LENNOX INTERNATIONAL INC, 424B4, 1999-07-29

LENNOX INTERNATIONAL INC
424B4, 1999-07-29
AIR-COND & WARM AIR HEATG EQUIP & COMM & INDL REFRIG EQUIP

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<PAGE> 1

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-75725

PROSPECTUS

8,500,000 Shares
[LENNOX INTERNATIONAL INC. LOGO]
COMMON STOCK
------------------------

LENNOX INTERNATIONAL INC. IS OFFERING 8,088,490 SHARES OF COMMON STOCK AND THE
SELLING STOCKHOLDERS ARE OFFERING 411,510 SHARES OF COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES.

------------------------

OUR COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE TRADING SYMBOL "LII," SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.

------------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
------------------------

PRICE $18 3/4 A SHARE

------------------------

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS LENNOX STOCKHOLDERS
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................. $18.750 $1.265 $17.485 $17.485
Total..................... $159,375,000 $10,752,500 $141,427,248 $7,195,252
</TABLE>

------------------------

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Lennox International Inc. has granted the U.S. underwriters the right to
purchase up to an additional 1,275,000 shares of common stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of common stock to purchasers on August 3, 1999.
------------------------

MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
WARBURG DILLON READ LLC
July 28, 1999
<PAGE> 2

<TABLE>
<S> <C>
[LENNOX INTERNATIONAL INC. LOGO] CLIMATE CONTROL SOLUTIONS IN FOUR KEY BUSINESSES
NORTH AMERICAN RESIDENTIAL [PHOTO DEPICTING PRODUCTS]
[PHOTO DEPICTING PRODUCTS] COMMERCIAL AIR CONDITIONING
[PHOTO DEPICTING PRODUCTS] COMMERCIAL REFRIGERATION
HEAT TRANSFER [PHOTO DEPICTING PRODUCTS]
</TABLE>
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Special Note Regarding Forward-Looking Statements........... 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial and Other Data........................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 32
Management.................................................. 49
Principal and Selling Stockholders.......................... 63
Certain Relationships and Related Party Transactions........ 65
Description of Capital Stock................................ 65
Shares Eligible for Future Sale............................. 72
Material Federal Income Tax Consequences for Non-U.S.
Holders................................................... 73
Underwriters................................................ 75
Legal Matters............................................... 79
Experts..................................................... 79
Where You Can Find More Information......................... 80
Index to Financial Statements............................... F-1
</TABLE>

---------------------

Until August 23, 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

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<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information and our financial statements and notes appearing elsewhere in this
prospectus.

LENNOX

We are a leading global provider of climate control solutions and had 1998
net sales of $1.8 billion. We design, manufacture and market a broad range of
products for the heating, ventilation, air conditioning and refrigeration
markets, which is sometimes referred to as "HVACR." Our products are sold under
well-established brand names including "Lennox", "Armstrong Air", "Bohn",
"Larkin", "Heatcraft" and others. We have recently initiated a program to
acquire dealers in metropolitan areas in the U.S. and Canada so we can provide
heating and air conditioning products and services directly to consumers.

Our furnaces, heat pumps, air conditioners, pre-fabricated fireplaces and
related products are available in a variety of designs, efficiency levels and
price points that provide an extensive line of comfort systems. A majority of
our sales of residential heating and air conditioning products in the U.S. and
Canada are to the repair and replacement market, which is less cyclical than the
new construction market. We also provide a range of air conditioning products
for commercial market applications such as mid-size office buildings,
restaurants, churches and schools. Our commercial refrigeration products are
used primarily in cold storage applications for food preservation in
supermarkets, convenience stores, restaurants, warehouses and distribution
centers. Our heat transfer products are used by us in our HVACR products and
sold to third parties.

We market our products using multiple brand names and distribute our
products through multiple distribution channels to penetrate different segments
of the HVACR market. Our "Lennox" brand of residential heating and air
conditioning products is sold directly through approximately 6,000 installing
dealers -- the "one-step" distribution system -- which has created strong and
long-term relationships with our dealers in North America. Our "Armstrong Air",
"Air-Ease", "Concord" and "Magic-Pak" residential heating and air conditioning
brands are sold to regional distributors that in turn sell the products to
installing contractors -- the "two-step" distribution system typically utilized
in the heating and air conditioning industry. The acquisition of heating and air
conditioning dealers in the U.S. and Canada allows us to participate in the
retail sale and service of heating and air conditioning products. Our hearth
products, commercial air conditioning products and refrigeration products are
also sold under multiple brand names and through a combination of wholesalers,
contractors, original equipment manufacturers, manufacturers' representatives
and national accounts.

COMPETITIVE STRENGTHS

We have a combination of strengths that position us to continue to be a
leading provider of climate control solutions, including:

- strong brand recognition and reputation, particularly with the well
recognized "Lennox" name;

- one of the broadest distribution systems of any major HVACR manufacturer;

- leading heat transfer design and manufacturing expertise;

- commitment to product innovation and technological leadership; and

- demonstrated manufacturing efficiency for our products.

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<PAGE> 5

GROWTH STRATEGY

- expanding our market opportunities in North America through a series of
initiatives, including the acquisition of heating and air conditioning
dealers;

- exploiting international opportunities through acquisitions and internal
growth;

- increasing our presence in the hearth products market by selling in the
distribution channels we acquired and through our historical distribution
channels; and

- continuing to invest in research and new product development.

RECENT OPERATING RESULTS

For the three months ended June 30, 1999, we expect that net sales will be
approximately $591.9 million, an increase of 29.8% from $456.0 million for the
three months ended June 30, 1998. Income from operations is expected to increase
by $12.9 million, or 37.9%, to approximately $46.9 million for the three months
ended June 30, 1999, as compared to $34.0 million for the corresponding period
in 1998. We expect that net income will be approximately $23.6 million for the
three months ended June 30, 1999, an increase of 37.2% from $17.2 million for
the three months ended June 30, 1998.

For the six months ended June 30, 1999, we expect that net sales will be
approximately $1,080.9 million, an increase of 29.4% from $835.6 million for the
six months ended June 30, 1998. Income from operations is expected to increase
by $14.8 million, or 28.5%, to approximately $66.7 million for the first six
months of this year, as compared to $51.9 million for the corresponding period
in 1998. We expect that net income will be approximately $30.2 million for the
six months ended June 30, 1999, an increase of 18.4% from $25.5 million for the
six months ended June 30, 1998.
---------------------

We are located at 2100 Lake Park Blvd., Richardson, Texas 75080 and our
telephone number is (972) 497-5000.

5
<PAGE> 6

THE OFFERING

Common stock offered by:

Lennox................... 8,088,490 shares

Selling stockholders..... 411,510 shares

Total............ 8,500,000 shares

Common stock offered in:

U.S. offering............ 6,800,000 shares

International offering... 1,700,000 shares

Total............ 8,500,000 shares

Common stock to be
outstanding after this
offering................. 44,660,740 shares

Use of proceeds............ We estimate that we will receive approximately
$140.3 million in net proceeds from the offering.
The net proceeds will be used to repay a portion of
the amounts borrowed under our revolving credit
facility and term credit agreement. We will not
receive any proceeds from the sale of the shares of
common stock offered by the selling stockholders.

NYSE symbol................ LII

All information in this prospectus relating to the number of shares of our
common stock or options has been adjusted to reflect a 33-for-one stock split of
our common stock which occurred on July 6, 1999.

Unless we specifically state otherwise, the information in this prospectus
does not take into account the issuance of up to 1,275,000 shares of common
stock which the underwriters have the option to purchase solely to cover
over-allotments. If the underwriters exercise their over-allotment option in
full, 45,935,740 shares of common stock will be outstanding after the offering.

The number of shares of our common stock to be outstanding immediately
after the offering does not take into account 3,868,458 shares of our common
stock that will be issuable upon the exercise of stock options, substantially
all of which were awarded under our stock option plans. Stock options for
2,838,858 shares of common stock are currently exercisable. For more information
on our stock option plans, see "Management -- 1998 Incentive Plan."

6
<PAGE> 7

SUMMARY FINANCIAL AND OTHER DATA

The following summary financial and other data for each of the years ended
December 31, 1996, 1997 and 1998 have been derived from our audited financial
statements included elsewhere in this prospectus. The summary financial and
other data for each of the three months ended March 31, 1998 and 1999 are
derived from our unaudited financial statements which, in our 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 this information. Our fiscal quarters are each comprised of 13
weeks. For convenience, the 13-week periods ended April 4, 1998 and April 3,
1999 are referred to as the three months ended March 31, 1998 and 1999,
respectively. Effective September 30, 1997 we increased our ownership of Ets.
Brancher S.A., our European joint venture, from 50% to 70% and, accordingly,
changed our accounting method of recognizing this investment from the equity
method to the consolidation method. You should read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and notes included elsewhere in this prospectus for a further
explanation of the financial data summarized here. The as adjusted amounts give
effect to this offering and the use of the net proceeds as described under "Use
of Proceeds."

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $1,364,546 $1,444,442 $1,821,836 $379,646 $489,059
Cost of goods sold........................................ 961,696 1,005,913 1,245,623 261,802 337,481
---------- ---------- ---------- -------- --------
Gross profit...................................... 402,850 438,529 576,213 117,844 151,578
Selling, general and administrative expenses.............. 298,049 326,280 461,143 97,255 129,268
Other operating expense, net.............................. 4,213 7,488 8,467 2,612 2,518
Product inspection charge(1).............................. -- 140,000 -- -- --
---------- ---------- ---------- -------- --------
Income (loss) from operations..................... 100,588 (35,239) 106,603 17,977 19,792
Interest expense, net..................................... 13,417 8,515 16,184 2,620 6,558
Other..................................................... (943) 1,955 1,602 230 (211)
Minority interest......................................... -- (666) (869) (502) (516)
---------- ---------- ---------- -------- --------
Income (loss) before income taxes................. 88,114 (45,043) 89,686 15,629 13,961
Provision (benefit) for income taxes...................... 33,388 (11,493) 37,161 7,323 7,331
---------- ---------- ---------- -------- --------
Net income (loss)................................. $ 54,726 $ (33,550) $ 52,525 $ 8,306 $ 6,630
========== ========== ========== ======== ========
Earnings (loss) per share:
Basic................................................... $ 1.62 $ (0.99) $ 1.50 $ 0.24 $ 0.19
Diluted................................................. 1.59 (0.99) 1.47 0.24 0.18
Weighted average shares outstanding:
Basic................................................... 33,693 33,924 34,914 34,452 35,541
Diluted................................................. 34,386 33,924 35,739 35,112 36,366
Dividends per share....................................... $ 0.26 $ 0.28 $ 0.32 $ 0.08 $ 0.09
OTHER DATA:
Depreciation and amortization............................. $ 34,149 $ 33,430 $ 43,545 $ 9,787 $ 13,502
Capital expenditures...................................... 31,903 34,581 52,435 12,316 20,050
Research and development expenses......................... 23,235 25,444 33,260 7,376 9,567
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 30,262 $ 30,262
Working capital............................................. 215,279 355,606
Total assets................................................ 1,292,534 1,292,534
Total debt.................................................. 449,921 309,594
Stockholders' equity........................................ 374,319 514,646
</TABLE>

- ---------------

(1) Represents a pre-tax charge taken in the fourth quarter of 1997 for
estimated costs of an inspection program for our Pulse furnaces installed
from 1982 to 1990 in the U.S. and Canada. We initiated the inspection
program because we received anecdotal reports of accelerated corrosion of a
component of these products under extreme operating conditions. We
periodically review the reserve balance and at this time we believe the
remaining reserve of $13.6 million at March 31, 1999 will be adequate to
cover the remaining costs associated with this inspection program. This
program ended on June 30, 1999.

7
<PAGE> 8

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision.

RISK FACTORS RELATING TO OUR BUSINESS

Our business is subject to the following risks, which include risks
relating to the industry in which we operate.

WE MAY INCUR MATERIAL COSTS AS A RESULT OF WARRANTY AND PRODUCT LIABILITY
CLAIMS WHICH WOULD NEGATIVELY IMPACT OUR PROFITABILITY

The development, manufacture, sale and use of our products involve a risk
of warranty and product liability claims. In addition, as we increase our
efforts to acquire installing heating and air conditioning dealers in the U.S.
and Canada, we incur the risk of liability claims for the installation and
service of heating and air conditioning products. We maintain product liability
insurance. Our product liability insurance policies have limits, however, that
if exceeded, may result in 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 U.S. 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.

WE ARE ENTERING NEW BUSINESSES IN WHICH WE HAVE LIMITED EXPERIENCE AND WE
MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OR OPERATE THESE NEW BUSINESSES

With our recently initiated program of acquiring heating and air
conditioning dealers and with our recent acquisitions of hearth products
manufacturers, we have entered into new lines of business. We cannot assure you
that we will be able to successfully manage or operate these new businesses.

THE CONSOLIDATION OF DISTRIBUTORS AND DEALERS COULD FORCE US TO LOWER OUR
PRICES OR HURT OUR BRAND NAMES WHICH WOULD RESULT IN LOWER SALES

There is currently an effort underway in the U.S. by several companies to
purchase independent distributors and dealers and consolidate them into large
enterprises. These large enterprises may be able to exert pressure on us or our
competitors to reduce prices. Additionally, these new enterprises tend to
emphasize their company name, rather than the brand of the manufacturer, in
their promotional activities, which could lead to dilution of the importance and
value of our brand names. Future price reductions and the brand dilution caused
by the consolidation among HVACR distributors and dealers could have an adverse
effect on our future sales and profitability.

OUR DEALER ACQUISITION PROGRAM COULD LEAD TO LOSS OF SALES FROM INDEPENDENT
DEALERS AND DEALERS OWNED BY CONSOLIDATORS

With our recently initiated program of acquiring heating and air
conditioning dealers in the U.S. and Canada, we face the risk that dealers owned
by consolidators and independent dealers may discontinue using

8
<PAGE> 9

our heating and air conditioning products because we are and increasingly will
be in competition with them. We sold approximately $50 million of heating and
air conditioning products to consolidators in 1998, representing 2.7% of our net
sales.

COOLER THAN NORMAL SUMMERS AND WARMER THAN NORMAL WINTERS MAY DEPRESS OUR
SALES

Demand for our products and for our services is strongly affected by the
weather. Hotter than normal summers generate strong demand for our replacement
air conditioning and refrigeration products and colder than normal winters have
the same effect on our heating products. Conversely, cooler than normal summers
and warmer than normal winters depress our sales. Because a high percentage of
our overhead and operating expenses is relatively fixed throughout the year,
operating earnings and net earnings tend to be lower in quarters with lower
sales.

WE MAY NOT BE ABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE HVACR
BUSINESS

Competition in our various markets could cause us to reduce our prices or
lose market share, or could negatively affect our cash flow, which could have an
adverse effect on our future financial results. Substantially all of the markets
in which we participate are highly competitive. The most significant competitive
factors we face are product reliability, product performance, service and price,
with the relative importance of these factors varying among our product lines.
In addition, in our new distribution channel in which we will sell our products
directly to consumers, we face competition from independent dealers and dealers
owned by consolidators and utility companies, some of whom may be able to
provide their 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 U.S. represented approximately 19.2% of our 1998 net sales. We anticipate
that, over time, international sales will continue to grow as a percentage of
our total sales.

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<PAGE> 10

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.

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 December
31, 1998, approximately 30% of our workforce was unionized. Within the U.S., we
currently have eight manufacturing facilities and five distribution centers,
along with our North American Parts Center in Des Moines, Iowa, with collective
bargaining agreements ranging from three to eight years in length. Of our
significant manufacturing facilities, the contract at our Lynwood, California
facility expires in December 1999. Following the expiration of the collective
bargaining agreement in April 1999, we experienced a work stoppage at our
Bellevue, Ohio factory for three weeks in May 1999. This facility has a new
collective bargaining agreement that expires April 2002. Outside of the U.S., we
have 12 significant facilities that are represented by unions. The agreement for
our manufacturing facility in Toronto, Ontario expired in April 1999 and the
agreement for our facility in Laval, Quebec expires in December 1999. As has
been the case in the past, the employees at our Toronto facility are continuing
to work under the expired contract pending negotiation of a new agreement. As we
expand our operations, we are subject to increased unionization of our
workforce. The results of future negotiations with these unions, including the
effects of any production interruptions or labor stoppages, could have an
adverse effect on our future financial results. You should read
"Business -- Employees" for a more complete discussion of our collective
bargaining agreements.

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 U.S. and
in other parts of the world. These laws and regulations could impose liability
for remediation costs or result in civil or criminal penalties in cases of
non-compliance. Compliance with environmental laws increases our costs of doing
business. Because these laws are subject to frequent change, we are unable to
predict the future costs resulting from environmental compliance.

The U.S. and other countries have established programs for limiting the
production, importation and use of certain ozone depleting chemicals, including
refrigerants used by us in most of our air conditioning and refrigeration
products. Some categories of these refrigerants have been banned completely and
others are currently scheduled to be phased out in the U.S. by the year 2030.
The U.S. is under pressure from the international environmental community to
accelerate the current 2030 deadline. In Europe, this phaseout may occur even
sooner. The industry's failure to find suitable replacement refrigerants for
substances that have been or will be banned or the acceleration of any phase out
schedules for these substances by governments could have an adverse effect on
our future financial results. You should read "Business -- Regulation" for a
more complete discussion of environmental regulations which affect our business.

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, we began converting all of our major
domestic management information systems from mainframe systems to distributed
processing systems. In order to avoid disruption to our operations, we have
conducted the conversion on a phased basis.

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<PAGE> 11

We anticipate that our major domestic operations will be supported by
distributed processing by the end of 1999. In addition, we have and will
continue to make investments in our computer systems and applications in an
effort to ensure that they are Year 2000 compliant. However, we may experience
interruptions of operations because of problems in implementing distributed
processing or because of Year 2000 problems within our company. Our suppliers or
customers might experience Year 2000 problems. You should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance" and "Business -- Information Systems" for a more complete
discussion of our systems upgrade and Year 2000 compliance initiative.

THE NORRIS FAMILY WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER OUR
COMPANY

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
closing of the offering, approximately 110 descendants of or persons otherwise
related to D.W. Norris, one of our original owners, will be able to collectively
control over 70% 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 SECURITIES MARKETS

There are risks relating to the securities markets that you should consider
in connection with your investment in and ownership of our stock.

ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY

Our governing documents contain provisions that make it more difficult to
implement corporate actions 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 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;

- our board of directors is divided into three classes, each serving
three-year terms;

- members of our 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 us and any person or group that
owns at least 10% of our voting stock.

Our 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 we are incorporated, contains provisions
that impose restrictions on business combinations such as mergers between us and
a holder of 15% or more of our voting stock. You should read the "Description of
Capital Stock" section for a more complete description of these provisions.

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<PAGE> 12

A SUBSTANTIAL NUMBER OF OUR SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC
MARKET AFTER THE OFFERING AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT
OUR STOCK PRICE

Sales of a substantial number of shares of our common stock into the public
market after the offering, or the perception that these sales could occur, could
adversely affect our stock price or could impair our ability to obtain capital
through an offering of equity securities. After the offering, we will have
outstanding 44,660,740 shares of common stock. Of these shares, the shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, except for any shares purchased
by our "affiliates" as that term is defined by Rule 144. The remaining
36,160,740 shares of common stock outstanding, which will represent
approximately 81% of the total outstanding shares of common stock, will be
"restricted" as that term is defined by Rule 144. You should read the "Shares
Eligible For Future Sale" section for a more complete discussion of these
matters.

BECAUSE THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, OUR
STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY AFTER THE OFFERING AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT

Prior to the offering, there has been no public market for our common
stock. We do not know how our common stock will trade in the future. The initial
public offering price was determined through negotiations between the
underwriters and us. You may not be able to resell your shares at or above the
initial public offering price as the price of our common stock may be affected
by a number of factors, including:

- actual or anticipated fluctuations in our operating results;

- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;

- announcements of new products or technological innovations; and

- the operating and stock price performance of other comparable companies.

In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.

You should read the "Underwriters" section for a more complete discussion
of the factors considered in determining the initial public offering price.

12
<PAGE> 13

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance. In come 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.
---------------------

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted.

We own or otherwise have rights to trademarks or trade names that we use in
connection with the sale of our products. Lennox(R), Armstrong Air(TM), Bohn(R),
Larkin(TM), Heatcraft(R), CompleteHeat(R), Climate Control(TM), Chandler
Refrigeration(R), Advanced Distributor Products(R), Raised Lance(TM),
Air-Ease(R), Concord(R), Magic-Pak(R), Superior(TM), Marco(R), Whitfield(R),
Security Chimneys(R), Alcair(TM), Friga-Bohn(TM) and Janka(TM), among others,
are trademarks that are owned by us. This prospectus also makes reference to
trademarks of other companies.

13
<PAGE> 14

USE OF PROCEEDS

We estimate that our net proceeds from the sale of our common stock in the
offering, after deducting estimated expenses of $1.1 million and underwriting
discounts and commissions, will be approximately $140.3 million, or
approximately $162.6 million if the underwriters exercise their over-allotment
option in full. We will use all of the proceeds from the offering to repay a
portion of the borrowings under our revolving credit facility and term credit
agreement. Borrowing availability under our revolving credit facility will be
used:

- to fund some of the cash portion of the purchase of additional dealers
and for other acquisitions;

- to provide working capital for our expanded operations;

- to fund capital expenditures; and

- for other general corporate purposes.

As of July 1, 1999 approximately $120 million was outstanding under our
revolving credit facility at an average interest rate of 5.2% and approximately
$90 million was outstanding under our term credit agreement at an interest rate
of 6.0%. Borrowings under our revolving credit facility and term credit
agreement, along with cash flow from operations, were used for:

- seasonal working capital needs;

- the acquisitions of the hearth products companies;

- the acquisitions of heating and air conditioning dealers in Canada;

- certain international acquisitions, including McQuay do Brasil S.A.;

- the acquisition of Livernois Engineering Holding Company and its licensed
patents; and

- expenses incurred in our Pulse inspection program.

For more information about our revolving credit facility and term credit
agreement, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

We will not receive any proceeds from the sale of common stock offered by
the selling stockholders.

DIVIDEND POLICY

We paid cash dividends of $0.26, $0.28 and $0.32 per share on our common
stock during 1996, 1997 and 1998, respectively. We anticipate that we will
continue to pay cash dividends on our common stock, but any future determination
as to the payment or amount of dividends will depend upon our future results of
operations, capital requirements, financial condition and other factors as our
board of directors may consider. In addition, our revolving credit facility,
term credit agreement and our other debt instruments prohibit the payment of
dividends unless we can incur $1.00 of additional indebtedness according to the
terms of these instruments. For more information about our debt instruments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

14
<PAGE> 15

CAPITALIZATION

The following table presents our cash and cash equivalents, short-term debt
and capitalization as of March 31, 1999 and as adjusted to give effect to the
offering and the use of the net proceeds as described under "Use of Proceeds."
The outstanding share information excludes 2,857,008 shares of common stock
issuable upon the exercise of outstanding options as of March 31, 1999. You
should read the information presented below together with our consolidated
financial statements and notes, "Selected Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management -- 1998 Incentive Plan" included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 30,262 $ 30,262
======== ========
Short-term debt (including current maturities of long-term
debt)..................................................... $216,426 $ 76,099
======== ========
Long-term debt.............................................. $233,495 $233,495
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, 35,561,757 shares issued and outstanding
actual and 43,650,247 shares as adjusted............... 356 437
Additional paid-in capital................................ 33,086 173,332
Retained earnings......................................... 354,444 354,444
Currency translation adjustments.......................... (13,567) (13,567)
-------- --------
Total stockholders' equity........................ 374,319 514,646
-------- --------
Total capitalization.............................. $607,814 $748,141
======== ========
</TABLE>

15
<PAGE> 16

DILUTION

Our net tangible book value as of March 31, 1999 was approximately $164.5
million or $4.63 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock issued and outstanding. After
giving effect to the sale of the 8,088,490 shares of common stock offered by us
at an initial public offering price of $18.75 per share and the use of the net
proceeds as described under "Use of Proceeds", our pro forma net tangible book
value as of March 31, 1999 would have been $304.8 million, or $6.98 per share.
This represents an immediate increase in net tangible book value of $2.35 per
share to existing stockholders and an immediate dilution of $11.77 per share to
new investors.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price............................... $18.75
Net tangible book value before the offering............... $4.63
Increase in pro forma net tangible book value attributable
to new investors....................................... 2.35
Pro forma net tangible book value after the offering........ 6.98
------
Dilution to new investors................................... $11.77
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences in the total consideration paid and the average price per share
paid by our existing stockholders and by purchasers of the shares of common
stock in the offering:

<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders......... 35,561,757 81.5% $ 33,442,000 19.2% $ 0.94
New investors.......... 8,088,490 18.5 140,327,000 80.8 18.75
----------- ------ ------------ ------
Total........ 43,650,247 100.0% $173,769,000 100.0%
=========== ====== ============ ======
</TABLE>

The computations in the tables above exclude 2,857,008 shares of common
stock issuable upon exercise of stock options substantially all of which were
awarded under our stock option plans. For more information on our stock option
plans, see "Management -- 1998 Incentive Plan."

