company shall promptly prepare and file with the SEC, the Joint Proxy Statement
and Parent and the Company shall prepare, and Parent will file with the SEC, the
S-4 in which the Joint Proxy Statement will be included as a prospectus. Each of
Parent and the Company shall use its reasonable best efforts to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing. Each of Parent and the Company shall use its reasonable best
efforts to cause the Joint Proxy Statement to be mailed to its respective
stockholders at the earliest practicable date. Each of Parent and Merger Sub
shall use its reasonable best efforts to obtain all necessary state securities
laws or "blue sky" permits, approvals and registrations in connection with the
issuance of Parent Common Stock in the Merger and upon the exercise of the
Company Stock Options and the Company Warrants and the Company shall furnish all
information concerning the Company and the holders of Company Common Stock as
may be reasonably requested in connection with obtaining such permits, approvals
and registrations.
5.2 Letter of the Company's Accountants. The Company shall use its
reasonable best efforts to cause to be delivered to Parent a letter of Ernst &
Young LLP, the Company's independent public accountants, dated a date within two
business days before the date on which the S-4 shall become effective and
addressed to Parent and the Company, in form and substance reasonably
satisfactory to Parent and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4.
5.3 Letter of Parent's Accountants. Parent shall use its reasonable best
efforts to cause to be delivered to the Company a letter of Arthur Andersen LLP,
Parent's independent public accountants, dated a date within two business days
before the date on which the S-4 shall become effective and addressed to Parent
and the Company, in form and substance reasonably satisfactory to the Company
and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the S-4.
5.4 Access to Information. Upon reasonable notice, Parent and the Company,
as the case may be, shall (and shall cause each of their respective Subsidiaries
to) afford to the officers, employees, accountants, counsel and other
representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, each of Parent and the Company,
as the case may be, shall (and shall cause each of their respective Subsidiaries
to) furnish promptly to the other (a) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to SEC requirements and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Each of Parent and the Company agrees that it will not, and will cause its
respective representatives not to, use any information obtained pursuant to this
Section 5.4 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. The Confidentiality Agreements dated October 15,
1999 and October 19, 1999 between Parent and the Company (collectively, the
"Confidentiality Agreements") shall apply with respect to information furnished
thereunder or hereunder and any other activities contemplated thereby.
5.5 Stockholders Meetings.
(a) Company Stockholders' Meeting. The Company shall (i) call a
meeting of its stockholders (the "Company Stockholders' Meeting") to be
held as promptly as practicable after the date hereof for the purpose of
voting upon this Agreement and the Merger, (ii) through its Board of
Directors, recommend to its stockholders the advisability and approval of
such matters and not rescind such recommendation, (iii) use its best
efforts to obtain approval and adoption of this Agreement and the Merger by
its stockholders and (iv) use all reasonable efforts to hold such meeting
as soon as practicable after the date upon which the S-4 becomes effective;
provided, however, that nothing herein obligates the Company to take any
action that would cause its Board of Directors to act
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inconsistently with their fiduciary duties as determined by the Board of
Directors of the Company in good faith after consultation with independent
legal counsel (which may include its regularly engaged independent legal
counsel). The Company Stockholders' Meeting shall be held on such date as
soon as practicable after the date upon which the S-4 becomes effective as
the Company and Parent shall mutually determine.
(b) Parent Stockholders' Meeting. Parent shall (i) call a meeting of
its stockholders (the "Parent Stockholders' Meeting") to be held as
promptly as practicable after the date hereof for the purpose of voting
upon this Agreement and the issuance of Parent Common Stock pursuant to the
Merger, (ii) through its Board of Directors, recommend to its stockholders
approval of such matters and not rescind such recommendation, (iii) use its
best efforts to obtain approval and adoption of this Agreement and the
issuance of Parent Common Stock pursuant to the Merger by its stockholders
and (iv) use all reasonable efforts to hold such meeting as soon as
practicable after the date upon which the S-4 becomes effective. The Parent
Stockholders' Meeting shall be held on such date as soon as practicable
after the date upon which the S-4 becomes effective as the Company and
Parent shall mutually determine.
5.6 HSR and Other Approvals.
(a) HSR Act. Each party hereto shall file or cause to be filed with
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") any notification required
to be filed by their respective "ultimate parent" companies under the HSR
Act and the rules and regulations promulgated thereunder with respect to
the transactions contemplated hereby. Such parties will use all
commercially reasonable efforts to make such filings promptly and to
respond on a timely basis to any requests for additional information made
by either of such agencies. Each of the parties hereto agrees to furnish
the others with copies of all correspondence, filings and communications
(and memoranda setting forth the substance thereof) between it and its
affiliates and their respective representatives, on the one hand, and the
FTC, the Antitrust Division or any other Governmental Entity or members or
their respective staffs, on the other hand, with respect to this Agreement
and the transactions contemplated hereby. Each party hereto agrees to
furnish the others with such necessary information and reasonable
assistance as such other parties and their respective affiliates may
reasonably request in connection with their preparation of necessary
filings, registrations or submissions of information to any Governmental
Entities, including without limitation any filings necessary under the
provisions of the HSR Act.
(b) Other Regulatory Approvals. Each party hereto shall cooperate and
use its reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all necessary applications, notices, petitions,
filings and other documents, and to use all commercially reasonable efforts
to obtain (and will cooperate with each other in obtaining) any consent,
acquiescence, authorization, order or approval of, or any exemption or
nonopposition by, any Governmental Entity required to be obtained or made
by Parent or the Company or any of their respective Subsidiaries in
connection with the Merger or the taking of any action contemplated thereby
or by this Agreement.
5.7 Agreements of Rule 145 Affiliates. Prior to the Effective Time, the
Company shall cause to be prepared and delivered to Parent a list identifying
all persons who, at the time of the Company Stockholders' Meeting may be deemed
to be "affiliates" of the Company, as that term is used in paragraphs (c) and
(d) of Rule 145 under the Securities Act (the "Rule 145 Affiliates"). The
Company shall use its reasonable best efforts to cause each person who is
identified as a Rule 145 Affiliate in such Company list to deliver to Parent, at
or prior to the Effective Time, a written agreement, in form and substance
agreeable to Parent and the Company, that such Rule 145 Affiliate will not sell,
pledge, transfer or otherwise dispose of any shares of Parent Common Stock
issued to such Rule 145 Affiliate pursuant to the Merger, except pursuant to an
effective registration statement or in compliance with Rule 145 or an exemption
from the registration requirements of the Securities Act. The Company and the
Rule 145 Affiliates shall be relieved of this obligation under the foregoing
provisions of this Section 5.7 and such
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written agreements if, and to the extent, such Rule 145 is amended not to
require such written agreements or any of the covenants contained therein.
5.8 Authorization for Shares and Stock Exchange Listing. Prior to the
Effective Time, Parent shall have taken all action necessary to permit it to
issue the number of shares of Parent Common Stock required to be issued pursuant
to Section 2.1. Parent shall use all reasonable efforts to cause the shares of
Parent Common Stock to be issued in the Merger and the shares of Parent Common
Stock to be reserved for issuance upon exercise of the Company Stock Options and
the Company Warrants and issuances under the Company Stock Plans to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Closing Date.
5.9 Employee Matters. Parent and the Company agree that all employees of
the Company immediately prior to the Effective Time shall be employed by the
Surviving Corporation immediately after the Effective Time, it being understood
that Parent and the Surviving Corporation shall not have any obligations to
continue employing such employees for any length of time thereafter. Parent and
the Company further agree that Company Employee Benefit Plans in effect at the
date of this Agreement shall, to the extent practicable, remain in effect until
otherwise determined after the Effective Time. To the extent such Company
Employee Benefit Plans are not continued, (i) the Company employees will be
covered by Parent Employee Benefit Plans applicable to similarly situated
employees of Parent or (ii) Parent will maintain for a period of one year after
the Effective Time benefit plans that are not less favorable, in the aggregate,
to the employees covered by Company Employee Benefit Plans than are the Company
Employee Benefit Plans. In the case of Company Pension Plans that are continued
and under which the employees' interests are based upon Company Common Stock,
Parent and the Company agree that such interests shall be based on Parent Common
Stock in an equitable manner (and in the case of any such interests existing at
the Effective Time, on the basis of the Conversion Number); provided, however,
that nothing contained herein shall be construed as requiring Parent or the
Surviving Corporation to continue any specific Company Pension Plan. Parent and
the Surviving Corporation further agree that any present employees of the
Company shall be credited for their service with the Company and its predecessor
entities, for purposes of eligibility and vesting in the plans provided by
Parent and the Surviving Corporation. Those employees' benefits under Parent's
and the Surviving Corporation's medical benefit plan shall not be subject to any
exclusions for any pre-existing conditions, and credit shall be received for any
deductibles or out-of-pocket amounts previously paid during the current year.
5.10 Stock Options and Warrants; Restricted Stock Awards; and Stock
Purchase Plans.
(a) At the Effective Time, each outstanding option to purchase Company
Common Stock and any stock appreciation rights related thereto that has
been granted pursuant to a Company Stock Plan ("Company Stock Option") and
the Company Warrants, whether vested or unvested, shall be assumed by
Parent. Each such option or warrant shall be deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under such
Company Stock Option or Company Warrant, a number of shares of Parent
Common Stock equal to the number of shares of Company Common Stock
purchasable pursuant to such Company Stock Option or Company Warrant
multiplied by the Conversion Number, at a price per share equal to the
per-share exercise price for the shares of Company Common Stock purchasable
pursuant to such Company Stock Option or Company Warrant divided by the
Conversion Number; provided, however, that in the case of any option to
which Section 421 of the Code applies by reason of its qualification under
any of Sections 422-424 of the Code, the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of
exercise of such option shall be determined in order to comply with Section
424(a) of the Code; and provided further, that, unless otherwise provided
in the applicable Company Stock Plan, Company Stock Option or Company
Warrant, the number of shares of Parent Common Stock that may be purchased
upon exercise of such Company Stock Option or Company Warrant shall not
include any fractional share and, upon exercise of such Company Stock
Option or Company Warrant, a cash payment shall be made for any fractional
share based upon the closing price of a share of Parent Common Stock on the
NYSE on the trading day immediately preceding the date of exercise.
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(b) The Company shall take such action as is necessary to amend the
Company's 1996 Employee Stock Purchase Plan and the Company's 1997
Nonqualified Stock Purchase Plan (collectively referred to herein as the
"Purchase Plans") to cause the Exercise Date of the current Plan Year (as
each is defined under each of the Purchase Plans) to be immediately prior
to the Effective Time (the "Final Purchase Date"), provided that such
change in the Exercise Date shall be conditioned upon the consummation of
the Merger. On the Final Purchase Date, the Company shall apply the funds
credited as of such date under such Purchase Plan within each participant's
contribution account to the purchase of whole shares of Company Common
Stock in accordance with the terms of such Purchase Plan. Any cash balance
remaining in a participant's account which is insufficient to purchase an
additional whole share of Company Common Stock shall be refunded to such
participant as soon as practicable following the Final Purchase Date.
(c) At the Effective Time, each Company Restricted Stock Award,
whether vested or unvested, shall be deemed to constitute a restricted
stock award on the same terms and conditions as were applicable under the
Restricted Stock Award, which shall constitute the right to receive a
number of shares of Parent Common Stock equal to the number of shares of
Company Common Stock granted pursuant to such Restricted Stock Award
multiplied by the Conversion Number, at a vesting strike price equal to the
vesting strike price for the Restricted Stock Award divided by the
Conversion Number.
(d) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery
upon exercise of the Company Stock Options, Company Warrants and Company
Restricted Stock Awards assumed in accordance with this Section 5.10. As
soon as practicable after the Effective Time, Parent shall file with the
SEC a registration statement on Form S-8 (or any successor form) or another
appropriate form with respect to the shares of Parent Common Stock subject
to the Company Stock Options and shall use its reasonable best efforts to
maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as Company Stock Options remain
outstanding.
5.11 Indemnification; Directors' and Officers' Insurance.
(a) The Company shall, and from and after the Effective Time, Parent
and the Surviving Corporation shall, indemnify, defend and hold harmless
each person who is now, or has been at any time prior to the date hereof or
who becomes prior to the Effective Time, an officer or director of the
Company or any of its Subsidiaries or an employee of the Company or any of
its Subsidiaries who acts as a fiduciary under any Company Employee Benefit
Plans or Company Pension Plans (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including attorneys' fees),
liabilities or judgments or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any threatened or actual
claim, action, suit, proceeding or investigation based in whole or in part
on or arising in whole or in part out of the fact that such person is or
was a director, officer, or such employee of the Company or any Subsidiary
whether pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after,
the Effective Time ("Indemnified Liabilities"), including all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part
out of, or pertaining to this Agreement or the transactions contemplated
hereby, in each case to the full extent permitted under applicable Delaware
law (and Parent and the Surviving Corporation, as the case may be, will pay
expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law).
Without limiting the foregoing, in the event any such claim, action, suit,
proceeding or investigation is brought against any Indemnified Parties
(whether arising before or after the Effective Time), (i) the Indemnified
Parties may retain counsel satisfactory to them and the Company (or them
and Parent and the Surviving Corporation after the Effective Time) and the
Company (or after the Effective Time, Parent and the Surviving Corporation)
shall pay all fees and expenses of such counsel for the
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Indemnified Parties promptly as statements therefor are received; and (ii)
the Company (or after the Effective Time, Parent and the Surviving
Corporation) will use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that neither the Company, Parent nor
the Surviving Corporation shall be liable for any settlement effected
without its written consent, which consent, however, shall not be
unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under this Section 5.11, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify the Company (or
after the Effective Time, Parent and the Surviving Corporation), but the
failure so to notify shall not relieve a party from any liability that it
may have under this Section 5.11, except to the extent such failure
materially prejudices such party. The Indemnified Parties as a group may
retain only one law firm to represent them with respect to each such matter
unless there is, under applicable standards of professional conduct, a
conflict or a potential conflict on any significant issue between the
positions of any two or more Indemnified Parties. The Company, Parent and
Merger Sub agree that all rights to indemnification, including provisions
relating to advances of expenses incurred in defense of any action or suit,
existing in favor of the Indemnified Parties (including in the Restated
Certificate of Incorporation or Bylaws of the Company) with respect to
matters occurring through the Effective Time, shall survive the Merger and
shall continue in full force and effect.
(b) For a period of six years after the Effective Time, Parent shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company and its
Subsidiaries (provided that Parent may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions that
are no less advantageous in any material respect to the Indemnified
Parties) with respect to matters arising before the Effective Time,
provided that Parent shall not be required to pay an annual premium for
such insurance in excess of two times the last annual premium paid by the
Company prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount.
5.12 Agreement to Defend. In the event any claim, action, suit,
investigation or other proceeding by any governmental body or other person or
other legal or administrative proceeding is commenced that questions the
validity or legality of the transactions contemplated hereby or seeks damages in
connection therewith, the parties hereto agree to cooperate and use their
reasonable efforts to defend against and respond thereto.
5.13 Public Announcements. The parties hereto will consult with each other
before issuing any press release or otherwise making any public statements with
respect to the transactions contemplated by this Agreement, and shall not issue
any such press release or make any such public statement without the consent of
the other parties, except as may be required by applicable law or by obligations
pursuant to any listing agreement with any national securities exchange or
transaction reporting system so long as the other parties are notified promptly
by the disclosing party of such press release or public statement.
5.14 Other Actions. Except as contemplated by this Agreement, neither
Parent nor the Company shall, and shall not permit any of its Subsidiaries to,
take or agree or commit to take any action that is reasonably likely to result
in any of its respective representations or warranties hereunder being untrue in
any material respect or in any of the conditions to the Merger set forth in
Article VI not being satisfied. Each of the parties agrees to use its reasonable
best efforts to satisfy the conditions to Closing set forth in this Agreement.
5.15 Advice of Changes; SEC Filings. Parent and the Company, as the case
may be, shall confer on a regular basis with each other, report on operational
matters and promptly advise each other orally and in writing of any change or
event having, or which, insofar as can reasonably be foreseen, could have, a
Material Adverse Effect on Parent or the Company, as the case may be. Parent and
the Company shall promptly provide each other (or their respective counsel)
copies of all filings made by such party with the SEC or any other state or
federal Governmental Entity in connection with this Agreement and the
transactions contemplated hereby.
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5.16 Reorganization. It is the intention of Parent and the Company that
the Merger will qualify as a reorganization described in Section 368(a) of the
Code. Neither Parent nor the Company (nor any of their respective Subsidiaries)
will take or omit to take any action (whether before, on or after the Closing
Date) that would cause the Merger not to be so treated. The parties will
characterize the Merger as such a reorganization for purposes of all Tax Returns
and other filings.
5.17 Conveyance Taxes. Parent and the Company will (a) cooperate in the
preparation, execution and filing of all material returns questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees and any similar taxes which become
payable in connection with the transactions contemplated by this Agreement that
are required or permitted to be filed on or before the Effective Time, (b)
cooperate in the preparation, execution and filing of all material returns,
questionnaires, applications or other documents regarding any material
applicable exemptions to any such tax or fee, and (c) each pay any such material
tax or fee which becomes payable by it on or before the Effective Time.
