<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1999
REGISTRATION NO. 333-75725
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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LENNOX INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3585 42-0991521
(State or other jurisdiction of (Primary Industrial Standard (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2100 LAKE PARK BLVD.
RICHARDSON, TEXAS 75080
(972) 497-5000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------------
CARL E. EDWARDS, JR.
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
LENNOX INTERNATIONAL INC.
2100 LAKE PARK BLVD.
RICHARDSON, TEXAS 75080
(972) 497-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
ANDREW M. BAKER ROBERT F. GRAY, JR.
BAKER & BOTTS, L.L.P. FULBRIGHT & JAWORSKI L.L.P.
2001 ROSS AVENUE 1301 MCKINNEY, SUITE 5100
DALLAS, TEXAS 75201 HOUSTON, TEXAS 77010
(214) 953-6500 (713) 651-5151
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ] _______
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"). The Prospectuses are identical in all material
respects except for the front cover page. The U.S. Prospectus is included herein
and is followed by the alternate front cover page to be used in the
International Prospectus. The alternate page for the International Prospectus
included herein is labeled "Alternate Cover Page for International Prospectus."
Final forms of each Prospectus will be filed with the Securities and Exchange
Commission under Rule 424(b).
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued July 27, 1999
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. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $17 AND $20
PER SHARE.
------------------------
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 $ 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................. $ $ $ $
Total..................... $ $ $ $
</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 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 , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
WARBURG DILLON READ LLC
, 1999
<PAGE> 4
<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> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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<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......................... 79
Index to Financial Statements............................... F-1
</TABLE>
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Until , 1999 (25 days after the date of this prospectus),
all dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3
<PAGE> 6
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.
4
<PAGE> 7
GROWTH STRATEGY
Our growth strategy is designed to capitalize on our competitive strengths
in order to expand our market share and profitability in the worldwide HVACR
markets. We will continue to pursue internal programs and strategic acquisitions
that broaden our product and service offerings, expand our market opportunities
and enhance our technological expertise. The key elements of this strategy
include:
- 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.
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We are located at 2100 Lake Park Blvd., Richardson, Texas 75080 and our
telephone number is (972) 497-5000.
5
<PAGE> 8
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
$138.4 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.
Proposed NYSE symbol....... LII
All information in this prospectus relating to the number of shares of our
common stock or options has been adjusted to reflect a 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> 9
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
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(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............................................. 215,279 353,716
Total assets................................................ 1,292,534 1,292,534
Total debt.................................................. 449,921 311,484
Stockholders' equity........................................ 374,319 512,756
</TABLE>
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(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 ends on June 30, 1999.
7
<PAGE> 10
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> 11
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> 12
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.
10
<PAGE> 13
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.
11
<PAGE> 14
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 will be determined through negotiations between the
underwriters and us. You may not be able to resell your shares at or above the
initial public offering price as the price of our common stock may be affected
by a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- announcements of new products or technological innovations; and
- the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.
You should read the "Underwriters" section for a more complete discussion
of the factors considered in determining the initial public offering price.
12
<PAGE> 15
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> 16
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 $138.4 million, or
approximately $160.4 million if the underwriters exercise their over-allotment
option in full, at an assumed initial public offering price of $18.50 per share.
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> 17
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 $ 77,989
======== ========
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................................ 33,086 171,442
Retained earnings......................................... 354,444 354,444
Currency translation adjustments.......................... (13,567) (13,567)
-------- --------
Total stockholders' equity........................ 374,319 512,756
-------- --------
Total capitalization.............................. $607,814 $746,251
======== ========
</TABLE>
15
<PAGE> 18
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 assumed initial public offering price of $18.50 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 $302.9 million, or
$6.94 per share. This represents an immediate increase in net tangible book
value of $2.31 per share to existing stockholders and an immediate dilution of
$11.56 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $18.50
Net tangible book value before the offering............... $4.63
Increase in pro forma net tangible book value attributable
to new investors....................................... 2.31
Pro forma net tangible book value after the offering........ 6.94
------
Dilution to new investors................................... $11.56
======
</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 19.5% $ 0.94
New investors.......... 8,088,490 18.5 138,437,000 80.5 17.12
----------- ------ ------------ ------
Total........ 43,650,247 100.0% $171,879,000 100.0%
=========== ====== ============ ======
</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> 19
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>
- ---------------
(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 ends on June 30, 1999.
17
<PAGE> 20
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> 21
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> 22
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
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<PAGE> 23
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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<PAGE> 24
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
22
<PAGE> 25
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%
24
<PAGE> 27
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.
25
<PAGE> 28
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
26
<PAGE> 29
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.
27
<PAGE> 30
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> 31
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> 32
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> 33
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> 34
BUSINESS
We are a leading global provider of climate control solutions. We design,
manufacture and market a broad range of products for the HVACR markets. Our
products are sold under well-established brand names including "Lennox",
"Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. We are also one of
the largest manufacturers in North America of heat transfer products, such as
evaporator coils and condenser coils. We have leveraged our expertise in heat
transfer technology, which is critical to the efficient operation of any heating
or cooling system, to become an industry leader known for our product innovation
and the quality and reliability of our products. As a result of recent
acquisitions, we have also become a leader in the growing market for hearth
products, which includes pre-fabricated fireplaces and related products.
Historically, we have sold our "Lennox" brand of residential heating and air
conditioning products directly to a network of installing dealers, which
currently numbers approximately 6,000, making us the largest wholesale
distributor of these products in North America. We have recently initiated a
program to acquire dealers in metropolitan areas in the U.S. and Canada so that
we can provide heating and air conditioning products and services directly to
consumers.