16
<PAGE> 17

SELECTED FINANCIAL AND OTHER DATA

The following selected financial and other data for each of the years in
the five-year period ended December 31, 1998 have been derived from our
financial statements which have been audited by Arthur Andersen LLP. The summary
financial and other data for each of the three months ended March 31, 1998 and
1999 are derived from our unaudited financial statements which, in our 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. Our fiscal quarters are each
comprised of 13 weeks. For convenience, the 13-week periods ended April 4, 1998
and April 3, 1999 are referred to as the three months ended March 31, 1998 and
1999, respectively. Effective September 30, 1997 we increased our ownership of
Ets. Brancher, our European joint venture, from 50% to 70% and, accordingly,
changed our accounting method of recognizing this investment from the equity
method to the consolidation method. You should read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and notes included elsewhere in this prospectus for a further
explanation of the financial data summarized here.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
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 $ 379,646 $ 489,059
Cost of goods sold................... 815,511 946,881 961,696 1,005,913 1,245,623 261,802 337,481
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit................. 352,588 360,118 402,850 438,529 576,213 117,844 151,578
Selling, general and administrative
expenses........................... 273,421 285,938 298,049 326,280 461,143 97,255 129,268
Other operating expense, net......... 7,460 2,555 4,213 7,488 8,467 2,612 2,518
Product inspection charge(1)......... -- -- -- 140,000 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................. 71,707 71,625 100,588 (35,239) 106,603 17,977 19,792
Interest expense, net................ 20,830 20,615 13,417 8,515 16,184 2,620 6,558
Other................................ 836 (622) (943) 1,955 1,602 230 (211)
Minority interest.................... -- -- -- (666) (869) (502) (516)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes...................... 50,041 51,632 88,114 (45,043) 89,686 15,629 13,961
Provision (benefit) for income
taxes.............................. 19,286 17,480 33,388 (11,493) 37,161 7,323 7,331
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 30,755 $ 34,152 $ 54,726 $ (33,550) $ 52,525 $ 8,306 $ 6,630
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share:
Basic.............................. $ 0.93 $ 1.04 $ 1.62 $ (0.99) $ 1.50 $ 0.24 $ 0.19
Diluted............................ 0.93 1.04 1.59 (0.99) 1.47 0.24 0.18
Weighted average shares outstanding:
Basic.............................. 32,938 32,899 33,693 33,924 34,914 34,452 35,541
Diluted............................ 32,994 32,964 34,386 33,924 35,739 35,112 36,366
Dividends per share.................. $ 0.20 $ 0.22 $ 0.26 $ 0.28 $ 0.32 $ 0.08 $ 0.09
OTHER DATA:
Depreciation and amortization........ $ 32,896 $ 32,212 $ 34,149 $ 33,430 $ 43,545 $ 9,787 $ 13,502
Capital expenditures................. 36,189 26,675 31,903 34,581 52,435 12,316 20,050
Research and development expenses.... 22,773 22,682 23,235 25,444 33,260 7,376 9,567
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 2,980 $ 73,811 $ 151,877 $ 147,802 $ 28,389 $ 171,624 $ 30,262
Working capital...................... 252,301 307,502 325,956 335,891 263,289 404,738 215,279
Total assets......................... 737,528 768,517 820,653 970,892 1,152,952 1,043,581 1,292,534
Total debt........................... 243,480 219,346 184,756 198,530 317,441 272,120 449,921
Stockholders' equity................. 286,849 315,313 361,464 325,478 376,440 333,734 374,319
</TABLE>

- ---------------

17
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We participate in four reportable business segments of the HVACR industry.
The first segment is the North American residential market in which we
manufacture and market a full line of heating, air conditioning and hearth
products for the residential replacement and new construction markets in the
U.S. and Canada. The North American residential segment also includes
installation, maintenance and repair services performed by Lennox-owned dealers.
The second segment is the global commercial air conditioning market in which we
manufacture and sell rooftop products and applied systems for commercial
applications. The third segment is the global commercial refrigeration market
which consists of unit coolers, condensing units and other commercial
refrigeration products. The fourth segment is the heat transfer market in which
we design, manufacture and sell evaporator and condenser coils, copper tubing
and related manufacturing equipment to original equipment manufacturers and
other specialty purchasers on a global basis.

We sell our products to numerous types of customers, including
distributors, installing dealers, homeowners, national accounts and original
equipment manufacturers. The demand for our products is cyclical and influenced
by national and regional economic and demographic factors, such as interest
rates, the availability of financing, regional population and employment trends
and general economic conditions, especially consumer confidence. In addition to
economic cycles, demand for our products is seasonal and dependent on the
weather. Hotter than normal summers generate strong demand for replacement air
conditioning and refrigeration products and colder than normal winters have the
same effect on heating products. Conversely, cooler than normal summers and
warmer than normal winters depress sales of HVACR products.

The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead and estimated costs of warranty expense. The
principal raw materials used in our manufacturing processes are copper, aluminum
and steel. In instances where we are unable to pass on to our customers
increases in the costs of copper and aluminum, we enter into forward contracts
for the purchase of such materials. We have forward commitments for the
substantial majority of our internal needs of aluminum through December 1999 and
copper through December 2000. We attempt to minimize the risk of price
fluctuations in key components by entering into contracts, typically at the
beginning of the year, which generally provide for fixed prices for our needs
throughout the year. These hedging strategies enable us to establish product
prices for the entire model year while minimizing the impact of price increases
of components and raw materials on our margins. Warranty expense is estimated
based on historical trends and other factors.

Following the expiration of the collective bargaining agreement in April
1999, we experienced a work stoppage at our Bellevue, Ohio factory for three
weeks in May 1999. This factory manufactures our "Armstrong Air" brand of
residential heating and air conditioning products for the North American market.
We had accumulated additional inventory levels in anticipation of a possible
work stoppage. Through the use of management personnel we continued limited
production from this factory during this period. As a result, we were generally
able to meet the majority of our customer orders. We do not believe that we
suffered any damage to our relationships with our customers. We do not expect
that this work stoppage will have a material adverse effect on our results of
operations for the second quarter of 1999. On May 20, 1999, the union at the
Bellevue, Ohio factory ratified a new collective bargaining agreement that
expires April 2002 and this factory resumed full production within two business
days.

In September 1997, we increased our ownership in Ets. Brancher from 50% to
70%. As a result, we assumed control of the venture and began consolidating the
financial position and operating results of the venture in the fourth quarter of
1997. Previously, we used the equity method of accounting for our investment in
this entity. In the fourth quarter of 1998, we restructured our ownership of our
various European entities to allow for more efficient transfer of funds and to
provide for tax optimization. Although our European operations contributed to
revenue, they had an operating loss in 1997, 1998 and the first quarter of 1999,
primarily due to the performance of the commercial air conditioning business. In
the second half of 1998, we

18
<PAGE> 19

commenced and substantially completed the installation of a new management team
for our European operations. We are in the process of bringing our manufacturing
and operating expertise to the European businesses.

We acquired Superior Fireplace Company, Marco Mfg., Inc. and Pyro
Industries, Inc. in the third quarter of 1998 and Security Chimneys
International, Ltd. in the first quarter of 1999 for an aggregate purchase price
of approximately $120 million. These acquisitions give us one of the broadest
lines of hearth products in the industry. These businesses had aggregate
revenues of approximately $150 million in 1998, $68.6 million of which was
reflected in our 1998 net sales.

We 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 $67 million in cash, common stock and
seller financing. In addition, we assumed approximately $28 million of Kirby's
debt. Kirby had revenues of approximately $68 million and $86 million for the
twelve months ended June 30, 1998 and the nine months ended March 31, 1999,
respectively.

We recently initiated a program to acquire high quality heating and air
conditioning dealers in metropolitan areas in the U.S. and Canada to market
"Lennox" and other brands of heating and air conditioning products. This
strategy will enable us to extend our distribution directly to the consumer and
permit us to participate in the revenues and margins available at the retail
level while strengthening and protecting our brand equity. We believe that the
retail sales and service market represents a significant growth opportunity
because this market is large and highly fragmented. The retail sales and service
market in the U.S. is comprised of over 30,000 dealers. In addition, we believe
that the heating and air conditioning service business is somewhat less seasonal
than the business of manufacturing and selling heating and air conditioning
products. As of July 2, 1999, we had acquired 50 dealers in Canada and two in
the U.S. for an aggregate purchase price of approximately $74 million and had
signed letters of intent to acquire nine additional Canadian dealers and 11 U.S.
dealers for an aggregate purchase price of approximately $79 million. As we
acquire more heating and air conditioning dealers, we expect that we will incur
additional costs to expand our infrastructure to effectively manage these
businesses.

We have assigned a 40-year life to the goodwill acquired in the
acquisitions of 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, we concluded that
the anticipated future cash flows associated with the goodwill recognized in the
acquisitions will continue for at least 40 years.

Our fiscal year ends on December 31 of each year, and our fiscal quarters
are each comprised of 13 weeks. For convenience, throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations, the 13
week periods comprising each fiscal quarter are denoted by the last day of the
calendar quarter.

19
<PAGE> 20

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of net sales, our statement
of income data for the years ended December 31, 1996, 1997 and 1998 and the
three months ended March 31, 1998 and 1999.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------
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 69.0 69.0
----- ----- ----- ----- -----
Gross profit..................... 29.5 30.4 31.6 31.0 31.0
----- ----- ----- ----- -----
Selling, general and administrative
expenses................................. 21.8 22.6 25.3 25.6 26.5
Other operating expense, net............... 0.3 0.5 0.4 0.7 0.5
Product inspection charge.................. -- 9.7 -- -- --
----- ----- ----- ----- -----
Income (loss) from operations.... 7.4 (2.4) 5.9 4.7 4.0
Interest expense, net...................... 1.0 0.6 0.9 0.6 1.2
Other...................................... (0.1) 0.1 0.1 0.1 0.0
Minority interest.......................... -- 0.0 0.0 (0.1) (0.1)
----- ----- ----- ----- -----
Income (loss) before income
taxes.......................... 6.5 (3.1) 4.9 4.1 2.9
Provision (benefit) for income taxes....... 2.5 (0.8) 2.0 1.9 1.5
----- ----- ----- ----- -----
Net income (loss)................ 4.0% (2.3)% 2.9% 2.2% 1.4%
===== ===== ===== ===== =====
</TABLE>

The following table sets forth net sales by business segment and geographic
market (dollars in millions):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------ ---------------------------------
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% $203.6 53.6% $284.9 58.3%
Commercial air conditioning.......... 228.9 16.8 278.8 19.3 392.1 21.5 81.8 21.6 92.5 18.9
Commercial refrigeration............. 135.6 9.9 154.3 10.7 237.3 13.0 47.9 12.6 61.6 12.6
Heat transfer........................ 142.9 10.5 146.2 10.1 178.7 9.8 46.3 12.2 50.0 10.2
-------- ----- -------- ----- -------- ----- ------ ----- ------ -----
Total net sales............... $1,364.5 100.0% $1,444.4 100.0% $1,821.8 100.0% $379.6 100.0% $489.0 100.0%
======== ===== ======== ===== ======== ===== ====== ===== ====== =====
GEOGRAPHIC MARKET:
U.S.................................. $1,252.5 91.8% $1,274.9 88.3% $1,472.3 80.8% $304.8 80.3% $383.1 78.3%
International........................ 112.0 8.2 169.5 11.7 349.5 19.2 74.8 19.7 105.9 21.7
-------- ----- -------- ----- -------- ----- ------ ----- ------ -----
Total net sales............... $1,364.5 100.0% $1,444.4 100.0% $1,821.8 100.0% $379.6 100.0% $489.0 100.0%
======== ===== ======== ===== ======== ===== ====== ===== ====== =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998

Net sales. Net sales increased $109.4 million, or 28.8%, to $489.0 million
for the three months ended March 31, 1999 from $379.6 million for the three
months ended March 31, 1998.

Net sales related to the North American residential segment were $284.9
million during the three months ended March 31, 1999, an increase of $81.3
million, or 39.9%, from $203.6 million for the corresponding three months in
1998. Of the $81.3 million increase, $35.9 million was due to sales from the
hearth products acquisitions which occurred in the third quarter of 1998 and the
first quarter of 1999, $16.7 million was due to sales from our Canadian dealers
and $5.0 million was due to sales from acquired heating and air conditioning
distributors. The remaining $23.7 million increase in North American residential
net sales was primarily due to an 11.6% increase in sales of our existing
businesses, almost all of which resulted from increased sales volumes,
principally caused by three factors. First, the hot summer in 1998 depleted the
inventory levels at our distributors and they increased their purchases in the
first quarter of 1999 to refill their inventories. Second, we offered our
Armstrong distributors preferential credit terms to encourage them to accumulate
inventory in

20
<PAGE> 21

anticipation of a possible work stoppage at our Bellevue, Ohio factory. Third,
our volume increased as a result of sales to new dealers, which were added as a
result of programs to expand our dealer base.

Commercial air conditioning net sales increased $10.7 million, or 13.1%, to
$92.5 million for the three months ended March 31, 1999 compared to the
corresponding three months in 1998. Of this increase, $8.5 million was due to
increased sales volumes in North America primarily due to the effectiveness of
recently established commercial sales districts. Net sales related to the
commercial refrigeration segment were $61.6 million during the three months
ended March 31, 1999, an increase of $13.7 million, or 28.6%, from $47.9 million
for the corresponding three months in 1998. McQuay do Brasil, which we acquired
in September 1998, contributed $3.3 million to commercial refrigeration revenues
in the first quarter of 1999 and Lovelock Luke Pty. Limited, which we acquired
in December 1998, contributed $11.4 million. North American commercial
refrigeration sales increased $2.4 million primarily due to strong sales volumes
to our supermarket customers and increased activity with our large distributors,
while sales in Europe decreased $3.4 million as compared to the prior period
principally due to reduced sales in Russia and Eastern Europe. Heat transfer
revenues increased $3.7 million, or 8.0%, to $50.0 million for the three months
ended March 31, 1999 compared to the corresponding three months in 1998. This
increase was primarily due to increased sales volumes to original equipment
manufacturers in North America.

Domestic sales increased $78.3 million, or 25.7%, to $383.1 million for the
first quarter of 1999 from $304.8 million for the first quarter of 1998.
International sales increased $31.1 million, or 41.6%, to $105.9 million for the
first quarter of 1999 from $74.8 million for the first quarter of 1998. Sales in
Brazil for the first quarter of 1999 were $3.3 million but would have been
approximately $4.9 million if devaluation of the Brazilian currency had not
occurred in this quarter. As a result of the devaluation, we had to reduce the
carrying value of our Brazilian investment by $5.9 million, thereby causing a
reduction in our investments in joint ventures on our balance sheet.

Gross profit. Gross profit was $151.6 million for the three months ended
March 31, 1999 as compared to $117.8 million for the three months ended March
31, 1998, an increase of $33.8 million. Gross profit margin was 31.0% for both
the three months ended March 31, 1999 and 1998. The increase of $33.8 million in
gross profit was primarily attributable to increased sales in the 1999 period as
compared to 1998. Gross profit margin remained unchanged for the 1999 period
because there were no substantive price increases for our products for the 1999
period, and improvements due to lower raw material costs, improved manufacturing
processes and increased overhead absorption associated with higher volumes of
sales were offset by increases in labor and overhead costs.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $129.3 million for the three months ended March 31,
1999, an increase of $32.0 million, or 32.9%, from $97.3 million for the three
months ended March 31, 1998. Selling, general and administrative expenses
represented 26.5% and 25.6% of total net revenues for the first three months of
1999 and 1998, respectively. Of the $32.0 million increase, $18.5 million, or
57.8%, was related to increased infrastructure associated with acquisitions. Of
the remaining $13.5 million increase, $9.5 million 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. The remaining $4.0 million increase in selling, general and
administrative expenses for the 1999 period related primarily to infrastructure
investments in Europe and Asia and normal inflationary adjustments.

Other operating expense, net. Other operating expense, net totaled $2.5
million for the three months ended March 31, 1999, a decrease of $0.1 million
from $2.6 million for the corresponding three months in 1998. Other operating
expense, net is comprised of (income) loss from joint ventures, amortization of
goodwill, and other intangibles and miscellaneous items. Increases in goodwill
amortization were generally offset by decreases in miscellaneous expenses and a
slight reduction in losses from joint ventures.

Income from operations. Income from operations was $19.8 million for the
three months ended March 31, 1999 compared to $18.0 million for the three months
ended March 31, 1998. Income from

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operations represented 4.0% and 4.7% of net sales for the three months ended
March 31, 1999 and 1998, respectively.

Domestic income from operations was $21.8 million during the three months
ended March 31, 1999, an increase of 16.0% from $18.8 million during the
corresponding period in 1998. International income (loss) from operations was
$(2.0) million during the 1999 period and $(0.8) million during the 1998 period.

Interest expense, net. Interest expense, net for the three months ended
March 31, 1999 increased to $6.6 million from $2.6 million for the same period
in 1998. Of the $4.0 million increase in interest expense, $1.3 million was due
to the incurrence of $75 million in additional long-term borrowings in April
1998 and $2.7 million was due to increased usage of our credit lines. Short-term
borrowing increased in the first quarter of 1999 as a result of acquisitions,
payments related to the Pulse inspection program and increased working capital
for seasonal needs.

Other. Other expense (income) was $(0.2) million for the three months ended
March 31, 1999 and $0.2 million for the three months ended March 31, 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 $(0.5)
million for both the three months ended March 31, 1999 and 1998 represents the
minority interest in Ets. Brancher and, for 1999, McQuay do Brasil.

Provision for income taxes. The provision for income taxes was $7.3 million
for both the three months ended March 31, 1999 and 1998. The effective tax rate
of 52.5% and 46.9% for the three months ended March 31, 1999 and 1998,
respectively, differs from the statutory federal rate of 35.0% principally due
to state and local taxes and valuation reserves provided for foreign operating
losses. No tax benefits are being recognized for our tax loss carryforwards in
Europe, which will not be used until our operations in Europe are profitable.

Net income. Net income was $6.6 million and $8.3 million for the three
months ended March 31, 1999 and 1998, respectively. Net income represented 1.4%
and 2.2% of net sales for the three months ended March 31, 1999 and 1998,
respectively.

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 of $68.6
million of sales beginning in the third quarter of 1998 of the hearth products
companies. Hot weather in the spring of 1998 and an expanded dealer and
distributor base led to greater sales of the "Lennox" and "Armstrong Air"
brands. Commercial air conditioning revenues increased $113.3 million, or 40.6%,
to $392.1 million for 1998 compared to 1997. If the effect of the consolidation
of Ets. Brancher is excluded, commercial air conditioning revenues would have
increased $46.5 million, or 17.9%, to $306.1 million for 1998 as compared to
1997. This increase was primarily due to increased volumes of rooftop air
conditioner sales in the U.S. and Canada. Net sales related to the commercial
refrigeration segment were $237.3 million during 1998, an increase of 53.8% from
$154.3 million for 1997. If the effect of the consolidation of Ets. Brancher is
excluded, net sales related to the commercial refrigeration products segment
would have increased $20.2 million, or 14.8%, to $156.8 million for 1998 as
compared to 1997. This increase is primarily caused by sales volume increases
due to hot weather in North America in 1998 and the acquisition of McQuay do
Brasil in September 1998. Heat transfer revenues increased $32.5 million, or
22.3%, to $178.7 million for 1998 compared to 1997. If the effect of the
consolidation of Ets. Brancher is excluded, heat transfer revenues would

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<PAGE> 23

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 McQuay do Brasil and Lovelock Luke.

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 our global operation.

Other operating expense, net. Other operating expense, net totaled $8.5
million for 1998, an increase of $1.1 million from $7.4 million for 1997. Other
operating expense, net is comprised of (income) loss from joint ventures,
amortization of goodwill and other intangibles and miscellaneous items. The $1.1
million increase is due to increases in amortization of goodwill of $1.7 million
and losses from joint ventures of $1.3 million, partially offset by a decrease
in other intangible and miscellaneous expense of $2.0 million.

Product inspection charge. In the fourth quarter of 1997, we recorded a
non-recurring pre-tax charge of $140.0 million to provide for management's best
estimate of the projected expenses of the product inspection program related to
our Pulse furnace. As part of our normal warranty process, we continuously
monitor the replacement rate for, among other components, heat exchangers in our
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, we publicly announced the Pulse inspection program in
1997. Under the program, we have offered the owners of all Pulse furnaces
installed between 1982 and 1990 a subsidized inspection and a free carbon
monoxide detector. The inspection includes a severe pressure test to determine
the serviceability of the

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heat exchanger. If the heat exchanger does not pass the test, we will either
replace the heat exchanger or offer a new furnace and subsidize the labor costs
for installation. The cost required for the program depends on the number of
units we find, the number of units that fail the pressure test, whether
consumers select to replace the heat exchanger or receive a new furnace and the
cost of the replacement products. Based on the results of our historical
experience, input from our dealers and consultation with the Consumer Products
Safety Commission, we estimated we could ultimately locate approximately 67% of
the Pulse furnaces that were manufactured between 1982 and 1988. In terms of
estimated failure rates, we utilized the data gathered from "field experience"
tests, which indicated a failure rate of approximately 30%. In terms of consumer
selection, we estimated that half would elect the new heat exchanger and half
would elect the new furnace. Finally, we utilized our 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. We
believe we had adequate information to develop reasonable assumptions in
estimating the cost of the Pulse inspection program.

We periodically review the reserve balance and at this time believe the
remaining reserve of $13.6 million at March 31, 1999 will be adequate to cover
the remaining costs associated with this inspection program. This program ends
on June 30, 1999.

Income (loss) from operations. Income (loss) from operations was $106.6
million for 1998 compared to $(35.2) million for 1997. Excluding the Ets.
Brancher consolidation, the special charge for the Pulse inspection program and
the three non-recurring selling, general and administrative expense items
mentioned above, income from operations would have been $122.6 million for 1998,
or 7.5% of net sales, as compared to $106.1 million for 1997, or 7.6% of net
sales.

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, McQuay do Brasil.

Provision (benefit) for income taxes. The effective tax rates for the 1998
provision and the 1997 benefit were 41.4% and 25.5%, respectively. The effective
tax rates differ from the federal statutory rate of 35% primarily due to state
income taxes and valuation reserves provided for foreign operating losses.

Net income (loss). Net income (loss) was $52.5 million and $(33.6) million
for the year ended December 31, 1998 and 1997, respectively. If the effects of
the consolidation of Ets. Brancher and the non-recurring charge relating to the
Pulse inspection program are excluded, net income would have been $52.9 million
and $55.2 million for 1998 and 1997, representing 3.2% and 3.9% of net sales for
1998 and 1997, respectively.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net sales. Net sales increased $79.9 million, or 5.9%, to $1,444.4 million
for the year ended December 31, 1997 from $1,364.5 million for the year ended
December 31, 1996. If the effect of the consolidation of Ets. Brancher is
excluded, net sales would have increased by $39.7 million, or 2.9%, to $1,404.2
million for 1997 compared to 1996.

Net sales related to the North American residential segment were $865.1
million during 1997, an increase of 0.9% from $857.1 million for 1996. This
increase was principally due to increases in the number of heating and air
conditioning units sold by us, despite the fact that industry shipments were
generally down 5%

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for 1997. The weather in 1997 was mild with a cool spring and modest winter over
most of the U.S., and inventory levels for both dealers and distributors were
higher than normal at the end of 1996. Commercial air conditioning revenues
increased $49.9 million, or 21.8%, to $278.8 million for 1997 compared to 1996.
Of the $49.9 million increase, 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 we established early in 1997 as well as the continued roll out of
the L Series rooftop product line. Net sales related to the commercial
refrigeration segment were $154.3 million during 1997, an increase of 13.8% from
$135.6 million for 1996. This increase was primarily due to the consolidation of
Ets. Brancher in the fourth quarter of 1997. Heat transfer revenues increased
$3.3 million, or 2.3%, to $146.2 million for 1997 compared to 1996. Ets.
Brancher contributed $3.3 million to heat transfer product sales in 1997.