5.18 Other Agreements. Concurrently with the execution of this Agreement,
(i) Parent shall enter into an agreement reasonably satisfactory to Parent with
each of the persons identified on Exhibit 5.18(a) hereto regarding the voting of
shares of Company Common Stock at the Company Stockholders' Meeting and (ii) the
Company shall enter into an agreement reasonably satisfactory to the Company
with each of the persons identified in Exhibit 5.18(b) hereto regarding the
voting of shares of Parent Common Stock at the Parent Stockholders' Meeting.
5.19 Company Credit Agreement. At or prior to the Closing, Parent shall
refinance (or arrange for the continuation of) or repay all the Company's debt
under its $200 million bank credit facility with SunTrust Bank, Nashville, N.A.,
NationsBank, N.A., and The First National Bank of Chicago and the other lenders
thereunder (the "Bank Credit Facility"). Parent acknowledges that the Merger may
constitute an "Event of Default" under the Bank Credit Facility. Notwithstanding
the foregoing, Parent acknowledges that the receipt of the consent or waiver of
the lenders under the Bank Credit Facility shall not be a condition to Parent's
obligation to effect the Merger.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) The Company Stockholder Approval. This Agreement and the Merger
shall have been approved and adopted by the affirmative vote of the holders
of a majority of the outstanding shares of Company Common Stock entitled to
vote thereon.
(b) Parent Stockholder Approval. The issuance of Parent Common Stock
pursuant to the Merger shall have been approved and adopted by the
affirmative vote of the holders of Parent Common Stock required by the
rules and regulations of the NYSE.
(c) NYSE Listing. The shares of Parent Common Stock issuable to the
Company stockholders pursuant to this Agreement in the Merger shall have
been authorized for listing on the NYSE upon official notice of issuance.
(d) Other Approvals. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated and
all filings required to be made prior to the Effective Time with, and all
consents, approvals, permits and authorizations required to be obtained
prior to the Effective Time from, any Governmental Entity in connection
with the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby shall have been made or obtained (as
the case may be), except where the failure to obtain such consents,
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approvals, permits and authorizations would not be reasonably likely to
result in a Material Adverse Effect on Parent (assuming the Merger has
taken place) or to materially adversely affect the consummation of the
Merger, and no such consent, approval, permit or authorization shall impose
terms or conditions that would have, or would be reasonably likely to have,
a Material Adverse Effect on Parent (assuming the Merger has taken place).
(e) S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a
stop order.
(f) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
have complied fully with its obligations under Section 5.6 hereof and, in
addition, shall use all reasonable efforts to have any such decree, ruling,
injunction or order vacated, except as otherwise contemplated by this
Agreement.
6.2 Conditions of Obligations of Parent. The obligations of Parent and
Merger Sub to effect the Merger are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Parent.
(a) Representations and Warranties of the Company. Each of the
representations and warranties of the Company set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and
as of the Closing Date, except where the failure to be so true and correct
(without giving effect to the individual materiality qualifications and
thresholds otherwise contained in Section 3.1 hereof) would not in the
aggregate have a Material Adverse Effect on the Company, and Parent shall
have received a certificate signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company to such
effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by the
Chief Executive Officer and the Chief Financial Officer of the Company to
such effect.
(c) Letters from Rule 145 Affiliates. Parent shall have received from
each person named in the Company list referred to in Section 5.7 an
executed copy of an agreement as provided in such section.
(d) Tax Opinion. Parent shall have received an opinion from Baker &
Botts, L.L.P. ("Parent's Counsel"), in form and substance reasonably
satisfactory to Parent, dated the Closing Date, a copy of which will be
furnished to the Company, substantially to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that, accordingly for federal income tax purposes
(i) no gain or loss will be recognized by Parent, Merger Sub or the Company
as a result of the Merger and (ii) no gain or loss will be recognized by a
stockholder of the Company as a result of the Merger upon the conversion of
shares of Company Common Stock into shares of Parent Common Stock (except
with respect to cash, if any, received in lieu of fractional shares of
Parent Common Stock). In rendering such opinion, Parent's Counsel may
receive and rely upon representations of fact and covenants contained in
certificates of officers of the Company and Parent, reasonably satisfactory
in form and substance to such counsel.
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6.3 Conditions of Obligations of the Company. The obligation of the
Company to effect the Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by the
Company:
(a) Representations and Warranties of Parent and Merger Sub. Each of
the representations and warranties of Parent and Merger Sub set forth in
this Agreement shall be true and correct in all material respects as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date, except where the failure to be so true
and correct (without giving effect to the individual materiality
qualifications and thresholds otherwise contained in Section 3.2 hereof)
would not in the aggregate have a Material Adverse Effect on Parent, and
the Company shall have received a certificate signed on behalf of Parent by
the Chief Executive Officer and the Chief Financial Officer of Parent to
such effect.
(b) Performance of Obligations of Parent and Merger Sub. Each of
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Closing Date, and the Company shall have received a certificate
signed on behalf of Parent by the Chief Executive Officer and the Chief
Financial Officer of Parent to such effect.
(c) Tax Opinion. The Company shall have received an opinion from
Waller Lansden Dortch & Davis, A Professional Limited Liability Company
("Company's Counsel"), in form and substance reasonably satisfactory to the
Company, dated the Closing Date, a copy of which will be furnished to
Parent, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that, accordingly for federal income tax purposes
(i) no gain or loss will be recognized by Parent, Merger Sub or the Company
as a result of the Merger and (ii) no gain or loss will be recognized by a
stockholder of the Company as a result of the Merger upon the conversion of
shares of Company Common Stock into shares of Parent Common Stock (except
with respect to cash, if any, received in lieu of fractional shares of
Parent Common Stock). In rendering such opinion, the Company's Counsel may
receive and rely upon representations of fact and covenants contained in
certificates of officers of the Company and Parent, reasonably satisfactory
in form and substance to such counsel.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company and the stockholders of Parent:
(a) by mutual written consent of Parent and the Company, or by mutual
action of their respective Boards of Directors;
(b) by either Parent or the Company if (i) any Governmental Entity
shall have issued any Injunction or taken any other action permanently
restraining, enjoining or otherwise prohibiting the consummation of the
Merger and such Injunction or other action shall have become final and
nonappealable; or (ii) any required approval of the stockholders of a party
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote held at a duly held meeting of stockholders or at
any adjournment or postponement thereof;
(c) by Parent or the Company if the Merger shall not have been
consummated by April 30, 2000; provided, however, that the right to
terminate this Agreement under this Section 7.1(c) shall not be available
to any party whose breach of any representation or warranty or failure to
fulfill any
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covenant or agreement under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date;
(d) by Parent if (i) the Company shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by it at or prior to such date
of termination (provided such breach has not been cured within 30 days
following receipt by the Company of notice of such breach and is existing
at the time of termination of this Agreement); (ii) any representation or
warranty of the Company contained in this Agreement shall not be true in
all material respects when made or on or at the time of termination as if
made on such date of termination (except to the extent it relates to a
particular date), provided such breach has not been cured within 30 days
following receipt by the Company of notice of such breach and is existing
at the time of termination of this Agreement, except where the failure to
be so true and correct (without giving effect to the individual materiality
qualifications and thresholds otherwise contained in Section 3.1 hereof)
would not have a Material Adverse Effect on the Company; or (iii) after the
date hereof there has been any Material Adverse Change with respect to the
Company;
(e) by the Company if (i) Parent or Merger Sub shall have failed to
comply in any material respect with any of the covenants or agreements
contained in this Agreement to be complied with or performed by it at or
prior to such date of termination (provided such breach has not been cured
within 30 days following receipt by Parent of notice of such breach and is
existing at the time of termination of this Agreement); (ii) any
representation or warranty of Parent or Merger Sub contained in this
Agreement shall not be true in all material respects when made or on or at
the time of termination as if made on such date of termination (except to
the extent it relates to a particular date), provided such breach has not
been cured within 30 days following receipt by Parent of notice of such
breach and is existing at the time of termination of this Agreement, except
where the failure to be so true and correct (without giving effect to the
individual materiality qualifications and thresholds otherwise contained in
Section 3.2 hereof) would not have a Material Adverse Effect on Parent; or
(iii) after the date hereof there has been any Material Adverse Change with
respect to Parent;
(f) by Parent if (i) the Board of Directors of the Company shall have
withdrawn or modified, in any manner which is adverse to Parent, its
recommendation or approval of the Merger or this Agreement and the
transactions contemplated hereby or shall have resolved to do so, (ii) the
Board of Directors of the Company shall have failed to call the Company
Stockholder Meeting in accordance with Section 5.5(a), (iii) if the Board
of Directors of the Company have failed to mail the Joint Proxy Statement
to its stockholders within a reasonable period of time after the Joint
Proxy Statement shall be available for mailing or failed to include therein
such approval and recommendation (including the recommendation that the
stockholders of the Company vote in favor of this Agreement and the Merger)
or (iv) the Board of Directors of the Company shall have recommended to the
stockholders of the Company any Acquisition Proposal or any transaction
described in the definition of Acquisition Proposal, or shall have resolved
to do so; and
(g) by the Company, if the Company shall exercise the right specified
in clause (ii) of Section 4.3(a); provided that the Company may not effect
such termination pursuant to this Section 7.1(g) unless and until (i)
Parent receives at least two days' prior written notice from the Company of
its intention to effect such termination pursuant to this Section 7.1(g);
(ii) during such two day period, the Company shall, and shall cause its
respective financial and legal advisors to, consider any adjustment in the
terms and conditions of this Agreement that Parent may propose; and (iii)
the Company pays the amounts required by Section 7.2 concurrently with such
termination.
7.2 Effect of Termination.
(a) In the event of termination of this Agreement by any party hereto
as provided in Section 7.1, this Agreement shall forthwith become void and
there shall be no liability or obligation on the part of any party hereto
except (i) with respect to this Section 7.2, the second and third sentences
of Section 5.4, and Section 8.1, and (ii) to the extent that such
termination results from
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the willful breach (except as provided in Section 8.8) by a party hereto of
any of its representations or warranties or of any of its covenants or
agreements contained in this Agreement.
(b) If (i) Parent terminates this Agreement pursuant to Section
7.1(d)(i) and at the time of such termination an Acquisition Proposal is
pending, (ii) if Parent terminates this Agreement pursuant to Section
7.1(f) or (iii) the Company terminates this Agreement pursuant to Section
7.1(g), the Company shall, on the day of such termination, pay Parent a fee
of $5.0 million in cash by wire transfer of immediately available funds to
an account designated by Parent.
(c) If within six months of any termination of this Agreement by
Parent pursuant to Section 7.1(d)(i), the Company agrees to or consummates
an Acquisition Proposal, then at the closing of any Acquisition Proposal,
the Company shall pay Parent a fee of $5.0 million in cash by wire transfer
of immediately available funds to an account designated by Parent;
provided, however, that if the Company has already paid a fee of $5.0
million to Parent pursuant to Section 7.2(b), then the Company shall not be
obligated to pay another fee pursuant to this Section 7.2(c); provided
further, that if the Company has already paid a fee of $4.0 million to
Parent pursuant to Section 7.2(d), then the Company shall only be obligated
to pay $1.0 million pursuant to this Section 7.2(c).
(d) If this Agreement is terminated by Parent pursuant to Section
7.1(b)(ii) (with respect to a failure to obtain the requisite shareholder
vote of the Company), and Parent shall not be entitled to a termination fee
under any other provision of this Agreement, and if prior to the event
giving rise to such termination by Parent, the Company shall not be
entitled to terminate this Agreement pursuant to Sections 7.1(b)(i), 7.1(c)
or 7.1(e), then the Company shall, on the date of such termination, pay
Parent a fee of $4.0 million in cash by wire transfer of immediately
available funds to an account designated by Parent.
(e) If this Agreement is terminated by the Company pursuant to Section
7.1(b)(ii) (with respect to a failure to obtain the requisite shareholder
vote of Parent), and if prior to the event giving rise to such termination
by the Company, Parent shall not be entitled to terminate this Agreement
pursuant to Sections 7.1(b)(i), 7.1(c), 7.1(d) or 7.1(f), Parent shall, on
the day of such termination, pay the Company a fee of $4.0 million in cash
by wire transfer of immediately available funds to an account designated by
the Company.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of the Company and the stockholders of Parent, but, after
any such approval, no amendment shall be made which by law requires further
approval by such stockholders without first obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Payment of Expenses. Each party hereto shall pay its own expenses
incident to preparing for entering into and carrying out this Agreement and the
consummation of the transactions contemplated hereby, whether or not the Merger
shall be consummated, except that Parent and the Company shall share equally the
expenses incurred by Parent and the Company in connection with the printing and
mailing of the Joint Proxy Statement.
8.2 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective Time
and any liability for breach or violation thereof shall terminate absolutely and
be of no further force and effect at and as of the Effective Time, except for
the agreements contained in Sections 2.1, 2.2, 4.4, 5.9 through 5.11, and 7.2
and Article VIII, the agreements delivered pursuant to Section 5.7 and the
representations, covenants and agreements contained in Section 5.16. The
Confidentiality Agreements shall survive the execution and delivery of this
Agreement, and the provisions of the Confidentiality Agreements shall apply to
all information and material delivered hereunder.
8.3 Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, return receipt
requested and shall be deemed to be given, dated and received (i) when so
delivered personally, (ii) upon receipt of an appropriate electronic answerback
or confirmation when so delivered by telegraph or telecopy (to such number
specified below or another number or numbers as such person may subsequently
designate by notice given hereunder) or, (iii) five business days after the date
of mailing to the following address or to such other address or addresses as
such person may subsequently designate by notice given hereunder, if so
delivered by mail:
(a) if to Parent, to:
Lennox International Inc.
2100 Lake Park Blvd.
Richardson, Texas 75080
Telecopy: (972) 497-5440
Attention: Chief Executive Officer
with a copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, TX 75201
Telecopy: (214) 953-6503
Attention: Andrew M. Baker
and (b) if to the Company, to:
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Telecopy: (615) 221-4131
Attention: Chief Executive Officer
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with copies to:
Cleary, Gottlieb, Steen & Hamilton
1 Liberty Plaza
New York, NY 10006
Telecopy: (212) 225-3999
Attention: Victor I. Lewkow, Esq.
and
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
511 Union Street
Suite 2100, Nashville City Center
Nashville, TN 37219
Telecopy: (615) 244-6804
Attention: J. Chase Cole, Esq.
8.4 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the word "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation." Unless the
context otherwise requires, "or" is disjunctive but not necessarily exclusive,
and words in the singular include the plural and in the plural include the
singular.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement
(together with the Confidentiality Agreements, the Company Option Agreement and
any other documents and instruments referred to herein and (a) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereto
and (b) except as provided in Sections 5.9 through 5.11, is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder.
8.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
8.8 Jurisdiction. Any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with, this
Agreement, the Company Option Agreement or the transactions contemplated hereby
or thereby may be brought in any federal or state court located in the State of
Delaware, and each of the parties hereby consents to the jurisdiction of such
courts (and of the appropriate appellate courts therefrom) in any such suit,
action or proceeding and irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of such suit, action or proceeding in any such court or that any such suit,
action or proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any suit, action or proceeding may be served on
any party anywhere in the world, whether within or without the jurisdiction of
any such court. Without limiting the foregoing, each party agrees that service
of process on such party as provided in Section 8.3 shall be deemed effective
service of process on such party.
8.9 No Remedy in Certain Circumstances. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable, or order any party to take any action
inconsistent herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the remaining provisions
and obligations
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contained or set forth herein shall not in any way be affected or impaired
thereby, unless the foregoing inconsistent action or the failure to take an
action constitutes a material breach of this Agreement or makes this Agreement
impossible to perform, in which case this Agreement shall terminate pursuant to
Article VII hereof. Except as otherwise contemplated by this Agreement, to the
extent that a party hereto took an action inconsistent herewith or failed to
take action consistent herewith or required hereby pursuant to an order or
judgment of a court or other competent authority, such party shall not incur any
liability or obligation unless such party breached its obligations under Section
5.6 hereof or did not in good faith seek to resist or object to the imposition
or entering of such order or judgment.
8.10 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties, except that Merger Sub may assign, in its sole discretion, any or all
of its rights, interests and obligations hereunder to any newly formed, direct
wholly owned Subsidiary of Parent, which Subsidiary would then be substituted
for Merger Sub for purposes of this Agreement, provided such assignment would
not cause (or potentially cause) the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a) of the Code. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns.
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IN WITNESS WHEREOF, each party has caused this Agreement to be signed by
its respective officers thereunto duly authorized, all as of the date first
written above.
LENNOX INTERNATIONAL INC.
By: /s/ JOHN W. NORRIS, JR.
----------------------------------
Name: John W. Norris, Jr.
Title: Chairman of the Board and
Chief Executive Officer
LII ACQUISITION CORPORATION
By: /s/ CARL E. EDWARDS, JR.
----------------------------------
Name: Carl E. Edwards, Jr.
Title: Vice President
SERVICE EXPERTS, INC.
By: /s/ ALAN R. SIELBECK
----------------------------------
Name: Alan R. Sielbeck
Title: Chief Executive Officer
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EXHIBIT 3.1(I)
SENIOR MANAGERS
Section (a) -- Senior Managers of Parent
Mark Dolan
Jim Mishler
Ken Fernandez
Rusty Boaz
John Dugan
Section (b) -- Senior Managers of the Company
Andrew Beto
Gary Elekes
Lurton Keel, Jr.
Robert Major
Robert McCullough, Jr.