Our furnaces, heat pumps, air conditioners, pre-fabricated fireplaces and
related products are available in a variety of designs, efficiency levels and
price points that provide an extensive line of comfort systems. A majority of
our sales of residential heating and air conditioning products in the U.S. and
Canada are to the repair and replacement market, which is less cyclical than the
new construction market. We also provide a range of air conditioning products
for commercial market applications such as mid-size office buildings,
restaurants, churches and schools. Our commercial refrigeration products are
used primarily in cold storage applications for food preservation in
supermarkets, convenience stores, restaurants, warehouses and distribution
centers. Our heat transfer products are used by us in our HVACR products and
sold to third parties.
Shown below are our four business segments, the key products and brand
names within each segment and 1998 net sales by segment. The North American
residential segment also includes installation, maintenance and repair services
performed by Lennox-owned dealers. See our audited financial statements included
elsewhere in this prospectus for more information on our segments.
<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> 35
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
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<PAGE> 36
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.
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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
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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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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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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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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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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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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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<PAGE> 46
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> 47
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> 48
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
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<PAGE> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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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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> 56
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> 57
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> 58
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,
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<PAGE> 59
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
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<PAGE> 60
- 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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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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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;
(c) the approval by the stockholders of a reorganization, merger or
consolidation in which:
(1) existing stockholders would not own more than 65% of the common
stock and voting stock of the resulting company;
(2) a person, other than specified exempt persons, would own 35% or
more of the common stock or voting stock of the resulting company; or
(3) less than a majority of the board of the resulting company
would consist of the then incumbent members of 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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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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- 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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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)........... 65,604 * 3,399 62,205 *
</TABLE>
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- ---------------
* 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) Represents shares held by the Zink Family Irrevocable Trust of which John
P. Zink is the trustee.
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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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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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- 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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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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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;
(c) an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
(d) a trust whose administration is subject to the primary supervision
of a U.S. court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.
This summary deals only with purchasers of common stock who hold common
stock as capital assets and does not address all of the U.S. federal income and
estate tax considerations that may be relevant to a Non-U.S. Holder in light of
its particular circumstances or to Non-U.S. Holders that may be subject to
special treatment under U.S. federal income tax laws, such as insurance
companies, tax-exempt organizations, financial institutions, brokers, dealers in
securities, regulated investment companies, common trust funds, or persons that
hold common stock as part of a hedge, conversion or constructive sale
transaction, straddle or other risk reduction transaction. Furthermore, this
summary does not discuss any aspects of state, local or foreign taxation. This
summary is based on current provisions of the Internal Revenue Code of 1986,
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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- 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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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.........................
Credit Suisse First Boston Corporation....................
Warburg Dillon Read LLC, a subsidiary of UBS AG...........
Subtotal..........................................
---------
International Underwriters:
Morgan Stanley & Co. International Limited................
Credit Suisse First Boston (Europe) Limited...............
UBS AG, acting through its division Warburg Dillon Read...
Subtotal..........................................
---------
Total............................................. 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
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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.
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
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Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments, as principal or
agent, for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom; and
- it has 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 $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.
Lennox has granted to the U.S. underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
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 $ , the total underwriters' discounts and commissions would be
$ and total proceeds to Lennox would be $ .
At the request of Lennox, the underwriters have reserved for sale, at the
initial public offering price, up to 425,000 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.
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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. 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. In addition,
Warburg Dillon Read LLC has provided certain
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investment banking services and has acted as placement agent for Lennox's
private placements of debt securities in 1993 and 1998, for which services they
received customary fees in connection therewith.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between Lennox and the U.S. representatives. Among the factors to be considered
in determining the initial public offering price will be the future prospects of
Lennox and its industry in general, sales, earnings and certain other financial
operating information of Lennox in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and certain financial
and operating information of companies engaged in activities similar to those of
Lennox. The estimated initial public offering price range set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.
Pursuant to the repayment of our revolving credit facility and term credit
agreement, will receive an amount greater than 10% of the net proceeds of
the sale of our common stock. is an affiliate of , which is a
member of the National Association of Securities Dealers. Accordingly, the
underwriting arrangements related to our sale of common stock must comply with
Rule 2710(c)(8) and Rule 2720(c)(3) of the Conduct Rules of the National
Association of Securities Dealers. The rules provide that when a National
Association of Securities Dealer member is to receive an amount greater than 10%
of the net proceeds of an offering, 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. To comply with this requirement, Morgan
Stanley & Co. Incorporated will serve as a qualified independent underwriter and
will recommend a price in compliance with the requirements of Rule 2720. 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.
79
<PAGE> 82
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.
80
<PAGE> 83
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> 84
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> 85
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> 86
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> 87
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
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
F-5
<PAGE> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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:
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-30
<PAGE> 113
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> 114
<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.
</TABLE>
<PAGE> 115
<TABLE>
<S> <C>
[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.
</TABLE>
<PAGE> 116
[LENNOX LOGO]
<PAGE> 117
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued July 27, 1999
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 THE COMMON
STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $17
AND $20 PER SHARE.