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, we recognized a non-recurring $4.6 million gain on the sale of a portion
of our interest in Alliance Compressors, a joint venture to manufacture
compressors. After the sale, we owned a 24.5% interest in Alliance Compressors.

Income (loss) from operations. Income (loss) from operations was $(35.2)
million in 1997, a decrease of $135.8 million from $100.6 million in 1996. The
$135.8 million decrease was primarily due to the $140.0 million non-recurring
pre-tax charge relating to the Pulse inspection program. Excluding the special
charge for the Pulse inspection program and the consolidation of Ets. Brancher,
income from operations would have been $106.1 million in 1997, representing 7.6%
of net sales, the same percent as in 1996.

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. We 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.

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<PAGE> 26

Provision (benefit) for income taxes. The effective tax rates for the 1997
benefit and the 1996 provision were 25.5% and 37.9%, respectively. The effective
tax rates differ from the federal statutory rate of 35% primarily due to state
income taxes and valuation reserves provided for foreign operating losses.

Net income (loss). There was a net loss of $(33.6) million for the year
ended December 31, 1997 compared to net income of $54.7 million for the year
ended December 31, 1996. If the non-recurring charge relating to the Pulse
inspection program and the consolidation of Ets. Brancher are excluded, net
income would have been $55.2 million for 1997, representing 3.9% of net sales,
compared to 4.0% of net sales for 1996.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations and capital requirements from
internally generated funds and, to a lesser extent, borrowings from external
sources. Our capital requirements have related principally to acquisitions, the
expansion of our production capacity and increased working capital needs that
have accompanied sales growth.

Net cash provided by operating activities totaled $158.8 million, $58.5
million and $5.0 million for 1996, 1997 and 1998, respectively. The reduction in
cash provided by operating activities is primarily due to the Pulse inspection
program as we spent $26.6 million and $86.1 million on this program in 1997 and
1998, respectively. In addition, we had unusually strong sales of our "Lennox"
brand of North American air conditioning products late in 1997 and accordingly
accounts receivable in December 1997 were higher than normal. Net cash provided
by (used in) operating activities was $(57.2) million for the three months ended
March 31, 1999 compared to $(31.7) million for the three months ended March 31,
1998. The increase in cash used in operating activities is primarily due to
increases in accounts and notes receivable resulting from higher first quarter
1999 sales. Net cash used in investing activities totaled $37.1 million, $44.6
million, $212.4 million, $13.7 million and $71.2 million for 1996, 1997 and 1998
and the three months ended March 31, 1998 and 1999, respectively. The greater
use of cash for investing relates primarily to increased acquisition activity as
we spent $14.3 million, $160.5 million, $1.4 million and $51.1 million for
acquisitions in 1997 and 1998 and the three months ended March 31, 1998 and
1999, respectively. Net cash provided by (used in) financing activities was
($44.0) million, ($17.3) million, $89.5 million, $69.2 million and $130.9
million for 1996, 1997 and 1998 and the three months ended March 31, 1998 and
1999, respectively. In 1998, we issued $75.0 million principal amount of notes
and increased short term borrowings by $36.7 million. In the first quarter of
1999, we increased short-term borrowings by $134.5 million primarily to fund
acquisitions. Due to the seasonality of the air conditioning and refrigeration
businesses, we typically use cash in the first six months and generate cash
during the latter half of the year. Accordingly, we do not believe it is
appropriate to compare interim periods to the full fiscal year. Our internally
generated cash flow, along with borrowings under our revolving credit facility,
have been sufficient to cover our working capital, capital expenditure and debt
service requirements over the last three years.

In the past, we have used a combination of internally generated funds,
external borrowings and our stock to make acquisitions. We intend to acquire
additional heating and air conditioning dealers in the U.S. and Canada. We plan
to finance these acquisitions with a combination of cash, stock and debt. As of
July 2, 1999, we had acquired 50 dealers in Canada and two in the U.S. for an
aggregate purchase price of approximately $74 million and had signed letters of
intent to acquire nine additional Canadian dealers and 11 U.S. dealers for an
aggregate purchase price of approximately $79 million. On June 25, 1999, we
filed a shelf registration statement for $100 million of our common stock to use
in connection with acquisitions.

We have agreed to purchase on March 31, 2000 the remaining 30% interest in
Ets. Brancher not owned by us for approximately $17 million. In June 1999, we
acquired James N. Kirby Pty. Ltd. for approximately $67 million. In addition, we
assumed approximately $28 million of Kirby's debt. The purchase price consisted
of approximately $17 million in cash, $36 million in deferred payments and
650,430 shares of common stock. The $36 million in deferred payments will be
made in installments of approximately $12 million per year over the next three
years. If our common stock does not trade at a price greater than $29.09 per
share for five consecutive days from the period from June 1999 to June 2000,
then we are obligated to pay the former

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owners of Kirby the difference between the trading price for the last five days
of this period and $29.09 for 577,500 of the shares of common stock.

Our capital expenditures were $31.9 million, $34.6 million, $52.4 million
and $20.0 million for 1996, 1997 and 1998 and the three months ended March 31,
1999, respectively. We have budgeted $80 million for capital expenditures for
1999. These expenditures primarily relate to production equipment (including
tooling), training facilities, leasehold improvements and information systems.
The majority of these planned capital expenditures are discretionary. We plan to
finance these capital expenditures using cash flow from operations and a portion
of the net proceeds from this offering.

At March 31, 1999, we had long-term debt obligations outstanding of $260.2
million. The total long-term debt consists primarily of six issues of notes with
an aggregate principal amount of $240.6 million, interest rates ranging from
6.56% to 9.69% and maturities ranging from 2001 to 2008. The notes contain
restrictive covenants, including covenants that place limitations on our ability
to incur additional indebtedness, encumber our assets, sell our assets or pay
dividends. Our ability to incur debt is limited to 60.0% of our consolidated
capitalization. As of March 31, 1999, our consolidated indebtedness as a percent
of consolidated capitalization was 51.8%. Generally, the aggregate sale of
assets outside the ordinary course of business cannot exceed 15% of our
consolidated assets during any fiscal year and all transfers after January 1,
1998 cannot exceed 30% of our consolidated assets. In addition, in order to pay
dividends or make a sale of assets outside the ordinary course of business, we
must be able to incur $1.00 of additional indebtedness. In addition, we are
required to maintain a consolidated net worth equal to $261.0 million plus 15%
of our consolidated quarterly net income beginning April 1, 1998. At March 31,
1999, the required consolidated net worth was $270.2 million and we had a
consolidated net worth of $374.3 million. Upon a change of control, we 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. Our debt service
requirements (including principal and interest payments) for long-term debt are
$38.1 million for 1999. As of December 31, 1998, we had approximate minimum
commitments on all non-cancelable operating leases of $22 million and $19
million in 1999 and 2000, respectively.

We have $135 million of borrowings available under our revolving credit
facility. Our revolving credit facility provides for both "standby loans" and
"offered rate loans." Standby loans are made ratably by all lenders under the
revolving credit facility, while offered rate loans are, subject to the terms
and conditions of the credit facility, separately negotiated between us and one
or more members of the lending syndicate. Standby loans bear interest, at our
option, at a rate equal to either (a) the London Interbank Offered Rate plus a
margin equal to 0.150% to 0.405% depending on the ratio of our debt to total
capitalization, or (b) the greater of (1) the Federal Funds Effective Rate plus
0.5%, and (2) the Prime Rate. Offered rate loans bear interest at a fixed rate
agreed to by us and the lender or lenders making such loans. Under the revolving
credit facility, we are obligated to pay fees, including (a) a quarterly
facility fee to each lender under the credit facility equal to a percentage,
varying from 0.100% to 0.220% (depending on the ratio of our debt to total
capitalization) of each lender's total commitment, whether used or unused, under
the revolving credit facility and (b) administrative fees to the administrative
agent and documentation agent under the revolving credit facility. The revolving
credit facility contains the same restrictive covenants and maintenance tests as
the notes. The revolving credit facility will expire on July 13, 2001, unless
earlier terminated according to its terms and conditions.

In March 1999, we entered into a term credit agreement which provides for
borrowings of up to $115 million. Repayments of borrowings result in a permanent
reduction of the commitment. Loans bear interest, at our option, at a rate equal
to (a) the rate offered by the administrative agent in its London offices plus
1.00% to 1.75%, depending upon the period, or (b) the greater of (1) the Federal
Funds Effective Rate plus 0.5% or (2) the Prime Rate, in each case plus 0% to
0.75%, depending upon the period. Under the term credit agreement, we are
obligated to pay fees, including (a) a quarterly commitment fee equal to 0.15%
of the unused portion of the commitment and (b) administrative fees to the
administrative agent. We are required to use the net proceeds from any issuance
of our securities, including the net proceeds from this offering, to repay any
amounts outstanding under the term credit agreement. The term credit agreement
expires upon completion of this offering. The term credit agreement otherwise
expires on December 31, 1999.

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<PAGE> 28

We have entered into a new $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, to take effect upon completion of this
offering. It is a requirement that we receive not less than $140 million in net
proceeds from this offering before the new revolving credit facility will go
into effect and we can make borrowings under this facility. This new facility is
designed to replace our existing revolving credit facility and term credit
agreement. However, in the event that we do not receive at least $140 million in
net proceeds from this offering, we will maintain our existing credit facility.
The new credit facility has restrictive covenants and maintenance tests
identical to those in our existing revolving credit facility and notes, plus two
additional financial covenants. First, the ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization, hereinafter
referred to as "EBITDA," cannot exceed 3.0 based upon a rolling four quarter
basis. Second, the ratio of EBITDA less capital expenditures to interest expense
should be greater than 3.0 based on a rolling four quarter basis. Pursuant to
the terms of the notes, we will be required to add these additional financial
covenants to the notes. Borrowings under this new credit facility will bear
interest, at our 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 our ratio of total funded debt to EBITDA. We will pay 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 new credit facility will have a term of five
years.

We are currently negotiating an agreement with The Prudential Insurance
Company of America or its affiliates which, if entered into, will allow us to
borrow up to $100 million in the form of senior notes from time to time within
the first three years of the agreement. We expect that the minimum amount of
notes that we could draw at any one time would be $10 million and that the
maturity and interest rate would be selected from alternatives provided by
Prudential at the time the notes are issued, up to a maximum maturity of 15
years. We expect that the master shelf agreement will have customary covenants
and that they will be substantially similar to those contained in our
outstanding series of notes.

We believe that cash flow from operations, as well as the net proceeds from
the offering and available borrowings under our revolving credit facility, will
be sufficient to fund our operations for the foreseeable future. We may pursue
additional debt or equity financing in connection with acquisitions.

QUARTERLY RESULTS OF OPERATIONS

The following table presents certain of our quarterly information for the
years ended December 31, 1997 and 1998 and the three months ended March 31,
1999. Such information is derived from our unaudited financial statements and,
in the opinion of our management, includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of such
information. Operating results for any given quarter are not necessarily
indicative of results for any future period and should not be relied upon as an
indicator of future performance. Beginning with the fourth quarter of 1997, our
results of operations reflect the consolidation of Ets. Brancher.

<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
</TABLE>

28
<PAGE> 29

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.

<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% .5% 1.4%
</TABLE>

Our quarterly operating results have varied significantly and are likely to
vary significantly in the future. Demand for our products is seasonal and
dependent on the weather. In addition, a majority of our revenue is derived from
products whose sales peak in the summer months. Consequently, we often
experience lower sales levels in the first and fourth quarters of each year.
Because a high percentage of our overhead and operating expenses are relatively
fixed throughout the year, operating earnings and net earnings tend to be lower
in quarters with lower sales.

MARKET RISK

The estimated fair values of our financial instruments approximate their
respective carrying amounts at March 31, 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 $26,500 6.75%
9.53% promissory notes.................................. 21,000 21,800 6.75
11.10% promissory notes................................. 7,135 7,300 9.00
</TABLE>

The fair values presented above are based on the amount of future cash
flows associated with each instrument, discounted using our current borrowing
rate for similar debt instruments of comparable maturity. The fair values are
estimates as of March 31, 1999, and are not necessarily indicative of amounts
for which we could settle currently or indicative of the intent or ability of us
to dispose of or liquidate such instruments.

Our results of operations can be affected by changes in exchange rates. Net
sales and expenses in currencies other than the U.S. dollar are translated into
U.S. dollars for financial reporting purposes based on the average exchange rate
for the period. During 1996, 1997 and 1998, net sales from outside the U.S. and
Canada represented 8.2%, 11.7% and 19.2%, respectively, of total net sales.
Historically, foreign currency transaction gains (losses) have not had a
material effect on our operations.

We have entered into foreign currency exchange contracts to hedge our
investment in Ets. Brancher. We do not engage in currency speculation. These
contracts do not subject us to risk from exchange rate movements because the
gains or losses on the contracts offset the losses or gains, respectively, on
the assets and liabilities of Ets. Brancher. As of March 31, 1999, we had
entered into foreign currency exchange contracts with a nominal value of 165.5
million French francs (approximately $27.0 million). These contracts require us
to exchange French francs for U.S. dollars at maturity, which is in May 2003, at
rates agreed to at inception of the contracts. If the counterparties to the
exchange contracts do not fulfill their obligations to deliver the contracted
currencies, we could be at risk for any currency related fluctuations.

From time to time we enter into foreign currency exchange contracts to
hedge receivables from our foreign subsidiaries. These contracts do not subject
us to risk from exchange rate movements because the gains or losses on the
contracts offset losses or gains, respectively, on the receivables being hedged.
As of

29
<PAGE> 30

March 31, 1999, we had obligations to deliver the equivalent of $61.7 million of
various foreign currencies by June 30, 1999, for which the counterparties to the
contracts will pay fixed contract amounts.

We have contracts with various suppliers to purchase copper and aluminum
for use in our manufacturing processes. As of March 31, 1999, we had contracts
to purchase 17.1 million pounds of copper over the next 24 months at fixed
prices that average $0.75 per pound ($12.8 million) and contracts to purchase
six million pounds of copper at a variable price equal to the COMEX copper price
(0.63 per pound at March 31, 1999) over the next 12 months. We also had
contracts to purchase 19.3 million pounds of aluminum at $0.61 per pound ($11.8
million) over the next 12 months. The fair value of the copper and aluminum
purchase commitments was a liability of $2.6 million at March 31, 1999.

INFLATION

Historically, inflation has not had a material effect on our results of
operations.

YEAR 2000 COMPLIANCE

The Year 2000 issue concerns the ability of information technology and
non-information technology systems and processes to properly recognize and
process date-sensitive information before, during and after December 31, 1999.
We have a variety of computer software program applications, computer hardware
equipment and other equipment with embedded electronic circuits, including
applications used in our financial business systems, manufacturing processes and
administrative functions, which are collectively referred to as the "systems".
We expect that our systems will be ready for the Year 2000 transition.

In order to identify and resolve Year 2000 issues affecting us, we
established a Year 2000 compliance program. The Year 2000 compliance program is
administered by a task force, consisting of members of senior management as well
as personnel from our accounting, internal audit and legal departments, which
has oversight of the information systems managers and other administrative
personnel charged with implementing our Year 2000 compliance program. The task
force has established a specific compliance team for Lennox Corporate and for
each of our operating locations.

In 1994 we began the replacement of all core business systems for our
domestic subsidiaries. The purpose of this replacement was to upgrade systems
architecture and functionality, improve business integration and implement
process improvements. SAP was selected as the enterprise resource for planning
("ERP") system to replace mission critical software and hardware for Lennox
Industries, Heatcraft'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 December 31, 1998, all replacements were
complete except for the Heat Transfer Division of Heatcraft, which is scheduled
to be complete by September 30, 1999, and upgrades for some subsidiaries of
Lennox Global.

SAP, Fourth Shift and ROI Manage 2000 have certified that these systems are
Year 2000 compliant. Hardware, operating systems and databases installed to
support these systems are either compliant or have Year 2000 vendor supplied
updates to be applied in 1999. Other smaller applications integrated with SAP
have been replaced or upgraded with Year 2000 compliant software.

The implementations of SAP, Fourth Shift and ROI Manage 2000 and the
related hardware, operating systems and databases comprise the systems that are
most critical to our operations, which are referred to as "critical systems,"
and address the areas of our business which would have otherwise been
significantly affected by the Year 2000. As of April 30, 1999, we were
approximately 85% complete with the implementation of the Year 2000 compliance
program for all critical systems, and we expect to be 100% complete by September
30, 1999.

Our Year 2000 Program also addresses compliance in areas in addition to
critical systems, including: voice and data networks, desktop computers,
peripherals, EDI, contracted or purchased departmental software, computer
controlled production equipment, test stations, building security, transport and
heating and air conditioning systems, service providers, key customers and
suppliers and Lennox manufactured and purchased products. As of April 30, 1999,
we were more than 60% complete with the implementation of the Year 2000
compliance program for all such areas, and we expect to be 100% complete by
September 30, 1999.
30
<PAGE> 31

We have initiated communications with significant suppliers, customers and
other third parties to identify and assess Year 2000 risks and by September 1999
expect to have developed solutions that will minimize the impact on us. Lennox
Industries distributed surveys to approximately 200 of its major suppliers in
January 1999 and over half of these suppliers have responded. All of these
respondents stated that they are either compliant or are planning to be
compliant. In April 1999, a follow-up survey was sent to the suppliers who had
not yet responded. We expect to resolve any identified problems with critical or
non-responding suppliers or to develop contingency plans where needed. We depend
on third-party trucking companies to deliver finished products from our
factories to our customers. None of Lennox Industries' trucking contractors is
individually critical to our business. About 125 different trucking companies
handle 95% of Lennox Industries' distribution. We have communicated with
approximately 50 of the largest trucking contractors and received assurances
that they will not have service disruptions due to the Year 2000. Our
manufacturing facilities are highly dependent on public utilities, especially
electrical power, natural gas, water and communications companies. If third
party providers, due to the Year 2000 issue, fail to provide us with components
or materials which are necessary to manufacture our products, with sufficient
electrical power and other utilities to sustain our manufacturing process, or
with adequate and reliable means of transporting our products to our customers,
and we have not developed adequate contingency plans, then there could be an
adverse effect on our results of operations at any facility affected by these
problems. Currently, we are not aware of any of our significant third party
providers or customers that are not or will not be Year 2000 compliant.

We believe that our 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 our operations as a whole.
For the most part, our 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 our 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. These contingency plans should be completed by
October 1999.

Our estimated cost to become Year 2000 compliant is approximately $7.5
million, of which we have already spent approximately $3.4 million. All of these
expenses will reduce our net income. Of the $7.5 million in total costs,
approximately $5.1 million relates to application software, including consulting
and training relating to the software, of which approximately $2.8 million has
been spent to date. The remaining $2.3 million in total estimated costs relates
to infrastructure and hardware, of which approximately $0.7 million has been
spent and the remaining $1.6 million 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. We have not deferred any significant information technology
projects because of our response to Year 2000 issues. All Year 2000 costs are
being funded from our 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 our 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."

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivatives embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. We do not believe that the adoption of this
pronouncement will have a significant impact on our financial statements.

31
<PAGE> 32

BUSINESS

We are a leading global provider of climate control solutions. We design,
manufacture and market a broad range of products for the HVACR markets. Our
products are sold under well-established brand names including "Lennox",
"Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. We are also one of
the largest manufacturers in North America of heat transfer products, such as
evaporator coils and condenser coils. We have leveraged our expertise in heat
transfer technology, which is critical to the efficient operation of any heating
or cooling system, to become an industry leader known for our product innovation
and the quality and reliability of our products. As a result of recent
acquisitions, we have also become a leader in the growing market for hearth
products, which includes pre-fabricated fireplaces and related products.
Historically, we have sold our "Lennox" brand of residential heating and air
conditioning products directly to a network of installing dealers, which
currently numbers approximately 6,000, making us the largest wholesale
distributor of these products in North America. We have recently initiated a
program to acquire dealers in metropolitan areas in the U.S. and Canada so that
we can provide heating and air conditioning products and services directly to
consumers.

Shown below are our four business segments, the key products and brand
names within each segment and 1998 net sales by segment. The North American
residential segment also includes installation, maintenance and repair services
performed by Lennox-owned dealers. See our audited financial statements included
elsewhere in this prospectus for more information on our segments.

<TABLE>
<CAPTION>
SEGMENT PRODUCTS BRAND NAMES 1998 NET SALES
------- -------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
North American residential Furnaces, heat pumps, air Lennox, Armstrong Air, Air-Ease, $1,013.7
conditioners, packaged heating Concord, Magic-Pak, Advanced
and cooling systems and related Distributor Products, Superior,
products; pre-fabricated Marco, Whitfield and Security
fireplaces, free standing Chimneys
stoves, fireplace inserts and
accessories
Commercial air conditioning Unitary air conditioning and Lennox, Alcair and Janka 392.1
applied systems
Commercial refrigeration Chillers, condensing units, unit Bohn, Friga-Bohn, Larkin, 237.3
coolers, fluid coolers, air Climate Control and Chandler
cooled condensers and air Refrigeration
handlers
Heat transfer Evaporator and condenser coils Heatcraft and Friga-Bohn 178.7
and equipment and tooling to
manufacture coils
--------
Total........................... $1,821.8
========
</TABLE>

We market and distribute our products using multiple brand names through
multiple distribution channels to penetrate different segments of the HVACR
market. Our "Lennox" brand of residential heating and air conditioning products
is sold directly through installing dealers -- the "one-step" distribution
system -- which has created strong and long-term relationships with dealers in
North America. Our "Armstrong Air," "Air-Ease," "Concord" and "Magic-Pak"
residential heating and air conditioning brands are sold to regional
distributors that in turn sell the products to installing contractors -- the
"two-step" distribution system typically utilized in the heating and air
conditioning industry. The acquisition of heating and air conditioning dealers
in the U.S. and Canada allows us to participate in the retail sale and service
of
32
<PAGE> 33

heating and air conditioning products. Our hearth products, commercial air
conditioning products and refrigeration products are also sold under multiple
brand names and through a combination of wholesalers, contractors, original
equipment manufacturers, manufacturers' representatives and national accounts.

From our beginning in 1895 until the mid-1980's, we focused primarily on
the North American residential heating and air conditioning market. In the
1980's, we expanded our product offerings by acquiring several heat transfer and
commercial refrigeration businesses. In the mid-1990's, we increased our
international presence, product offerings and brand portfolio through
acquisitions in Europe, Latin America and the Asia Pacific region. The most
significant international acquisition was the purchase in 1996 of a 50% interest
in two operating subsidiaries of Ets. Brancher for approximately $22.0 million,
which significantly expanded our geographic presence and provided us with an
entry into the commercial air conditioning and refrigeration markets in Europe.
In 1997, we increased our ownership interest in Ets. Brancher to 70% for an
additional $18.4 million. In September 1998, we acquired a majority interest in
McQuay do Brasil S.A., a Brazilian company which participates in the commercial
refrigeration and heat transfer markets in Brazil and surrounding countries, for
$20.5 million. We recently expanded our product offerings to include hearth
products through the acquisitions of Superior Fireplace Company, Marco Mfg.,
Inc. and Pyro Industries, Inc. in the third quarter of 1998 and Security
Chimneys International, Ltd. in the first quarter of 1999 for an aggregate
purchase price of approximately $120 million. As a result of these acquisitions,
we are one of the largest manufacturers of hearth products in the U.S. and
Canada, offering a broad line of products through a variety of distribution
channels. In the fourth quarter of 1998, we acquired the assets of Lovelock Luke
Pty. Limited, a distributor of refrigeration and related equipment in Australia
and New Zealand, for approximately $7 million. In May 1999, we acquired
Livernois Engineering Holding Company and related patents for approximately $21
million. Livernois produces heat transfer manufacturing equipment for the HVACR
and automotive industries. In May 1999, we entered into a letter of intent to
acquire essentially all of the assets of the air conditioning and heating
division of The Ducane Company, based in South Carolina, for approximately $45
million. This acquisition, if completed, will give us additional capacity to
manufacture heating and air conditioning products. We 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 $67 million.