John McKinney
Charner Triplett
Peter Zabaski
<PAGE> 226
EXHIBIT 5.18
VOTING AGREEMENTS
Section (a) -- Stockholders of the Company
Alan R. Sielbeck
Ronald L. Smith
Anthony M. Schofield
Section (b) -- Stockholders of Parent
John W. Norris, Jr.
H. E. French
Robert E. Schjerven
Michael G. Schwartz
Harry J. Ashenhurst
Carl E. Edwards, Jr.
W. Lane Pennington
Clyde W. Wyant
John J. Hubbuch
David H. Anderson
Richard W. Booth
Thomas W. Booth
James J. Byrne
Janet K. Cooper
John E. Major
Donald E. Miller
Richard L. Thompson
Leo E. Anderson Trust
David H. Anderson Trust
Betty Oaks Trust
1996 Anderson GST Exempt Trust
<PAGE> 227
ANNEX B
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of October 26, 1999 (this
"Agreement"), between Service Experts, Inc., a Delaware corporation ("Issuer"),
and Lennox International Inc., a Delaware corporation (the "Grantee").
RECITALS
WHEREAS, Grantee and the Issuer are concurrently with the execution and
delivery of this Agreement entering into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which, among other things, LII Acquisition
Corporation, a Delaware corporation, will merge with and into the Issuer on the
terms and subject to the conditions stated therein; and
WHEREAS, in order to induce Grantee to enter into the Merger Agreement and
as a condition for Grantee's agreeing to do so, the Issuer has granted to
Grantee the Stock Option (as hereinafter defined), on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and in the Merger Agreement, and for other good and valuable
consideration, the adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Definitions. Capitalized terms used and not defined herein have the
respective meanings assigned to them in the Merger Agreement.
2. Grant of Stock Option. The Issuer hereby grants to Grantee an
irrevocable option (the "Stock Option") to purchase, on the terms and
subject to the conditions hereof, for $8.94 per share (the "Exercise
Price") in cash, up to 3,618,491 fully paid and non-assessable shares (the
"Option Shares") of the Issuer's common stock, par value $0.01 per share
(the "Common Stock"). The Exercise Price and number of Option Shares shall
be subject to adjustment as provided in Section 5 below.
3. Exercise of Stock Option.
(a) Grantee may, subject to the provisions of this Section 3,
exercise the Stock Option, in whole or in part, at any time or from time
to time, after the occurrence of a Triggering Event (defined below) and
prior to the Termination Date. "Termination Date" shall mean, subject to
Section 9(a), the earliest of (i) the Effective Time of the Merger or
(ii) the first anniversary of the date of termination of the Merger
Agreement. The Issuer shall notify Grantee in writing as promptly as
practicable following its becoming aware of the occurrence of any
Triggering Event, it being understood that the giving of such notice by
the Issuer shall not be a condition to the right of Grantee to exercise
the Option or for a Triggering Event to have occurred. Notwithstanding
the occurrence of the Termination Date, Grantee shall be entitled to
purchase Option Shares pursuant to any exercise of the Stock Option, on
the terms and subject to the conditions hereof, to the extent Grantee
exercised the Stock Option prior to the occurrence of the Termination
Date. A "Triggering Event" shall mean an event the result of which is
that a termination fee is required to be paid by the Issuer to Grantee
pursuant to Section 7.2(b) or (c) of the Merger Agreement.
(b) Grantee may purchase Option Shares pursuant to the Stock Option
only if all of the following conditions are satisfied: (i) no
preliminary or permanent injunction or other order issued by any federal
or state court of competent jurisdiction in the United States shall be
in effect prohibiting delivery of the Option Shares, (ii) any waiting
period applicable to the purchase of the Option Shares under the HSR Act
shall have expired or been terminated, and (iii) any prior notification
to or approval of any other regulatory authority in the United States or
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elsewhere required in connection with such purchase shall have been made
or obtained, other than those which if not made or obtained would not
reasonably be expected to result in a significant detriment to the
Issuer and its Subsidiaries, taken as a whole.
(c) If Grantee shall be entitled to and wishes to exercise the
Stock Option, it shall do so by giving the Issuer written notice (the
"Stock Exercise Notice") to such effect, specifying the number of Option
Shares to be purchased, the denominations of the certificate or
certificates evidencing the Option Shares Grantee wishes to purchase
pursuant to this Section 3(c) and a place and closing date not earlier
than three business days nor later than 20 business days from the date
of such Stock Exercise Notice. If the closing cannot be consummated on
such date because any condition to the purchase of Option Shares set
forth in Section 3(b) has not been satisfied or as a result of any
restriction arising under any applicable law or regulation, the closing
shall occur five days (or such earlier time as Grantee may specify)
after satisfaction of all such conditions and the cessation of all such
restrictions.
(d) So long as the Stock Option is exercisable pursuant to the
terms of Section 3(a), Grantee may elect to send a written notice to the
Issuer (the "Cash Exercise Notice") specifying a date not later than 20
business days and not earlier than five business days following the date
such notice is given on which date the Issuer shall pay to Grantee in
exchange for the cancellation of the relevant portion of the Stock
Option an amount in cash equal to the Spread (as hereinafter defined)
multiplied by all or such relevant portion of the Option Shares subject
to the Stock Option as Grantee shall specify. As used herein, "Spread"
shall mean the excess, if any, over the Exercise Price of the higher of
(x) if applicable, the highest price per share of Common Stock paid by
any Person pursuant to any Acquisition Proposal relating to Grantee or
agreed to be paid in any Acquisition Proposal approved by the Board of
Directors of Issuer (the "Proposed Alternative Transaction Price") or
(y) the average of the closing prices of the shares of Common Stock on
the principal securities exchange or quotation system on which the
Common Stock is then listed or traded as reported in The Wall Street
Journal (Central edition) (but subject to correction for typographical
or other manifest errors in such reporting) for the five consecutive
trading days immediately preceding the date on which the Cash Exercise
Notice is given (the "Average Market Price"). If the Proposed
Alternative Transaction Price includes any property other than cash, the
Proposed Alternative Transaction Price shall be the sum of (i) the fixed
cash amount, if any, included in the Proposed Alternative Transaction
Price plus (ii) the fair market value of such other property. If such
other property consists of securities with an existing public trading
market, the average of the closing prices (or the average of the closing
bid and asked prices if closing prices are unavailable) for such
securities in their principal public trading market on the five trading
days ending five days prior to the date on which the Cash Exercise
Notice is given shall be deemed to equal the fair market value of such
property. If such other property includes anything other than cash or
securities with an existing public trading market, the Proposed
Alternative Transaction Price shall be deemed to equal the Average
Market Price. Upon exercise of its right pursuant to this Section 3(d)
and the receipt by Grantee of the applicable cash amount with respect to
the Option Shares or the applicable portion thereof, the obligations of
the Issuer to deliver Option Shares pursuant to Section 3(e) shall be
terminated with respect to the number of Option Shares specified in the
Cash Exercise Notice. The Spread shall be appropriately adjusted, if
applicable, to give effect to Section 5.
(e) (i) At any closing pursuant to Section 3(c) hereof, Grantee
shall make payment to the Issuer of the aggregate purchase price for the
Option Shares to be purchased and the Issuer shall deliver to Grantee a
certificate or certificates, as applicable, representing the purchased
Option Shares, registered in the name of Grantee or its designee and
(ii) at any closing pursuant to Section 3(d) hereof, the Issuer will
deliver to Grantee cash in an amount determined pursuant to Section 3(d)
hereof. Any payment made by Grantee to the Issuer, or by the Issuer to
Grantee, pursuant to this Agreement shall be made by wire transfer of
immediately available funds to a bank designated by the party receiving
such funds, provided that the failure or refusal by the
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Issuer to designate such a bank account shall not preclude Grantee from
exercising the Stock Option. If at the time of the issuance of Options
Shares pursuant to the exercise of the Stock Option, Issuer shall have
issued any securities similar to rights under a shareholder rights plan,
then the Option Shares issued pursuant to such exercise shall be
accompanied by a corresponding right with terms substantially the same
as and at least as favorable to Issuer as are provided under any Issuer
shareholder rights agreement or any similar agreement then in effect.
(f) Certificates for Common Stock delivered at the closing
described in Section 3(c) hereof shall be endorsed with a restrictive
legend that shall read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE
REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF ANY EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE."
It is understood and agreed that the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery
of substitute certificate(s) without such reference if such Option
Shares have been registered pursuant to the Securities Act, such Option
Shares have been sold in reliance on and in accordance with Rule 144
under the Securities Act or Grantee has delivered to Issuer a copy of a
letter from the staff of the SEC, or an opinion of counsel in form and
substance reasonably satisfactory to Issuer and its counsel, to the
effect that such legend is not required for purposes of the Securities
Act.
4. Representations of Grantee. Grantee hereby represents and warrants
to the Issuer that any Option Shares acquired by Grantee upon the exercise
of the Stock Option will not be, and the Stock Option is not being,
acquired by Grantee with the intention of making a public distribution
thereof, other than pursuant to an effective registration statement under
the Securities Act or otherwise in compliance with the Securities Act.
5. Adjustment upon Changes in Capitalization or Merger.
(a) In the event of any change in the outstanding shares of Common
Stock by reason of a stock dividend, stock split, reverse stock split,
split-up, merger, consolidation, recapitalization, combination,
conversion, exchange of shares, extraordinary or liquidating dividend or
similar transaction that would effect Grantee's rights hereunder, the
type and number of shares or securities purchasable upon the exercise of
the Stock Option and the Exercise Price shall be adjusted appropriately,
and proper provision will be made in the agreements governing such
transaction, so that Grantee will receive upon exercise of the Stock
Option a number and class of shares or amount of other securities or
property that Grantee would have received in respect of the Option
Shares had the Stock Option been exercised immediately prior to such
event or the record date therefor, as applicable. In no event shall the
number of shares of Common Stock subject to the Stock Option exceed
19.9% of the number of shares of Common Stock issued and outstanding at
the time of exercise (without giving effect to any shares subject or
issued pursuant to the Stock Option).
(b) Without limiting the foregoing, whenever the number of Option
Shares purchasable upon exercise of the Stock Option is adjusted as
provided in this Section 5, the Exercise Price shall be adjusted by
multiplying the Exercise Price by a fraction, the numerator of which is
equal to the number of Option Shares purchasable prior to the adjustment
and the denominator of which is equal to the number of Option Shares
purchasable after the adjustment.
(c) Without limiting or altering the parties' rights and
obligations under the Merger Agreement, in the event that the Issuer
enters into an agreement (i) to consolidate with or merge into any
Person, other than Grantee or one of its Subsidiaries, and the Issuer
will not be the continuing or surviving corporation in such
consolidation or merger, (ii) to permit any Person, other than Grantee
or one of its Subsidiaries, to merge into the Issuer and the Issuer will
be the continuing or surviving corporation, but in connection with this
merger, the shares of
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Common Stock outstanding immediately prior to the consummation of this
merger will be changed into or exchanged for stock or other securities
of the Issuer or any other Person or cash or any other property, or the
shares of Common Stock outstanding immediately prior to the consummation
of such merger will, after such merger, represent less than 50% of the
outstanding voting securities of the merged Issuer, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any Person,
other than Grantee or one of its Subsidiaries, then, and in each such
case, the agreement governing this transaction shall make proper
provision so that the Stock Option will, upon the consummation of any
such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option with identical terms
appropriately adjusted to acquire the number and class of shares or
other securities or property that Grantee would have received in respect
of Option Shares had the Stock Option been exercised immediately prior
to such consolidation, merger, sale or transfer or the record date
therefor, as applicable, and will make any other necessary adjustments.
The Issuer shall take such steps in connection with such consolidation,
merger, liquidation or other transaction as may be reasonably necessary
to assure that the provisions hereof shall thereafter apply as nearly as
possible to any securities or property thereafter deliverable upon
exercise of the Stock Option.
(d) Without limiting or altering the parties' relative rights and
obligations under the Merger Agreement, if any additional shares of
Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in Section 5(a)), the number of shares of
Common Stock subject to the Option will be adjusted so that, after such
issuance, it (together with any Option Shares previously issued) equals
19.9% of the number of shares of Common Stock then issued and
outstanding, without giving effect to any shares subject to or issued
pursuant to the Option.
6. Further Assurances; Remedies.
(a) The Issuer agrees to maintain, free from preemptive rights,
sufficient authorized but unissued or treasury shares of Common Stock so
that the Stock Option may be fully exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights of third parties to
purchase shares of Common Stock from the Issuer, and to issue the
appropriate number of shares of Common Stock pursuant to the terms of
this Agreement. All of the Option Shares to be issued pursuant to the
Stock Option, upon issuance and delivery thereof pursuant to this
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims,
liens, charges, encumbrances and security interests (other than those
created by this Agreement).
(b) The Issuer agrees not to avoid or seek to avoid (whether by
charter amendment or through reorganization, consolidation, merger,
issuance of rights, dissolution or sale of assets, or by any other
voluntary act) the observance or performance of any of the covenants,
agreements or conditions to be observed or performed hereunder by the
Issuer.
(c) The Issuer agrees that promptly after the occurrence of a
Triggering Event it shall take all actions as may from time to time be
required (including (i) complying with all applicable premerger
notification, reporting and waiting period requirements under the HSR
Act and (ii) in the event that prior notification to or approval of any
other regulatory authority in the United States or elsewhere is
necessary before the Stock Option may be exercised, complying with its
obligations thereunder and cooperating with Grantee in Grantee's
preparing and processing the required notices or applications) in order
to permit Grantee to exercise the Stock Option and purchase Option
Shares pursuant to such exercise.
(d) The parties agree that Grantee would be irreparably damaged if
for any reason the Issuer failed, in breach of its obligations
hereunder, to issue any of the Option Shares (or other securities or
property deliverable pursuant to Section 5 hereof) upon exercise of the
Stock Option or to perform any of its other obligations under this
Agreement, and that Grantee would not have an adequate remedy at law for
money damages in such event. Accordingly, Grantee shall be
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entitled to specific performance and injunctive and other equitable
relief to enforce the performance of this Agreement by the Issuer.
Accordingly, if Grantee should institute an action or proceeding seeking
specific enforcement of the provisions hereof, the Issuer hereby waives
the claim or defense that Grantee has an adequate remedy at law and
hereby agrees not to assert in any such action or proceeding the claim
or defense that such a remedy at law exists. The Issuer further agrees
to waive any requirements for the securing or posting of any bond in
connection with obtaining any such equitable relief. This provision is
without prejudice to any other rights that Grantee may have against the
Issuer for any failure to perform its obligations under this Agreement.
7. Listing of Option Shares. Promptly after the occurrence of a
Triggering Event and from time to time thereafter if necessary, the Issuer
will apply to list all of the Option Shares subject to the Stock Option on
the NYSE and will use its reasonable best efforts to obtain approval of
such listing as soon as practicable.
8. Registration of the Option Shares.
(a) If, within two years of the exercise of the Stock Option,
Grantee requests the Issuer in writing to register under the Securities
Act at least twenty-five percent (25%) of the Option Shares received by
Grantee hereunder (or, in the event that Grantee then holds less than
twenty-five percent (25%) of the Option Shares received by Grantee
hereunder, all of the Option Shares then held by Grantee), the Issuer
will use its reasonable best efforts to cause the offering of the Option
Shares so specified in such request to be registered as soon as
practicable so as to permit the sale or other distribution by Grantee of
the Option Shares specified in its request (and to keep such
registration in effect for a period of at least 90 days), and in
connection therewith the Issuer shall prepare and file as promptly as
reasonably possible (but in no event later than 60 days from receipt of
Grantee's request) a registration statement under the Securities Act to
effect such registration on an appropriate form, which would permit the
sale of the Option Shares by Grantee in accordance with the plan of
disposition specified by Grantee in its request. The Issuer shall not be
obligated to make effective more than two registration statements
pursuant to the foregoing sentence. The obligations of Issuer hereunder
to file a registration statement and to maintain its effectiveness may
be suspended for up to 90 calendar days in the aggregate if the Board of
Directors of Issuer shall have determined that the filing of such
registration statement or the maintenance of its effectiveness would
require premature disclosure of material nonpublic information that
would materially and adversely affect Issuer or otherwise interfere with
or adversely affect any pending or proposed offering of securities of
Issuer or any other material transaction involving Issuer.
(b) If, within five years of the exercise of the Stock Option, the
Issuer shall propose to file a registration statement under the
Securities Act (other than a filing on Form S-4 or S-8 or any successor
form) with respect to any shares of Common Stock, the Issuer shall
notify Grantee in writing not less than ten days prior to filing such
registration statement. If Grantee wishes to have any portion of its
Option Shares included in such registration statement, it shall advise
the Issuer in writing to that effect within two business days following
receipt of such notice, and the Issuer will thereupon include the number
of Option Shares indicated by Grantee under such Registration Statement;
provided that if the managing underwriter(s) of the offering pursuant to
such registration statement advise the Issuer that in their opinion the
number of shares of Common Stock requested to be included in such
registration exceeds the number which can be sold in such offering on a
commercially reasonable basis, priority shall be given to securities
intended to be registered by the Issuer for its own account and,
thereafter, the Issuer shall include in such registration Option Shares
requested by Grantee to be included therein pro rata with the shares of
Common Stock intended to be included therein by other shareholders of
the Issuer.