------------------------
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 $ 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................. $ $ $ $
Total..................... $ $ $ $
</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 , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
WARBURG DILLON READ
, 1999
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the prospectus which forms
a part of this Registration Statement.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses incurred by Lennox in
connection with the issuance and distribution of the securities being registered
pursuant to this Registration Statement, other than underwriting discounts and
commissions.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Securities Act registration fee............................. $ 54,349
NASD filing fee............................................. 20,050
Printing and engraving fees and expenses.................... 200,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 225,000
Transfer agent and registrar fees and expenses.............. 35,000
New York Stock Exchange listing fee......................... 80,000
Miscellaneous............................................... 85,601
----------
Total............................................. $1,100,000
==========
</TABLE>
All of the foregoing estimated costs, expenses and fees will be borne by
Lennox.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
II-1
<PAGE> 119
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
145(a) and (b), or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under Section
145(a) and (b) (unless ordered by a court) shall be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
the present or former director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 145(a) and (b). Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
Section 145(f) of the DGCL provides that the indemnification and
advancement of expenses provided by, or granted pursuant to, Section 145 shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would have the power to indemnify such person against such
liability under Section 145.
Section 102(b)(7) of the DGCL provides that the liability of a director may
not be limited or eliminated for the breach of such director's duty of loyalty
to the corporation or its stockholders, for such director's intentional acts or
omissions not in good faith, for such director's concurrence in or vote for an
unlawful payment of a dividend or unlawful stock purchase or redemption or for
any improper personal benefit derived by the director from any transaction.
RESTATED CERTIFICATE OF INCORPORATION
Article Eighth of Lennox's restated certificate of incorporation provides
that a director of Lennox shall not be liable to Lennox or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the DGCL as the same exists or may hereafter be amended. Any repeal or
modification of Article Eighth shall not adversely affect any right or
protection of a director of Lennox existing thereunder with respect to any act
or omission occurring prior to such repeal or modification.
BYLAWS
Article VI of Lennox's bylaws provides that each person who at any time
shall serve or shall have served as a director or officer of Lennox, or any
person who, while a director or officer of Lennox, is or was serving at
II-2
<PAGE> 120
the request of Lennox as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall be entitled to (a)
indemnification and (b) the advancement of expenses incurred by such person from
Lennox as, and to the fullest extent, permitted by Section 145 of the DGCL or
any successor statutory provision, as from time to time amended. Lennox may
indemnify any other person, to the same extent and subject to the same
limitations specified in the immediately preceding sentence, by reason of the
fact that such other person is or was an employee or agent of Lennox or another
corporation, partnership, joint venture, trust or other enterprise.
The indemnification and advancement of expenses provided by, or granted
pursuant to, Article VI shall not be deemed exclusive of any other rights to
which any person seeking indemnification or advancement of expenses may be
entitled under any bylaw of Lennox, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office. All rights to indemnification under Article VI shall be deemed to be
provided by a contract between Lennox and the director, officer, employee or
agent who served in such capacity at any time while the bylaws of Lennox and
other relevant provisions of the DGCL and other applicable law, if any, are in
effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing. Without limiting the provisions of Article VI, Lennox
is authorized from time to time, without further action by the stockholders of
Lennox, to enter into agreements with any director or officer of Lennox
providing such rights of indemnification as Lennox may deem appropriate, up to
the maximum extent permitted by law. Any agreement entered into by Lennox with a
director may be authorized by the other directors, and such authorization shall
not be invalid on the basis that similar agreements may have been or may
thereafter be entered into with other directors.
Lennox may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of Lennox, or is or was serving at
the request of Lennox as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not Lennox
would have the power to indemnify such person against such liability under the
applicable provisions of Article VI or the DGCL.
UNDERWRITING AGREEMENT
The Underwriting Agreement, the form of which is filed as Exhibit 1.1 to
this Registration Statement, provides for the indemnification of the directors
and officers of Lennox against certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act").
The above discussion of the restated certificate, bylaws and Underwriting
Agreement, and Section 145 of the DGCL is not intended to be exhaustive and is
respectively qualified in its entirety by the restated certificate, bylaws,
Underwriting Agreement and such statute.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to the several Note Purchase Agreements, dated as of April 3,
1998, by and among Lennox International Inc. and The Prudential Insurance
Company of America, Teachers Insurance and Annuity Association of America,
Connecticut General Life Insurance Company, Connecticut General Life Insurance
Company on Behalf of One or More Separate Accounts, CIGNA Property and Casualty
Insurance Company and U.S. Private Placement Fund, United of Omaha Life
Insurance Company and Companion Life Insurance Company (collectively, the "Note
Purchasers"), Lennox sold an aggregate of $25,000,000 of its 6.56% Senior Notes
due April 3, 2005, and an aggregate of $50,000,000 of its 6.75% Senior Notes due
April 3, 2008 to the Note Purchasers at the purchase price of 100% of the
principal amount thereof in reliance upon the exemption from the registration
requirements of the Securities Act set forth in Section 4(2) thereof.
Between July 1, 1996 and July 1, 1999, Lennox sold the following securities
pursuant to its various benefit programs: (a) 1,297,329 shares of common stock
issued upon the exercise of options granted to directors and employees of Lennox
pursuant to Lennox's benefit programs and (b) 16,335 shares of common stock to
directors of Lennox. The exercise prices of the options referred to in clause
(a) ranged from $3.96 to
II-3
<PAGE> 121
$14.23 per share. The sale prices of shares referred to in clause (b) ranged
from $8.08 to $21.43 per share. Lennox issued the securities referred to in
clauses (a) and (b) above in reliance upon the exemption from the registration
requirements of the Securities Act set forth in Section 4(2) and Regulation 701
thereof. During the same three-year period, Lennox sold 100,485 shares of common
stock to certain existing stockholders of Lennox at sales prices ranging from
$9.06 per share to $21.43 per share in reliance upon the exemption from the
registration requirements of the Securities Act set forth in Section 4(2)
thereof.