We were founded in 1895 in Marshalltown, Iowa when Dave Lennox, who owned a
machine repair business for the railroads, successfully developed and patented a
riveted steel coal-fired furnace which was substantially more durable than the
cast iron furnaces used at the time. By 1904, the manufacture of these furnaces
had grown into a significant business and was diverting the Lennox Machine Shop
from its core business. As a result, in 1904, a group of investors headed by
D.W. Norris bought the furnace business and named it the Lennox Furnace Company.
Over the years, D.W. Norris ensured that ownership of Lennox was distributed to
all generations of his family. Today, Lennox's ownership is broadly distributed
among approximately 110 descendants of or persons otherwise related to D.W.
Norris.

INDUSTRY OVERVIEW

NORTH AMERICAN RESIDENTIAL

Residential Heating and Air Conditioning. The residential market in the
U.S. and Canada is divided into two basic categories: furnaces and air
conditioning systems. Air conditioning is further divided into two basic
categories: residential split systems and heat pumps and window and room air
conditioners. We do not participate in the window and room air conditioner
category. Split system air conditioners are comprised of a condensing unit,
normally located outside of the household, and an evaporator unit, which is
typically positioned indoors to use the blower mechanism of a furnace or fan
coil unit in the case of a heat pump.

In recent decades the functions performed by the products of this market
have become increasingly important to modern life. The advent of modern, high
efficiency air conditioning was one of the significant factors contributing to
the growth of large metropolitan areas in parts of the southern U.S. According
to a report published by the U.S. Department of Housing and Urban Development
for 1995, 98% of all new houses constructed in the southern region of the U.S.
and 80% of all new houses in the U.S. included central air conditioning.
According to the U.S. Census Bureau, manufacturers' sales for all residential
air conditioners

33
<PAGE> 34

and warm air furnaces produced in 1997 for the U.S. market were approximately
$5.5 billion, reflecting a compound annual growth rate of approximately 7.2%
from 1993 to 1997. We estimate that manufacturers' sales in Canada were
approximately $200 million in 1997.

Services in the residential market in North America consist of the
installation, replacement, maintenance and repair of heating and air
conditioning systems at existing residences and the installation of heating and
air conditioning systems at newly constructed homes. This market is served by
small, owner-operated businesses operating in a single geographic area and
dealers owned by consolidators, utility companies and others, some of whom may
operate under a uniform trade name and in multiple geographic locations. The
retail sales and service market in the U.S. is comprised of over 30,000 dealers.

The principal factors affecting market growth in the North American
residential market are new home construction, the weather and economic
conditions, especially consumer confidence. Residential heating and air
conditioning products are sold for both the replacement and new construction
markets. The residential new construction market has historically been a more
price sensitive market because many homebuilders focus on initial price rather
than operating efficiency or ongoing service costs.

Hearth Products. The main components of the hearth products market are
pre-fabricated gas fireplaces and inserts, pre-fabricated wood burning
fireplaces and inserts, pellet stoves, gas logs, and accessories and
miscellaneous items. We participate in all major aspects of the hearth products
market. According to the Hearth Products Association, an industry trade group,
there were 2.3 million unit sales in 1998, including all gas and wood burning
appliances, and this market is expected to grow at 7.5% per year through 2000.
The addition of a fireplace is considered one of the best return on investment
decisions that a homeowner can make. Hearth products are distributed and sold
through many channels, ranging from contractors to specialty retailers.

COMMERCIAL AIR CONDITIONING

The global commercial air conditioning market is divided into two basic
categories: unitary air conditioners and applied systems. We primarily
participate in the unitary air conditioning market in North America and in both
the unitary and applied systems markets in Europe. Unitary products consist of
modular split systems and packaged products with up to 30 tons of cooling
capacity. One ton of cooling capacity is equivalent to 12,000 BTUs and is
generally adequate to air condition approximately 500 square feet of space.
Packaged units are self-contained heating and cooling or cooling only units that
typically fit on top of a low rise commercial building such as a shopping center
or a restaurant. Applied systems are typically larger engineered systems, which
are designed to operate in multi-story buildings and include air cooled and
water cooled chillers, air handling units and equipment to monitor and control
the entire system.

According to the Air-Conditioning & Refrigeration Institute, an industry
trade group, global manufacturers' sales for all commercial air conditioning
systems produced in 1994 (the latest available data) were approximately $14
billion. The principal factors affecting growth in this market are new
construction, economic conditions and environmental regulation of refrigerants.
Unlike residential heating and air conditioning systems, some commercial air
conditioning systems use refrigerants that have been banned or that are
currently being phased out, especially in Europe. We expect that such regulation
will lead to increased growth in this market.

COMMERCIAL REFRIGERATION

The global refrigeration market is a highly diversified market, including
everything from household refrigerators and walk-in coolers to large, ammonia
based flash freezing plants and process cooling equipment. We define our served
market as the design and manufacture of equipment used in cold storage,
primarily for the preservation of perishable goods. Our served market includes
condensing units, unit coolers, air cooled condensers, non-supermarket racks and
packaged systems. According to the U.S. Census Bureau, our served market in the
U.S. accounted for approximately $510.9 million in revenues in 1997, reflecting
a compound annual growth rate of approximately 5.3% from 1993 to 1997.

34
<PAGE> 35

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. We
produce heat transfer surfaces not only for traditional HVACR applications, but
also for many of these other applications. Many HVACR manufacturers produce
standard coils for their own use and generally do not sell coils to third
parties. Coils are also designed and produced by independent coil manufacturers
and sold to original equipment manufacturers for use in their products. Coils
are typically designed, developed and sold by engineers who work with customers
to produce a coil that will meet the customer's precise specifications. Factors
affecting a coil purchaser's decision are quality, delivery time, engineering
and design capability, and price.

Since heat transfer products are a fundamental part of HVACR products, the
heat transfer market is driven by the same economic factors that affect the
HVACR markets generally. Because of the fragmented nature of this market and the
fact that coils are often produced internally by HVACR manufacturers, it is
difficult to gauge the size of the worldwide served heat transfer market.
According to the U.S. Census Bureau, the served market in the U.S. (i.e., third
party sales) accounted for approximately $528.1 million in revenues in 1997,
reflecting a compound annual growth rate of approximately 6.2% from 1993 to
1997.

COMPETITIVE STRENGTHS

We have a combination of strengths that position us to continue to be a
leading provider of climate control solutions including:

STRONG BRAND RECOGNITION AND REPUTATION

We believe that our well known brand names and reputation for quality
products and services position us to compete successfully in our existing
markets and to continue to expand internationally. Our studies indicate that our
"Lennox" brand is the most widely recognized brand name in the North American
residential heating and air conditioning markets. Furthermore, in a recent
survey of home builders, the "Lennox" brand received the highest overall rating
in terms of product quality for furnaces and unitary air conditioners. We market
our other HVACR and hearth products under the well known brand names of
"Armstrong Air", "Bohn", "Larkin" and "Superior", among others.

BREADTH OF DISTRIBUTION

We market and distribute our products using multiple brand names through
multiple distribution channels to penetrate different segments of the HVACR
market. We sell our heating and air conditioning products through independent
and Lennox-owned installing dealers, as well as through regional distributors.
Our hearth products, commercial air conditioning and refrigeration products are
also sold under multiple brand names and through a combination of wholesalers,
installing contractors, manufacturers' representatives, original equipment
manufacturers, national accounts and specialty retailers. We believe that sales
growth is

35
<PAGE> 36

driven, in part, by the level of exposure to our customers and our distribution
strategy is designed to maximize this exposure.

PROVEN HEAT TRANSFER EXPERTISE

Heat transfer surfaces, which include evaporator and condenser coils, are
critical to the operation of most HVACR products. For a given application, a
variety of factors must be evaluated, such as the size of the HVACR unit and
desired energy efficiency, while considering such additional elements as
manufacturing ease. Since our acquisition of the Heatcraft business in 1986, we
have devoted significant resources to the development of heat transfer surfaces.
We use computer-aided design and other advanced software to improve the
efficiency of designs and simulate and evaluate the movement of refrigerants
even before a prototype is built. Since we also produce coils for sale to third
parties, we are able to spread our research and development costs over third
party purchases of heat transfer products as well as sales of our own HVACR
products. We acquired Livernois Engineering Holding Company and related patents
in May 1999 which provides us with access to additional heat transfer
technology. Livernois produces heat transfer manufacturing equipment for the
HVACR and automotive industries.

COMMITMENT TO PRODUCT INNOVATION AND TECHNOLOGICAL LEADERSHIP

Throughout our history, we have dedicated substantial resources to research
and development and product innovation. We pioneered the introduction of the
forced air furnace in 1935, which resulted in new approaches to home design for
more efficient heating. Other examples of our product innovation include:

- the multi-zone rooftop air conditioner in 1965;

- the two-speed condensing unit for more efficient air conditioning in
1973;

- the high efficiency gas furnace in 1982;

- the first commercially available high efficiency combination hot water
heater and furnace in 1994; and

- "Floating Tube" and "Thermoflex" technologies, which significantly reduce
leaks in air cooled condensers and unit coolers, in 1995.

We have invested approximately $127 million over the last five years on
research and development activities, and we intend to continue to invest in
these activities to create innovative and technologically superior products.

DEMONSTRATED MANUFACTURING EFFICIENCY

Over the last several years, we have implemented advanced manufacturing
techniques and created programs to incentivize our employees to reduce
production cycle lead times to a week in many of our 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 controllable working capital, which we define
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, we estimate that our 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.

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<PAGE> 37

GROWTH STRATEGY

Our growth strategy is designed to capitalize on our competitive strengths
in order to expand our market share and profitability in the worldwide HVACR
markets. We will continue to pursue internal programs and strategic acquisitions
that broaden our product and service offerings, expand our market opportunities
and enhance our technological expertise. We continually review acquisition
candidates but do not have any agreements or commitments with respect to any
significant acquisitions except for the acquisition of North American heating
and air conditioning dealers described below. The key elements of this strategy
include:

EXPAND MARKET IN NORTH AMERICA

Our program to acquire heating and air conditioning dealers in the U.S. and
Canada represents a new direction for the heating and air conditioning industry
because, to our knowledge, no other major manufacturer has made a significant
investment in retail distribution. This strategy will enable us to extend our
distribution directly to the consumer, thereby permitting us to participate in
the revenues and margins available at the retail level while strengthening and
protecting our brand equity. We believe that the retail sales and service market
represents a significant growth opportunity because this market is large and
highly fragmented. The retail sales and service market in the U.S. is comprised
of over 30,000 dealers. We started this program in September 1998, and as of
July 2, 1999 we had acquired 50 dealers in Canada and two in the U.S. for an
aggregate purchase price of approximately $74 million and had signed letters of
intent to acquire nine additional Canadian and 11 U.S. dealers for an aggregate
purchase price of approximately $79 million. We intend to start acquiring
dealers in the U.S. by initially focusing on our existing "Lennox" dealers and
will try to achieve a balance between residential new construction, residential
replacement and light commercial activities. We believe our long history of
direct relationships with our dealers through the one-step distribution system
and the resulting knowledge of local markets will give us advantages in
identifying and acquiring suitable candidates. We have assembled an experienced
management team to administer the dealer operations, and we have developed a
portfolio of training programs, management procedures and goods and services
that we believe will enhance the quality, effectiveness and profitability of
dealer operations.

In addition to our acquisition program, we have initiated a program to
strengthen our independent dealer network by providing all dealers with a broad
array of services and support. Participants in a newly-created associate dealer
program will receive retirement and other benefits in exchange for agreeing that
at least 75% of their residential heating and air conditioning purchases will be
of our products and for granting us a right of first refusal to acquire their
businesses. As of July 2, 1999, over 1,200 dealers in the U.S. and Canada had
joined our 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.

We also intend to increase our market share in North America by:

- selectively expanding our "Lennox" independent dealer network;

- promoting the cross-selling of our "Armstrong Air" and other residential
heating and air conditioning brands to our existing network of "Lennox"
dealers as a second line;

- promoting the cross-selling of our hearth products to our "Lennox" dealer
base;

- expanding the geographic market for the "Armstrong Air" brand of
residential heating and air conditioning products from its traditional
presence in the Northeast and Central U.S. to the southern and western
portions of the U.S.;

- exploiting the fragmented third-party evaporator coil market; and

- pursuing complementary acquisitions that expand our product offerings or
geographic presence.

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EXPLOIT INTERNATIONAL OPPORTUNITIES

Worldwide demand for residential and commercial heating, air conditioning,
refrigeration and heat transfer products is increasing. We believe that the
increasing international demand for these products presents substantial
opportunities, especially in emerging markets and particularly for heat transfer
and refrigeration products. An example is the increasing use of refrigeration
products to preserve perishables including food products in underdeveloped
countries. Refrigeration products generally have the same design and
applications globally. To take advantage of international opportunities, we have
made substantial investments in manufacturing facilities in Europe, Latin
America and Asia Pacific through acquisitions, including a 70% interest in Ets.
Brancher. Our international sales have grown from $112.0 million in 1996 to
$349.5 million in 1998. We will continue to focus on expanding our international
operations through acquisitions and internal growth to take advantage of
international growth opportunities. We are also investing additional resources
in our international operations with the goal of achieving manufacturing and
distribution efficiencies comparable to that of our North American operations.

INCREASE PRESENCE IN HEARTH PRODUCTS MARKET

With our recent acquisitions of hearth products companies, we now
manufacture and sell one of the broadest lines of hearth products in North
America. We offer multiple brands of hearth products at a range of price points.
We believe that this broad product line will allow us to compete successfully in
the hearth products market since many distributors prefer to concentrate their
product purchases with a limited number of suppliers. We believe that we can
increase our penetration of this market by selling in the distribution channels
we acquired and through our historical distribution channels. Many of our
heating and air conditioning dealers have begun to expand their product
offerings to include hearth products.

CONTINUE PRODUCT INNOVATION

An important part of our growth strategy is to continue to invest in
research and new product development. We have designated a number of our
facilities as "centers for excellence" that are responsible for the research and
development of core competencies vital to our success, such as combustion
technology, vapor compression, heat transfer and low temperature refrigeration.
Technological advances are disseminated from these "centers for excellence" to
all of our operating divisions. Historically, our commitment to research and
development has resulted in product innovations such as the first high
efficiency gas furnace. More recently, we were the first to manufacture and
market a complete combination high efficiency water heater and furnace, the
CompleteHeat, and also developed an integrated electronic refrigeration control
system, the Beacon control system.

PRODUCTS

NORTH AMERICAN RESIDENTIAL PRODUCTS AND SERVICES

Heating and Air Conditioning Products. We manufacture and market a broad
range of furnaces, heat pumps, air conditioners, packaged heating and cooling
systems and related products. These products are available in a variety of
product designs and efficiency levels at a range of price points intended to
provide a complete line of home comfort systems for both the residential
replacement and new construction markets. We market these products through
multiple brand names. In addition, we manufacture zoning controls, thermostats
and a complete line of replacement parts. We believe that by maintaining a broad
product line with multiple brand names, we can address different market segments
and penetrate multiple distribution channels.

Our Advanced Distributor Products division builds evaporator coils, unit
heaters and air handlers under the "ADP" brand as well as the "Lennox" and
"Armstrong Air" brands. This division supplies us with components for our
heating and air conditioning products and produces evaporator coils to be used
in connection with competitors' heating and air conditioning products and as an
alternative to such competitors' brand name components. We started this business
in 1993 and have been able to achieve an approximate 20% share of this market
for evaporator coils through the application of our technological and
manufacturing skills.

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<PAGE> 39

Hearth Products. We believe we are the only North American HVACR
manufacturer that also designs, manufactures and markets residential hearth
products. Our hearth products include prefabricated gas and wood burning
fireplaces, free standing pellet and gas stoves, fireplace inserts, gas logs and
accessories. Many of the fireplaces are built with a blower or fan option and
are efficient heat sources as well as attractive amenities to the home. Prior to
the hearth products acquisitions, we offered a limited selection of hearth
products in Canada and, to a lesser extent, in the U.S. We substantially
expanded our offering of hearth products and distribution outlets with these
acquisitions. We currently market our hearth products under the "Lennox",
"Superior", "Marco", "Whitfield", and "Security Chimneys" brand names. We
believe that our strong relationship with our dealers and our brand names will
assist in selling into this market.

Retail Service. With our recently initiated program of acquiring dealers in
the U.S. and Canada, we have begun to provide installation, maintenance, repair
and replacement services for heating and air conditioning systems directly to
both residential and light commercial customers. Installation services include
the installation of heating and air conditioning systems in new construction and
the replacement of existing systems. Other services include preventative
maintenance, emergency repairs and the replacement of parts associated with
heating and air conditioning systems. We also sell a wide range of mechanical
and electrical equipment, parts and supplies in connection with these services.

COMMERCIAL AIR CONDITIONING

We manufacture and sell commercial air conditioning equipment in North
America, Europe, Asia Pacific and South America.

North America. In the North American commercial markets, our air
conditioning equipment is used in applications such as low rise office
buildings, restaurants, retail and supermarket centers, churches and schools.
Our product offerings for these applications include rooftop units which range
from two to 30 tons of cooling capacity and split system/air handler
combinations which range from two to 20 tons. In North America, we sell unitary
equipment as opposed to larger applied systems. Our newest rooftop unit, the L
Series, was introduced in 1995 and has been well received by the national
accounts market where it is sold to restaurants, mass merchandisers and other
retail outlets. We believe that this product's success is attributable to its
efficiency, design flexibility, low life cycle cost, ease of service and
advanced control technology.

International. We compete in the commercial air conditioning market in
Europe through our ownership of 70% of Ets. Brancher and Ets. Brancher's
operating subsidiaries, HCF S.A. and Friga-Bohn S.A. We have agreed to buy the
remaining 30% interest in Ets. Brancher on March 31, 2000 for 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.

We have been active in Australia for several years, primarily in the
distribution of our residential and light commercial heating and air
conditioning products manufactured in North America. In 1997, we acquired the
assets of Alcair Industries, an Australian manufacturer of commercial heating
and air conditioning products (packaged and split systems) ranging in size from
two to 60 tons. This acquisition provided us with a manufacturing presence,
doubled our revenues in Australia and added marketing, distribution and
management strength to our operations in Australia.

Through our 50% owned Fairco joint venture in Argentina, we manufacture
split system heating and air conditioning products and a limited range of L
Series commercial air conditioning products for sale in Argentina, Chile and the
surrounding Mercosur trading zone, which includes Brazil, Argentina, Bolivia,
Paraguay and Uruguay.

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<PAGE> 40

COMMERCIAL REFRIGERATION

North America. We are one of the leading manufacturers of commercial
refrigeration products in North America. Our refrigeration products include
chillers, condensing units, unit coolers, fluid coolers, air cooled condensers
and air handlers. Our refrigeration products are sold for cold storage
applications to preserve food and other perishables. These products are used by
supermarkets, convenience stores, restaurants, warehouses and distribution
centers. As part of our sale of commercial refrigeration products, we routinely
provide application engineering for consulting engineers, contractors and
others. Some of our larger commercial refrigeration projects have included the
sale of custom designed systems for the Georgia Dome, Camden Yards, Ohio
University, the Boston Museum of Fine Arts and Ericsson Stadium.

International. Friga-Bohn manufactures and markets refrigeration products
through manufacturing facilities and joint ventures located in France, Italy and
Spain. Friga-Bohn's refrigeration products include small chillers, unit coolers,
air cooled condensers, fluid coolers and refrigeration racks. These products are
sold to distributors, installing contractors and original equipment
manufacturers.

We also own 50% of a joint venture in Mexico that produces unit coolers and
condensing units of the same design and quality as those manufactured by us in
the U.S. Since this venture produces a smaller range of products, the product
line is complemented with imports from the U.S. which are sold through the joint
venture's distribution network. Sales are made in Mexico to wholesalers,
installing contractors and original equipment manufacturers. As production
volumes increase, there exists the potential to export some of the high labor
content products from the joint venture into North America and Latin America.

In the third quarter of 1998, we acquired an 84% interest in McQuay do
Brasil S.A., a Brazilian company that manufactures condensing units and unit
coolers. We believe this acquisition gives us the leading market share for
commercial refrigeration products in Brazil.

In the fourth quarter of 1998, we acquired the assets of Lovelock Luke Pty.
Limited, a distributor of refrigeration and related equipment in Australia and
New Zealand. This acquisition gives us an established commercial refrigeration
business in Australia and New Zealand.

In June 1999, we acquired James N. Kirby Pty. Ltd. for approximately $67
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 our commercial refrigeration and heat
transfer business in the Asia Pacific region.

HEAT TRANSFER

We are one of the largest manufacturers of heat transfer coils in the U.S.,
Europe, Mexico and Brazil. These products are used primarily by original
equipment manufacturers of residential and commercial air conditioning products,
transportation air conditioning and refrigeration systems, and commercial
refrigeration products. A portion of our original equipment manufacturer coils
are produced for use in our residential and commercial HVACR products. We also
produce private label replacement coils for use in other manufacturers' HVACR
equipment. We believe that the engineering expertise of our sales force provides
us with an advantage in designing and applying these products for our customers.
Advanced computer software enables us to predict with a high degree of accuracy
the performance of complete air conditioning and refrigeration systems.

In addition to supplying the original equipment manufacturer market, we
also produce replacement coils for large commercial air conditioning, heating
and industrial processing systems. Many of these coils are specially designed
for particular systems and in the event of a failure may need to be replaced
quickly. We are the industry leader in this market and have designed our
manufacturing processes and systems in North America so that we can deliver
custom coils within 48 hours of receipt of an order. This premium service
enables us to receive superior prices and generate attractive margins.

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<PAGE> 41

We also design and manufacture the equipment and tooling necessary to
produce coils. We use such equipment and tooling in our manufacturing facilities
and sell it to third parties. Typically, there is a long lead time between the
initial order and receipt for this type of equipment and tooling from third
parties. Since we have the ability to quickly produce the equipment and tooling
necessary to manufacture heat transfer products and systems, we can accelerate
the international growth of our heat transfer products segment. For example, we
were able to design, manufacture and deliver the equipment necessary to produce
evaporator and condenser coils for our joint venture in Mexico in what we
estimate was half the time than would otherwise have been required to obtain the
equipment from third parties. Upon completion of our acquisition of Livernois,
we will also supply heat transfer manufacturing equipment to the automotive
industry.

In addition to manufacturing heat transfer products in the North American
market, we produce coils for the European market through a joint venture in the
Czech Republic. Our joint venture in Mexico produces evaporator and condenser
coils for use in that country and for export to the Caribbean and the U.S. Our
Brazilian joint venture manufactures heat transfer coils that are sold to both
HVACR manufacturers and automotive original equipment manufacturers in Brazil.

MARKETING AND DISTRIBUTION

We manage numerous distribution channels for our products in order to
better penetrate the HVACR market. Generally, our products are sold through a
combination of distributors, independent and company-owned dealers, wholesalers,
manufacturers' representatives, original equipment manufacturers and national
accounts. We have also established separate distribution networks in each
country in which we conduct operations. We deploy dedicated sales forces across
all our business segments and brands in a manner designed to maximize the
ability of each sales force to service its particular distribution channel. To
maximize enterprise-wide effectiveness, we have active cross-functional and
cross-organizational teams working on issues such as pricing and coordinated
approaches to product design and national account customers with interests
cutting across business segments. We have approximately 1,600 persons employed
in sales and marketing positions and spent $50.2 million on advertising,
promotions and related marketing activities in 1998.

One example of the competitive strength of our marketing and distribution
strategy is in the North American residential heating and air conditioning
market, in which we use three distinctly different distribution
approaches -- the one-step distribution system, the two-step distribution system
and sales made directly to consumers through Lennox-owned dealers. We market and
distribute our "Lennox" brand of heating and air conditioning products directly
to approximately 6,000 dealers that install these products.

We distribute our "Armstrong Air", "Air-Ease", "Concord" and "Magic-Pak"
brands of residential heating and air conditioning products through the
traditional two-step distribution process whereby we sell our products to
distributors who, in turn, sell the products to a local installing dealer.
Accordingly, by using multiple brands and distribution channels, we are able to
better penetrate the North American residential heating and air conditioning
market. In addition, we have begun to acquire or establish distributors in key
strategic areas when a satisfactory relationship with an independent distributor
is not available.

We have initiated a program to acquire high quality dealers in metropolitan
areas in the U.S. and Canada so we can provide heating and air conditioning
products and services directly to consumers. We intend to start acquiring
dealers in the U.S. by initially focusing on our existing "Lennox" dealers who
are part of our one-step distribution system.