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(c) All expenses relating to or in connection with any registration
contemplated under this Section 8 and the transactions contemplated
thereby (including all filing, printing, reasonable professional,
roadshow and other fees and expenses relating thereto) will be at the
Issuer's expense except for underwriting discounts or commissions and
brokers' fees. The Issuer and Grantee agree to enter into a customary
underwriting agreement with underwriters upon such terms and conditions
as are customarily contained in underwriting agreements with respect to
secondary distributions. The Issuer shall indemnify Grantee, its
officers, directors, agents, other controlling persons and any
underwriters retained by Grantee in connection with such sale of such
Option Shares in the customary way, and shall agree to customary
contribution provisions with such persons, with respect to claims,
damages, losses and liabilities (and any expenses relating thereto)
arising (or to which Grantee, its officers, directors, agents, other
controlling persons or underwriters may be subject) in connection with
any such offer or sale under the federal securities laws or otherwise,
except for information furnished in writing by Grantee or its
underwriters to the Issuer. Grantee and its underwriters, respectively,
shall indemnify the Issuer to the same extent with respect to
information furnished in writing to the Issuer by Grantee and such
underwriters, respectively.
9. Miscellaneous.
(a) Extension of Exercise Periods. The periods during which Grantee
may exercise its rights under Sections 2 and 3 hereof shall be extended
in each such case at the request of Grantee to the extent necessary to
avoid liability by Grantee under Section 16(b) of the Exchange Act by
reason of such exercise.
(b) Amendments; Entire Agreement. This Agreement may not be
modified, amended, altered or supplemented, except upon the execution
and delivery of a written agreement executed by the parties hereto. This
Agreement, the Merger Agreement (including the documents and instruments
attached thereto as exhibits or schedules or delivered in connection
therewith) and the Confidentiality Agreements (i) constitute the entire
agreement and supersede all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter
of this Agreement, and (ii) except as provided in Section 8.6 of the
Merger Agreement, are not intended to confer upon any person other than
the parties any rights or remedies.
(c) Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally,
telegraphed or telecopied or sent by certified or registered mail,
postage prepaid, and shall be deemed to be given, dated and received (i)
when so delivered personally, (ii) upon receipt of an appropriate
electronic answerback or confirmation when so delivered by telegraph or
telecopy (to such number specified below or another number or numbers as
such person may subsequently designate by notice given hereunder) or,
(iii) five business days after the date of mailing to the following
address or to such other address or addresses as such person may
subsequently designate by notice given hereunder, if so delivered by
mail:
If to Grantee, to:
Lennox International Inc.
2100 Lake Park Blvd.
Richardson, Texas 75080
Telecopy: (972) 497-5440
Attention: Chief Executive Officer
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with a copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, TX 75201
Telecopy: (214) 953-6503
Attention: Andrew M. Baker
If to Issuer, to:
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Telecopy: (615) 221-4131
Attention: Chief Executive Officer
with copies to:
Cleary, Gottlieb, Steen & Hamilton
1 Liberty Plaza
New York, NY 10006
Telecopy: (212) 225-3999
Attention: Victor I. Lewkow, Esq.
and
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
511 Union Street
Suite 2100, Nashville City Center
Nashville, TN 37219
Telecopy: (615) 244-6804
Attention: J. Chase Cole, Esq.
(d) Expenses. Except as otherwise specifically provided herein and
without limiting anything contained in the Merger Agreement, each party
hereto shall pay its own expenses incurred in connection with this
Agreement, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
(e) Severability. If any term, provision, covenant or restriction
of this Agreement is held to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
regard to principles of conflicts of law.
(g) Jurisdiction. Any suit, action or proceeding seeking to enforce
any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby or thereby
shall be brought in any federal or state court located in the State of
Delaware, and each of the parties hereby consents to the jurisdiction of
such courts (and of the appropriate appellate courts therefrom) in any
such suit, action or proceeding and irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter
have to the laying of the venue of any such suit, action or proceeding
in any such court or that any such suit, action or proceeding which is
brought in any such court has been brought in an inconvenient forum.
Process in any such suit, action or proceeding may be served on any
party anywhere in the world, whether within or without the jurisdiction
of any such court. Without
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limiting the foregoing, each party agrees that service of process on
such party as provided in Section 9(c) shall be deemed effective service
of process on such party.
(h) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which
together shall constitute one and the same Agreement.
(i) Headings. The section headings herein are for convenience only
and shall not affect the construction hereof.
(j) Assignment. This Agreement shall be binding upon each party
hereto and such party's successors and assigns. This Agreement shall not
be assignable by the Issuer, but may be assigned by Grantee in whole or
in part to any direct or indirect wholly-owned subsidiary of Grantee,
provided that Grantee shall remain liable for any obligations so
assigned.
(k) Survival. All representations, warranties and covenants
contained herein shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
(l) Time of the Essence. The parties agree that time shall be of
the essence in the performance of obligations hereunder.
(m) Public Announcement. Grantee and the Issuer will consult with
each other before issuing any press release or making any public
statement with respect to this Agreement and the transactions
contemplated hereby and shall not issue any press release or make any
public statement without the prior consent of the other party, which
shall not be unreasonably withheld. Notwithstanding the foregoing, any
such press release or public statement as may be required by applicable
law or any listing Agreement with any national securities exchange, may
be issued prior to such consultation, if the party making the release or
statement has used its reasonable efforts to consult with the other
party.
(n) Extension; Waiver. Any agreement on the part of a party to
waive any provision of this Agreement, or to extend the time for
performance, will be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise
will not constitute a waiver of such rights.
(o) Further Assurances. In the event of any exercise of the Option
by Grantee, Issuer and Grantee will execute and deliver all other
documents and instruments and take all other action that may be
reasonably necessary in order to consummate the transactions provided
for by such exercise.
10. Profit Limitation.
(a) Notwithstanding any other provision of this Agreement or the
Merger Agreement, in no event shall Grantee's Total Profit (as defined
below) exceed $7.0 million (the "Maximum Amount") and, if it otherwise
would exceed such Maximum Amount, Grantee at its sole election may (i)
pay cash to the Issuer, (ii) deliver to the Issuer for cancellation
Option Shares previously purchased by Grantee, or (iii) any combination
thereof, so that Grantee's actually realized Total Profit (as defined
below) shall not exceed the Maximum Amount after taking into account the
foregoing actions.
(b) Notwithstanding any other provision of this Agreement, the
Stock Option may not be exercised for a number of Option Shares as
would, as of the date of the Stock Exercise Notice or Cash Exercise
Notice, as applicable, result in a Notional Total Profit (as defined
below) of more than the Maximum Amount and, if exercise of the Stock
Option otherwise would result in the Notional Total Profit exceeding
such amount, Grantee, at its discretion, may (in addition to any of the
actions specified in Section 10(a) above) increase the Exercise Price
for that number of Option Shares set forth in the Stock Exercise Notice
or Cash Exercise Notice, as applicable, so
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that the Notional Total Profit shall not exceed the Maximum Amount;
provided, that nothing in this sentence shall restrict any exercise of
the Stock Option permitted hereby on any subsequent date at the Exercise
Price set forth in Section 2 hereof.
(c) As used herein, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (i) the cash amount
actually received by Grantee pursuant to Section 7.2 of the Merger
Agreement less any repayment by Grantee to the Issuer pursuant to
Section 10(a)(i) hereof, (ii) (x) the net cash amounts or the fair
market value of any property received by Grantee pursuant to the sale of
Option Shares (or of any other securities into or for which such Option
Shares are converted or exchanged), less (y) Grantee's purchase price
for such Option Shares (or other securities) plus (iii) the aggregate
amounts received by Grantee pursuant to Section 3(d).
(d) As used herein, the term "Notional Total Profit" with respect
to any number of Option Shares as to which Grantee may propose to
exercise the Stock Option shall mean the Total Profit determined as of
the date of the Stock Exercise Notice or Cash Exercise Notice, as
applicable, assuming that the Stock Option was exercised on such date
for such number of Option Shares and assuming that such Option Shares,
together with all other Option Shares previously acquired upon exercise
of the Stock Option and held by Grantee and its affiliates as of such
date, were sold for cash at the closing price on the NYSE for the Common
Stock as of the close of business on the preceding trading day (less
customary brokerage commissions).
11. Restrictions on Certain Actions; Covenants of Grantee. From and
after the date of exercise of the Stock Option (other than an exercise
contemplated by Section 3(d) hereof), in whole or in part with respect to
more than ten percent (10%) of the then outstanding shares of Common Stock,
and until the earlier of (x) two years from the date of exercise or (y) the
date Grantee beneficially owns less than five percent (5%) of the then
outstanding shares of Common Stock:
(a) Without the prior consent of the Board of Directors of the
Issuer, Grantee will not, and will not permit any of its affiliates to:
(i) acquire or agree, offer or propose to acquire, beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of more
than 15% of any class of Voting Securities (as defined below), or any
rights or options to acquire such ownership (including from a third
party);
(ii) propose a merger, consolidation or similar transaction
involving the Issuer;
(iii) offer or propose to purchase, lease or otherwise acquire
all or a substantial portion of the assets of the Issuer;
(iv) solicit or participate in the solicitation of any proxies
or consents with respect to the securities of the Issuer;
(v) enter into any agreements or arrangements with any third
party with respect to any of the foregoing; or
(vi) publicly disclose that it requested the consent of the
Board of Directors of the Issuer to do any of the foregoing except as
required by law.
(b) The provisions of this Section 11 shall terminate at such time
as the Stock Option granted hereby expires without having been exercised
in whole or in part. The provisions of this Section 11 shall not apply
to actions taken pursuant to the Merger Agreement. "Voting Securities"
means the shares of Common Stock, preferred stock and any other
securities of the Issuer entitled to vote generally for the election of
directors or any other securities (including, without limitation, rights
and options), convertible into, exchangeable into or exercisable for,
any of the foregoing (whether or not presently exercisable, convertible
or exchangeable).
B-9
<PAGE> 236
IN WITNESS WHEREOF, each party has caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of the date first
written above.
SERVICE EXPERTS, INC.
By: /s/ ALAN SIELBECK
----------------------------------
Name: Alan Sielbeck
Title: Chief Executive Officer
LENNOX INTERNATIONAL INC.
By: /s/ JOHN W. NORRIS, JR.
----------------------------------
Name: John W. Norris, Jr.
Title: Chairman of the Board and
Chief
Executive Officer
B-10
<PAGE> 237
ANNEX C
FORM OF SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT, dated as of October 26, 1999 (this
"Agreement"), by and between Service Experts, Inc., a Delaware corporation
("SEI"), and (the "Shareholder").
WHEREAS, Lennox International Inc., a Delaware corporation ("Lennox"), and
LII Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Lennox ("Merger Sub"), have entered into an Agreement and Plan of
Merger, dated as of the date hereof (the "Merger Agreement"; capitalized terms
not defined in this Agreement have the meanings ascribed to them in the Merger
Agreement), with SEI that provides, among other things, upon the terms and
subject to the conditions thereof, for the merger of Merger Sub with and into
SEI (the "Merger").
WHEREAS, as a condition to the willingness of SEI to enter into the Merger
Agreement, SEI has required that the Shareholder agree, and in order to induce
SEI to enter into the Merger Agreement, the Shareholder has agreed, to vote, in
accordance with the terms of this Agreement, all the shares of Lennox Common
Stock set forth opposite Shareholder's name on Schedule A hereto and any and all
shares of Lennox Common Stock that may hereafter be acquired by the Shareholder
in his or her individual capacity (collectively, the "Shares"), whether pursuant
to stock option agreements, warrants or otherwise.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE SHAREHOLDER
SECTION 1.1. Authority Relative to This Agreement. Shareholder is competent
to execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement has been duly and validly executed and delivered by Shareholder
and, assuming the due authorization, execution and delivery by SEI, constitutes
a legal, valid and binding obligation of Shareholder, enforceable against
Shareholder in accordance with its terms.
SECTION 1.2. No Conflict. The execution and delivery of this Agreement by
Shareholder does not, and the performance of this Agreement by Shareholder shall
not, result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance, on any of the Shares pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Shareholder is a party or
by which Shareholder or the Shares are bound or affected.
SECTION 1.3. Marketable Title. Shareholder represents and warrants to SEI
that Shareholder has good and marketable title to the Shares, free and clear of
all liens, claims, charges and encumbrances and has full power and authority to
exercise all voting rights in respect thereof.
SECTION 1.4. Revocation of Proxies. Shareholder hereby revokes any and all
previous proxies granted with respect to the Shares.
SECTION 1.5. Agreement to Vote the Shares for the Merger. Shareholder
agrees that he or she will attend (either in person or by proxy) any meeting of
the shareholders of Lennox to be held for the purpose of obtaining shareholder
approval of the issuance of Lennox Common Stock pursuant to the Merger and that
Shareholder will vote (or consent in lieu of a meeting of shareholders) all the
Shares in favor of approval of the issuance of Lennox Common Stock pursuant to
the Merger.
C-1
<PAGE> 238
SECTION 1.6. Further Assurances. Each party hereto shall execute and
deliver such additional instruments and other documents and shall take such
further actions as may be necessary or appropriate to effectuate, carry out and
comply with all of such party's obligations under this Agreement, including
without limitation any actions reasonably requested by SEI or Lennox in
connection with obtaining any required consents or approvals to the actions
contemplated hereby under the HSR Act or the Exchange Act. Without limiting the
generality of the foregoing, none of the parties hereto shall enter into any
agreement or arrangement (or alter, amend or terminate any existing agreement or
arrangement) if such action would materially impair the ability of any party to
effectuate, carry out or comply with all of the terms of this Agreement. The
parties hereto understand and agree that notwithstanding any other provision
contained herein, Shareholder is not prohibited from affecting any sale,
transfer, assignment, division or any other disposition of Shares at any time,
and the obligation to vote the Shares as provided in Section 1.5 of this
Agreement applies only to the Shares owned by the Shareholder at the time of the
events referred to in such section.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF SEI
SECTION 2.1. Authority Relative to This Agreement. SEI has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement has been duly and validly
executed and delivered by SEI and, assuming the due authorization, execution and
delivery by Shareholder, constitutes a legal, valid and binding obligation of
SEI, enforceable against SEI in accordance with its terms.
SECTION 2.2. No Conflict. The execution and delivery of this Agreement by
SEI does not, and the performance of this Agreement by SEI shall not, result in
any material breach of or constitute a material default (or an event that with
notice or lapse of time or both would become a material default) under, or give
to others any rights of termination, amendment, acceleration or cancellation of,
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other material instrument or obligation to which
SEI is a party or by which SEI is bound or affected.
ARTICLE III
MISCELLANEOUS
SECTION 3.1. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
SECTION 3.2. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance or injunctive relief in respect of the terms
hereof.
SECTION 3.3. Entire Agreement. This Agreement constitutes the entire
agreement between SEI and Shareholder with respect to the subject matter hereof
and supersedes all prior agreements and understandings, both written and oral,
between SEI and Shareholder with respect to the subject matter hereof.
SECTION 3.4. Assignment. This Agreement shall not be assigned by operation
of law or otherwise (other than by will or the laws of descent and
distribution).
SECTION 3.5. Parties in Interest. This Agreement shall inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any person other than the parties hereto any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
C-2
<PAGE> 239
SECTION 3.6. Amendment; Waiver. This Agreement may not be amended except by
an instrument in writing signed by each of the parties hereto. Any party hereto
may (i) extend the time for the performance of any obligation or other act of
any other party hereto, (ii) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any agreement or condition contained herein. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
SECTION 3.7. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
this Agreement is not affected in any manner materially adverse to any party.
Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the terms of
this Agreement remain as originally contemplated to the fullest extent possible.
SECTION 3.8. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 3.8):
if to SEI:
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Telecopy: (615) 221-4131
Attention: Chief Executive Officer
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
1 Liberty Plaza
New York, NY 10006
Facsimile No.: (212) 225-3999
Attention: Victor I. Lewkow, Esq.
and
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
511 Union Street
Suite 2100, Nashville City Center
Nashville, TN 37219
Telecopy: (615) 244-6804
Attention: J. Chase Cole, Esq.
C-3
<PAGE> 240
if to Shareholder:
Lennox International Inc.
2100 Lake Park Blvd.
Richardson, TX 75080
Telecopy: (972) 497-5440
Attention: Carl Edwards
with a copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, TX 75201
Telecopy: (214) 953-6503
Attention: Andrew M. Baker
SECTION 3.9. Termination. This Agreement shall terminate upon the Effective
Date or upon the termination of the Merger Agreement in accordance with the
termination provisions provided therein.
SECTION 3.10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to principles of conflicts of law.
SECTION 3.11. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby or thereby shall be
brought in any federal or state court located in the State of Delaware, and each
of the parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 3.8 shall be deemed
effective service of process on such party.
SECTION 3.12. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 3.13. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
[Remainder of Page Intentionally Left Blank.]
C-4
<PAGE> 241
IN WITNESS WHEREOF, SEI has caused this Agreement to be executed by its
respective officer thereunto duly authorized and Shareholder has duly executed
this Agreement, each as of the date first written above.
SERVICE EXPERTS, INC.
By:
----------------------------------
Alan R. Sielbeck
President and Chief Executive
Officer
SHAREHOLDER
------------------------------------
C-5
<PAGE> 242
SCHEDULE A
LENNOX COMMON STOCK SHARES
C-6
<PAGE> 243
ANNEX D
FORM OF SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT, dated as of October 26, 1999 (this
"Agreement"), by and between Lennox International Inc., a Delaware corporation
("Lennox"), and (the "Shareholder").