In November 1997, Lennox issued 82,500 shares of common stock to Ray
Strong, an individual, in connection with the purchase of a 50% interest in
Strong LGL International, L.L.C. The value allocated to such shares of common
stock was approximately $1.2 million. In addition, in September 1997, Lennox
issued 631,389 shares of common stock to Jean Jacques Brancher, an individual,
or his designated assigns, in connection with Lennox's acquisition of an
additional 20% interest in the Ets. Brancher joint venture. The value allocated
to such shares of common stock was approximately $8.3 million. In May 1999,
Lennox issued 304,953 shares of common stock to nine individuals and five trusts
in connection with the acquisition of Livernois Engineering Holding Company. The
value allocated to such shares of common stock was approximately $7.4 million.
The shares issued in all of the foregoing transactions were issued in reliance
upon the exemption from the registration requirements of the Securities Act set
forth in Section 4(2) thereof.
In June 1999, Lennox issued 650,430 shares of common stock to James N.
Kirby Holdings Pty. Ltd., an Australian company, in connection with the
acquisition of James N. Kirby Pty. Ltd. The value allocated to such shares of
common stock was approximately $14.2 million. The 650,430 shares issued in the
foregoing transaction was issued in reliance upon the exemption from the
registration requirements of the Securities Act set forth in Regulation S
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1** -- Restated Certificate of Incorporation of Lennox.
3.2** -- Amended and Restated Bylaws of Lennox.
4.1** -- Specimen Stock Certificate for the Common Stock, par
value $.01 per share, of Lennox.
5.1 -- Opinion of Baker & Botts, L.L.P. regarding legality of
securities being registered.
10.1** -- Agreement of Assumption and Restatement, dated as of
December 1, 1991 between Lennox and identified
Noteholders relating to Lennox's 9.53% Series F
Promissory Notes due 2001 and 9.69% Promissory Notes due
2003.
10.2** -- Note Purchase Agreement, dated as of December 1, 1993,
between Lennox and identified Noteholders relating to
Lennox's 6.73% Senior Promissory Notes due 2008.
10.3** -- Note Purchase Agreement, dated as of July 6, 1995,
between Lennox and Teachers Insurance and Annuity
Association of America relating to Lennox's 7.06% Senior
Promissory Notes due 2005.
10.4** -- Note Purchase Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 6.56% Senior Notes due 2005 and 6.75% Senior
Notes due 2008.
10.5** -- Note Amendment Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 9.53% Senior Promissory Notes due 2001, 9.69%
Senior Promissory Notes due 2003, 7.06% Senior Promissory
Notes due 2005 and 6.73% Senior Promissory Notes due
2008.
</TABLE>
II-4
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6** -- Revolving Credit Facility Agreement, dated as of July 13,
1998, among Lennox, identified Lenders, Chase Bank of
Texas, N.A., as Administrative Agent, and Wachovia Bank,
N.A., as Documentation Agent.
10.7** -- Advance Term Credit Agreement, dated as of March 16,
1999, among Lennox, Chase Bank of Texas, National
Association, as Administrative Agent, and Wachovia Bank,
N.A., as Documentation Agent.
10.8** -- 1998 Incentive Plan of Lennox International Inc.
10.9** -- Lennox International Inc. Profit Sharing Restoration
Plan.
10.10** -- Lennox International Inc. Supplemental Executive
Retirement Plan.
10.11** -- Letter of Intent, dated as of June 23, 1998, between
Jean-Jacques Brancher and Lennox Global Ltd.
10.12** -- First Amendment to the Amended and Restated Venture
Agreement, dated as of December 27, 1997, between Ets.
Brancher S.A. and Lennox Global Ltd.
10.13** -- Amended and Restated Venture Agreement, dated as of
November 10, 1997, by and among Lennox Global Ltd.,
Lennox International Inc., Ets. Brancher S.A. and Fibel
S.A.
10.14** -- Shareholder Restructure Agreement, dated as of September
30, 1997, by and among Jean Jacques Brancher, Ets.
Brancher S.A., AFIBRAL S.A., Parifri S.A. and Lennox
International Inc.
10.15** -- Form of Indemnification Agreement entered into between
Lennox and certain executive officers and directors
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution).
10.16** -- Form of Employment Agreement entered into between Lennox
and certain executive officers (includes a schedule
identifying the various parties to such agreement and the
applicable dates of execution).
10.17** -- Form of Change of Control Employment Agreement entered
into between Lennox and certain executive officers
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution).
10.18** -- Stock Disposition Agreement, dated as of June 2, 1997,
among Lennox, A.O.C. Corporation and Compass Bank.
10.19** -- Stock Disposition Agreement, dated as of January 22,
1998, among Lennox, A.O.C. Corporation and Compass Bank.
10.20** -- Stock Disposition Agreement, dated as of May 7, 1998,
among Lennox and Northern Trust Bank of Florida, N.A.
10.21** -- Master Stock Disposition Agreement, dated as of August
10, 1998, among Lennox, Chase Bank of Texas, N.A., and
various executive officers and directors.
10.22** -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Harris Trust &
Savings Bank.
10.23** -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Susan M. Major and
Harris Trust & Savings Bank.
10.24** -- Stock Disposition Agreement, dated as of February 10,
1999, among Lennox, David H. Anderson and Northern Trust
Bank of Texas, N.A.
10.25 -- Revolving Credit Facility Agreement, dated as of July 29,
1999, among Lennox, Chase Bank of Texas, National
Association, as administrative agent, Wachovia Bank,
N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named therein.