Through the years, the "Lennox" brand has become synonymous with the "Dave
Lennox" image, which is utilized in national television and print advertising as
well as in numerous locally produced dealer ads, open houses and trade events,
and is easily the best recognized advertising icon in the heating and air
conditioning industry. We spent an aggregate of $40.1 million in advertising,
promotions and related marketing activities in 1998 on the "Lennox" brand alone.

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<PAGE> 42

MANUFACTURING

We operate 15 manufacturing facilities in the U.S. and Canada and 19
outside the U.S. and Canada. These plants range from small manufacturing
facilities to large 1,000,000 square foot facilities in Grenada, Mississippi and
Marshalltown, Iowa. In our facilities most impacted by seasonal demand, we
manufacture both heating and air conditioning products to smooth seasonal
production demands and maintain a relatively stable labor force. We are
generally able to hire temporary employees to meet changes in demand.

Some of the recently acquired manufacturing facilities have not yet reached
the levels of efficiency that have been achieved at our plants which we have
owned for a longer time. However, we intend to bring our manufacturing and
operating expertise to these plants.

PURCHASING

We rely on various suppliers to furnish the raw materials and components
used in the manufacture of our products. To maximize our buying power in the
marketplace, we utilize a "purchasing council" that consolidates purchases of
our entire domestic requirements of particular items across all business
segments. The purchasing council generally concentrates its purchases for a
given material or component with one or two suppliers, although we believe that
there are alternative suppliers for all of our key raw material and component
needs. Compressors, motors and controls constitute our most significant
component purchases, while steel, copper and aluminum account for the bulk of
our raw material purchases. Although most of the compressors used by us are
purchased directly from major compressor manufacturers, we own a 24.5% interest
in a joint venture to manufacture compressors in the one and one-half to seven
horsepower range. We expect that this joint venture, which began limited
production in April 1998, will be capable of providing us with a substantial
portion of our compressor requirements in the residential air conditioning
market after achieving full production levels, which is expected in 2001.

We attempt to minimize the risk of price fluctuations in key components by
entering into contracts, typically at the beginning of the year, which generally
provide for fixed prices for our needs throughout the year. In instances where
we are unable to pass on to our customers increases in the costs of copper and
aluminum, we enter into forward contracts for the purchase of such materials. We
have forward commitments for the substantial majority of our internal needs of
aluminum through December 1999 and copper through December 2000.

INFORMATION SYSTEMS

Our North American operations are supported by enterprise business systems
which support all core business processes. Enterprise business systems are
designed to enhance the continuity of operations, ensure appropriate controls,
and support timely and efficient decision making. Our largest operating
divisions began installing the SAP enterprise business software system in 1996.
We have substantially completed the implementation of SAP software and full
implementation by all divisions converting to SAP is expected to be completed by
the end of 1999. The SAP software system is designed to facilitate the flow of
information and business processes across all business functions such as sales,
manufacturing, distribution and financial accounting.

TECHNOLOGY AND RESEARCH AND DEVELOPMENT

We support an extensive research and development program focusing on the
development of new products and improvements to our existing product lines. We
spent an aggregate of $23.2 million, $25.4 million and $33.3 million on research
and development during 1996, 1997 and 1998, respectively. As of December 31,
1998, we employed approximately 480 persons dedicated to research and
development activities. We have a number of research and development facilities
located around the world, including a limited number of "centers for excellence"
that are responsible for the research and development of particular core
competencies vital to our business, such as combustion technology, vapor
compression, heat transfer and low temperature refrigeration.

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We use advanced, commercially available computer-aided design,
computer-aided manufacturing, computational fluid dynamics and other
sophisticated software not only to streamline the design and manufacturing
processes, but also to give us the ability to run complex computer simulations
on a product design before a working prototype is created. We operate a full
line of metalworking equipment and advanced laboratories certified by applicable
industry associations.

PATENTS AND PROPRIETARY RIGHTS

We hold numerous patents that relate to the design and use of our products.
We consider these patents important, but no single patent is material to the
overall conduct of our business. Our policy is to obtain and protect patents
whenever such action would be beneficial to us. No patent which we consider
material will expire in the next five years. We own several trademarks that we
consider important in the marketing of our 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) and Friga-Bohn(TM). These trademarks have no fixed expiration dates
and we believe our rights in these trademarks are adequately protected.

COMPETITION

Substantially all of the markets in which we participate are highly
competitive. The most significant competitive factors facing us are product
reliability, product performance, service and price, with the relative
importance of these factors varying among our product lines. In addition, as we
acquire more heating and air conditioning dealers, we will face increasing
competition from independent dealers and dealers owned by consolidators and
utility companies. Our competitors may have greater financial and marketing
resources than we have. Listed below are some of the companies that we view as
our main manufacturing competitors in each segment we serve, with relevant brand
names, when different than the company name, shown in parentheses.

- North American residential -- United Technologies Corporation (Carrier);
Goodman Manufacturing Company (Janitrol, Amana); American Standard
Companies Inc. (Trane); York International Corporation; Hearth
Technologies Inc. (Heatilator); and CFM Majestic, Inc. (Majestic).

- Commercial air conditioning -- United Technologies Corporation (Carrier);
American Standard Companies Inc. (Trane); York International Corporation;
Daikin Industries, Ltd.; and McQuay International.

- Commercial refrigeration -- United Technologies Corporation (Ardco
Group); Tecumseh Products Co.; Copeland Corporation; and Hussmann
International Inc. (Krack).

- Heat transfer -- Modine Manufacturing Company and Super Radiator Coils.

EMPLOYEES

As of December 31, 1998, we employed approximately 11,700 employees,
approximately 3,400 of which were represented by unions. The number of hourly
workers we employ during the course of the year may vary in order to match our
labor needs during periods of fluctuating demand. We believe that our
relationships with our employees are generally good.

Within the U.S., we have eight manufacturing facilities and five
distribution centers, along with our North American Parts Center in Des Moines,
Iowa, with collective bargaining agreements ranging from three to eight years in
length. The five distribution centers are covered by a single contract that
expires in 2001. At our significant manufacturing facilities, one collective
bargaining agreement expires in December 1999 -- Lynwood, California. Three
collective bargaining agreements expire in 2000 -- Marshalltown, Iowa,
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, we
experienced a work stoppage at our Bellevue, Ohio factory for three weeks in May
1999. This facility has a new collective bargaining agreement that expires April
2002. Outside of the U.S., we have 12 significant
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facilities that are represented by unions. The four agreements for HCF in France
have no fixed expiration date. The agreement at our facility in Laval, Quebec
expires in December 1999 and the agreement at our facility in Burgos, Spain
expires in 2000. The agreement at our facility in Toronto, Ontario expired in
April 1999 and, as has been the case in the past, the employees at this facility
are continuing to work under the expired contract pending negotiation of a new
agreement. We believe that our relationships with the unions representing our
employees are generally good, and do not anticipate any material adverse
consequences resulting from negotiations to renew these agreements.

PROPERTIES

The following chart lists our major domestic and international
manufacturing, distribution and office facilities and whether such facilities
are owned or leased:

DOMESTIC FACILITIES

<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED
-------- -------------------------------- ------------------ ------------
<S> <C> <C> <C>
Richardson, TX World headquarters and offices; Lennox N/A Owned and
Industries headquarters; 230,000 Leased
square feet
Bellevue, OH Armstrong headquarters, factory and Residential furnaces, residential and Owned and
distribution center; 800,000 square light commercial air conditioners and Leased
feet heat pumps
Grenada, MS Heatcraft Heat Transfer Division Coils and copper tubing; evaporator Owned and
headquarters and factory, 1,000,000 coils, gas-fired unit heaters and Leased
square feet; Advanced Distributor residential air handlers; and custom
Products factory, 300,000 square feet; order replacement coils
commercial products factory, 217,000
square feet
Stone Mountain, GA Heatcraft Refrigeration Products Commercial and industrial condensing Owned
Division headquarters, R&D and units, packaged chillers and custom
factory; 145,000 square feet refrigeration racks
Marshalltown, IA Lennox Industries heating and air Residential heating and cooling Owned and
conditioning products factory, products, gas furnaces, split-system Leased
1,000,000 square feet; distribution condensing units, split-system heat
center, 300,000 square feet pumps and CompleteHeat
Des Moines, IA Lennox Industries distribution center Central supplier of Lennox repair Leased
and light manufacturing; 352,000 parts
square feet
Carrollton, TX Lennox Industries heating and air N/A Owned
conditioning products development and
research facility; 130,000 square feet
Stuttgart, AR Lennox Industries light commercial Commercial rooftop equipment and Owned and
heating and air conditioning factory; accessories Leased
500,000 square feet
Union City, TN Superior Fireplace Company factory; Gas and wood burning fireplaces Owned
294,690 square feet
Lynwood, CA Marco Mfg. Inc. headquarters and Gas and wood burning fireplaces Leased
factory; 200,000 square feet
</TABLE>

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<PAGE> 45

INTERNATIONAL FACILITIES

<TABLE>
<CAPTION>
LOCATION DESCRIPTION AND APPROXIMATE SIZE PRINCIPAL PRODUCTS OWNED/LEASED
-------- -------------------------------- ------------------ ------------
<S> <C> <C> <C>
Genas, France Friga-Bohn headquarters and factory; Heat exchangers for refrigeration and *
16,000 square meters air conditioning; refrigeration
products, condensers, fluid coolers,
pressure vessels, liquid receivers and
refrigeration components
Mions, France HCF-Lennox headquarters and factories; Air cooled chillers, water cooled *
12,000 square meters chillers, reversible chillers and
packaged boilers
Burgos, Spain Lennox-Refac factory; 8,000 square Comfort air conditioning equipment, *
meters packaged and split units (cooling or
heat pump); small and medium capacity
water cooled chillers
Krunkel, Germany European headquarters and factories Process cooling systems *
for HYFRA GmbH products; 6,000 square
meters
Prague, Czech Janka and Friga-Coil factories; 30,000 Air handling equipment; heat transfer *
Republic square meters coils
Sydney, Australia Lennox Australia Pty. Ltd. Rooftop packaged and split commercial Leased
headquarters and factory; 20,000 air conditioners
square feet
San Jose dos McQuay do Brasil headquarters and Refrigeration condensing units, unit *
Campos, Brazil factory; 160,000 square feet coolers and heat transfer coils
Etobicoke, Canada Lennox-Canada factory, 212,000 square Multi-position gas furnaces, gas Owned
feet fireplaces and commercial unit heaters
</TABLE>

- ---------------

* Facilities owned or leased by a joint venture in which we have an interest.

In addition to the properties described above and excluding dealer
facilities, we lease over 55 facilities in the U.S. for use as sales offices and
district warehouses and a limited number of additional facilities worldwide for
use as sales and service offices and regional warehouses. We believe that our
properties are in good condition and adequate for our requirements. We also
believe that our principal plants are generally adequate to meet our production
needs.

REGULATION

Our operations are subject to evolving and often increasingly stringent
federal, state, local and international laws and regulations concerning the
environment. Environmental laws that affect or could affect our domestic
operations include, among others, the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation, and Liability Act, the Occupational Safety and Health
Act, the National Environmental Policy Act, the Toxic Substances Control Act,
any regulations promulgated under these acts and various other Federal, state
and local laws and regulations governing environmental matters. We believe we
are in substantial compliance with such existing environmental laws and
regulations. Our non-U.S. operations are also subject to various environmental
statutes and regulations. Generally, these statutes and regulations impose
operational requirements that are similar to those imposed in the U.S. We
believe we are in substantial compliance with applicable non-U.S. environmental
statutes and regulations.

Refrigerants. In the past decade, there has been increasing regulatory and
political pressure to phase out the use of certain ozone depleting substances,
including hydrochlorofluorocarbons, which are sometimes referred to as "HCFCs".
This development is of particular importance to us and our competitors because
of the common usage of HCFCs as refrigerants for air conditioning and
refrigeration equipment. As discussed below, we do not believe that
implementation of the phase out schedule for HCFCs contained in the current
regulations will have a material adverse effect on our financial position or
results of operations. We do believe, however, that there will likely be
continued pressure by the international environmental community for the U.S. and
other countries to accelerate the phase out schedule. We have been an active
participant in the ongoing international dialogue on these issues and believe
that we are well positioned to react to any changes in the regulatory landscape.

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<PAGE> 46

In September 1987, the U.S. became a signatory to an international
agreement titled the Montreal Protocol on Substances that Deplete the Ozone
Layer. The Montreal Protocol requires its signatories to phase out HCFCs on an
orderly basis. All countries in the developed world have become signatories to
the Montreal Protocol. The manner in which these countries implement the
Montreal Protocol and regulate HCFCs differs widely.

The 1990 U.S. Clean Air Act amendments implement the Montreal Protocol by
establishing a program to limit the production, importation and use of specified
ozone depleting substances, including HCFCs currently used as refrigerants by us
and our competitors. Under the Act and implementing regulations, all HCFCs must
be phased out between 2010 and 2030. We believe that these regulations as
currently in effect will not have a material adverse effect on our operations.
It is not expected that the planned phase out of HCFCs will have a significant
impact on the sales of products utilizing these refrigerants prior to the end of
the decade. Nonetheless, as the supply of virgin and recycled HCFCs falls, it
will be necessary to address the need to substitute permitted substances for
HCFCs. Further, the U.S. is under pressure from the international environmental
community to accelerate the current 2030 deadline for phase out of HCFCs. An
accelerated phase out schedule could adversely affect our future financial
results and the industry generally.

We, together with major chemical manufacturers, are continually in the
process of reviewing and addressing the potential impact of refrigerant
regulations on our products. We believe that the combination of products that
presently utilize HCFCs, and products in the field which can be retrofitted to
alternate refrigerants, provide a complete line of commercial and industrial
products. Therefore, we do not foresee any material adverse impact on our
business or competitive position as a result of the Montreal Protocol, the 1990
Clean Air Act amendments or their implementing regulations. However, we believe
that the implementation of severe restrictions on the production, importation or
use of refrigerants we employ in larger quantities or acceleration of the
current phase out schedule could have such an impact on us and our competitors.

We are subject to appliance efficiency regulations promulgated under the
National Appliance Energy Conservation Act of 1987, as amended, and various
state regulations concerning the energy efficiency of our products. We have
developed and are developing products which comply with National Appliance
Energy Conservation Act regulations, and do not believe that such regulations
will have a material adverse effect on our business. The U.S. Department of
Energy began in 1998 its review of national standards for comfort products
covered under National Appliance Energy Conservation Act. It is anticipated that
the National Appliance Energy Conservation Act regulations requiring
manufacturers to phase in new higher efficiency products will not take effect
prior to 2006. We believe we are well positioned to comply with any new
standards that may be promulgated by the Department of Energy and do not foresee
any adverse material impact from a National Appliance Energy Conservation Act
standard change.

Remediation Activity. In addition to affecting our ongoing operations,
applicable environmental laws can impose obligations to remediate hazardous
substances at our properties, at properties formerly owned or operated by us and
at facilities to which we sent or send waste for treatment or disposal. We are
currently involved in remediation activities at our facility in Grenada,
Mississippi and at a formerly owned site in Ft. Worth, Texas. In addition,
former hazardous waste management units at two of our facilities, Danville,
Illinois and Wilmington, North Carolina, are currently in the process of being
closed under the Resource Conservation and Recovery Act.

The Resource Conservation and Recovery Act closure process can result in
the need to conduct soil and/or groundwater remediation to address any on-site
releases. The Grenada facility is subject to an administrative order issued by
the Mississippi Department of Environmental Quality under which we will conduct
groundwater remediation. We have established a $1.8 million reserve to cover
costs of remediation at the Grenada facility and possible costs associated with
the Resource Conservation and Recovery Act closure at the Danville facility. We
also have installed and are operating a groundwater treatment system at our
previously owned facility in Ft. Worth, Texas. We have established a reserve
having a balance of approximately $200,000 to cover the projected $50,000 annual
operating costs for ongoing treatment at the Ft. Worth site. Resource
Conservation and Recovery Act closure activities at the Wilmington facility
include an ongoing groundwater remediation project. This project is being
conducted and funded by a prior owner of

46
<PAGE> 47

the facility, under an indemnification obligation under the contract pursuant to
which we acquired the facility. We have no reason to believe that the prior
owner will not continue to conduct and pay for the required remediation at the
Wilmington facility. However, if the prior owner refused to meet its contractual
obligations, we would be required to complete the remediation. Through soil and
groundwater sampling, usually obtained during site acquisition due diligence, we
are aware of contamination at some of our other facilities. Based on the levels
of the contaminants detected, however, we do not believe we are required to
remediate the contamination at these facilities under existing environmental
laws. Nonetheless, it is possible that we may be required to conduct remediation
at these facilities in the future. Also, it is possible that third parties may
file property damage or personal injury claims against us related to this
contamination, particularly if the contamination on our property has migrated
offsite.

During environmental due diligence for a plant we acquired in 1998 in
Czechoslovakia, we 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 us 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 we have received notices that we are a potentially
responsible party along with other potentially responsible parties in Superfund
proceedings for cleanup of hazardous substances at certain sites to which the
potentially responsible parties are alleged to have sent waste. At present, our
only active Superfund involvements are at the Granville Solvents Superfund Site
located in Ohio, the Envirochem Third Site in Illinois and the Operating
Industries site in California. Since 1994, we have spent an average of $49,000
per year for costs related to the Granville Solvents site and expect to incur
similar costs 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,
we 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
our potential liability at those sites for $10,500. Although we 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, we do not expect it to be material. Based on the facts presently
known, we do not believe that environmental cleanup costs associated with these
Superfund sites will have a material adverse effect on our financial position or
results of operations.

Dealer operations. The heating and air conditioning dealers acquired in the
U.S. and Canada will be subject to various federal, state and local laws and
regulations, including, among others:

- permitting and licensing requirements applicable to service technicians
in their respective trades;

- building, heating, ventilation, air conditioning, plumbing and electrical
codes and zoning ordinances;

- laws and regulations relating to consumer protection, including laws and
regulations governing service contracts for residential services; and

- laws and regulations relating to worker safety and protection of the
environment.

A large number of state and local regulations governing the residential and
commercial maintenance services trades require various permits and licenses to
be held by individuals. In some cases, a required permit or license held by a
single individual may be sufficient to authorize specified activities for all of
our service technicians who work in the geographic area covered by the permit or
license.

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<PAGE> 48

LEGAL PROCEEDINGS

We are involved in various claims and lawsuits incidental to our business.
In the opinion of our management, these claims and suits in the aggregate will
not have a material adverse effect on our business, financial condition or
results of operations.

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<PAGE> 49

MANAGEMENT

The directors and executive officers of our company, 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.............................. 57 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........................ 43 Executive Vice President, Lennox Global Ltd. and
President, Asia Pacific Operations
Clyde W. Wyant............................ 60 Executive Vice President, Chief Financial Officer
and Treasurer
John J. Hubbuch........................... 56 Vice President, Controller and Chief Accounting
Officer
Linda G. Alvarado......................... 48 Director
David H. Anderson......................... 58 Director
Richard W. Booth.......................... 67 Director
Thomas W. Booth........................... 41 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....................... 59 Director
</TABLE>

There are currently two vacancies on our board of directors which we expect
to fill with non-employee directors. The following biographies describe the
business experience of our executive officers and directors.

John W. Norris, Jr. was elected Chairman of the board of directors of
Lennox in 1991. He has served as a director of Lennox since 1966. After joining
Lennox in 1960, Mr. Norris held a variety of key positions including Vice
President of Marketing, President of Lennox Industries (Canada) Ltd., 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

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<PAGE> 50

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 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./SnyderGeneral. 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

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<PAGE> 51

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.

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 Chairman, Chief Executive Officer and President of Wireless Knowledge,
a QUALCOMM Incorporated and Microsoft joint venture which operates a network
operation center, since November 1998. Previously he was Executive Vice
President of QUALCOMM and President of its Wireless Infrastructure Division, and
was responsible for managing and guiding the market potential for CDMA
infrastructure products. Prior to joining QUALCOMM in 1997, Mr. Major served
most recently as Senior Vice President and Staff Chief Technical Officer at
Motorola, Inc., 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

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<PAGE> 52

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

Our board of directors is divided into three classes of directors, with
each class elected to a three-year term every third year and holding office
until their successors are elected and qualified. The class whose term of office
will expire at our 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 our 2001 Annual Meeting of Stockholders consists
of Janet K. Cooper, Terry D. Stinson and Richard L. Thompson. The class whose
term of office will expire at our 2002 Annual Meeting of Stockholders consists
of David H. Anderson, Thomas W. Booth, James J. Byrne, Donald E. Miller and John
W. Norris, Jr.

Our board of directors has established an audit committee, acquisition
committee, board operations committee, human resource committee, compensation
committee and a pension and risk management committee. The audit committee is
responsible for meeting with management and our independent accountants to
determine the adequacy of internal controls and other financial reporting
matters. The following directors currently serve on the audit committee: John E.
Major (chair), Linda G. Alvarado, 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 our 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
our chief executive officer, making recommendations with respect to the salary
of our chief executive officer, approving the compensation of executive staff
members, approving the compensation for non-employee directors and committee
members, approving incentive stock options for senior management, approving all
employee benefit plan designs and other matters relating to the compensation of
our directors, officers and employees. The following directors currently serve
on the compensation committee: Richard L. Thompson (chair), Linda G. Alvarado,
James J. Byrne and John E. Major. During 1998, the following directors served on
the compensation committee or its

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<PAGE> 53

predecessor committee: Linda G. Alvarado, David V. Brown, James J. Byrne, Thomas
B. Howard, Jr., a former director, Robert W. Norris, a former director, and
Richard L. Thompson.

The pension and risk management committee is responsible for overseeing the
administration of our pension and profit sharing plans, overseeing matters
relating to our insurance coverage, reviewing matters of legal liability and
environmental issues, and other matters relating to risk management. The
following directors currently serve on the pension and risk management
committee: David H. Anderson (chair), Richard W. Booth, 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 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 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 our 1998 incentive plan, options to purchase shares
of common stock at an exercise price equal to the fair market value of such
shares at the date of grant.

EXECUTIVE COMPENSATION

The following table sets forth information on compensation earned in 1998
by our Chief Executive Officer and our four other most highly compensated
executive officers, such individuals sometimes being referred to as the "named
executive officers". In the third quarter of 1998, we terminated the Lennox
International Inc. performance share plan in connection with the adoption of the
1998 incentive plan. We terminated the performance share plan to reduce
potential earnings volatility associated with the application of variable price
accounting rules to the provisions of the plan. The amounts in the LTIP Payouts
column in the Summary Compensation Table below consists of the value of common
stock issued to the named executive officers in connection with the termination
of the performance share plan and in full settlement of our obligations under
that plan. Performance awards are now granted under our 1998 incentive plan.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
AWARDS
------------------------- PAYOUTS
ANNUAL SECURITIES ----------
COMPENSATION RESTRICTED UNDERLYING
--------------------- STOCK OPTIONS/SARS LTIP ALL OTHER
NAME SALARY BONUS(1) AWARDS(2) GRANTED PAYOUTS(3) COMPENSATION(4)
---- -------- ---------- ---------- ------------ ---------- ---------------
<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 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 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

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<PAGE> 54
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."

(3) Represents awards of shares of 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 us for the benefit of the named executive
officers. Contributions to the plans for the named executive officers were
as follows: Mr. Norris -- $139,730; Mr. Jenkins -- $86,223; Mr.
Schjerven -- $81,369; Mr. French -- $73,833; and Mr. Wyant -- $62,619.

(5) On December 31, 1998, Mr. Jenkins retired from his position as the Assistant
to the Chairman of the Board -- Business Development.

We maintain a pay-for-performance compensation philosophy to pay
market-competitive base salaries, while also delivering variable pay which is
directly linked to the achievement of performance measurements and to the
performance and contribution of the individual.

Executive compensation is composed of three primary components: base
salary, variable pay and benefits and perquisites. In order to evaluate the
competitiveness of our total compensation programs, we have periodically engaged
Hewitt Associates LLC, a human resources consulting firm, to conduct market
analyses of the compensation programs for executive level jobs within our
organization. In doing so, we emphasize delivering competitive total
compensation opportunities, while maintaining the flexibility to design
individual compensation components to support critical business objectives.

The following table provides information concerning stock options granted
to the named executive officers in 1998.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<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.