WHEREAS, Service Experts, Inc., a Delaware corporation ("SEI"), has entered
into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"; capitalized terms not defined in this Agreement have the meanings
ascribed to them in the Merger Agreement), with Lennox and LII Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of Lennox
("Merger Sub"), that provides, among other things, upon the terms and subject to
the conditions thereof, for the merger of Merger Sub with and into SEI (the
"Merger").
WHEREAS, as a condition to the willingness of Lennox to enter into the
Merger Agreement, Lennox has required that the Shareholder agree, and in order
to induce Lennox to enter into the Merger Agreement, the Shareholder has agreed,
to vote, in accordance with the terms of this Agreement, all the shares of SEI
Common Stock set forth opposite Shareholder's name on Schedule A hereto and any
and all shares of SEI Common Stock that may hereafter be acquired by the
Shareholder in his or her individual capacity (collectively, the "Shares"),
whether pursuant to stock option agreements, warrants or otherwise.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE SHAREHOLDER
SECTION 1.1. Authority Relative to This Agreement. Shareholder is competent
to execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement has been duly and validly executed and delivered by Shareholder
and, assuming the due authorization, execution and delivery by Lennox,
constitutes a legal, valid and binding obligation of Shareholder, enforceable
against Shareholder in accordance with its terms.
SECTION 1.2. No Conflict. The execution and delivery of this Agreement by
Shareholder does not, and the performance of this Agreement by Shareholder shall
not, result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or encumbrance, on any of the Shares pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Shareholder is a party or
by which Shareholder or the Shares are bound or affected.
SECTION 1.3. Marketable Title. Shareholder represents and warrants to
Lennox that Shareholder has good and marketable title to the Shares, free and
clear of all liens, claims, charges and encumbrances and has full power and
authority to exercise all voting rights in respect thereof.
SECTION 1.4. Revocation of Proxies. Shareholder hereby revokes any and all
previous proxies granted with respect to the Shares.
SECTION 1.5. Agreement to Vote the Shares for the Merger. Shareholder
agrees that he or she will attend (either in person or by proxy) any meeting of
the shareholders of SEI to be held for the purpose of obtaining shareholder
approval of the Merger and the Merger Agreement and that Shareholder will vote
(or consent in lieu of a meeting of shareholders) all the Shares in favor of
approval of the Merger and the Merger Agreement.
D-1
<PAGE> 244
SECTION 1.6. Further Assurances. Each party hereto shall execute and
deliver such additional instruments and other documents and shall take such
further actions as may be necessary or appropriate to effectuate, carry out and
comply with all of such party's obligations under this Agreement, including
without limitation any actions reasonably requested by Lennox or SEI in
connection with obtaining any required consents or approvals to the actions
contemplated hereby under the HSR Act or the Exchange Act. Without limiting the
generality of the foregoing, none of the parties hereto shall enter into any
agreement or arrangement (or alter, amend or terminate any existing agreement or
arrangement) if such action would materially impair the ability of any party to
effectuate, carry out or comply with all of the terms of this Agreement. The
parties hereto understand and agree that notwithstanding any other provision
contained herein, Shareholder is not prohibited from affecting any sale,
transfer, assignment, division or any other disposition of Shares at any time,
and the obligation to vote the Shares as provided in Section 1.5 of this
Agreement applies only to the Shares owned by the Shareholder at the time of the
events referred to in such section.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF LENNOX
SECTION 2.1 Authority Relative to This Agreement. Lennox has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement has been duly and validly
executed and delivered by Lennox and, assuming the due authorization, execution
and delivery by Shareholder, constitutes a legal, valid and binding obligation
of Lennox, enforceable against Lennox in accordance with its terms.
SECTION 2.2 No Conflict. The execution and delivery of this Agreement by
Lennox does not, and the performance of this Agreement by Lennox shall not,
result in any material breach of or constitute a material default (or an event
that with notice or lapse of time or both would become a material default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other material instrument or
obligation to which Lennox is a party or by which Lennox is bound or affected.
ARTICLE III
MISCELLANEOUS
SECTION 3.1. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
SECTION 3.2. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance or injunctive relief in respect of the terms
hereof.
SECTION 3.3. Entire Agreement. This Agreement constitutes the entire
agreement between Lennox and Shareholder with respect to the subject matter
hereof and supersedes all prior agreements and understandings, both written and
oral, between Lennox and Shareholder with respect to the subject matter hereof.
SECTION 3.4. Assignment. This Agreement shall not be assigned by operation
of law or otherwise (other than by will or the laws of descent and
distribution).
SECTION 3.5. Parties in Interest. This Agreement shall inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any person other than the parties hereto any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
D-2
<PAGE> 245
SECTION 3.6. Amendment; Waiver. This Agreement may not be amended except by
an instrument in writing signed by each of the parties hereto. Any party hereto
may (i) extend the time for the performance of any obligation or other act of
any other party hereto, (ii) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any agreement or condition contained herein. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
SECTION 3.7. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
this Agreement is not affected in any manner materially adverse to any party.
Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the terms of
this Agreement remain as originally contemplated to the fullest extent possible.
SECTION 3.8. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 3.8):
if to Lennox:
Lennox International Inc.
2100 Lake Park Blvd.
Richardson, TX 75080
Telecopy: (972) 497-5440
Attention: Chief Executive Officer
with a copy to:
Baker & Botts, L.L.P.
2001 Ross Avenue
Dallas, TX 75201-2980
Facsimile No.: (214) 953-6503
Attention: Andrew Baker
if to Shareholder:
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
Attention:
-----------------------------------------------------
with a copy to:
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SECTION 3.9. Termination. This Agreement shall terminate upon the Effective
Date or upon the termination of the Merger Agreement in accordance with the
termination provisions provided therein.
SECTION 3.10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to principles of conflicts of law.
D-3
<PAGE> 246
SECTION 3.11. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby or thereby shall be
brought in any federal or state court located in the State of Delaware, and each
of the parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 3.8 shall be deemed
effective service of process on such party.
SECTION 3.12. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 3.13. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
[Remainder of Page Intentionally Left Blank.]
D-4
<PAGE> 247
IN WITNESS WHEREOF, Lennox has caused this Agreement to be executed by its
respective officer thereunto duly authorized and Shareholder has duly executed
this Agreement, each as of the date first written above.
LENNOX INTERNATIONAL INC.
By:
----------------------------------
Clyde W. Wyant
Chief Financial Officer and
Treasurer
SHAREHOLDER
------------------------------------
D-5
<PAGE> 248
SCHEDULE A
SEI COMMON STOCK SHARES
D-6
<PAGE> 249
ANNEX E
SUNTRUST EQUITABLE SECURITIES CORPORATION
800 Nashville City Center
Nashville, Tennessee 37219-1743
Member New York Stock Exchange, Inc.
- --------------------------------------------------------------------------------
[SunTrust Equitable letterhead]
October 26, 1999
Board of Directors
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Members of the Board:
We understand that Service Experts, Inc. ("Company") intends to enter into
an Agreement and Plan of Merger (the "Agreement") with Lennox International,
Inc. ("Parent") and Titan Acquisition Corporation ("Merger Sub"). The Agreement
will provide that, at the effective time of the merger (the "Merger") of Merger
Sub into the Company (the "Effective Time"), the Company will become a wholly-
owned subsidiary of Parent and each outstanding share of common stock of the
Company will be converted into the right to receive 0.67 shares of common stock
of Parent (the "Exchange Ratio"). The terms and conditions of the Merger are
more fully set forth in the Agreement and related documents.
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the shareholders of the Company (the
"Shareholders") of the Exchange Ratio. At your direction, we do not express any
views on any other term of the Merger. Specifically, our opinion does not
address the Company's underlying business decision to effect the transactions
contemplated by the Agreement or the merits of the Merger relative to any
alternative transaction or business strategy that may be available to the
Company.
SunTrust Equitable Securities Corporation ("SunTrust Equitable"), as part
of its investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. SunTrust Equitable has been engaged to render financial advisory
services to the Company in connection with the Merger and will receive a fee and
reimbursement of its expenses, a significant portion of which is contingent upon
the consummation of the Merger. In addition, the Company has agreed to indemnify
SunTrust Equitable for certain liabilities arising out of the rendering of this
opinion. In the past, SunTrust Equitable has performed investment banking and
financial advisory services for the Company from time to time for which we have
received customary compensation, including providing investment banking and
financial advisory services in connection with the formation and structuring of
the Company for which SunTrust Equitable received warrants to purchase 82,391
shares of the Company's common stock with an exercise price of $13.00 per share.
In the ordinary course of business, we trade the equity and debt securities of
the Company for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in these securities.
In addition, SunTrust Bank, Nashville, N.A., an affiliate of SunTrust Equitable,
performs commercial banking services for the Company and receives customary fees
for such services, and is currently one of the Company's largest commercial
lenders.
A SUBSIDIARY OF SUNTRUST BANKS, INC.
E-1
<PAGE> 250
In connection with our opinion, we have reviewed, among other things, a
draft of the Agreement dated October 25, 1999 and terms of related documents,
certain publicly-available information regarding the Company and Parent and
certain other financial information, reports, forecasts and other information
which was provided to us by or on behalf of managements of the Company and
Parent regarding the Company and Parent. For purposes of our opinion, we have
assumed that the final form of the Agreement will not differ in any material
respect from the draft of the Agreement provided to us. We held discussions with
the managements and representatives of the Company and Parent concerning the
historical and current operations of the Company and Parent, their respective
financial condition and prospects, as well as the strategic and operating
benefits anticipated from the Merger. Without limiting the foregoing, with
respect to the forecasts included in the prospective financial information
furnished to us relating to the Company we have, with your consent, for purposes
of our analysis and in formulating our opinion, assumed and relied solely upon
the accuracy and completeness of those forecasts relating to the Company
included in the prospective financial information that have been identified to
us as representing the best currently available judgments and estimates of the
Company's management as to the Company's current business and future prospects,
and for purposes of our analysis and in rendering this opinion, we have assumed
that such forecasts were reasonably prepared in good faith. We express no
opinion as to any of the prospective financial information or the assumptions on
which it is based. In addition, we (i) considered, to the extent available, the
financial terms of certain other similar transactions recently effected which we
considered comparable to the Merger, (h) compared certain financial positions
and operating results and stock market data of the Company to other companies in
the heating, ventilation and air conditioning ("HVAC") and electrical contract
services industry and compared certain financial positions and operating results
and stock market data of Parent to other companies in the HVAC and refrigeration
equipment manufacturing industry, (iii) reviewed the pro forma financial effects
of the Merger to the combined company and (iv) conducted such other financial
studies, analyses and investigations and reviewed such other factors as we
deemed appropriate for purposes of this opinion.
In rendering this opinion, we have relied, without assuming any
responsibility for independent verification, on the accuracy and completeness of
all historical financial and other historical information reviewed by us that
was publicly available or furnished to us by or on behalf of the Company and
Parent, and we have not assumed any responsibility for independent verification
of any such historical information or any of the prospective financial
information furnished to us. We have assumed that the financial forecasts of
Parent provided to us which we examined were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the management of Parent. We have also assumed, with the consent of the Company,
that the Merger will be a tax-free reorganization. We have assumed that the
transactions described in the draft Agreement provided to us will be consummated
without waiver or modification of any of the material terms or conditions
contained therein by any party thereto. We have not made an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company or Parent, nor were we furnished with any such evaluations or
appraisals. Our opinion is based upon economic, market and other conditions
existing on the date hereof and does not address the fairness of the Exchange
Ratio to the Shareholders as of any other date. Our opinion does not address the
merits of the underlying decision by the Company to engage in the Merger and
does not constitute a recommendation to any Shareholder of the Company as to
whether or not that Shareholder should vote to approve the Merger and should not
be relied upon by any Shareholder as such. The financial markets in general, and
the markets for the securities of the Company and Parent in particular, are
subject to volatility, and this opinion does not purport to address potential
developments in the financial markets or the markets for the securities of the
Company and Parent after the date hereof.
It is understood that this letter is for the benefit and use of the Board
of Directors of the Company in its consideration of the Merger. This letter may
not be reproduced, disseminated, quoted or referred to at any time without our
prior written consent; however, the opinion rendered hereby may be included in
its entirety in the registration statement or proxy statement relating to the
Merger to be distributed by the Company to its Shareholders.
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<PAGE> 251
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date hereof,
the Exchange Ratio is fair, from a financial point of view, to the Shareholders
of the Company.
Very truly yours,
SUNTRUST EQUITABLE
SECURITIES CORPORATION
E-3
<PAGE> 252
ANNEX F
LOGO
October 26, 1999
Board of Directors
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the stockholders of Service Experts, Inc. (the
"Company") of the Exchange Ratio (as defined below) provided for pursuant to the
terms of the Agreement and Plan of Merger, dated as of October 26, 1999 (the
"Merger Agreement"), among the Company, Lennox International, Inc. ("Parent")
and Titan Acquisition Corporation, a wholly owned subsidiary of Parent ("Sub").
The Merger Agreement provides for, among other things, a merger of Sub with and
into the Company (the "Merger") pursuant to which each outstanding share of
common stock, par value $0.01 per share, of the Company (other than any shares
held in the treasury of the Company or owned by Parent, Sub or their respective
subsidiaries) will be converted into 0.67 shares of common stock, par value
$0.01 per share, of Parent (the "Exchange Ratio"). The terms and conditions of
the Merger are set forth in more detail in the Merger Agreement.
In connection with rendering our opinion, we have reviewed a draft of the
Merger Agreement, and for purposes hereof, we have assumed that the final form
thereof will not differ in any material respect from the draft provided to us.
We have also reviewed and analyzed certain publicly available business and
financial information relating to the Company and Parent for recent years and
interim periods to date, as well as certain internal financial and operating
information, including certain prospective financial information prepared by or
on behalf of the Company and Parent and provided to us for purposes of our
analysis (collectively, the "Prospective Financial Information"), and we have
met with the managements of the Company and Parent to review and discuss such
information and, among other matters, each of the Company's and Parent's
respective businesses, financial condition, results of operations and future
prospects.
We have reviewed and considered certain financial and stock market data
relating to the Company and Parent, and we have compared that data with similar
data for certain other companies, the securities of which are publicly traded,
that we believe may be relevant or comparable in certain respects to the Company
and Parent or one or more of their respective businesses or assets, and we have
reviewed and considered the financial terms of certain recent acquisitions and
other business combination transactions that we believe to be reasonably
comparable to the Merger or otherwise relevant to our inquiry. We have also
performed such other financial analyses, and reviewed such other information, as
we considered appropriate for purposes of this opinion.
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all of the historical financial
and other historical information provided to or discussed with us or publicly
available, and we have not assumed any responsibility for independent
verification of any of such historical information or any of the Prospective
Financial Information furnished to us. In addition, with respect to the
forecasts included in the Prospective Financial Information relating to the
Company, we have, with your consent, for purposes of our analysis and in
formulating our opinion, assumed and relied solely upon the accuracy and
completeness of such of those forecasts that have been identified to us as
representing the best currently available judgments and estimates of the
Company's
[WASSERSTEIN PERELLA & CO. LETTERHEAD FOOTER]
F-1
<PAGE> 253
management as to the Company's current business and future prospects, and for
purposes of our analysis and in rendering this opinion, we have assumed that
such forecasts were reasonably prepared in good faith. We express no opinion as
to any of the Prospective Financial Information or the assumptions on which it
is based. In addition, we have not reviewed any of the books and records of the
Company or Parent, or assumed any responsibility for conducting a physical
inspection of the properties or facilities of the Company or Parent or for
making or obtaining an independent valuation or appraisal of the assets or
liabilities of the Company or Parent, and no such independent valuation or
appraisal was provided to us.
We note that the Merger is intended to qualify as a tax-free reorganization
for United States federal income tax purposes, and we have assumed that the
Merger will so qualify. We have assumed that obtaining all regulatory and other
approvals and third-party consents required for consummation of the Merger will
not have an adverse impact on the Company or Parent or the anticipated benefits
of the Merger, and we have assumed that the transactions described in the Merger
Agreement will be consummated without waiver or modification of any of the
material terms or conditions contained therein by any party thereto. Our opinion
is necessarily based on economic and market conditions and other circumstances
as they exist and can be evaluated by us as of the date hereof We are not
expressing any opinion herein as to the prices at which any securities of Parent
or the Company will actually trade at any time.
In the ordinary course of our business, we may actively trade the debt and
equity securities of the Company and Parent for our own account and for the
accounts of customers. and, accordingly, may at any time hold a long or short
position in such securities.
We are acting as one of the financial advisors to the Company in connection
with the proposed Merger and will receive a fee for our services, a significant
portion of which is contingent upon the consummation of the Merger, as well as a
fee for rendering this opinion. In addition, the Company has agreed to indemnify
Wasserstein Perella for certain liabilities arising out of its engagement and
the rendering of this opinion.
Our opinion addresses only the fairness from a financial point of view to
the shareholders of the Company of the Exchange Ratio provided for pursuant to
the Merger Agreement and we do not express any views on any other term of the
Merger. Specifically, our opinion does not address the Company's underlying
business decision to effect the transactions contemplated by the Merger
Agreement or the merits of the Merger relative to any alternative transaction or
business strategy that may available to the Company.
It is understood that this letter is for the benefit and use of the Board
of Directors of the Company in its consideration of the Merger, and except for
inclusion in its entirety in any registration statement or proxy statement
required to be circulated to shareholders of the Company relating to the Merger,
may not be quoted, referred to or reproduced at any time or in any manner
without our prior written consent. This opinion does not constitute a
recommendation to any shareholder or as to how such holder should vote with
respect to the Merger, and should not be relied upon by any shareholder as such.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof
the Exchange Ratio provided for pursuant to the Merger Agreement is fair to the
shareholders of the Company from a financial point of view.