</TABLE>
II-5
<PAGE> 123
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21.1 -- Subsidiaries of Lennox.
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Baker & Botts, L.L.P. (included in the opinion
filed as Exhibit 5.1 to this Registration Statement).
24.1** -- Powers of Attorney.
27.1** -- Financial Data Schedule.
</TABLE>
- ---------------
** Previously filed.
(b) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves and report of
Arthur Andersen LLP thereon.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant also undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Richardson, State of Texas, on July 27, 1999.
LENNOX INTERNATIONAL INC.
By: /s/ JOHN W. NORRIS, JR.
----------------------------------
John W. Norris, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN W. NORRIS, JR. Chairman of the Board and Chief July 27, 1999
- ----------------------------------------------------- Executive Officer (Principal
John W. Norris, Jr. Executive Officer)
/s/ CLYDE W. WYANT Executive Vice President, Chief July 27, 1999
- ----------------------------------------------------- Financial Officer and
Clyde W. Wyant Treasurer (Principal Financial
Officer)
/s/ JOHN J. HUBBUCH Vice President, Controller and July 27, 1999
- ----------------------------------------------------- Chief Accounting Officer
John J. Hubbuch (Principal Accounting Officer)
* Director July 27, 1999
- -----------------------------------------------------
Linda G. Alvarado
* Director July 27, 1999
- -----------------------------------------------------
David H. Anderson
* Director July 27, 1999
- -----------------------------------------------------
Richard W. Booth
Director
- -----------------------------------------------------
Thomas W. Booth
* Director July 27, 1999
- -----------------------------------------------------
David V. Brown
* Director July 27, 1999
- -----------------------------------------------------
James J. Byrne
Director
- -----------------------------------------------------
Janet K. Cooper
</TABLE>
II-7
<PAGE> 125
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director July 27, 1999
- -----------------------------------------------------
John E. Major
* Director July 27, 1999
- -----------------------------------------------------
Donald E. Miller
* Director July 27, 1999
- -----------------------------------------------------
Terry D. Stinson
* Director July 27, 1999
- -----------------------------------------------------
Richard L. Thompson
*By: /s/ JOHN W. NORRIS, JR.
- -----------------------------------------------------
John W. Norris, Jr.
Attorney-in-Fact for such persons
pursuant to the powers of attorney
dated April 6, 1999 filed as an
exhibit to the Registration Statement
</TABLE>
II-8
<PAGE> 126
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: The Stockholders and Board of Directors of
Lennox International Inc.
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of Lennox International Inc. and
subsidiaries included in this registration statement on Form S-1 and have issued
our report thereon dated February 18, 1999. Our audits were made for the purpose
of forming an opinion on the basic consolidated financial statements taken as a
whole. Schedule II, Valuation and Qualifying Accounts and Reserves, is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 18, 1999
S-1
<PAGE> 127
LENNOX INTERNATIONAL INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR
---------- ---------- ------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996:
Allowance for doubtful accounts................ $ 9,611 $7,041 $(4,537) $12,115
1997:
Allowance for doubtful accounts................ $12,115 $8,997 $(4,164) $16,948
1998:
Allowance for doubtful accounts................ $16,948 $6,224 $(4,647) $18,525
</TABLE>
- ---------------
(1) Uncollectable accounts charged off, net of recoveries.
S-2
<PAGE> 128
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement.
3.1** -- Restated Certificate of Incorporation of Lennox.
3.2** -- Amended and Restated Bylaws of Lennox.
4.1** -- Specimen Stock Certificate for the Common Stock, par
value $.01 per share, of Lennox.
5.1 -- Opinion of Baker & Botts, L.L.P. regarding legality of
securities being registered.
10.1** -- Agreement of Assumption and Restatement, dated as of
December 1, 1991 between Lennox and identified
Noteholders relating to Lennox's 9.53% Series F
Promissory Notes due 2001 and 9.69% Promissory Notes due
2003.
10.2** -- Note Purchase Agreement, dated as of December 1, 1993,
between Lennox and identified Noteholders relating to
Lennox's 6.73% Senior Promissory Notes due 2008.
10.3** -- Note Purchase Agreement, dated as of July 6, 1995,
between Lennox and Teachers Insurance and Annuity
Association of America relating to Lennox's 7.06% Senior
Promissory Notes due 2005.
10.4** -- Note Purchase Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 6.56% Senior Notes due 2005 and 6.75% Senior
Notes due 2008.
10.5** -- Note Amendment Agreement, dated as of April 3, 1998,
between Lennox and identified Noteholders relating to
Lennox's 9.53% Senior Promissory Notes due 2001, 9.69%
Senior Promissory Notes due 2003, 7.06% Senior Promissory
Notes due 2005 and 6.73% Senior Promissory Notes due
2008.
10.6** -- Revolving Credit Facility Agreement, dated as of July 13,
1998, among Lennox, identified Lenders, Chase Bank of
Texas, N.A., as administrative agent, and Wachovia Bank,
N.A., as documentation agent.
10.7** -- Advance Term Credit Agreement, dated as of March 16,
1999, among Lennox, Chase Bank of Texas, National
Association, as Administrative Agent, and Wachovia Bank,
N.A., as Documentation Agent.
10.8** -- 1998 Incentive Plan of Lennox International Inc.
10.9** -- Lennox International Inc. Profit Sharing Restoration
Plan.
10.10** -- Lennox International Inc. Supplemental Executive
Retirement Plan.
10.11** -- Letter of Intent, dated as of June 23, 1998, between
Jean-Jacques Brancher and Lennox Global Ltd.