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<PAGE> 55

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

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 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." Presented below is the maximum number of shares of common
stock that may be payable to each of the named executive officers that is
subject to achievement of the performance goals. The actual number of shares
awarded depends on the level of achievement of the performance objectives.

LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR

<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

Our board of directors has adopted, and our 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 our growth and performance. The description below
represents a summary of the principal terms and conditions of the 1998 incentive
plan.

Awards to our employees or independent contractors under the 1998 incentive
plan may be made in the form of grants of stock options, stock appreciation
rights, restricted or non-restricted stock or units denominated in stock, cash
awards 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.

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<PAGE> 56

The 1998 incentive plan provides for awards to be made in respect of a
maximum of 4,603,500 shares of our common stock, of which 3,943,500 shares will
be available for awards to our 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 common stock, stock awards for more than 165,000 shares of
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.

Our 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 our employees;

- eliminate or make less restrictive any restrictions contained in an award
to our employees;

- waive any restriction or other provision of the 1998 incentive plan or in
any award to our employees; or

- otherwise amend or modify an award to our employees in any manner that is
either not adverse to the employee holding the award or consented to by
such employee.

EMPLOYEE AWARDS

The compensation committee will determine the type or types of awards made
under the 1998 incentive plan and will designate the employees who are to be
recipients of such awards. Each award may be embodied in an agreement, which
will contain such terms, conditions and limitations as are determined by the
compensation committee. Awards to our employees may be granted singly, in
combination or in tandem. Awards to our employees may also be made in
combination or in tandem with, in replacement of, or as alternatives to, grants
or rights under the 1998 incentive plan or any other employee plan or program of
Lennox, including any acquired entity. All or part of an award to our employees
may be subject to conditions established by the compensation committee, which
may include continuous service with Lennox, achievement of specific business
objectives, increases in specified indices, attainment of specified growth rates
and other comparable measurements of performance.

The types of awards to our employees that may be made under the 1998
incentive plan are as follows:

Options: Options are rights to purchase a specified number of shares of
common stock at a specified price. An option granted 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 common stock on the date of grant. To the
extent that the aggregate fair market value, measured at the time of grant, of
common stock subject to incentive stock options that first become exercisable by
an employee in any one calendar year exceeds $100,000, such options shall be
treated as non-qualified stock options and not as incentive stock options.
Non-qualified stock options must have an exercise price per share that is not
less than, but may exceed, the fair market value of the common stock on the date
of grant. In either case, the exercise price must be paid in full at the time an
option is exercised in cash or, if the employee so elects, by means of tendering
common stock or surrendering another award.

Stock Appreciation Rights: Stock appreciation rights are rights to receive
a payment, in cash or common stock, equal to the excess of the fair market value
or other specified valuation of a specified number of shares of common stock on
the date the rights are exercised over a specified strike price. A stock
appreciation right may be granted in tandem under the 1998 incentive plan to the
holder of an option with respect to all or a portion of the shares of common
stock subject to such option or may be granted separately. The terms,

56
<PAGE> 57

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 our compensation committee.

Stock Awards: Stock awards consist of grants of restricted common stock or
non-restricted common stock or units denominated in common stock. The terms,
conditions and limitations applicable to any stock awards will be determined by
our compensation committee. The compensation committee may remove any
restrictions on stock awards, at its discretion. Rights to dividends or dividend
equivalents may be extended to and made part of any stock award in the
discretion of the compensation committee.

Cash Awards: Cash awards consist of grants denominated in cash. The terms,
conditions and limitations applicable to any cash awards will be determined by
our compensation committee.

Performance Awards: Performance awards consist of grants made to an
employee subject to the attainment of one or more performance goals. A
performance award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
established by our compensation committee prior to the earlier of (a) 90 days
after the commencement of the period of service to which the performance goals
relate and (b) the elapse of 25% of the period of service, and in any event
while the outcome is substantially uncertain. A performance goal may be based
upon one or more business criteria that apply to the employee, one or more
business units of Lennox or Lennox as a whole. The terms, conditions and
limitations applicable to any performance awards will be determined by our
compensation committee.

DIRECTOR AWARDS

Our board of directors will administer the 1998 incentive plan as it
relates to awards to non-employee directors. The board will have the right to
determine on an annual basis, or at any other time in its sole discretion, to
award options which are non-qualified stock options to non-employee directors.
No such options awarded in any year shall provide for the purchase of more than
16,500 shares of 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 our board of directors.

OTHER PROVISIONS

Our board of directors may amend, modify, suspend or terminate the 1998
incentive plan for the purpose of addressing any changes in legal requirements
or for any other purpose permitted by law, except that:

- no amendment that would impair the rights of any employee or non-employee
director 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
our common stock, declaration of a stock dividend payable in shares of our
common stock or other stock split, the 1998 incentive plan provides for our
board of directors to make appropriate adjustments to:

- the number of shares of common stock reserved under the 1998 incentive
plan;

- the number of shares of common stock covered by outstanding awards in the
form of common stock or units denominated in common stock;

- the exercise or other price in respect of such awards;

- the appropriate fair market value and other price determinations for
awards in order to reflect such transactions; and

57
<PAGE> 58

- 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, the adoption by Lennox of any plan of exchange affecting
the common stock or any distribution to holders of common stock or securities or
property, other than normal cash dividends or stock dividends, our board of
directors will make appropriate adjustments to the amounts or other items
referred to above to give effect to such transactions, but only to the extent
necessary to maintain the proportionate interest of the holders of the awards
and to preserve, without exceeding, the value of the awards.

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. We pay the full
cost of all these plans.

The pension plan for salaried employees is a floor offset plan. A target
benefit is calculated using credited service and final average pay during the
five highest consecutive years. The benefit is currently based on 1.00% of final
average pay, plus .60% of final average pay above Social Security covered
compensation, times the number of years of credited service, not to exceed 30
years. Employees vest after five years of service and may commence unreduced
benefits at age 65. If 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 our 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 --

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<PAGE> 59

14.00 years; Mr. Wyant, $402,391 -- 8.30 years; Mr. Schjerven, $411,416 -- 12.80
years; Mr. French, $340,666 -- 9.80 years.

EMPLOYMENT AGREEMENTS

We have entered into an employment agreement with each of the named
executive officers who are currently employees of Lennox. 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 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 we terminate the employee prior to the expiration of the term of the
agreement or if we do not renew the agreement for any reason other than for
cause, the employee will be entitled to receive monthly payments of the greater
of the employee's base salary for the remainder of the agreement's term or three
months of the employee's base salary in addition to any other compensation or
benefits applicable to an employee at the employee's level.

If we terminate the employee other than for cause, including our
non-renewal of the agreement, and the employee agrees to execute a written
general release of any and all possible claims against us existing at the time
of termination, we will provide the employee with an enhanced severance package.
That package includes payment of the employee's base monthly salary for a period
of twenty-four months following the date of termination, a lump sum payment of
$12,000 in lieu of perquisites lost, and forgiveness of COBRA premiums due for
group health insurance coverage for up to eighteen months while the employee
remains unemployed. If the employee remains unemployed at the end of eighteen
months, the equivalent of the COBRA premium will be paid to the employee on a
month to month basis for up to six additional months while the employee remains
unemployed. Outplacement services are provided or, at the employee's election, a
lump-sum payment of 10% of the employee's annual base salary will be made to the
employee in lieu of those services. Additionally, the employee's beneficiary
will receive a lump-sum death benefit equivalent to six months of the employee's
base salary should the employee die while entitled to enhanced severance
payments.

CHANGE OF CONTROL EMPLOYMENT AGREEMENTS

We have entered into a change of control employment agreement with each of
the named executive officers who are currently employees of Lennox. 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) our board
of directors determines that a change of control is not likely or (b) the named
executive officer, upon proper

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<PAGE> 60

notice to us, elects to terminate his term of the change of control agreement as
of any anniversary of the potential change of control.

A "change of control" generally includes the occurrence on or after the
date of the offering of any of the following:

(a) any person, other than specified exempt persons, including Lennox
and its subsidiaries and employee benefit plans, becoming a beneficial
owner of 35% or more of the shares of common stock or voting stock of
Lennox then outstanding, including as a result of the offering;

(b) a change in the identity of a majority of the persons serving as
members of our board of directors, unless such change was approved by a
majority of the incumbent members of our board of directors;

(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 our board of directors;
or

(d) the approval by the stockholders of a liquidation or dissolution
of Lennox, unless such liquidation or dissolution is part of a plan of
liquidation or dissolution involving a sale to a company of which following
such transaction:

(1) more than 65% of the common stock and voting stock would be
owned by existing stockholders;

(2) no person, other than 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 our board of directors.

A "potential change in control" generally includes any of the following:

- the commencement of a tender or exchange offer for voting stock that, if
consummated, would result in a change of control;

- Lennox entering into an agreement which, if consummated, would constitute
a change of control;

- the commencement of a contested election contest subject to proxy rules;
or

- the occurrence of any other event that our board of directors determines
could result in a change of control.

During the term of the change of control agreement, an officer's position,
authority, duties and responsibilities may not be diminished, and all forms of
compensation, including salary, bonus, regular salaried employee plan benefits,
stock options, restricted stock and other awards, must continue on a basis no
less favorable than at the beginning of the term of the change of control
agreement and, in the case of specified benefits, must continue on a basis no
less favorable in the aggregate than the most favorable application of such
benefits to any of our employees.

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<PAGE> 61

If an officer terminates employment during the term of the change of
control agreement for good reason and we fail to honor the terms of the change
of control agreement, we will pay the officer:

- his then unpaid current salary and a pro rata portion of the highest
bonus earned during the three preceding years, as well as previously
deferred compensation and accrued vacation time;

- a lump-sum benefit equal to the sum of three times the officer's annual
base salary and three times the annual bonus he would have earned in the
year of termination;

- for purposes of our supplemental retirement plan and our profit sharing
restoration plan, three additional years added to both his service and
age criteria; and

- continued coverage under our employee welfare benefits plans for up to
four and one-half years.

In addition, all options, restricted stock and other compensatory awards held by
the officer will immediately vest and become exercisable, and the term 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:

- we have no right of offset;

- the officer is not required to mitigate damages; and

- we agree to pay any legal fees incurred by the officer in connection with
such contest.

We also agree to pay all amounts owing to the officer during any period of
dispute, subject only to the officer's agreement to repay any amounts to which
he is determined not to be entitled. The change of control agreements provide
for a tax gross-up in the event that 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 our
information, and, for a period of 24 months following his termination of
employment, to avoid any attempts to induce our employees to terminate their
employment with us.

INDEMNIFICATION AGREEMENTS

We have entered into indemnification agreements with our directors and a
number of our 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, we have generally agreed to indemnify, and advance
expenses to, each indemnitee to the fullest extent permitted by applicable law
on the date of the agreements and to such greater extent as applicable law may
at a future time permit. In addition, the indemnification agreements contain
specific provisions pursuant to which we have agreed to indemnify each
indemnitee:

- if such person is, by reason of his or her status as a director, nominee
for director, officer, agent or fiduciary of ours or of any other
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise with which such person was serving at our request, any
such status being referred to as a "corporate status," made or threatened
to be made a party to any threatened, pending or completed action, suit,
arbitration, alternative dispute resolution mechanism, investigation or
other proceeding, other than a proceeding by or in the right of Lennox;

- if such person is, by reason of his or her corporate status, made or
threatened to be made a party to any proceeding brought by or in the
right of Lennox to procure a judgment in its favor, except that no
indemnification shall be made in respect of any claim, issue or matter in
such proceeding as to which such indemnitee shall have been adjudged to
be liable to Lennox if applicable law prohibits such indemnification,
unless and only to the extent that a court shall otherwise determine;

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<PAGE> 62

- 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;

- against expenses actually and reasonably incurred by such person or on
his or her behalf in connection with a proceeding to the extent that such
indemnitee is, by reason of his or her corporate status, a witness or
otherwise participates in any proceeding at a time when such person is
not a party in the proceeding; and

- against expenses actually and reasonably incurred by such person in
certain judicial adjudications of or awards in arbitration to enforce his
or her rights under the indemnification agreements.

In addition, under the terms of the indemnification agreements, we have
agreed to pay all reasonable expenses incurred by or on behalf of an indemnitee
in connection with any proceeding, whether brought by or in the right of Lennox
or otherwise, in advance of any determination with respect to entitlement to
indemnification and within 15 days after the receipt by us of a written request
from such indemnitee for such payment. In the indemnification agreements, each
indemnitee has agreed that he or she will reimburse and repay us for any
expenses so advanced to the extent that it shall ultimately be determined that
he or she is not entitled to be indemnified by us against such expenses.

The indemnification agreements also include provisions that specify the
procedures and presumptions which are to be employed to determine whether an
indemnitee is entitled to indemnification. In some cases, the nature of the
procedures specified in the indemnification agreements varies depending on
whether we have undergone a change in control.

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<PAGE> 63

PRINCIPAL AND SELLING STOCKHOLDERS

The following table contains information regarding the beneficial ownership
of our common stock as of May 31, 1999 and as adjusted to reflect the offering
by the following individuals:

- each person known by us to own more than 5% of the outstanding shares of
common stock;

- each of our directors;

- each named executive officer;

- all executive officers and directors as a group; and

- each selling stockholder.

All persons listed have an address in care of our principal executive offices
and have sole voting and investment power of their shares unless otherwise
indicated.

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 common stock subject to options held by that person that
were exercisable on May 31, 1999 or became exercisable within 60 days following
May 31, 1999 are considered outstanding. However, such shares are not considered
outstanding for the purpose of computing the percentage ownership of any other
person. To our knowledge and unless otherwise indicated, each stockholder has
sole voting and investment power over the shares listed as beneficially owned by
such stockholder, subject to community property laws where applicable.
Percentage of ownership is based on 35,920,104 shares of common stock
outstanding as of May 31, 1999 and 44,008,594 shares of common stock outstanding
after the completion of the offering. As of May 31, 1999, we had approximately
265 record holders of our common stock.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE THE OFFERING AFTER THE OFFERING
------------------------ SHARES TO BE SOLD ------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE IN THE OFFERING NUMBER PERCENTAGE
---------------- ----------- ---------- ----------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
John W. Norris, Jr.(1)......... 3,997,125 11.1% -- 3,997,125 9.0%
H. E. French................... 92,499 * -- 92,499 *
Robert E. Schjerven............ 215,226 * -- 215,226 *
Robert L. Jenkins.............. 242,220 * -- 242,220 *
Clyde W. Wyant(2).............. 226,842 * -- 226,842 *
Linda G. Alvarado(3)........... 117,150 * -- 117,150 *
David H. Anderson(4)........... 4,429,788 12.3 165,000(5) 4,264,788 9.7
Richard W. Booth(6)............ 5,156,217 14.3 -- 5,156,217 11.7
Thomas W. Booth(7)............. 2,787,279 7.8 -- 2,787,279 6.3
David V. Brown(8).............. 1,327,788 3.7 -- 1,327,788 3.0
James J. Byrne(9).............. 148,830 * -- 148,830 *
Janet K. Cooper................ 0 -- -- 0 --
John E. Major(10).............. 130,614 * -- 130,614 *
Donald E. Miller(11)........... 121,143 * -- 121,143 *
Terry D. Stinson............... 297 * -- 297 *
Richard L. Thompson(12)........ 135,531 * -- 135,531 *
All executive officers and
directors as a group (21
persons)(13)................. 17,341,929 46.4 165,000 17,176,929 37.8
A.O.C. Corporation(14)......... 2,695,770 7.5 -- 2,695,770 6.1
Robert W. Norris(15)........... 2,514,303 7.0 56,100(16) 2,458,203 5.6
Frank E. Zink(17).............. 2,553,210 7.1 66,000 2,487,210 5.7
Phillip L. Zink(18)............ 4,310,460 12.0 -- 4,310,460 9.8
William N. Consler............. 7,293 * 990 6,303 *
David S. Miller................ 1,683 * 1,683 0 --
Steven P. Miller............... 1,683 * 1,683 0 --
Eileen F. Murphy(19)........... 61,182 * 33,000 28,182 *
Thomas R. Thompson............. 12,243 * 1,980 10,263 *
David W. Zink.................. 500,247 1.4 81,675 418,572 1.0
John P. Zink(19)(20)........... 541,860 1.5 3,399(21) 538,461 1.2
</TABLE>

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<PAGE> 64

- ---------------

* 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)204,600 shares subject to options.

(2) Includes 126,720 shares of common stock subject to options.

(3) Includes 117,150 shares subject to options.

(4) Includes:
(a)1,246,872 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)2,711,280 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)117,150 shares subject to options.

(5) Represents shares held by the David H. Anderson Trust.

(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; and
(d)117,150 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 the trustee;
(c)71,181 shares held by Thomas W. Booth's children; and
(d)2,475 shares subject to options.

(8) Includes:
(a)315,117 shares held by David V. Brown's children; and
(b)117,150 shares subject to options.

(9) Includes 117,150 shares subject to options.

(10) Includes 117,150 shares subject to options.

(11) Includes:
(a)3,993 shares held by the Donald E. Miller Trust of which Donald E.
Miller is a co-trustee; and
(b)117,150 shares subject to options.

(12) Includes 117,150 shares subject to options.

(13) Includes 1,449,492 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) From 1967 to May 1999, Mr. Norris was a director of Lennox. Share numbers
include:
(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)1,181,169 shares held by the Robert W. Norris Revocable Trust of which
Robert W. Norris is the trustee;
(d)153,714 shares held by the Christina 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; and
(f)181,302 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) Represents 33,000 shares held by the Robert W. Norris Revocable Trust,
13,200 shares held by the Christina Marie Dammann 1991 Revocable Trust and
9,900 shares held by the Nicholas W. Norris 1991 Revocable Trust.

(17) Includes 2,036,364 shares held by trusts for the benefit of Anne Zink of
which Frank E. Zink is a co-trustee.

(18) 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.

(19) Eileen F. Murphy and John P. Zink are spouses.

(20) Includes:
(a)65,604 shares by the Zink Family Irrevocable Trust of which John P. Zink
is the Trustee; and
(b)22,400 shares held by John P. Zink's children.

(21) Represents shares held by the Zink Family Irrevocable Trust.

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<PAGE> 65

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

John W. Norris, Jr., our Chairman and Chief Executive Officer, and David H.
Anderson, Richard W. Booth and David V. Brown, each one of our directors, as
well as some of our stockholders, are members of AOC Land Investment, LLC. AOC
Land Investment, LLC owns 70% of AOC Development II, LLC. AOC Development II,
LLC is building a new office building and we have agreed to lease part of it for
use as our corporate headquarters. The lease will have a term of 25 years and
the annual lease payments are expected to be approximately $2.1 million per year
for the first five years. We believe that the terms of our lease with AOC
Development II, LLC are at least as favorable as could be obtained from
unaffiliated third parties.

From time to time we have entered into stock disposition agreements which
allowed our executives, directors and stockholders to borrow money and use our
capital stock held by them as collateral. The stock disposition agreements
provided that in the event of a default on the underlying loan, we would do one
of several things, including registering the capital stock under the Securities
Act of 1933 finding a buyer to purchase the stock or purchasing the stock
ourself. There were never any defaults under these agreements. Currently, there
are stock disposition agreements in existence covering 1,814,439 shares of
common stock. We will not enter into these type of agreements following
completion of the offering.

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 us than might have been obtained from unaffiliated third parties.
We do not intend to enter into any future transactions in which our directors,
executive officers or principal stockholders and their affiliates have a
material interest unless such transactions are approved by a majority of the
disinterested members of our board of directors and are on terms that are no
less favorable to us than those that we could obtain from unaffiliated third
parties.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 200,000,000 shares of common stock
and 25,000,000 shares of preferred stock, par value $.01 per share. Of the
200,000,000 shares of common stock authorized, 8,500,000 are being offered in
the offering, or 9,775,000 shares if the underwriters' over-allotment option is
exercised in full, and 4,603,500 shares have been reserved for issuance under
our 1998 incentive plan. See "Management -- 1998 Incentive Plan" for a
description of the 1998 incentive plan. None of the preferred stock is
outstanding.

COMMON STOCK

The holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders. Generally, all matters to be voted on by
stockholders must be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by all shares of
common stock present in person or represented by proxy, voting together as a
single class, except as may be required by law and subject to any voting rights
granted to holders of any preferred stock. However, the removal of a director
from office, the approval and authorization of specified business combinations
and amendments to specified provisions of our certificate of incorporation each
require the approval of not less than 80% of the combined voting power of our
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class. See "-- Certificate of
Incorporation and Bylaw Provisions". The common stock does not have cumulative
voting rights.

Subject to the prior rights of the holders of any shares of our preferred
stock, the holders of common stock shall be entitled to receive, to the extent
permitted by law, such dividends as may be declared from time to time by our
board of directors. On our liquidation, dissolution or winding up, after payment
in full of the amounts required to be paid to holders of preferred stock, if
any, all holders of common stock are entitled to share ratably in any assets
available for distribution to holders of shares of common stock.

The outstanding shares of common stock are legally issued, fully paid and
nonassessable. The common stock does not have any preemptive, subscription or
conversion rights. Additional shares of authorized

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<PAGE> 66

common stock may be issued, as authorized by our board of directors from time to
time, without stockholder approval, except as may be required by applicable
stock exchange requirements.

PREFERRED STOCK

As of the date of this prospectus, no shares of preferred stock are
outstanding. Our board of directors may authorize the issuance of preferred
stock in one or more series and may determine, 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 our securities, and the price or prices or rate or rates at
which conversion or exchange shall be exercised;

- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;

- 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.

We believe that the ability of our board of directors to issue one or more
series of preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
that might arise. The authorized shares of preferred stock will be available for
issuance without further action by our stockholders, unless such action is
required by applicable law or the rules of any stock exchange on which our
securities may be listed or traded.

Although our board of directors has no intention at the present time of
doing so, it could issue a series of preferred stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. Our board of directors will make any determination to
issue such shares based on its judgment as to our best interests and the best
interests of our stockholders. Our board of directors, in so acting, could issue
preferred stock having terms that could discourage a potential acquiror from
making, without first negotiating with our board of directors, an acquisition
attempt through which such acquiror may be able to change the composition of our
board of directors, including a tender offer or other transaction that some, or
a majority, of our stockholders might believe to be in their best interests or
in which stockholders might receive a premium for their stock over the then
current market price of such stock.

BUSINESS COMBINATION STATUTE

As a corporation organized under the laws of the State of Delaware, we will
be subject to Section 203 of the Delaware General Corporation Law, which
restricts specified business combinations between us and an "interested
stockholder" or its affiliates or associates for a period of three years
following the time that the

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stockholder becomes an "interested stockholder." In general, an "interested
stockholder" is defined as a stockholder owning 15% or more of our outstanding
voting stock. The restrictions do not apply if:

- prior to an interested stockholder becoming such, our board of directors
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;

- upon completion of the transaction which resulted in any person becoming
an interested stockholder, such interested stockholder owns at least 85%
of our voting stock outstanding at the time the transaction commenced,
excluding shares owned by employee stock ownership plans and persons who
are both directors and officers of Lennox; or

- at or subsequent to the time an interested stockholder becomes such, the
business combination is both approved by our board of directors and
authorized at an annual or special meeting of our stockholders, not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder.

Under 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. Our
certificate of incorporation does not exclude us from the restrictions imposed
under Section 203. It is anticipated that the provisions of Section 203 may
encourage companies interested in acquiring us to negotiate in advance with our
board of directors since the stockholder approval requirement would be avoided
if a majority of the directors then in office approves, prior to the date on
which a stockholder becomes an interested stockholder, either the business
combination or the transaction which results in the stockholder becoming an
interested stockholder.

CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS

The summary below describes provisions of our certificate of incorporation
and bylaws. The provisions of our certificate of incorporation and bylaws
discussed below may have the effect, either alone or in combination with the
provisions of Section 203 discussed above, of making more difficult or
discouraging a tender offer, proxy contest or other takeover attempt that is
opposed by our board of directors but that a stockholder might consider to be in
such stockholder's best interest. Those provisions include:

- restrictions on the rights of stockholders to remove directors;

- prohibitions against stockholders calling a special meeting of
stockholders or acting by unanimous written consent in lieu of a meeting;

- requirements for advance notice of actions proposed by stockholders for
consideration at meetings of the stockholders; and

- restrictions on business combination transactions with "related persons."