Very truly yours,
WASSERSTEIN PERELLA & CO., INC.
F-2
<PAGE> 254
ANNEX G
[WARBURG DILLON READ FULL LETTERHEAD]
October 25, 1999
The Board of Directors
Lennox International Inc.
2100 Lake Park Boulevard
Richardson, TX 75080
Attention: John W. Norris, Jr.
Chairman and Chief Executive Officer
We understand that Lennox International Inc., a Delaware corporation (the
"Company"), Service Experts, Inc., a Delaware corporation ("Service Experts"),
and LII Acquisition Corporation, a newly formed Delaware corporation and a
direct wholly owned subsidiary of the Company ("Merger Sub"), are considering
entering into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which Merger Sub will be merged with and into Service Experts (the "Merger"),
with Service Experts being the surviving corporation in the Merger. Upon
effectiveness of the Merger, each outstanding share of common stock of Service
Experts ("Service Experts Common Stock") including all issued and outstanding
options, warrants or other stock issuance agreements, will be converted, at a
fixed exchange ratio, into the right to receive 0.67 shares of common stock, par
value of $0.01 per share ("Company Common Stock"), of the Company (the
"Conversion Number"). In addition, the Company will assume approximately $160
million in total indebtedness as part of the Merger. No Company Common Stock
will be issued to holders of fractional shares of Service Experts Common Stock.
In connection with the Merger Agreement, the Company and Service Experts are
considering entering into a Stock Option Agreement (together with the Merger
Agreement, the "Agreements") pursuant to which Service Experts will grant to the
Company an option, exercisable in certain circumstances described therein, to
purchase a number of shares of Service Experts Common Stock equal to
approximately 19.9% of the number of outstanding shares of Service Experts
Common Stock. The terms and conditions of the Merger are more fully set forth in
the drafts of the Agreements dated October 24, 1999.
You have requested our opinion as to whether the Conversion Number is fair,
from a financial point of view, to the Company.
Warburg Dillon Read LLC ("WDR") has acted as financial advisor to the Board
of Directors of the Company in connection with the Merger and will receive a fee
upon the consummation thereof. In the past, WDR and its predecessors have
provided investment banking services to the Company and received customary
compensation for the rendering of such services. In July of 1999, WDR was a
co-manager of the Company's $160 million dollar initial public offering and has
served as lead agent in a series of private placements for the Company. In the
ordinary course of business, WDR, its successors and affiliates may trade or
have traded securities of the Company or Service Experts for their own accounts
and, accordingly, may at any time hold a long or short position in such
securities.
Our opinion does not address the Company's underlying business decision to
effect the Merger or constitute a recommendation to any shareholder of the
Company or Service Experts as to how such shareholder should vote with respect
to the Merger. At your direction, we have not been asked to, nor do we, offer
any opinion as to the material terms of the Agreements or the form of the
Merger. In rendering
[WDR FOOTER]
G-1
<PAGE> 255
[WARBURG DILLON READ FULL LETTERHEAD]
this opinion, we have assumed, with your consent, that the final executed form
of the Agreements will not differ in any material respect from the drafts that
we have examined, and that the Company and Service Experts will comply with all
the material terms of the draft and final version of the Agreements.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company and Service Experts, (ii) reviewed certain internal
financial information and other data relating to the business and financial
prospects of the Company, including estimates and financial forecasts prepared
by management of the Company, that were provided to us by the Company and not
publicly available, (iii) reviewed certain internal financial information and
other data relating to the business and financial prospects of Service Experts,
including estimates and financial forecasts prepared by and subjected to due
diligence by the management of the Company and Service Experts and not publicly
available, (iv) conducted discussions with members of the senior management of
the Company and Service Experts, (v) reviewed publicly available financial and
stock market data with respect to certain other companies in lines of business
we believe to be generally comparable to those of the Company and Service
Experts, (vi) compared the financial terms of the Merger with the publicly
available financial terms of certain other transactions which we believe to be
generally relevant, (vii) considered certain pro forma effects of the Merger on
the Company's financial statements and reviewed certain estimates of synergies
prepared by Company management, (viii) reviewed drafts of the Agreements, and
(ix) conducted such other financial studies, analyses, and investigations, and
considered such other information as we deemed necessary or appropriate.
In connection with our review, at your direction, we have not assumed any
responsibility for independent verification for any of the information reviewed
by us for the purpose of this opinion and have, at your direction, relied on its
being complete and accurate in all material respects. In addition, at your
direction, we have not made any independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company or Service
Experts, nor have we been furnished with any such evaluation or appraisal. With
respect to the financial forecasts (including the obtaining of synergies),
estimates of revenues and costs, presumed pro forma effects, and analysis of
potential synergies referred to above, we have assumed, at your direction, that
they have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of each company as to the
future performance of their respective companies. Our opinion is necessarily
based on economic, monetary, market and other conditions as in effect on, and
the information made available to us, as of October 25, 1999.
[WDR FOOTER]
G-2
<PAGE> 256
[WARBURG DILLON READ FULL LETTERHEAD]
Based upon and subject to the foregoing, it is our opinion that, the
Conversion Number is fair, from a financial point of view, to the Company.
Very truly yours,
WARBURG DILLON READ LLC
By: /s/ DAVID M. DICKSON, JR.
----------------------------------
David M. Dickson, Jr.
Managing Director
By: /s/ HARRY A. SHAW
----------------------------------
Harry A. Shaw
Director
[WDR FOOTER]
G-3
<PAGE> 257
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the prospectus which forms
a part of this Registration Statement.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
145(a) and (b), or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under Section
145(a) and (b) (unless ordered by a court) shall be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the present or former director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 145(a) and (b). Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt
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<PAGE> 258
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation as authorized in Section 145. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
Section 145(f) of the DGCL provides that the indemnification and
advancement of expenses provided by, or granted pursuant to, Section 145 shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would have the power to indemnify such person against such
liability under Section 145.
Section 102(b)(7) of the DGCL provides that the liability of a director may
not be limited or eliminated for the breach of such director's duty of loyalty
to the corporation or its stockholders, for such director's intentional acts or
omissions not in good faith, for such director's concurrence in or vote for an
unlawful payment of a dividend or unlawful stock purchase or redemption or for
any improper personal benefit derived by the director from any transaction.
Restated Certificate of Incorporation
Article Eighth of Lennox's restated certificate of incorporation provides
that a director of Lennox shall not be liable to Lennox or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the DGCL as the same exists or may hereafter be amended. Any repeal or
modification of Article Eighth shall not adversely affect any right or
protection of a director of Lennox existing thereunder with respect to any act
or omission occurring prior to such repeal or modification.
Bylaws
Article VI of Lennox's bylaws provides that each person who at any time
shall serve or shall have served as a director or officer of Lennox, or any
person who, while a director or officer of Lennox, is or was serving at the
request of Lennox as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, shall be entitled to (a)
indemnification and (b) the advancement of expenses incurred by such person from
Lennox as, and to the fullest extent, permitted by Section 145 of the DGCL or
any successor statutory provision, as from time to time amended. Lennox may
indemnify any other person, to the same extent and subject to the same
limitations specified in the immediately preceding sentence, by reason of the
fact that such other person is or was an employee or agent of Lennox or another
corporation, partnership, joint venture, trust or other enterprise.
The indemnification and advancement of expenses provided by, or granted
pursuant to, Article VI shall not be deemed exclusive of any other rights to
which any person seeking indemnification or advancement of expenses may be
entitled under any bylaw of Lennox, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office. All rights to indemnification under Article VI shall be deemed to be
provided by a contract between Lennox and the director, officer, employee or
agent who served in such capacity at any time while the bylaws of Lennox and
other relevant provisions of the DGCL and other applicable law, if any, are in
effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing. Without limiting the provisions of Article VI, Lennox
is authorized from time to
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<PAGE> 259
time, without further action by the stockholders of Lennox, to enter into
agreements with any director or officer of Lennox providing such rights of
indemnification as Lennox may deem appropriate, up to the maximum extent
permitted by law. Any agreement entered into by Lennox with a director may be
authorized by the other directors, and such authorization shall not be invalid
on the basis that similar agreements may have been or may thereafter be entered
into with other directors.
Lennox may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of Lennox, or is or was serving at
the request of Lennox as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not Lennox
would have the power to indemnify such person against such liability under the
applicable provisions of Article VI or the DGCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of October 26,
1999, among Lennox International Inc., LII Acquisition
Corporation, and Service Experts, Inc. (included as Annex
A of the prospectus which forms a part of this
Registration Statement).
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)).
5.1 -- Opinion of Baker & Botts, L.L.P. regarding legality of
securities being registered.
8.1 -- Opinion of Baker & Botts, L.L.P. regarding certain tax
matters with respect to the merger.
8.2 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, regarding certain tax matters
with respect to the merger.
10.1 -- Agreement of Assumption and Restatement, dated as of
December 1, 1991, between Lennox and identified
Noteholders relating to Lennox's 9.53% Series F
Promissory Notes due 2001 and 9.69% Promissory Notes due
2003 (incorporated by reference to Exhibit 10.1 to
Lennox's Registration Statement on Form S-1 (Registration
No. 333-75725)).
10.2 -- Note Purchase Agreement, dated as of December 1, 1993,
between Lennox and identified Noteholders relating to
Lennox's 6.73% Senior Promissory Notes due 2008
(incorporated by reference to Exhibit 10.2 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.3 -- Note Purchase Agreement, dated as of July 6, 1995,
between Lennox and Teachers Insurance and Annuity
Association of America relating to Lennox's 7.06% Senior
Promissory Notes due 2005 (incorporated by reference to
Exhibit 10.3 to Lennox's Registration Statement on Form
S-1 (Registration No. 333-75725)).
10.4 -- Note Purchase Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 6.56% Senior Notes due 2005 and 6.75% Senior
Notes due 2008 (incorporated by reference to Exhibit 10.4
to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
</TABLE>
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<PAGE> 260
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5 -- Note Amendment Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 9.53% Senior Promissory Notes due 2001, 9.69%
Senior Promissory Notes due 2003, 7.06% Senior Promissory
Notes due 2005 and 6.73% Senior Promissory Notes due 2008
(incorporated by reference to Exhibit 10.5 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.6 -- Revolving Credit Facility Agreement, dated as of July 29,
1999, among Lennox, Chase Bank of Texas, National
Association, as administrative agent, Wachovia Bank,
N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named therein
(incorporated by reference to Exhibit 10.25 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.7 -- Master Shelf Agreement, dated as of October 15, 1999,
between Lennox and The Prudential Insurance Company of
America relating to Senior Notes to be issued in a
maximum principal amount of $100,000,000 (incorporated by
reference to Exhibit 10.1 to Lennox's Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
1999).
10.8 -- 1998 Incentive Plan of Lennox International Inc.
(incorporated by reference to Exhibit 10.8 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.9 -- Lennox International Inc. Profit Sharing Restoration Plan
(incorporated by reference to Exhibit 10.9 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.10 -- Lennox International Inc. Supplemental Executive
Retirement Plan (incorporated by reference to Exhibit
10.10 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.11 -- Letter of Intent, dated as of June 23, 1998, between
Jean-Jacques Brancher and Lennox Global Ltd.
(incorporated by reference to Exhibit 10.11 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.12 -- First Amendment to the Amended and Restated Venture
Agreement, dated as of December 27, 1997, between Ets.
Brancher S.A. and Lennox Global Ltd. (incorporated by
reference to Exhibit 10.12 to Lennox's Registration
Statement on Form S-1 (Registration No. 333-75725)).
10.13 -- Amended and Restated Venture Agreement, dated as of
November 10, 1997, by and among Lennox Global Ltd.,
Lennox International Inc., Ets. Brancher S.A. and Fibel
S.A. (incorporated by reference to Exhibit 10.13 to
Lennox's Registration Statement on Form S-1 (Registration
No. 333-75725)).
10.14 -- Shareholder Restructure Agreement, dated as of September
30, 1997, by and among Jean Jacques Brancher, Ets.
Brancher S.A., AFIBRAL S.A., Parifri S.A. and Lennox
International Inc. (incorporated by reference to Exhibit
10.14 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.15 -- Form of Indemnification Agreement entered into between
Lennox and certain executive officers and directors
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution)
(incorporated by reference to Exhibit 10.15 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
</TABLE>
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<PAGE> 261
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16 -- Form of Employment Agreement entered into between Lennox
and certain executive officers (includes a schedule
identifying the various parties to such agreement and the
applicable dates of execution) (incorporated by reference
to Exhibit 10.16 to Lennox's Registration Statement on
Form S-1 (Registration No. 333-75725)).
10.17 -- Form of Change of Control Employment Agreement entered
into between Lennox and certain executive officers
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution)
(incorporated by reference to Exhibit 10.17 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.18 -- Stock Disposition Agreement, dated as of June 2, 1997,
among Lennox, A.O.C. Corporation and Compass Bank
(incorporated by reference to Exhibit 10.18 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.19 -- Stock Disposition Agreement, dated as of January 22,
1998, among Lennox, A.O.C. Corporation and Compass Bank
(incorporated by reference to Exhibit 10.19 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.20 -- Stock Disposition Agreement, dated as of May 7, 1998,
among Lennox and Northern Trust Bank of Florida, N.A.
(incorporated by reference to Exhibit 10.20 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.21 -- Master Stock Disposition Agreement, dated as of August
10, 1998, among Lennox, Chase Bank of Texas, N.A., and
various executive officers and directors (incorporated by
reference to Exhibit 10.21 to Lennox's Registration
Statement on Form S-1 (Registration No. 333-75725)).
10.22 -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Harris Trust &
Savings Bank (incorporated by reference to Exhibit 10.22
to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.23 -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Susan M. Major and
Harris Trust & Savings Bank (incorporated by reference to
Exhibit 10.23 to Lennox's Registration Statement on Form
S-1 (Registration No. 333-75725)).
10.24 -- Stock Option Agreement, dated as of October 26, 1999,
between Lennox International Inc. and Service Experts,
Inc. (included as Annex B of the prospectus which forms a
part of this Registration Statement).
10.25 -- Form of Service Experts Shareholder Agreement (included
as Annex C of the prospectus which forms a part of this
Registration Statement).
10.26 -- Form of Lennox Shareholder Agreement (included as Annex D
of the prospectus which forms a part of this Registration
Statement).
21.1 -- Subsidiaries of Lennox.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Baker & Botts, L.L.P. (included in Exhibits
5.1 and 8.1 to this Registration Statement).
23.4 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 8.2 to
this Registration Statement).
23.5 -- Consent of SunTrust Equitable Securities Corporation
(included in Annex E of the prospectus which forms a part
of this Registration Statement).
23.6 -- Consent of Wasserstein Perella & Co., Inc. (included in
Annex F of the prospectus which forms a part of this
Registration Statement).
</TABLE>
II-5
<PAGE> 262
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.7 -- Consent of Warburg Dillon Read LLC.
24.1 -- Powers of Attorney (included in the signature pages of
this Registration Statement).
99.1 -- Form of Lennox International Inc. Proxy Card.
99.2 -- Form of Service Experts, Inc. Proxy Card.
</TABLE>
(b) Financial Statement Schedule
Not Applicable.
(c) Report, Opinion or Appraisal
Not Applicable.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant also undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415 under the Securities Act, will be filed as part
of an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not subject of and included in the registration statement when it became
effective.
II-6
<PAGE> 263
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richardson, State of
Texas, on December 9, 1999.
LENNOX INTERNATIONAL INC.
By: /s/ JOHN W. NORRIS, JR.
----------------------------------
John W. Norris, Jr.
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of Lennox International Inc., a Delaware corporation, which is filing a
Registration Statement on Form S-4 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended (the "Securities
Act"), hereby constitutes and appoints John W. Norris, Jr., Carl E. Edwards, Jr.
and Clyde W. Wyant, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, and in
any and all capacities, to sign and file any and all amendments (including
post-effective amendments) to this Registration Statement, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, it being understood that said attorneys-in-fact and agents,
and each of them, shall have full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person and that each of the undersigned hereby ratifies and confirms all that
said attorneys-in-fact as agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN W. NORRIS, JR. Chairman of the Board and December 9, 1999
- ----------------------------------------------------- Chief Executive Officer
John W. Norris, Jr. (Principal Executive
Officer)
/s/ CLYDE W. WYANT Executive Vice President, December 9, 1999
- ----------------------------------------------------- Chief Financial Officer
Clyde W. Wyant and Treasurer (Principal
Financial Officer)
/s/ JOHN J. HUBBUCH Vice President, Controller December 9, 1999
- ----------------------------------------------------- and Chief Accounting
John J. Hubbuch Officer (Principal
Accounting Officer)
Director
- -----------------------------------------------------
Linda G. Alvarado
/s/ DAVID H. ANDERSON Director December 9, 1999
- -----------------------------------------------------
David H. Anderson
</TABLE>
II-7
<PAGE> 264
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD W. BOOTH Director December 9, 1999
- -----------------------------------------------------
Richard W. Booth
/s/ THOMAS W. BOOTH Director December 9, 1999
- -----------------------------------------------------
Thomas W. Booth
/s/ DAVID V. BROWN Director December 9, 1999
- -----------------------------------------------------
David V. Brown
/s/ JAMES J. BYRNE Director December 9, 1999
- -----------------------------------------------------
James J. Byrne
/s/ JANET K. COOPER Director December 9, 1999
- -----------------------------------------------------
Janet K. Cooper
/s/ JOHN E. MAJOR Director December 9, 1999
- -----------------------------------------------------
John E. Major
/s/ DONALD E. MILLER Director December 9, 1999
- -----------------------------------------------------
Donald E. Miller
/s/ TERRY D. STINSON Director December 9, 1999
- -----------------------------------------------------
Terry D. Stinson
/s/ RICHARD L. THOMPSON Director December 9, 1999
- -----------------------------------------------------
Richard L. Thompson
</TABLE>
II-8
<PAGE> 265
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of October 26,
1999, among Lennox International Inc., LII Acquisition
Corporation, and Service Experts, Inc. (included as Annex
A of the prospectus which forms a part of this
Registration Statement).