10.12** -- First Amendment to the Amended and Restated Venture
Agreement, dated as of December 27, 1997, between Ets.
Brancher S.A. and Lennox Global Ltd.
10.13** -- Amended and Restated Venture Agreement, dated as of
November 10, 1997, by and among Lennox Global Ltd.,
Lennox International Inc., Ets. Brancher S.A. and Fibel
S.A.
10.14** -- Shareholder Restructure Agreement, dated as of September
30, 1997, by and among Jean Jacques Brancher, Ets.
Brancher S.A., AFIBRAL S.A., Parifri S.A. and Lennox
International Inc.
10.15** -- Form of Indemnification Agreement entered into between
Lennox and certain executive officers and directors
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution).
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16** -- Form of Employment Agreement entered into between Lennox
and certain executive officers (includes a schedule
identifying the various parties to such agreement and the
applicable dates of execution).
10.17** -- Form of Change of Control Employment Agreement entered
into between Lennox and certain executive officers
(includes a schedule identifying the various parties to
such agreement and the applicable dates of execution).
10.18** -- Stock Disposition Agreement, dated as of June 2, 1997,
among Lennox, A.O.C. Corporation and Compass Bank.
10.19** -- Stock Disposition Agreement, dated as of January 22,
1998, among Lennox, A.O.C. Corporation and Compass Bank.
10.20** -- Stock Disposition Agreement, dated as of May 7, 1998,
among Lennox and Northern Trust Bank of Florida, N.A.
10.21** -- Master Stock Disposition Agreement, dated as of August
10, 1998, among Lennox, Chase Bank of Texas, N.A., and
various executive officers and directors.
10.22** -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Harris Trust &
Savings Bank.
10.23** -- Stock Disposition Agreement, dated as of November 19,
1998, among Lennox, John E. Major and Susan M. Major and
Harris Trust & Savings Bank.
10.24** -- Stock Disposition Agreement, dated as of February 10,
1999, among Lennox, David H. Anderson and Northern Trust
Bank of Texas, N.A.
10.25 -- Revolving Credit Facility Agreement, dated as of July 29,
1999, among Lennox, Chase Bank of Texas, National
Association, as administrative agent, Wachovia Bank,
N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named herein.
21.1 -- Subsidiaries of Lennox.
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Baker & Botts, L.L.P. (included in the opinion
filed as Exhibit 5.1 to this Registration Statement).
24.1** -- Powers of Attorney (included in the signature pages of
this Registration Statement).
27.1** -- Financial Data Schedule.
</TABLE>
- ---------------
** Previously filed.
<PAGE> 1
DRAFT OF JULY 26, 1999
8,500,000 Shares
LENNOX INTERNATIONAL INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
July _____, 1999
<PAGE> 2
July _____, 1999
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Warburg Dillon Read LLC, a subsidiary of UBS AG
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Credit Suisse First Boston (Europe) Limited
UBS AG, acting through its division Warburg Dillon Read
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Ladies and Gentlemen:
Lennox International Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters (as defined below)
hereto, and certain stockholders of the Company (the "SELLING STOCKHOLDERS")
named in Schedule I hereto severally propose to sell to the several
Underwriters, an aggregate of 8,500,000 shares of the Common Stock, par value
$.01 per share, of the Company (the "FIRM SHARES"), of which 8,088,490 shares
are to be issued and sold by the Company and 411,510 shares are to be sold by
the Selling Stockholders, each Selling Stockholder selling the amount set forth
opposite such Selling Stockholder's name in Schedule I hereto.
It is understood that, subject to the conditions hereinafter stated,
6,800,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the several U.S.
Underwriters named in Schedule II hereto (the "U.S. UNDERWRITERS") in connection
with the offering and sale of such U.S. Firm Shares in the United States (as
defined below) and Canada to United States or Canadian Persons (as defined
below), and 1,700,000 Firm Shares (the "INTERNATIONAL SHARES") will be sold to
the several International Underwriters named in Schedule III hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the
<PAGE> 3
United States and Canada to persons other than United States or Canadian
Persons. Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation and Warburg Dillon Read LLC, a subsidiary of UBS AG, shall act as
representatives (the "U.S. REPRESENTATIVES") of the several U.S. Underwriters,
and Morgan Stanley & Co. International Limited, Credit Suisse First Boston
(Europe) Limited and UBS AG, acting through its division Warburg Dillon Read,
shall act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the
several International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the "UNDERWRITERS".
"UNITED STATES OR CANADIAN PERSON" shall mean any national or resident
of the United States or Canada, or any corporation, pension, profit-sharing or
other trust or other entity organized under the laws of the United States or
Canada or of any political subdivision thereof (other than a branch located
outside the United States and Canada of any United States or Canadian Person),
and shall include any United States or Canadian branch of a person who is
otherwise not a United States or Canadian Person. "UNITED STATES" shall mean the
United States of America, its territories, its possessions and all areas subject
to its jurisdiction.
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional 1,275,000 shares of its Common Stock,
par value $.01 per share (the "ADDITIONAL SHARES") if and to the extent that the
U.S. Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of common stock granted to the
U.S. Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares
are hereinafter collectively referred to as the "SHARES". The shares of Common
Stock, par value $.01 per share, of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the
"COMMON STOCK". The Company and the Selling Stockholders are hereinafter
sometimes collectively referred to as the "SELLERS".