CLASSIFIED BOARD OF DIRECTORS; REMOVAL; NUMBER OF DIRECTORS; FILLING
VACANCIES

Our certificate of incorporation and bylaws provide that the board of
directors shall be divided into three classes, designated Class I, Class II and
Class III, with the classes to be as nearly equal in number as possible. The
term of office of each class shall expire at the third annual meeting of
stockholders for the election of directors following the election of such class.
See "Management -- Information Regarding the Board of Directors and Committees"
for a discussion of the directors in each class. Each director is to hold office
until his or her successor is duly elected and qualified, or until his or her
earlier resignation or removal.

Our bylaws provide that the number of directors will be fixed from time to
time by to a resolution adopted by the board of directors; provided that the
number so fixed shall not be more than 15 nor less than three directors. Our
bylaws also provide that any vacancies will be filled only by the affirmative
vote of a majority of the remaining directors, even if less than a quorum.
Accordingly, absent an amendment to the bylaws, our board of directors could
prevent any stockholder from enlarging the board of directors and filling the
new

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directorships with such stockholder's own nominees. Moreover, our certificate of
incorporation and bylaws provide that directors may be removed only for cause
and only upon the affirmative vote of holders of at least 80% of our voting
stock at a special meeting of stockholders called expressly for that purpose.

The classification of directors could have the effect of making it more
difficult for stockholders to change the composition of the board of directors.
At least two annual meetings of stockholders, instead of one, are generally
required to effect a change in a majority of the board of directors. Such a
delay may help ensure that our directors, if confronted by a holder attempting
to force a proxy contest, a tender or exchange offer, or an extraordinary
corporate transaction, would have sufficient time to review the proposal as well
as any available alternatives to the proposal and to act in what they believe to
be the best interest of the stockholders. The classification provisions will
apply to every election of directors, however, regardless of whether a change in
the composition of the board of directors would be beneficial to us and our
stockholders and whether or not a majority of our stockholders believe that such
a change would be desirable.

The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of us, even though such an attempt might be
beneficial to us and our stockholders. The classification of the board of
directors could thus increase the likelihood that incumbent directors will
retain their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of our stock by purchasers whose
objective is to take control of us and remove a majority of the board of
directors, the classification of the board of directors could tend to reduce the
likelihood of fluctuations in the market price of the common stock that might
result from accumulations of large blocks. Accordingly, stockholders could be
deprived of opportunities to sell their shares of common stock at a higher
market price than might otherwise be the case.

NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS

Our certificate of incorporation and bylaws provide that stockholder action
can be taken only at an annual or special meeting of stockholders and
stockholder action may not be taken by written consent in lieu of a meeting.
Special meetings of stockholders can be called only by our 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 us.

The provisions of our certificate of incorporation and bylaws prohibiting
stockholder action by written consent and permitting special meetings to be
called only by the chairman, vice chairman or president, or at the request of a
majority of the board or directors, may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting. The
provisions would also prevent the holders of a majority of our voting stock from
unilaterally using the written consent procedure to take stockholder action.
Moreover, a stockholder could not force stockholder consideration of a proposal
over the opposition of the chairman, vice chairman or president, or a majority
of the board of directors, by calling a special meeting of stockholders prior to
the time such parties believe such consideration to be appropriate.

ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS

Our bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or bring other business
before an annual meeting of stockholders.

The stockholder notice procedure provides that only persons who are
nominated by, or at the direction of, the board of directors, or by a
stockholder who has given timely written notice containing specified information
to our secretary prior to the meeting at which directors are to be elected, will
be eligible for election as our directors. The stockholder notice procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, the chairman of the
board of directors, or in the absence of the chairman of the board, the
president, or by a stockholder who has given timely written notice containing
specified information to our secretary of such stockholder's intention to bring
such business before such meeting. Under the stockholder notice procedure, for
notice of stockholder nominations or proposals to be made at an annual meeting
to be timely, such notice must be received by us not

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less than 60 days nor more than 90 days in advance of such meeting. For notice
of stockholder nominations or proposals to be made at a special meeting of
stockholders to be timely, such notice must be received by us not later than the
close of business on the tenth day following the date on which notice of such
meeting is first given to stockholders. 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 our
secretary not later than the close of business on the tenth day following the
day on which notice of the date of the meeting of stockholders was mailed or
such public disclosure was made to the stockholders. If the board of directors
or, alternatively, the presiding officer at a meeting, in the case of a
stockholder proposal, or the chairman of the meeting, in the case of a
stockholder nomination to the board of directors, determines at or prior to the
meeting that business was not brought before the meeting or a person was not
nominated in accordance with the stockholder notice procedure, such business
will not be conducted at such meeting, or such person will not be eligible for
election as a director, as the case may be.

By requiring advance notice of nominations by stockholders, the stockholder
notice procedure will afford our board of directors an opportunity to consider
the qualifications of the proposed nominees 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 the board of directors, will provide the board of
directors with an opportunity to inform stockholders, prior to such meetings, of
any business proposed to be conducted at such meetings, together with any
recommendations as to the board of directors' position regarding action to be
taken 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 our bylaws do not give the board of directors any power to approve
or disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to us and our stockholders.

FAIR PRICE PROVISION

Our certificate of incorporation contains a "fair price" provision that
applies to specified business combination transactions involving any person,
entity or group that beneficially owns at least 10% of our aggregate voting
stock -- such person, entity or group is sometimes referred to as a "related
person". This provision requires the affirmative vote of the holders of not less
than 80% of our voting stock to approve specified transactions between a related
person and us or our subsidiaries, including:

- any merger, consolidation or share exchange;

- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of our assets, or the assets of any of our subsidiaries
having a fair market value of more than 10% of our total consolidated
assets, or assets representing more than 10% of our earning power and our
subsidiaries taken as a whole, which is referred to as a "substantial
part";

- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with us or any of our subsidiaries of all or a
substantial part of the assets of a related person;

- the issuance or transfer of any of our securities or any of our
subsidiaries by us or any of our subsidiaries to a related person;

- any reclassification of securities, recapitalization, or any other
transaction involving us or any of our subsidiaries that would have the
effect of increasing the voting power of a related person;

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<PAGE> 70

- the adoption of a plan or proposal for our liquidation or dissolution
proposed by or on behalf of a related person;

- the acquisition by or on behalf of a related person of shares
constituting a majority of our voting power; and

- the entering into of any agreement, contract or other arrangement
providing for any of the transactions described above.

This voting requirement will not apply to certain transactions, including:

(a) any transaction approved by a two-thirds vote of the continuing
directors; or

(b) any transaction in which:

(1) the consideration to be received by the holders of common
stock, other than the related person involved in the business
combination, is not less in amount than the highest per share price paid
by the related person in acquiring any of its holdings of common stock;
and

(2) if necessary, a proxy statement complying with the requirements
of the Securities Exchange Act of 1934 shall have been mailed at least
30 days prior to any vote on such business combination to all of our
stockholders for the purpose of soliciting stockholder approval of such
business combination.

This provision could have the effect of delaying or preventing a change in
control of us in a transaction or series of transactions that did not satisfy
the "fair price" criteria.

LIABILITY OF DIRECTORS; INDEMNIFICATION

Our certificate of incorporation provides that a director will not be
personally liable for monetary damages to us or our stockholders for breach of
fiduciary duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- for paying a dividend or approving a stock repurchase in violation of
Section 174 of the Delaware General Corporation Law; or

- for any transaction from which the director derived an improper personal
benefit.

Any amendment or repeal of such provision shall not adversely affect any
right or protection of a director existing under such provision for any act or
omission occurring prior to such amendment or repeal.

Our bylaws provide that each person who at any time serves or served as one
of our directors or officers, or any person who, while one of our directors or
officers, is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
entitled to indemnification and the advancement of expenses from us, and to the
fullest extent, permitted by Section 145 of the Delaware General Corporation Law
or any successor statutory provision. We will indemnify any person who was or is
a party to any threatened, pending or completed action, suit or proceeding
because he or she is or was one of our directors or officers, or is or was
serving at our request as a director or officer of another corporation,
partnership or other enterprise. However, as provided in Section 145, this
indemnification will only be provided if the indemnitee acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, our best
interests.

AMENDMENTS

Our certificate of incorporation provides that we reserve the right to
amend, alter, change, or repeal any provision contained in our certificate of
incorporation, and all rights conferred to stockholders are granted

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subject to such reservation. The affirmative vote of holders of not less than
80% of our voting stock, voting together as a single class, shall be required to
alter, amend, adopt any provision inconsistent with or repeal specified
provisions of our certificate of incorporation, including those provisions
discussed in this section. In addition, the 80% vote described in the prior
sentence shall not be required for any alteration, amendment, adoption of
inconsistent provision or repeal of the "fair price" provision discussed under
"-- Fair Price Provision" above which is recommended to the stockholders by
two-thirds of the continuing directors of Lennox and such alteration, amendment,
adoption of inconsistent provision or repeal shall require the vote, if any,
required under the applicable provisions of the Delaware General Corporation Law
and our certificate of incorporation. In addition, our certificate of
incorporation provides that stockholders may only adopt, amend or repeal our
bylaws by the affirmative vote of holders of not less than 80% of our voting
stock, voting together as a single class. Our bylaws may be amended by our board
of directors.

RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY

Our certificate of incorporation authorizes the board of directors to
create and issue rights, warrants and options entitling the holders of them to
purchase from us shares of any class or classes of our capital stock or other
securities or property upon such terms and conditions as the board of directors
may deem advisable.

LISTING

Our common stock has been approved for listing on the New York Stock
Exchange under the trading symbol "LII," subject to official notice of issuance.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.

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<PAGE> 72

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices.

Upon completion of the offering, we will have 44,660,740 shares of common
stock issued and outstanding, or 45,935,740 shares if the underwriters'
over-allotment option is exercised in full. Of these shares, the 8,500,000
shares of common stock to be sold in the offering will be freely tradable
without restrictions or further registration under the Securities Act of 1933,
except that shares purchased by an "affiliate" of ours, as that term is defined
in Rule 144 under the Securities Act of 1933, will be subject to the resale
limitations of Rule 144. The remaining 36,160,740 shares of common stock
outstanding will be "restricted securities" as that term is defined by Rule 144.

In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed after the later of the date on which "restricted" shares
were acquired from us or the date on which they were acquired from an
"affiliate," then the holder of these shares, including an affiliate, is
entitled to sell a number of shares within any three-month period that does not
exceed the greater of:

- one percent of the then outstanding shares of the common stock; or

- the average weekly reported volume of trading of the common stock during
the four calendar weeks preceding such sale.

Sales under Rule 144 are also subject to requirements pertaining to the
manner of such sales, notices of such sales and the availability of current
public information concerning Lennox. Affiliates may sell shares not
constituting "restricted" shares in accordance with the above volume limitations
and other requirements but without regard to the one-year period. Under Rule
144(k), if a period of at least two years has elapsed between the later of the
date on which "restricted" shares were acquired from us and the date on which
they were acquired from an affiliate, a holder of such shares who is not an
affiliate at the time of the sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
This description of Rule 144 is not intended to be a complete description
thereof.

Sales of significant amounts of the common stock, or the perception that
such sales could occur, could have an adverse impact on the market price of the
common stock. We, our directors and executive officers, the selling stockholders
and a number of other stockholders have agreed, subject to certain exceptions,
not to sell any common stock for a period of 180 days from the date of this
prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated. See "Underwriters" for a discussion of these prohibitions.

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<PAGE> 73

MATERIAL FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS

The following is a summary of the material U.S. federal income and estate
tax consequences expected to result under current law from the purchase,
ownership and taxable disposition of common stock by a Non-U.S. Holder. For this
purpose, a "Non-U.S. Holder" is defined as a person or entity other than:

(a) a citizen or resident of the U.S.;

(b) a corporation, partnership or other entity created or organized in
or under the laws of the U.S. or of any state thereof;

(d) a trust whose administration is subject to the primary supervision
of a U.S. court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.

This summary deals only with purchasers of common stock who hold common
stock as capital assets and does not address all of the U.S. federal income and
estate tax considerations that may be relevant to a Non-U.S. Holder in light of
its particular circumstances or to Non-U.S. Holders that may be subject to
special treatment under U.S. federal income tax laws, such as insurance
companies, tax-exempt organizations, financial institutions, brokers, dealers in
securities, regulated investment companies, common trust funds, or persons that
hold common stock as part of a hedge, conversion or constructive sale
transaction, straddle or other risk reduction transaction. Furthermore, this
summary does not discuss any aspects of state, local or foreign taxation. This
summary is based on current provisions of the Internal Revenue Code of 1986,
Treasury regulations, judicial opinions, published positions of the U.S.
Internal Revenue Service and other applicable authorities, all of which are
subject to change, possibly with retroactive effect. Each prospective purchaser
of common stock is advised to consult its tax advisor with respect to the tax
consequences of acquiring, holding and disposing of common stock.

DIVIDENDS

Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30 percent rate or a
lower rate that is specified by an applicable income tax treaty. However, if
dividends are effectively connected with the conduct of a trade or business by
the Non-U.S. Holder in the U.S. they may be taxed at ordinary U.S. federal
income tax rates and will not be subject to the withholding tax described above.
In order for this treatment to apply, the Non-U.S. Holder must provide the
dividend payor with proper documentation, consisting generally of I.R.S. Form
4224 and, if an income tax treaty is applicable, must maintain a U.S. permanent
establishment to which the dividends are attributable. If the Non-U.S. Holder is
a corporation, such effectively connected income may also be subject to an
additional "branch profits tax" which is imposed, under certain circumstances,
at a rate of 30% or a lower rate that is specified by an applicable treaty of
the Non-U.S. corporation's "effectively connected earnings and profits," subject
to certain adjustments.

SALE OR DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of any gain recognized on the sale or other taxable disposition of
common stock unless:

- the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the U.S.;

- in the case of a Non-U.S. Holder who is an individual and holds the
common stock as a capital asset, the holder is present in the U.S. for
183 or more days in the taxable year of the disposition and either (a)
the individual has a "tax home" for U.S. federal income tax purposes in
the U.S. or (b) the gain is attributable to an office or other fixed
place of business maintained by the individual in the U.S.;

- the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
federal income tax law applicable to certain U.S. expatriates; or

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<PAGE> 74

- Lennox is or has been during certain periods preceding the disposition a
U.S. real property holding corporation and either (a) the common stock
ceases to be "regularly traded on an established securities market" for
U.S. federal income tax purposes or (b) the Non-U.S. Holder has held,
directly or indirectly, at any time during the five-year period ending on
the date of disposition, more than 5 percent of all of Lennox's
outstanding common stock. Lennox is not, and does not anticipate
becoming, a U.S. real property holding corporation.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Lennox must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the amount, if any, of tax withheld
with respect to such dividends. This information may also be made available to
the tax authorities in the Non-U.S. Holder's country of residence.

U.S. backup withholding is a withholding tax imposed at the rate of 31% on
certain payments to persons that fail to furnish certain information under the
U.S. information reporting requirements. Generally it will not apply to
dividends paid to Non-U.S. Holders if such dividends are subject to the 30% or
lower treaty rate withholding discussed above. In the case of dividends which
are not described in the preceding sentence, backup withholding would still not
apply (a) under current law, if such dividends are paid before January 1, 2001
to a Non-U.S. Holder at an address outside the U.S. or (b) under recently
promulgated final U.S. Treasury regulations which are to become effective as of
January 1, 2001, if certain certification procedures or documentation
requirements are satisfied.

Upon the sale or other taxable disposition of common stock by a Non-U.S.
Holder to or through a U.S. office of a broker, the broker must backup withhold
at a rate of 31 percent and report the sale to the IRS, unless the holder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Upon the sale or other taxable disposition of common
stock by a Non-U.S. Holder to or through the foreign office of a U.S. broker, or
a foreign broker with certain types of relationships to the U.S., the broker
must report the sale to the IRS unless the broker has documentary evidence in
its files that the seller is a Non-U.S. Holder and certain other conditions are
met, or the holder otherwise establishes an exemption, but, prior to January 1,
2001, the broker need not withhold. A sale or other taxable disposition of
common stock by a Non-U.S. Holder to or through the foreign office of a foreign
broker that does not have certain types of relationships to the U.S. is
generally not subject to either information reporting or backup withholding.

Backup withholding is not an additional U.S. federal income tax. Amounts
withheld under the backup withholding rules are generally allowable as a refund
or credit against such Non-U.S. Holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the IRS.

FEDERAL ESTATE TAXES

Common stock owned or treated as owned by an individual who is not a
citizen or resident for U.S. federal estate tax purposes of the U.S. at the time
of death will be included in such individual's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.

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<PAGE> 75

UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation and Warburg Dillon Read LLC are acting as U.S. representatives, and
the international underwriters named below, for whom Morgan Stanley & Co.
International Limited, Credit Suisse First Boston (Europe) Limited and UBS AG,
acting through its division Warburg Dillon Read, are acting as international
representatives, have severally agreed to purchase, and Lennox and the selling
stockholders have agreed to sell to them, severally, the number of shares
indicated below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated......................... 1,858,334
Credit Suisse First Boston Corporation.................... 1,858,333
Warburg Dillon Read LLC, a subsidiary of UBS AG........... 1,858,333
Robert W. Baird & Co. Incorporated........................ 75,000
Chase Securities Inc...................................... 125,000
A.G. Edwards & Sons, Inc.................................. 125,000
First Union Capital Markets............................... 75,000
Janney Montgomery Scott Inc............................... 75,000
Edward D. Jones & Co., L.P................................ 125,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 125,000
Morgan Keegan & Company, Inc.............................. 75,000
Parker/Hunter Incorporated................................ 75,000
Raymond James & Associates, Inc........................... 75,000
Schroder & Co. Inc........................................ 125,000
Scotia Capital Markets (USA) Inc.......................... 75,000
Wachovia Securities, Inc.................................. 75,000
---------
Subtotal.......................................... 6,800,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited................ 566,668
Credit Suisse First Boston (Europe) Limited............... 566,666
UBS AG, acting through its division Warburg Dillon Read... 566,666
---------
Subtotal.......................................... 1,700,000
---------
Total............................................. 8,500,000
=========
</TABLE>

The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the "underwriters" and the "representatives", respectively. The
underwriters are offering the shares of common stock subject to their acceptance
of the shares from us and the selling stockholders and subject to prior sale.
The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The underwriters are obligated
to take and pay for all of the shares of common stock offered by this
prospectus, other than those covered by the U.S. underwriters' over-allotment
option described below, if any such shares are taken.

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<PAGE> 76

In the agreement between U.S. and international underwriters, each U.S.
underwriter has represented and agreed that:

- it is not purchasing any shares for the account of anyone other than a
U.S. or Canadian person; and

- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares outside the U.S. or Canada or to anyone other than a U.S. or
Canadian person.

In the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:

- it is not purchasing any shares for the account of any U.S. or Canadian
person; and

- it has not offered or sold, and will not offer or sell, any shares or
distribute any prospectus relating to the shares in the U.S. or Canada or
to any U.S. or Canadian person.

For any underwriter that is both a U.S. underwriter and an international
underwriter, the representations and agreements made by it in its capacity as a
U.S. underwriter apply only to it in its capacity as a U.S. underwriter and made
by it in its capacity as an international underwriter apply only to it in its
capacity as an international underwriter. The limitations described above do not
apply to stabilization transactions or to certain other transactions specified
in the agreement between U.S. and international underwriters. As used in this
section, "U.S. or Canadian person" means any national or resident of the U.S. or
Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the U.S. or Canada, or of any political
subdivision of the U.S. or Canada (other than a branch located outside the U.S.
and Canada of any U.S. or Canadian person). U.S. or Canadian person includes any
U.S. or Canadian branch of a person who is otherwise not a U.S. or Canadian
person.

In the agreement between U.S. and international underwriters, sales may be
made between U.S. underwriters and international underwriters of any number of
shares as may be mutually agreed. The per share price of any shares sold by the
underwriters shall be the public offering price listed on the cover page of this
prospectus, in U.S. dollars, less an amount not greater than the per share
amount of the concession to dealers described below.

In the agreement between U.S. and international underwriters, each U.S.
underwriter has represented that it has not offered or sold, and has agreed not
to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws of Canada. Each
U.S. underwriter has represented that any offer or sale of shares in Canada will
be made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which the offer or sale is made. Each
U.S. underwriter has further agreed to send to any dealer who purchases from it
any of the shares a notice stating that, by purchasing such shares, the dealer
represents and agrees that it has not offered or sold, and will not offer or
sell, directly or indirectly, any shares in any province or territory of Canada
or to, or for the benefit of, any resident of any province or territory of
Canada in contravention of the securities laws thereof and that any offer or
sale of shares in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in which
the offer or sale is made. Each dealer will deliver to any other dealer to whom
it sells any of the shares a notice containing substantially the same Canadian
restrictions.

In the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:

- it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international
underwriters, will not offer or sell, any shares to persons in the United
Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments, as principal or
agent, for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;

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<PAGE> 77

- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom; and

- it has and will distribute any document relating to the shares in the
United Kingdom only to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (as amended) or is a person to whom such document
may otherwise lawfully be issued or passed on.

In the agreement between U.S. and international underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell in Japan or to or for the account of
any resident of Japan, any of the shares. This limitation does not apply to
offers or sales to Japanese international underwriters or dealers and to offers
and sales pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law. Each international underwriter has further agreed to
send to any dealer who purchases from it any of the shares a notice stating in
substance that, by purchasing the shares, the dealer agrees that any offer or
sales of shares in Japan will be made only to Japanese international
underwriters or dealers or under an exemption from the registration requirements
of the Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law. Each dealer will send to any other dealer to whom it
sells any shares a notice containing substantially the same Japanese selling
restrictions.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $0.76 a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $0.10 a share to other underwriters or to certain dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.

Lennox has granted to the U.S. underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
1,275,000 additional shares of common stock at the public offering price listed
on the cover page of this prospectus, less underwriting discounts and
commissions. The U.S. underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this prospectus. To the extent
the option is exercised, each U.S. underwriter will become obligated, subject to
certain conditions, to purchase about the same percentage of the additional
shares of common stock as the number listed next to such U.S. underwriter's name
in the preceding table bears to the total number of shares of common stock
listed next to the names of all U.S. underwriters in the preceding table. If the
U.S. underwriters' option is exercised in full, the total price to the public
would be $183,281,250, the total underwriters' discounts and commissions would
be $12,365,375 and total proceeds to Lennox would be $163,720,623.

At the request of Lennox, the underwriters have reserved for sale, at the
initial public offering price, approximately 845,000 shares for directors,
officers, employees, business associates and related persons of Lennox. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered under this
prospectus.

The underwriters have informed Lennox that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.

Our common stock has been approved for listing on the New York Stock
Exchange under the trading symbol "LII," subject to official notice of issuance.

Each of Lennox and the directors, executive officers, the selling
stockholders and certain other stockholders of Lennox has agreed that, without
the prior written consent of Morgan Stanley & Co.

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<PAGE> 78

Incorporated on behalf of the underwriters, it will not, during the period
ending 180 days after the date of this prospectus:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or

- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;

whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. However, any such person
or entity may make a bona fide gift of shares during the restricted period if
the person or entity delivers to Morgan Stanley & Co. Incorporated an agreement
substantially similar to the above executed by the donee.

The restrictions described in the previous paragraph do not apply to:

- the sale of shares to the underwriters;

- transactions by any person other than Lennox relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares;

- the issuance or sale of shares of common stock pursuant to Lennox stock
option plans existing on the date of completion of the offering;

- the granting by Lennox of stock options and/or performance share awards
pursuant to Lennox's existing employee benefit plans; or

- the issuance of up to 5.4 million shares of common stock in connection
with acquisitions.

In the event that consent to a waiver of these restrictions is requested by
Lennox or any such person, Morgan Stanley & Co. Incorporated will consider the
specific facts and circumstances of the request in deciding whether to grant its
consent.

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. The underwriters have reserved the
right to reclaim selling concessions in order to encourage underwriters and
dealers to distribute the common stock for investment, rather than for
short-term profit taking. Increasing the proportion of the offering held for
investment may reduce the supply of common stock available for short-term
trading. Any of these activities may stabilize or maintain the market price of
the common stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.

Lennox, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933.