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)).
5.1 -- Opinion of Baker & Botts, L.L.P. regarding legality of
securities being registered.
8.1 -- Opinion of Baker & Botts, L.L.P. regarding certain tax
matters with respect to the merger.
8.2 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, regarding certain tax matters
with respect to the merger.
10.1 -- Agreement of Assumption and Restatement, dated as of
December 1, 1991, between Lennox and identified
Noteholders relating to Lennox's 9.53% Series F
Promissory Notes due 2001 and 9.69% Promissory Notes due
2003 (incorporated by reference to Exhibit 10.1 to
Lennox's Registration Statement on Form S-1 (Registration
No. 333-75725)).
10.2 -- Note Purchase Agreement, dated as of December 1, 1993,
between Lennox and identified Noteholders relating to
Lennox's 6.73% Senior Promissory Notes due 2008
(incorporated by reference to Exhibit 10.2 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.3 -- Note Purchase Agreement, dated as of July 6, 1995,
between Lennox and Teachers Insurance and Annuity
Association of America relating to Lennox's 7.06% Senior
Promissory Notes due 2005 (incorporated by reference to
Exhibit 10.3 to Lennox's Registration Statement on Form
S-1 (Registration No. 333-75725)).
10.4 -- Note Purchase Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 6.56% Senior Notes due 2005 and 6.75% Senior
Notes due 2008 (incorporated by reference to Exhibit 10.4
to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.5 -- Note Amendment Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 9.53% Senior Promissory Notes due 2001, 9.69%
Senior Promissory Notes due 2003, 7.06% Senior Promissory
Notes due 2005 and 6.73% Senior Promissory Notes due 2008
(incorporated by reference to Exhibit 10.5 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.6 -- Revolving Credit Facility Agreement, dated as of July 29,
1999, among Lennox, Chase Bank of Texas, National
Association, as administrative agent, Wachovia Bank,
N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named therein
(incorporated by reference to Exhibit 10.25 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
</TABLE>
<PAGE> 266
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7 -- Master Shelf Agreement, dated as of October 15, 1999,
between Lennox and The Prudential Insurance Company of
America relating to Senior Notes to be issued in a
maximum principal amount of $100,000,000 (incorporated by
reference to Exhibit 10.1 to Lennox's Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
1999).
10.8 -- 1998 Incentive Plan of Lennox International Inc.
(incorporated by reference to Exhibit 10.8 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.9 -- Lennox International Inc. Profit Sharing Restoration Plan
(incorporated by reference to Exhibit 10.9 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.10 -- Lennox International Inc. Supplemental Executive
Retirement Plan (incorporated by reference to Exhibit
10.10 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.11 -- Letter of Intent, dated as of June 23, 1998, between
Jean-Jacques Brancher and Lennox Global Ltd.
(incorporated by reference to Exhibit 10.11 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.12 -- First Amendment to the Amended and Restated Venture
Agreement, dated as of December 27, 1997, between Ets.
Brancher S.A. and Lennox Global Ltd. (incorporated by
reference to Exhibit 10.12 to Lennox's Registration
Statement on Form S-1 (Registration No. 333-75725)).
10.13 -- Amended and Restated Venture Agreement, dated as of
November 10, 1997, by and among Lennox Global Ltd.,
Lennox International Inc., Ets. Brancher S.A. and Fibel
S.A. (incorporated by reference to Exhibit 10.13 to
Lennox's Registration Statement on Form S-1 (Registration
No. 333-75725)).
10.14 -- Shareholder Restructure Agreement, dated as of September
30, 1997, by and among Jean Jacques Brancher, Ets.
Brancher S.A., AFIBRAL S.A., Parifri S.A. and Lennox
International Inc. (incorporated by reference to Exhibit
10.14 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.15 -- Form of Indemnification Agreement entered into between
Lennox and certain executive officers and directors
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution)
(incorporated by reference to Exhibit 10.15 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.16 -- Form of Employment Agreement entered into between Lennox
and certain executive officers (includes a schedule
identifying the various parties to such agreement and the
applicable dates of execution) (incorporated by reference
to Exhibit 10.16 to Lennox's Registration Statement on
Form S-1 (Registration No. 333-75725)).
10.17 -- Form of Change of Control Employment Agreement entered
into between Lennox and certain executive officers
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution)
(incorporated by reference to Exhibit 10.17 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.18 -- Stock Disposition Agreement, dated as of June 2, 1997,
among Lennox, A.O.C. Corporation and Compass Bank
(incorporated by reference to Exhibit 10.18 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
</TABLE>
<PAGE> 267
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.19 -- Stock Disposition Agreement, dated as of January 22,
1998, among Lennox, A.O.C. Corporation and Compass Bank
(incorporated by reference to Exhibit 10.19 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.20 -- Stock Disposition Agreement, dated as of May 7, 1998,
among Lennox and Northern Trust Bank of Florida, N.A.
(incorporated by reference to Exhibit 10.20 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).
10.21 -- Master Stock Disposition Agreement, dated as of August
10, 1998, among Lennox, Chase Bank of Texas, N.A., and
various executive officers and directors (incorporated by
reference to Exhibit 10.21 to Lennox's Registration
Statement on Form S-1 (Registration No. 333-75725)).
10.22 -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Harris Trust &
Savings Bank (incorporated by reference to Exhibit 10.22
to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
10.23 -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Susan M. Major and
Harris Trust & Savings Bank (incorporated by reference to
Exhibit 10.23 to Lennox's Registration Statement on Form
S-1 (Registration No. 333-75725)).
10.24 -- Stock Option Agreement, dated as of October 26, 1999,
between Lennox International Inc. and Service Experts,
Inc. (included as Annex B of the prospectus which forms a
part of this Registration Statement).
10.25 -- Form of Service Experts Shareholder Agreement (included
as Annex C of the prospectus which forms a part of this
Registration Statement).
10.26 -- Form of Lennox Shareholder Agreement (included as Annex D
of the prospectus which forms a part of this Registration
Statement).
21.1 -- Subsidiaries of Lennox.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Baker & Botts, L.L.P. (included in Exhibits
5.1 and 8.1 to this Registration Statement).
23.4 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 8.2 to
this Registration Statement).
23.5 -- Consent of SunTrust Equitable Securities Corporation
(included in Annex E of the prospectus which forms a part
of this Registration Statement).
23.6 -- Consent of Wasserstein Perella & Co., Inc. (included in
Annex F of the prospectus which forms a part of this
Registration Statement).
23.7 -- Consent of Warburg Dillon Read LLC.
24.1 -- Powers of Attorney (included in the signature pages of
this Registration Statement).
99.1 -- Form of Lennox International Inc. Proxy Card.
99.2 -- Form of Service Experts, Inc. Proxy Card.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[BAKER & BOTTS, L.L.P. LETTERHEAD]
December 9, 1999
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, Texas 75080
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form S-4
(the "Registration Statement"), that Lennox International Inc., a Delaware
corporation ("Lennox"), proposes to file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the registration of 14,301,943 shares of common stock, par value
$.01 per share ("Lennox Common Stock"), of Lennox issuable in connection with
the merger (the "Merger") of LII Acquisition Corporation, a Delaware corporation
and a direct wholly owned subsidiary of Lennox ("Merger Sub"), with and into
Service Experts, Inc., a Delaware corporation ("Service Experts"), pursuant to
an Agreement and Plan of Merger, dated as of October 26, 1999 (the "Merger
Agreement"), among Lennox, Merger Sub and Service Experts. As provided in the
Merger Agreement, each share of common stock, par value $.01 per share ("Service
Experts Common Stock"), of Service Experts outstanding immediately prior to the
effective time of the Merger will be converted into the right to receive .67 of
a share of Lennox Common Stock in connection with the Merger.
You have asked us to pass upon for you certain legal matters
with respect to the Lennox Common Stock to be issued in connection with the
transaction referred to above. In our capacity as counsel to Lennox in
connection with such transaction, we have examined the Restated Certificate of
Incorporation and Amended and Restated Bylaws of Lennox, each as amended to
date, the Merger Agreement, and originals, or copies certified or otherwise
identified, of corporate records of Lennox, including minute books of Lennox as
furnished to us by Lennox, certificates of public officials and of
representatives of Lennox, statutes and other instruments or documents, as a
basis for the opinions hereinafter expressed. In giving such opinions, we have
relied upon certificates of officers of Lennox with respect to the accuracy of
the material factual
<PAGE> 2
Lennox International Inc. Page 2 December 9, 1999
matters contained in such certificates. In making our examination, we have
assumed that all signatures on documents examined by us are genuine, that all
documents submitted to us as originals are authentic and that all documents
submitted to us as certified or photostatic copies conform with the original
copies of such documents. We have also assumed that all shares of Service
Experts Common Stock outstanding immediately prior to the effective time of the
Merger will be duly authorized, validly issued, fully paid and nonassessable.
On the basis of the foregoing, and subject to the assumptions,
limitations and qualifications set forth herein, we are of the opinion that:
1. Lennox is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware.
2. The Lennox Common Stock, when and to the extent issued in
connection with the Merger pursuant to and in accordance with the Merger
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.
The opinions set forth above are limited in all respects to
matters of Texas law and the General Corporation Law of the State of Delaware as
in effect on the date hereof. At your request, this opinion is being furnished
to you for filing as Exhibit 5 to the Registration Statement. Additionally, we
hereby consent to the reference to our Firm under the caption "Legal Matters" in
the joint proxy statement/prospectus forming a part of the Registration
Statement. In giving this consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
Very truly yours,
Baker & Botts, L.L.P.
<PAGE> 1
EXHIBIT 8.1
[BAKER & BOTTS LETTERHEAD]
December 9, 1999
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, Texas 75080
Ladies and Gentlemen:
We have acted as counsel to Lennox International Inc., a
Delaware corporation ("LII") in connection with the planned merger (the
"Merger") of LII Acquisition Corporation, a Delaware corporation ("Merger Sub"),
which is a newly formed and wholly-owned subsidiary of LII, with and into
Service Experts, Inc. ("SEI") pursuant to an Agreement and Plan of Merger, dated
as of October 26, 1999, as amended, among LII, Merger Sub and SEI (the
"Agreement"). Unless otherwise specified, capitalized terms shall have the
meaning assigned to such terms in the Agreement.(1)
In rendering this opinion, we have examined and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy at all relevant times of the statements, covenants, and representations
contained in (i) the Agreement, (ii) the Preliminary Joint Proxy
Statement/Prospectus dated December 9, 1999, included in the Registration
Statement on Form S-4 filed by LII with the Securities and Exchange Commission
("SEC") in connection with the Merger (the "Proxy Statement") and (iii) the
officers' certificates dated as of the date hereof that were provided to us by
LII and SEI and which are attached hereto as exhibits. In addition, we assume
that the Merger will be consummated strictly in accordance with the Agreement
and as described in the Proxy Statement. Any inaccuracy in any of the
aforementioned statements, representations, and assumptions or breach of any of
the aforementioned covenants could adversely affect our opinion.
On the basis of and subject to the foregoing and subject to
the limitations set forth below, it is our opinion that, under presently
applicable U.S. federal income tax law:
(i) The Merger will be treated as a reorganization within the
meaning of section 368(a) of the Code;
- --------------------
(1) References contained in this letter to the Agreement include,
unless the context otherwise requires, each document attached as an exhibit or
annex thereto.
<PAGE> 2
-2- December 9, 1999
(ii) No gain or loss will be recognized by LII, Merger Sub or SEI
as a result of the Merger; and
(iii) No gain or loss will be recognized by a shareholder of SEI as
a result of the Merger upon the conversion of shares of common
stock, par value $0.01 per share, of SEI into shares of common
stock, par value $0.01 per share, of LII ("LLI Common Stock")
(except with respect to cash, if any, received in lieu of
fractional shares of LII Common Stock).
Our opinion is based on our interpretation of the Code,
applicable Treasury regulations, judicial authority, and administrative rulings
and practice, all as of the date hereof. There can be no assurance that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the conclusions set forth herein. We do not
undertake to advise you as to any such future changes or interpretations unless
we are specifically retained to do so. Our opinion will not be binding upon the
Internal Revenue Service (the "Service"), and the Service will not be precluded
from adopting a contrary position. No opinion is expressed as to any matter not
specifically addressed above including, without limitation, the tax consequences
of the Merger under any foreign, state, or local tax law.
This opinion is delivered to you solely in connection with and
for purposes of the transactions contemplated by the Agreement and is not to be
relied upon by any other person, quoted in whole or in part, or otherwise
referred to (except in a list of closing documents), nor is it to be provided to
any other person without our prior written consent. Notwithstanding the
foregoing sentence, we consent to (i) provision of a copy of this letter to SEI
pursuant to the Merger Agreement, (ii) the filing with the SEC of this letter as
an exhibit to the Registration Statement of which the Proxy Statement is a part
and (iii) the reference to our firm under the heading "The Merger Transaction -
Material Federal Income Tax Consequences of the Merger" and "Legal Matters"
contained therein. In giving such consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933 or the rules of the SEC thereunder.
Very truly yours,
/s/ Baker & Botts, L.L.P.
Attachments
<PAGE> 1
EXHIBIT 8.2
[WALLER LANDSEN DORTCH & DAVIS LETTERHEAD]
December 8, 1999
Service Experts, Inc.
Six Cadillac Drive, Suite 400
Brentwood, TN 37027
Ladies and Gentlemen:
We have acted as tax counsel to Service Experts, Inc.
("Service Experts"), a Delaware corporation, in connection with (i) the proposed
merger (the "Merger"), as defined and described in the Agreement and Plan of
Merger, dated as of October 26, 1999 (the "Merger Agreement"), by and among
Service Experts, Lennox International Inc., a Delaware corporation ("Lennox"),
and LII Acquisition Corporation, a Delaware corporation and newly-formed,
wholly-owned subsidiary of Lennox ("Merger Sub"), and (ii) the preparation and
filing of the Registration Statement with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), (the "Registration Statement"), which includes the Joint Proxy
Statement/Prospectus of Service Experts and Lennox (the "Proxy
Statement/Prospectus"). This opinion is provided pursuant to the requirements of
Item 601(b)(8) of Regulation S-K under the Securities Act.
INFORMATION RELIED UPON
In rendering the opinion set forth herein, and with your
consent, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of the Merger Agreement, the
Registration Statement, the Proxy Statement/Prospectus, and the representations
(which we have neither investigated nor verified) given to us by letter, dated
December 8, 1999, by Service Experts and by letter, dated December 8, 1999, by
Lennox and Merger Sub, each as contained and described in the representations
section of such letters (collectively, the "Certificates"), and have assumed
that such Certificates are complete and accurate on the date given and will be
complete and accurate as of the Effective Time. In addition, we have examined
such other documents, agreements, and certificates and
<PAGE> 2
Service Experts, Inc.
December 8, 1999
Page 2
made such investigations of law and fact as we have deemed necessary or
appropriate as a basis for the opinion set forth below.
In our examination, we have assumed, with your consent, the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photocopies,
and the authenticity of the originals of such copies. As to any facts material
to this opinion which we did not independently establish or verify, we have
relied upon the accuracy and completeness of (i) the statements and
representations made by Service Experts, Lennox and Merger Sub and (ii) the
Proxy Statement/Prospectus, and we have assumed that such will be complete and
accurate through the date hereof and will continue to remain complete and
accurate as of the Effective Time. In addition, we have assumed, with your
consent, that the statements contained in the Certificates are complete and
accurate on the date hereof and will be complete and accurate as of the
Effective Time, and that any representation made in any of the documents
referred to herein "to the best of the knowledge and belief" (or similar
qualification) of any person or party is now and will be as of the Effective
Time complete and accurate without such qualification. We have also assumed that
the transactions contemplated by the Merger Agreement will be consummated in
accordance therewith and as described in the Proxy Statement/Prospectus and that
the Merger will qualify as a statutory merger under the applicable laws of the
State of Delaware.
Unless specified, capitalized terms used herein shall have the
meanings assigned to them in the Proxy Statement/Prospectus or the appendices
thereto (including the Merger Agreement). All references herein to the Code are
to the Internal Revenue Code of 1986, as amended (the "Code").
OPINION
On the basis of the foregoing, and subject to the assumptions,
qualifications and limitations stated herein, we are of the opinion that:
(i) The Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code;
(ii) No gain or loss will be recognized by Service Experts,
Lennox or Merger Sub as a result of the Merger; and
<PAGE> 3
Service Experts, Inc.
December 8, 1999
Page 3
(iii) No gain or loss will be recognized by the shareholders
of Service Experts who exchange all of their Service Experts Common
Stock solely for Lennox Common Stock pursuant to the Merger (except
with respect to cash received in lieu of a fractional share interest in
Lennox Common Stock).