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States or
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States or Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter referred to as the "PROSPECTUS". If the Company has filed
an abbreviated registration statement to register additional shares of Common
Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462
REGISTRATION STATEMENT"), then
-2-
<PAGE> 4
any reference herein to the term "REGISTRATION STATEMENT" shall be deemed to
include such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley
& Co. Incorporated ("MORGAN STANLEY") and certain other Underwriters have agreed
to reserve out of the Shares set forth opposite their names on Schedule II to
this Agreement up to 425,000 shares for sale to the Company's employees,
officers and directors and other parties associated with the Company
(collectively, "PARTICIPANTS"), as set forth in the Prospectus under the heading
"Underwriting" (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by such
Underwriters pursuant to the Directed Share Program (the "DIRECTED SHARES") will
be sold by such Underwriters pursuant to this Agreement at the public offering
price. Any Directed Shares not orally confirmed for purchase by any Participants
by the end of the first business day after the date on which this Agreement is
executed will be offered to the public by such Underwriters as set forth in the
Prospectus.
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (1) the
Company and its subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) the Company has
not purchased any of its outstanding capital stock in any material
amount nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock other than ordinary and
customary dividends; and (3) there has not been any material change in
the capital stock, short-term debt or long-term debt of the Company and
its subsidiaries, except in each case as described in the Registration
Statement or the Prospectus.
(b) The Company and its subsidiaries have good and valid title
in fee simple to all real property and good and valid title to all
personal property owned by them which is material to the business of
the Company and its subsidiaries, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, in each case except as
described in the Prospectus.
(c) The Company and its subsidiaries own or possess adequate
rights in, or can acquire adequate rights in, on reasonable terms, all
material patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented
-3-
<PAGE> 5
or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them,
and neither the Company nor any of its subsidiaries has received any
notice of infringement of or conflict with asserted rights of others
with respect to any of the foregoing which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
have a material adverse affect on the Company and its subsidiaries,
taken as a whole.
(d) Except as described in the Prospectus, no material labor
dispute with the employees of the Company or any of its subsidiaries
exists, or, to the knowledge of the Company, is imminent;
(e) The Company and its subsidiaries are insured by the
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any of
its subsidiaries (while a subsidiary of the Company) has been refused
any insurance coverage sought or applied for; and neither the Company
nor any of its subsidiaries has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have
a material adverse effect on the Company and its subsidiaries, taken as
a whole, except as described in the Prospectus.
(f) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
business except where the failure to possess such certificates,
authorizations and permits would not have a material adverse effect on
the Company and its subsidiaries taken as a whole, and neither the
Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described the Prospectus.
(g) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only
in accordance with management's general or specific authorization; and
(4) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
-4-
<PAGE> 6
(h) The Registration Statement has become effective. No stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the knowledge of the Company, threatened by the Commission.
(i) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(j) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(k) Each "significant subsidiary" of the Company within the
meaning of Regulation S-X under the Securities Act has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
all of the issued shares of capital stock of each such significant
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims.
-5-
<PAGE> 7
(l) This Agreement has been duly authorized, executed and
delivered by the Company.
(m) The authorized capital stock of the Company conforms in
all material respects as to legal matters to the description thereof
contained in the Prospectus.
(n) The shares of Common Stock (including the Shares to be
sold by the Selling Stockholders) outstanding prior to the issuance of
the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable.
(o) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered against payment therefor in
accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(p) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not violate any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except (i) such as may
be required by the securities or blue sky laws of the various states in
connection with the offer and sale of the Shares and, (ii) except as
provided in Section 1(y), such consents, approvals, authorizations,
registrations or qualifications as may be required by the securities
laws of any jurisdiction outside the United States in which the Shares
are offered and sold.
(q) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(r) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened to which the Company or any
of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
-6-
<PAGE> 8
(s) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(t) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(u) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except as described in the Prospectus or where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(v) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(w) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement which has not been
waived.
(x) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year
2000 problem (that is, any significant risk that computer hardware or
software applications used by the Company and its subsidiaries will
not, in the case of dates or time periods occurring after December 31,
1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000) (the "YEAR 2000 PROBLEM");
and as a result of such review, (i) the Company has no reason to
believe, and does not believe, that (A) there are any issues related to
the
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<PAGE> 9
Company's preparedness to address the Year 2000 Problem that are of a
character required to be described or referred to in the Registration
Statement or Prospectus which have not been accurately described in the
Registration Statement or Prospectus and (B) the Year 2000 Problem will
have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, or result in any material loss
or interference with the business or operations of the Company and its
subsidiaries, taken as a whole; and (ii) the Company reasonably
believes, after due inquiry, that the suppliers, vendors, customers or
other material third parties used or served by the Company and such
subsidiaries are addressing or will address the Year 2000 Problem in a
timely manner, except to the extent that a failure to address the Year
2000 Problem by any supplier, vendor, customer or material third party
would not have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(y) Furthermore, the Company represents and warrants to Morgan
Stanley and the Underwriters that are selling Shares pursuant to the
Directed Share Program that (i) the Registration Statement, the
Prospectus and any preliminary prospectus comply, and any further
amendments or supplements thereto will comply, with any applicable laws
or regulations of foreign jurisdictions in which the Prospectus or any
preliminary prospectus, as amended or supplemented, if applicable, are
distributed at the request of the Company in connection with the
Directed Share Program, and (ii) no authorization, approval, consent,
license, order, registration or qualification of or with any
government, governmental instrumentality or court, other than such as
have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States at the request of the Company.
(z) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its
products.