An affiliate of Credit Suisse First Boston Corporation was a participant
bank in Lennox's revolving credit facility which expired in June 1998. Such
affiliate currently has issued approximately $20 million in letters of credit on
behalf of Lennox, all but $1 million of which expired in December 1998. Such
affiliate has received customary banking fees for such services. Certain
affiliates of Chase Securities Inc. and Wachovia Securities, Inc. have acted as
agents in existing and prior Lennox credit arrangements and otherwise have
engaged in various general financing and banking transactions with Lennox and
its affiliates, for which services they

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<PAGE> 79

received customary banking fees. In addition, Chase Securities Inc., Wachovia
Securities, Inc., certain of their affiliates and an affiliate of Scotia Capital
Markets (USA) Inc. have agreed to act as agents or arrangers in the new Lennox
credit facility that will take effect upon completion of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".

Warburg Dillon Read LLC has provided certain investment banking services
and has acted as placement agent for Lennox's private placements of debt
securities in 1993 and 1998, for which services they received customary fees in
connection therewith.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the common
stock. The initial public offering price was determined by negotiations between
Lennox and the U.S. representatives. Among the factors considered in determining
the initial public offering price were the future prospects of Lennox and its
industry in general, sales, earnings and certain other financial operating
information of Lennox in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of
Lennox.

We intend to use the net proceeds of the offering to repay a portion of the
borrowings under our revolving credit facility and term credit agreement. Chase
Bank of Texas, National Association and Wachovia Bank, N.A. will each receive an
amount greater than 10% of the net proceeds of the offering. Chase Bank of
Texas, National Association is an affiliate of Chase Securities Inc. which is a
member of the National Association of Securities Dealers. Wachovia Bank, N.A. is
an affiliate of Wachovia Securities, Inc., which is also a member of the
National Association of Securities Dealers. Because more than 10% of the net
proceeds of the offering is being paid to affiliates of underwriters, the
offering is being made pursuant to Rule 2710(c)(8) and Rule 2720(c)(3) of the
Conduct Rules of the National Association of Securities Dealers. In accordance
with that Rule, the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" that meets the standards
outlined in the rule. Morgan Stanley & Co. Incorporated will serve as a
qualified independent underwriter and will recommend a price for the common
stock. In connection with our offering of common stock, Morgan Stanley & Co.
Incorporated, in its role as qualified independent underwriter, has performed
due diligence and investigations and reviewed and participated in the
preparation of this prospectus and the registration statement.

LEGAL MATTERS

The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for us by Baker & Botts, L.L.P., Dallas, Texas.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Fulbright & Jaworski L.L.P., Houston, Texas.

EXPERTS

Our financial statements and schedule as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report which is included in this prospectus, and are included in this prospectus
in reliance upon the authority of said firm as experts in giving said reports.

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<PAGE> 80

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act of 1933 for
the common stock offered by this prospectus. This prospectus does not contain
all of the information included in the registration statement and the exhibits
and schedules of the registration statement. Certain items are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to Lennox and the common stock, reference is made to the
registration statement and the exhibits and any schedules filed with the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document that is required to be summarized or
outlined in the prospectus are not necessarily complete and in each instance, if
such contract or document is filed as an exhibit, reference is made to the copy
of such contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including its exhibits and schedules, may be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site at http://www.sec.gov, from which interested persons
can electronically access the registration statement, including its exhibits and
schedules.

As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934. We will
fulfill our obligations under such requirements by filing periodic reports and
other information with the SEC. We intend to furnish our shareholders with
annual reports containing consolidated financial statements certified by an
independent public accounting firm.

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<PAGE> 81

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERIM FINANCIAL STATEMENTS OF LENNOX INTERNATIONAL INC.
(unaudited)
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999......................................... F-2
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1999.......................... F-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998
and 1999............................................... F-4
Notes to Consolidated Financial Statements -- Three Months
Ended March 31, 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................ F-15
</TABLE>

F-1
<PAGE> 82

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 28,389 $ 30,262
Accounts and notes receivable, net........................ 318,858 374,574
Inventories............................................... 274,679 323,962
Deferred income taxes..................................... 37,426 36,953
Other assets.............................................. 36,183 31,454
---------- ----------
Total current assets.............................. 695,535 797,205
INVESTMENTS IN JOINT VENTURES............................... 17,261 12,848
PROPERTY, PLANT, AND EQUIPMENT, net......................... 255,125 265,903
GOODWILL, net............................................... 155,290 186,630
OTHER ASSETS................................................ 29,741 29,948
---------- ----------
TOTAL ASSETS...................................... $1,152,952 $1,292,534
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term debt........................................... $ 56,070 $ 189,766
Current maturities of long-term debt...................... 18,778 26,660
Accounts payable.......................................... 149,824 175,308
Accrued expenses.......................................... 207,040 188,473
Income taxes payable...................................... 534 1,719
---------- ----------
Total current liabilities......................... 432,246 581,926
LONG-TERM DEBT.............................................. 242,593 233,495
DEFERRED INCOME TAXES....................................... 11,628 12,179
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS................ 16,511 16,706
OTHER LIABILITIES........................................... 60,845 61,318
---------- ----------
Total liabilities................................. 763,823 905,624
---------- ----------
MINORITY INTEREST........................................... 12,689 12,591
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, 35,546,940 shares and 35,561,757 shares
issued and outstanding for 1998 and 1999,
respectively........................................... 355 356
Additional paid-in capital................................ 32,889 33,086
Retained earnings......................................... 350,851 354,444
Currency translation adjustments.......................... (7,655) (13,567)
---------- ----------
Total stockholders' equity........................ 376,440 374,319
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,152,952 $1,292,534
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-2
<PAGE> 83

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
NET SALES................................................... $379,646 $489,059
COST OF GOODS SOLD.......................................... 261,802 337,481
-------- --------
Gross profit...................................... 117,844 151,578
OPERATING EXPENSES:
Selling, general and administrative....................... 97,255 129,268
Other operating expense, net.............................. 2,612 2,518
-------- --------
Income from operations............................ 17,977 19,792
INTEREST EXPENSE, net....................................... 2,620 6,558
OTHER....................................................... 230..... (211)
MINORITY INTEREST........................................... (502) (516)
-------- --------
Income before income taxes........................ 15,629 13,961
PROVISION FOR INCOME TAXES.................................. 7,323 7,331
-------- --------
Net income........................................ $ 8,306 $ 6,630
======== ========
EARNINGS PER SHARE:
Basic..................................................... $ 0.24 $ 0.19
Diluted................................................... $ 0.24 $ 0.18
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE> 84

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,306 $ 6,630
Adjustments to reconcile net income to net cash used in
operating activities --
Minority interest..................................... (502) (516)
Joint venture losses.................................. 1,158 1,088
Depreciation and amortization......................... 9,787 13,502
Loss on disposal of equipment......................... 27 18
Other................................................. 6,457 1,969
Changes in assets and liabilities, net of effects of
acquisitions --
Accounts and notes receivable......................... (11,272) (45,900)
Inventories........................................... (37,466) (38,763)
Other current assets.................................. 1,706 (2,660)
Accounts payable...................................... 30,385 22,004
Accrued expenses...................................... (35,136) (16,540)
Deferred income taxes................................. (718) 1,145
Income taxes payable and receivable................... 5,281 7,048
Long-term warranty, deferred income and other
liabilities.......................................... (9,702) (6,269)
-------- --------
Net cash used in operating activities.............. (31,689) (57,244)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and
equipment............................................... 8 35
Purchases of property, plant and equipment................ (12,316) (20,050)
Acquisitions, net of cash acquired........................ (1,360) (51,145)
-------- --------
Net cash used in investing activities.............. (13,668) (71,160)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings..................................... 2,575 134,536
Repayments of long-term debt.............................. (4,723) (701)
Long-term borrowings...................................... 75,000 --
Sales of common stock..................................... 932 249
Repurchases of common stock............................... (2,050) (131)
Cash dividends paid....................................... (2,569) (3,038)
-------- --------
Net cash provided by financing activities.......... 69,165 130,915
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 23,808 2,511
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS....... 14 (638)
CASH AND CASH EQUIVALENTS, beginning of period.............. 147,802 28,389
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $171,624 $ 30,262
======== ========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 2,238 $ 2,487
======== ========
Income taxes............................................ $ 2,760 $ 38
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE> 85

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)

1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION:

The accompanying unaudited consolidated balance sheet as of March 31, 1999,
and the consolidated statements of income and cash flows for the three months
ended March 31, 1998 and 1999 should be read in conjunction with Lennox
International Inc.'s (the "Company") consolidated financial statements and
accompanying footnotes as of December 31, 1997 and 1998 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 fiscal 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 $140.0 million to
provide for projected expenses of the product inspection program related to its
Pulse furnace. The Company has offered the owners of all Pulse furnaces
installed between 1982 and 1990 a subsidized inspection and a free carbon
monoxide detector. The inspection includes a severe pressure test to determine
the serviceability of the heat exchanger. If the heat exchanger does not pass
the test, the Company will either replace the heat exchanger or offer a new
furnace and subsidize the labor costs for installation. The cost required for
the program depends on the number of furnaces located, the percentage of those
located that do not pass the pressure test, and the replacement option chosen by
the homeowner.

As of March 31, 1999, the Company had incurred approximately $126.4 million
in costs related to the product inspection program. Consequently, there is a
current liability of $13.6 million recorded on the accompanying consolidated
balance sheet as of March 31, 1999 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 $13.6 million is adequate to cover the
remaining costs of the program.

3. REPORTABLE BUSINESS SEGMENTS:

F-5
<PAGE> 86
LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 THREE MONTHS
ENDED MARCH 31,
---------------------
NET SALES 1998 1999
- --------- --------- ---------
<S> <C> <C>
North American residential.............................. $203,646 $284,924
Commercial air conditioning............................. 81,800 92,468
Commercial refrigeration................................ 47,900 61,598
Heat transfer(1)........................................ 46,300 50,069
-------- --------
$379,646 $489,059
======== ========
</TABLE>

- ---------------

(1) The Heat Transfer segment had intersegment sales of $6,662 and $6,587 in
1998 and 1999, respectively.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
INCOME (LOSS) FROM OPERATIONS 1998 1999
- ----------------------------- --------- ---------
<S> <C> <C>
North American residential................................ $20,900 $24,589
Commercial air conditioning............................... (3,400) (1,934)
Commercial refrigeration.................................. 4,100 2,306
Heat transfer............................................. 3,400 3,239
Corporate and other....................................... (7,023) (8,408)
------- -------
$17,977 $19,792
======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
IDENTIFIABLE ASSETS 1998 1999
- ------------------- ------------------ ---------------
<S> <C> <C>
North American residential.................... $ 528,660 $ 625,411
Commercial air conditioning................... 198,982 218,521
Commercial refrigeration...................... 194,601 198,755
Heat transfer................................. 88,633 102,875
Corporate and other........................... 142,076 146,972
---------- ----------
$1,152,952 $1,292,534
========== ==========
</TABLE>

4. INVENTORIES:

Components of inventories are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
Finished goods....................................... $177,490 $226,258
Repair parts......................................... 31,674 31,093
Work in process...................................... 15,574 17,431
Raw materials........................................ 102,876 97,747
-------- --------
327,614 372,529
Reduction for last-in, first-out..................... 52,935 48,567
-------- --------
$274,679 $323,962
======== ========
</TABLE>

F-6
<PAGE> 87
LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT AND LINES OF CREDIT:

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<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.................... 24,600 24,600
5.75% promissory note, payable in 1999............... 951 876
5.84% promissory note, payable in 2000............... 2,275 2,113
4.80% promissory note, payable annually through
2004............................................... 1,119 1,031
6.50% promissory note, payable annually 1999 through
2005............................................... 1,382 1,259
5.50% promissory note, payable annually through
2004............................................... 639 582
6.50% promissory note, payable annually through
2003............................................... 371 341
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 25,000
6.75% promissory note, payable in 2008............... 50,000 50,000
11.10% mortgage note, payable semiannually through
2000............................................... 7,547 7,135
Texas Housing Opportunity Fund, Ltd. note, payable
in 1999............................................ 109 --
Capitalized lease obligations and other.............. 6,378 6,218
-------- --------
261,371 260,155
Less current maturities.............................. 18,778 26,660
-------- --------
$242,593 $233,495
======== ========
</TABLE>

On March 16, 1999, the Company entered into a short-term loan agreement
with a bank pursuant to which the Company may borrow up to $115 million. On
March 31, 1999, the Company borrowed $40 million at LIBOR plus 1% (6.0%). The
Company is required to use the net proceeds from the initial public offering to
repay any amounts outstanding under the term loan agreement. The short-term loan
agreement expires upon the earlier of the completion of the Company's initial
public offering or December 31, 1999.

The Company has bank lines of credit and short-term loans aggregating $279
million, of which $190 million was outstanding at March 31, 1999. 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.

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

F-7
<PAGE> 88
LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding, if dilutive, under the Company's stock-based compensation plans.
Diluted earnings per share are computed as follows (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Net income............................................... $ 8,306 $ 6,630
======= =======
Weighted average shares outstanding...................... 34,452 35,541
Effect of assumed exercise of options.................... 660 825
------- -------
Weighted average shares outstanding, as adjusted....... 35,112 36,366
======= =======
Diluted earnings per share............................... $ 0.24 $ 0.18
======= =======
</TABLE>

7. INVESTMENTS IN SUBSIDIARIES:

SECURITY CHIMNEY

In January 1999, the Company acquired the outstanding stock of Security
Chimney International LTD, a Canadian company engaged in the manufacture and
sale of sheet metal products for the hearth products industry and also wood
burning stoves. The purchase price of $13.0 million was paid in cash has been
allocated to the acquired assets and liabilities based upon fair market value
with $3.5 million allocated to goodwill. The goodwill will be amortized over 40
years. The acquisition was accounted for in accordance with the purchase method
of accounting. The results of operations have been fully consolidated with those
of the Company since the date of acquisition.

CANADIAN DEALERS

During the first quarter of 1999, the Company acquired the outstanding
stock of 22 dealers (the "Dealers") in Canada that had been independent retail
outlets of the Company's products. The aggregate purchase price of the Dealers
was $34.1 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 based upon fair
market value, and the excess of $24.8 million has been allocated to goodwill,
which is being amortized over 40 years. The results of operations for the
Dealers have been fully consolidated with those of the Company since the dates
of acquisition.

HART-GREER

During January of 1999, the Company acquired the assets of Hart-Greer Ltd.,
Inc. which had been an independent distributor of the Company's products. The
purchase price of $4.9 million in cash has been allocated to the assets and
liabilities based upon fair market value, and there was no goodwill recorded in
conjunction with the acquisition. This acquisition was accounted for in
accordance with the purchase method of accounting. The results of operations
have been fully consolidated with those of the Company since the date of
acquisition.

F-8
<PAGE> 89
LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
-------- --------
<S> <C> <C>
Net sales........................................ $416,346 $493,259
Net income....................................... 10,306 6,730
Basic earnings per share......................... 0.30 0.19
Diluted earnings per share....................... 0.29 0.19
</TABLE>

8. SUBSEQUENT EVENTS:

The Company experienced a work stoppage at the Bellevue, Ohio factory for
three weeks in May 1999. This factory manufactures the Company's "Armstrong Air"
brand of residential heating and air conditioning products for the North
American market. On May 20, 1999, the union at the Bellevue, Ohio factory
ratified a new collective bargaining agreement that expires April 2002, and this
factory resumed full production within two business days.

Subsequent to March 31, 1999, the Company acquired Livernois Engineering
Holding Company and its licensed patents for approximately $21 million.
Livernois produces heat transfer manufacturing equipment for the HVACR and
automotive industries.

Between April 1, 1999, and July 2, 1999, the Company had acquired 14
dealers in Canada and two dealers in the U.S. for an aggregate purchase price of
approximately $17 million in cash. The Company also signed letters of intent to
acquire nine additional Canadian dealers and 11 U.S. dealers for an aggregate
purchase price of approximately $79 million.

The Company has entered into an agreement to buy the remaining 30% interest
in Ets. Brancher for 102.5 million French francs (approximately $17 million) on
March 31, 2000.

In June 1999, the Company acquired James N. Kirby Pty. Ltd., an Australian
company that participates in the commercial refrigeration and heat transfer
markets in Australia, for approximately $67 million.

In July 1999, the Company declared a 33-for-one common stock split.
Accordingly, all information related to the number of shares of the Company's
common stock and options has been adjusted to reflect the stock split.

In July 1999, the Company entered into a new $300 million revolving credit
facility with a syndicate of banks. It is a requirement that the Company receive
not less than $140 million in net proceeds from an initial public offering of
common stock before the new revolving credit facility will go into effect.
Borrowings under this new credit facility will bear interest, at the Company'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%. Additionally, the Company is
obligated to pay a commitment fee equal to 0.15% to 0.30% of the unused
commitment. The new credit facility will have a term of 5 years.

F-9
<PAGE> 90

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> 91

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> 92

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> 93

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> 94

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> 95

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> 96
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.

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>

F-16
<PAGE> 97
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 U.S.
dollars at maturity (May 2003), at rates agreed to at inception of the
contracts. If the counterparty to the exchange contracts does not fulfill their
obligations to deliver the contracted currencies, the Company could be at risk
for any
F-17
<PAGE> 98
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
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.

F-18
<PAGE> 99
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

<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.

F-19
<PAGE> 100
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<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>

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>

F-20
<PAGE> 101
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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

F-21
<PAGE> 102
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

MCQUAY DO BRASIL

During August 1998, the Company's Lennox Global Ltd. subsidiary purchased
84% of the outstanding stock of McQuay do Brasil, a Brazilian company engaged in
the manufacture and sale of refrigeration, automotive air conditioning
equipment, and heat transfer products. The purchase price of $20.5 million in
cash has been allocated to the acquired assets and liabilities based upon the
fair value of those assets and liabilities,

F-22
<PAGE> 103
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and the excess of $11.3 million has been allocated to goodwill, which is being
amortized on a straight-line basis over 40 years. The results of operations of
McQuay do Brasil have been consolidated with those of the Company since the date
of acquisition.

The following table presents the pro forma results as if the Dealers, the
Hearth companies, and McQuay 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>

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>

F-23
<PAGE> 104
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has bank lines of credit aggregating $164 million, of which $56
million was outstanding at December 31, 1998. Included in the bank lines is a
$135 million revolving credit facility. The revolving credit facility provides
for both "standby loans" and "offered rate loans." Standby loans are made
ratably by all lenders under the revolving credit facility, while offered rate
loans are, subject to the terms and conditions of the credit facility,
separately negotiated between the Company and one or more members of the lending
syndicate. Standby loans bear interest at a rate equal to either (a) the London
Interbank Offered Rate plus a margin equal to 0.150% to 0.405% depending on the
ratio of debt to total capitalization, or (b) the greater of (1) the Federal
Funds Effective Rate plus 0.5%, and (2) the Prime Rate. Offered rate loans bear
interest at a fixed rate negotiated with the lender or lenders making such
loans. Under the revolving credit facility, the Company is obligated to pay
certain fees, including (a) a quarterly facility fee to each lender under the
credit facility equal to a percentage, varying from 0.100% to 0.220% (depending
on the ratio of debt to total capitalization), of each lender's total
commitment, whether used or unused, under the revolving credit facility and (b)
certain administrative fees to the administrative agent and documentation agent
under the revolving credit facility. The revolving credit facility will expire
on July 13, 2001, unless earlier terminated pursuant to its terms and
conditions. The unsecured promissory note agreements and lines of credit provide
for restrictions with respect to additional borrowings, maintenance of minimum
working capital and payment of dividends.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The estimated fair values of the Company's financial instruments
approximate their respective carrying amounts at December 31, 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.

F-24
<PAGE> 105
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. INCOME TAXES:

The income tax provision (benefit) consisted of the following (in
thousands):

<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>

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.

F-25
<PAGE> 106
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets (liabilities), as determined under the provisions of
SFAS No. 109, "Accounting for Income Taxes," were comprised of the following at
December 31 (in thousands):

<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.

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

F-26
<PAGE> 107
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for contributions to the plans amounted to $12.0 million, $11.5 million, and
$13.6 million in 1996, 1997, and 1998, respectively.

401(k) PLAN

The Company provides a 401(k) plan to substantially all eligible hourly and
salary employees of the Company, as defined. Participants may contribute up to
12% of their compensation to a 401(k) plan under Internal Revenue Code Section
401(k).

LONG-TERM INCENTIVE PLAN

The Company provided a long-term incentive plan, the Lennox International
Inc. Performance Share Plan (the "Performance Plan") to certain employees.
During 1998, the Company terminated the Performance Plan. Under the Performance
Plan, participants earned shares of the Company's common stock in accordance
with a discretionary formula established by the Board of Directors based on the
Company's performance over a three-year period. The value of the shares earned
was determined using an independent appraisal. Under the Performance Plan 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 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
======== ======== ======== ========
</TABLE>

F-27
<PAGE> 108
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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>

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>

F-28
<PAGE> 109
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The benefit obligation and fair value of plan assets for the pension plans with
benefit obligations in excess of plan assets were approximately $10,770,000 and
$0, respectively, as of December 31, 1997, and $12,478,000 and $3,607,000,
respectively, as of December 31, 1998.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):

<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>

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>

F-29
<PAGE> 110
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

Under the 1998 Incentive Plan, the Company is authorized to issue options
for 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>

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:

F-30
<PAGE> 111
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outstanding, if dilutive, under the Company's stock-based compensation plans.
Diluted earnings per share are computed as follows (in thousands, except per
share data):

<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 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-31
<PAGE> 112

<TABLE>
<S> <C>
[LENNOX INTERNATIONAL INC. LOGO] STRENGTH THROUGH
BRANDS AND PEOPLE
[Inside of back cover]
[Graphics depicting pictures of employees of
the Company]
[LENNOX LOGO]
</TABLE>

<TABLE>
<S> <C>
[LENNOX INTERNATIONAL INC. LOGO]
HISTORY AND INNOVATIONS
[Graphics depicting timeline of various milestones throughout Lennox's history]
[GRAPHIC]
1895 1904
Dave Lennox builds and markets the industry's first Lennox establishes a one-step distribution network,
riveted-steel furnace. selling directly to installing contractors.
[GRAPHIC] [GRAPHIC]
1923 1935
Lennox expands for the first time, building a warehouse Lennox pioneers the introduction of a forced-air furnace
in Syracuse, New York. Two years later a factory is for residential heating.
added.
1943 1952
Lennox retools its factories to support the World War II Lennox establishes operations in Canada.
effort.
[GRAPHIC] [GRAPHIC]
Lennox expands its product line with the introduction of 1960
residential central air-conditioning systems. Lennox establishes an international division with a
facility in Basingstoke, England and sales offices and
warehouses in Holland and Germany.
[GRAPHIC]
1964 1965
Lennox develops and manufactures the Duracurve heat Lennox introduces packaged multi-zone units for
exchanger, reducing noise problems in gas furnaces. commercial heating and cooling.
[GRAPHIC] [GRAPHIC]
1972 1973
"Dave Lennox" appears for the first time in a Lennox Lennox increases air conditioning efficiency with the
advertising campaign. development of the two-speed hermetic compressor.
1982 1984
Lennox develops and manufactures the industry's first Lennox International Inc. is established as the parent
high-efficiency gas furnace. company for Lennox Industries Inc. and future
acquisitions.
[GRAPHIC]
[HEATCRAFT LOGO]
1986 1988
Lennox International expands into the commercial Lennox International expands into two-step distribution
refrigeration and heat transfer markets with the of residential heating and cooling equipment with the
establishment of Heatcraft Inc. acquisition of Armstrong Air Conditioning Inc.
[ARMSTRONG AIR CONDITIONING, INC. LOGO]
Heatcraft implements a 48-hour coil replacement program
for commercial air conditioning systems.
[GRAPHIC] [LGL LOGO]
1994 1995
Lennox is the first to manufacture and market a complete Lennox Global Ltd. (LGL) is established to expand the
combination high-efficiency residential space/water company's presence in worldwide commercial air
heating system. conditioning, commercial refrigeration and heat transfer
product markets.
[GRAPHIC] [GRAPHIC]
Lennox enters the hearth products market with the Lennox begins factory configure-to-order for commercial
introduction of gas fireplaces. air conditioning with the introduction of the L series.
[GRAPHIC]
Heatcraft develops Floating Tube and Thermoflex
technology, significantly reducing leaks in air-cooled
condensers and unit coolers used for commercial
refrigeration.
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[GRAPHIC]
1996 1997
Heatcraft introduces the Beacon Control System, LGL enters into joint venture agreements in Europe, Asia
improving the accuracy and reliability of refrigeration and Latin America.
system information and easing installation.
[GRAPHIC]
1998
Lennox Industries begins to establish a retail
distribution network offering full sales and service
functions.
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[LENNOX LOGO]