The opinion expressed herein is based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. There can be no assurances that the opinion expressed herein
will be accepted by the Internal Revenue Service or, if challenged, by a court.
In addition, our opinion is based solely on the documents that we have examined,
the additional information that we have obtained, and the facts set out in the
Certificates that we have assumed, with your consent, to be true and correct.
Our opinion cannot be relied upon if any of the facts contained in such
documents or in any such additional information is, or later becomes,
inaccurate, or if any of the facts set out in the Certificates is, or later
becomes, inaccurate.
Our opinion is limited to the United States federal income tax
matters specifically covered thereby, and we have not been asked to address, nor
have we addressed, any other tax consequences that may result from the Merger or
any other transaction (including any transaction undertaken in connection with
the Merger). We express no opinion regarding the tax consequences of the Merger
to shareholders of Service Experts that are subject to special tax rules.
This letter is furnished to you for use in connection with the
Merger, as described in the Merger Agreement and the Proxy Statement/Prospectus,
and is not to be used, circulated, quoted, or otherwise referred to for any
other purpose without our express written permission. We hereby consent to the
filing of this opinion with the Commission as an exhibit to the Registration
Statement, and to the references to our firm under the heading "THE MERGER
TRANSACTION - Material Federal Income Tax Consequences of the Merger" and
elsewhere in the Proxy Statement/Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ WALLER LANDSEN DORTCH & DAVIS
A PROFESSIONAL LIMITED LIABILITY COMPANY
<PAGE> 1
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 1
<TABLE>
<CAPTION>
JURISDICTION NO. OF SHARES LOCATION OF SUBSTANTIAL
NAME OWNERSHIP OF INC. OUTSTANDING OPERATING ASSETS
- ---- --------- ------------ -------------- -----------------------
<S> <C> <C> <C> <C>
Lennox Industries Inc. 100% Iowa 994,394 Common United States
SEE ATTACHED CHART
Heatcraft Inc. 100% Mississippi 20 Common United States
Frigus-Bohn S.A. de C.V. 50% Mexico Mexico
LGL de Mexico, S.A. de C.V. 1% Mexico 50,000 Common Mexico
Lennox Participacoes Ltda. 1% Brazil
Frigo-Bohn do Brasil Ltda. 99% Brazil
Livernois Engineering Co. 100% Michigan 10,000 Common Michigan
Armstrong Air Conditioning Inc. 100% Ohio 1,030 Common United States
Jensen-Klich Supply Co. 100% Nebraska 1,750 Common United States
Armstrong Distributors Inc. 100% Delaware 1,000 Common United States
Lennox Global Ltd. 100% Delaware 1,000 Common United States
SEE ATTACHED CHART
Lennox Commercial Realty Inc. 100% Iowa 10 Common United States
Heatcraft Technologies Inc. 100% Delaware 1,000 Common United States
Lennox Industries 1% United Kingdom 300,000 Cum.
Preference United Kingdom
13,900 Ordinary
Strong LGL Colombia Ltda. 50% Colombia 10,000 Colombia
Alliance Compressors 24.5% Delaware (LLC) Delaware
LGL Peru S.A.C. 10% Peru Peru
Excel Comfort Systems Inc. 100% Delaware 1,000 Common Delaware
</TABLE>
<PAGE> 2
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 2
<TABLE>
<CAPTION>
JURISDICTION NO. OF SHARES LOCATION OF SUBSTANTIAL
NAME OWNERSHIP OF INC. OUTSTANDING OPERATING ASSETS
- ---- --------- ------------ ------------------- -----------------------
<S> <C> <C> <C> <C>
Lennox Industries Inc.
Lennox Industries (Canada) Ltd. 100% Canada 5,250 Pref. Canada
35,031 Cl A Common
1,180 Cl B Common
Hearth Products Inc. 100% Delaware 1,000 Common United States
Superior Fireplace Company 100% Delaware 1,000 Common United States
Marco Mfg., Inc. 100% California United States
Marcomp
Pyro Industries, Inc. 100% Washington United States
Securite Cheminees International Ltee 100% Canada Canada
-Security Chimneys International
USA Ltd. 100% United States
-Cheminees Securite SARL 100% France France
-Security Chimneys UK Limited 100% UK 2 Ordinary UK
Firecraft Technologies Inc. 100% Delaware 1,000 Common Delaware
The Earth Stove, Inc. 100% Oregon Oregon
Products Acceptance Corporation 100% Iowa 3,500 Common N/A
Lennox Manufacturing Inc. 100% Delaware 1,000 Common United States
Lennox Retail Inc. 100% Delaware 1,000 Common United States
Lennox Canada Inc. 100% Canada Canada
SEE ATTACHED
For U.S. Subsidiaries of Lennox Retail SEE ATTACHED
</TABLE>
<PAGE> 3
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 3
Lennox Canada Inc.
The following are all in Canada and are all owned 100% by Lennox Canada Inc.
unless otherwise noted:
Bradley Air Conditioning Limited
Valley Refrigeration Limited
Dearie Contracting Inc.
Dearie Martino Contractors Ltd.
Foster Air Conditioning Limited
Bryant Heating & Cooling Co. Ltd.
Montwest Air Ltd.
Fahrhall Mechanical Contractors Limited
Sipco Energies Ltd.
MHR Home Comfort Center Ltd.
Canadian Home Comfort Corp.
Arpi's Industries Canada Ltd.
Arpi's Holdings Ltd.
Advance Mechanical Ltd.
485237 B.C. Ltd.
Gandy Installations (1987) Ltd.
GAIA Enterprises Inc.
Welldone Plumbing, Heating and Air Conditioning (1990) Ltd.
592490 British Columbia Ltd.
M.A.W. Heating & Air Conditioning Ltd.
<PAGE> 4
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 4
Lennox Retail Inc.
The following are all in the United States and are all owned 100% by Lennox
Retail unless otherwise noted:
D.A. Bennett, Inc. - New York
Air Engineers, Inc. - Florida
Industrial Building Services, Inc. - Florida
Hobson Heating and Air Conditioning, Inc. - Georgia
Calverley Air Conditioning & Heating Co., Inc. - Texas
Air Experts, Inc. - Ohio
Jebco Heating & Air Conditioning, Inc. - Colorado
Air Systems of Florida, Inc. - Florida
Gray Refrigeration, Inc. - Texas
Airmasters Heating & Air Conditioning Co. - Michigan
Cook Heating & Air Conditioning, Inc. - Michigan
Cook Heating & Air Conditioning Co., Inc. - Indiana
Andy Lewis Htg. & A/C of Charlotte, Inc. - North Carolina
Andy Lewis Heating & Air Conditioning, Inc. - Georgia
Sedgwick Heating & Air Conditioning Co. - Minnesota
Shumate Mechanical Inc. - Delaware
Gables Air Conditioning, Inc. - Florida
Ryan Heating Co. Inc. - Delaware
The October Group, Inc. (d/b/a Greenwood Heating & Air Conditioning)
- Washington
Peitz Heating and Cooling, Inc. - South Dakota
NAS Acquisition Inc. - California
Miller Refrigeration, A/C, & Htg. Co.
John P. Timmerman Co.
Kiko Heating & Air Conditioning, Inc.
Wangsgaard A-Plus Refrigeration, Inc.
Edison Heating and Cooling, Inc.
Alliance Mechanical Heating & Air Conditioning, Inc.
Controlled Comfort Acquisition Inc.
Goldenseal Heating & Air Conditioning, Inc.
<PAGE> 5
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 5
<TABLE>
<CAPTION>
JURISDICTION NO. OF SHARES LOCATION OF SUBSTANTIAL
NAME OWNERSHIP OF INC. OUTSTANDING OPERATING ASSETS
- ---- --------- ----------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Lennox Global Ltd.
LGL Asia-Pacific Pte. Ltd. 100% Rep. of Singapore 2 Ordinary Singapore
Fairco S.A. 50% Argentina Argentina
LGL Europe Holding Co. 100% Delaware 1,000 Common N/A
SEE ATTACHED CHART
UK Industries Inc. 100% Delaware 1,000 Common N/A
LGL de Mexico, S.A. de C.V. 99% Mexico 50,000 Common Mexico
Lennox Participacoes Ltda. 99% Brazil
Frigo-Bohn do Brasil Ltda. 1% Brazil Brazil
Heatcraft do Brasil S.A. 82.86% Brazil Brazil
SIWA S.A. 100% Uruguay Uruguay
Str. LGL Dominicana, S.A. 100% Dominican Republic
Strong LGL Colombia Ltda. 50% Colombia
LGL Belgium S.P.R.L. .4% Belgium 1 Common Belgium
LGL (Thailand) Ltd. 100% Thailand Thailand
LGL Peru S.A.C. 90% Peru Peru
LGL Australia (US) Inc. 100% Delaware 1,000 Common Delaware
SEE ATTACHED CHART
</TABLE>
<PAGE> 6
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 6
<TABLE>
<CAPTION>
JURISDICTION NO. OF SHARES LOCATION OF SUBSTANTIAL
NAME OWNERSHIP OF INC. OUTSTANDING OPERATING ASSETS
- ---- --------- ------------ ------------------ -----------------------
<S> <C> <C> <C> <C>
LGL Australia (US) Inc.
LGL Co Pty Ltd 100% Australia Australia
LGL Australia Investment Pty Ltd 100% Australia Australia
LGL Australia Finance Pty Ltd 10% Australia Australia
LGL Australia Finance Pty Ltd 90% Australia Australia
LGL Australia Holdings Pty Ltd 100% Australia Australia
James N Kirby Pty Ltd 100% Australia Australia
Lennox Australia Pty. Ltd. 100% Australia 1,575,000 Com/Cl A Australia
1,575,000 Com/Cl B
LGL (Australia) Pty. Ltd. 100% Australia Australia
LGL Refrigeration Pty. Ltd. 100% Australia Australia
</TABLE>
<PAGE> 7
LENNOX INTERNATIONAL INC. SUBSIDIARIES
PAGE 7
<TABLE>
<CAPTION>
JURISDICTION NO. OF SHARES LOCATION OF SUBSTANTIAL
NAME OWNERSHIP OF INC. OUTSTANDING OPERATING ASSETS
- ---- --------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
LGL Europe Holding Co.
- -LGL Holland B.V. 100% Holland Holland
-Ets. Brancher S.A. 70% France France
-Frinotec S.A. 99.68% France France
-LGL France 100% France France
-Herac Ltd. 100% United Kingdom N/A
-Friga-Coil S.R.O 50% Czech Republic Czech Republic
-LGL Germany GmbH 100% Germany 500 Common Germany
-Friga-Bohn Warmeaustauscher GmbH 100% Germany
-Hyfra Ind. GmbH 99.9% Germany Germany
-Ruhaak 100% Germany Germany
-Refac Nord GmbH 100% Germany Germany
-Refac West 100% Germany Germany
-Lennox Global Spain S.L. 100% Spain
-ERSA 90.1% Spain
-Aldo Marine 70% Spain
-Lennox Refac, S.A. 100% Spain
-Redi sur Andalucia 70% Spain Spain
-Refac Portugal Lda. 50% Portugal Portugal
-LGL Belgium S.P.R.L. 99.6% Belgium 249 Common Belgium
-Refac B.V. 100% Netherlands Netherlands
-Refac N.V 100% Belgium Belgium
-Refac Kalte-Klima Technik
Vertriebs GmbH 50%
-HCF Lennox Limited 100% United Kingdom 100 Ordinary United Kingdom
-Lennox Industries 99% United Kingdom 300,000 Cum.
Preference United Kingdom
14,040 Ordinary
-Environheat Limited 100% United Kingdom 32,765 Ordinary N/A
-West S.R.L. 80% Italy Italy
-Janka Radotin a.s. 100% Czech Republic Czech Republic
-Friga Coil s.r.o. 50% Czech Republic Czech Republic
-Janka Slovensko, s.r.o. 100% Slovak Republic Slovak Republic
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
December 7, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 22, 1999, with respect to the
consolidated financial statements of Service Experts, Inc. incorporated by
reference in the joint Proxy Statement of Lennox International Inc. and
Service Experts, Inc. that is made a part of the Registration Statement on
Form S-4 of Lennox International Inc. for the proposed merger between
Lennox International Inc. and Service Experts, Inc.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 8, 1999
<PAGE> 1
EXHIBIT 23.7
Consent of Warburg Dillon Read LLC
We hereby consent to the use of Annex G containing our opinion letter dated
October 25, 1999 to the Board of Directors of Lennox in the Proxy
Statement/Prospectus constituting a part of the Registration Agreement on Form
S-4 relating to the proposed merger of Lennox and Service Experts and to the
references to our firm in such Proxy Agreement/Prospectus. In giving this
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
WARBURG DILLON READ LLC
New York, New York
December 8, 1999
<PAGE> 1
EXHIBIT 99.1
LENNOX INTERNATIONAL INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD______________, ______
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The signatory of this Proxy, by executing on the reverse side of this Proxy,
hereby appoints and constitutes John W. Norris, Jr. and Clyde W. Wyant, and each
of them, with full power of substitution, with the powers the signatory of this
Proxy would possess if personally present, to vote all shares of Lennox Common
Stock entitled to be voted by the signatory at the Special Meeting of
Stockholders to be held at 10:00 a.m., local time, on _________________, ______,
or at any reconvened meeting after any adjournment or postponement thereof, on
the matter set forth on the reverse side in accordance with any directions given
by the signatory and, in their discretion, on all other matters that may
properly come before the Special Meeting or any reconvened meeting after any
adjournment or postponement thereof.
IMPORTANT -- PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED ON THE
REVERSE SIDE. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ITEM 1.
- --------------------------------------------------------------------------------
FOLD AND DETACH PROXY CARD HERE
YOUR VOTE IS IMPORTANT.
YOU CAN VOTE IN THE FOLLOWING WAYS:
(1) BY PROXY. PLEASE TEAR OFF THE TOP PORTION OF THIS SHEET AND
MARK, SIGN AND DATE YOUR PROXY CARD AND PROMPTLY RETURN
IT IN THE ENCLOSED ENVELOPE.
(2) IN PERSON. YOU MAY ATTEND THE SPECIAL MEETING AND VOTE IN
PERSON.
PLEASE
VOTE
<PAGE> 2
LENNOX INTERNATIONAL INC.
SPECIAL MEETING OF STOCKHOLDERS
Please mark your vote like this [X]
THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR IF NO DIRECTION IS INDICATED,
WILL BE VOTED "FOR" ITEM 1. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" ITEM 1.
1. Issuance of shares of common stock of Lennox International Inc.
pursuant to a merger as described in the accompanying Joint Proxy
Statement/Prospectus.
[ ] For [ ] Against [ ] Abstain
[ ] I (WE) PLAN TO ATTEND THE SPECIAL MEETING OF
STOCKHOLDERS ON ______________________, _____.
Please sign exactly as your name appears
hereon. Executors, administrators,
guardians, and others signing in a
fiduciary capacity should indicate such
capacity when signing. If shares are held
jointly, each holder should sign. If a
corporation, please sign in full corporate
name by duly authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Date
--------------------------------------
Signature(s)
------------------------------
------------------------------------------
- --------------------------------------------------------------------------------
FOLD AND DETACH PROXY CARD HERE
If you plan to attend the Special Meeting of Stockholders to be held on
___________________, please check the appropriate box on the proxy card.
Please vote by signing the proxy card and returning it promptly to ensure your
representation at the Special Meeting.
YOUR VOTE IS IMPORTANT.
Thank you.
LENNOX INTERNATIONAL INC.
<PAGE> 1
EXHIBIT 99.2
SERVICE EXPERTS, INC.
SPECIAL MEETING OF STOCKHOLDERS
----------, ----
The undersigned hereby appoints Alan R. Sielbeck and Anthony M.
Schofield, or either of them, with power of substitution, as proxies to vote all
stock of Service Experts, Inc. owned by the undersigned at a Special Meeting of
Stockholders to be held at ____________________, 10:00 a.m., local time, on
__________, ____, and any adjournment thereof, on the following matter as
indicated below and such other business as may properly come before the meeting:
1. Proposal to approve and adopt an Agreement and Plan of Merger, dated as
of October 26, 1999, attached as Annex A to the joint proxy
statement/prospectus that has been delivered in connection with the
Special Meeting, and the merger transaction in which Service Experts
would become a wholly-owned subsidiary of Lennox International Inc.,
and the Service Experts stockholders would receive 0.67 of a share of
Lennox common stock for each share of Service Experts common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies named above may vote upon such other
matters as may properly come before the Special Meeting or any
adjournment or postponement thereof.
This Proxy is solicited on behalf of Service Experts' Board of
Directors.
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. If no direction is made, this
Proxy will be voted FOR Item 1 above. Any holder who wishes to withhold the
discretionary authority referred to in Item 2 above should mark a line through
the entire Item. Discretionary authority and votes against approval of the
merger agreement will not be used to vote in favor of adjournment.
Receipt of the joint proxy statement/prospectus dated __________, ____
is hereby acknowledged.
Dated:
-------------, ------
---------------------------
Signature of Stockholder
---------------------------
Signature if held jointly
Please sign exactly as your
name appears on your stock
certificate. If shares are
held jointly, each
stockholder should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If
a corporation, please sign
in full corporate name by
President or other
authorized officer. If a
partnership, please sign in
partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY USING
THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