2. Representations and Warranties of the Selling Stockholders. Each of
the Selling Stockholders severally represents and warrants to and agrees with
each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations
under, this Agreement, the Custody Agreement dated the date hereof
signed by such Selling Stockholder and the Company, as Custodian,
relating to the deposit of the Shares to be sold by such Selling
-8-
<PAGE> 10
Stockholder (the "CUSTODY AGREEMENT"), and the Power of Attorney dated
the date hereof appointing certain individuals as such Selling
Stockholder's attorneys-in-fact to the extent set forth therein,
relating to the transactions contemplated hereby and by the
Registration Statement (the "POWER OF ATTORNEY"), will not violate any
provision of applicable law, or the trust agreement, testamentary
document or similar document that governs the affairs of such Selling
Stockholder (if such Selling Stockholder is a trust or similar entity),
or any agreement or other instrument binding upon such Selling
Stockholder or any judgment, order or decree of any governmental body,
agency or court having jurisdiction over such Selling Stockholder, and
no consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by such
Selling Stockholder of its obligations under this Agreement or the
Custody Agreement or Power of Attorney of such Selling Stockholder,
except (i) for such as may be required by the securities or blue sky
laws of the various states in connection with the offer and sale of the
Shares, (ii) for such consents, approvals, authorizations,
registrations or qualifications as may be required by the securities
laws of any jurisdiction outside the United States in which the Shares
are offered and sold and (iii) for such consents, approvals,
authorizations or qualifications which if not made or obtained, or
violations which if existing, would not adversely affect the
performance of the Selling Stockholder of its obligations hereunder.
(c) Such Selling Stockholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Stockholder
and the legal right and power, and all authorization and approval
required by law, to enter into this Agreement, the Custody Agreement
and the Power of Attorney and to sell, transfer and deliver the Shares
to be sold by such Selling Stockholder.
(d) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Stockholder and
are valid and binding agreements of such Selling Stockholder.
(e) Upon delivery of and payment for the Shares to be sold by
such Selling Stockholder pursuant to this Agreement, title to such
Shares will pass to the Underwriters free and clear of any security
interests, claims, liens, equities and other encumbrances.
(f) To the extent that any statements or omissions made in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder expressly for use therein, (i) the Registration
Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as
amended or supplemented, if applicable, will comply in all material
respects with the Securities Act
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<PAGE> 11
and the applicable rules and regulations of the Commission thereunder
and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
3. Agreements to Sell and Purchase. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller a U.S. $ ___ a share (the
"PURCHASE PRICE") the number of Firm Shares (subject to such adjustments to
eliminate fractional shares as the U.S. Representatives may determine) that
bears the same proportion to the number of Firm Shares to be sold by such Seller
as the number of Firm Shares set forth in Schedule II and Schedule III hereto
opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally and not jointly, up to 1,275,000
Additional Shares at the Purchase Price. If the U.S. Underwriters, on behalf of
the Underwriters, elect to exercise such option, the U.S. Underwriters shall so
notify the Company in writing not later than 30 days after the date of this
Agreement, which notice shall specify the number of Additional Shares to be
purchased by the U.S. Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section 5
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each U.S. Underwriter agrees, severally and not jointly, to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the U.S. Underwriters may determine) that bears the same
proportion to the total number of Additional Shares to be purchased as the
number of U.S. Firm Shares set forth in Schedule II hereto opposite the name of
such U.S. Underwriter bears to the total number of U.S. Firm Shares.
Each Seller hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) 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, lend, 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 (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other
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<PAGE> 12
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
bona fide gifts of shares of Common Stock by a Selling Stockholder if such
Selling Stockholder delivers to Morgan Stanley & Co. Incorporated a "lockup
letter", in substantially the form of Exhibit A hereto, executed by the donee,
(B) the Shares to be sold hereunder, (C) the issuance by the Company of shares
of Common Stock upon the exercise of an option or warrant or the conversion of a
security or the vesting of a performance share award outstanding on the date
hereof that are disclosed in the Prospectus or of which the Underwriters have
been advised in writing, (D) the granting by the Company of stock options and/or
performance share awards pursuant to the Company's existing employee benefit
plans provided that such options do not become exercisable during such 180-day
period, (E) the issuance by the Company of up to 5,400,000 shares of Common
Stock in connection with acquisitions or (F) transactions by any person other
than the Company relating to shares of Common Stock or other securities acquired
in open market transactions after the completion of the offering of the Shares.
In addition, each Selling Stockholder, agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 180 days after the date of the Prospectus,
make any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
4. Terms of Public Offering. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession not in excess of $_____ a share to any
Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1999,(1) or at such other time on the same or such other
date, not later than _________, 1999,(2) as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"CLOSING DATE".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the
- --------
(1) Insert date 3 business days or, in the event the offering is priced after
4:30 p.m. Eastern Time, 4 business days after date of Underwriting Agreement.
(2) Insert date 5 business days after the date inserted in accordance with note
1 above.
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<PAGE> 13
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on the date specified in the notice described in Section 3 or at such
other time on the same or on such other date, in any event not later than
_______, 1999,(3) as shall be designated in writing by you. The time and date of
such payment are hereinafter referred to as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:30 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated
in the Prospectus.
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(3) Insert date 10 business days after the expiration of the greenshoe option.
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<PAGE> 14
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 6(a)(i) above; to
the effect that Lennox Industries Inc., Armstrong Air Conditioning
Inc., Heatcraft Inc., Lennox Global Ltd., Lennox Industries (Canada)
Ltd. and LGL Europe Holding Co. (collectively, the "LENNOX SIGNIFICANT
SUBSIDIARIES") are the only "significant subsidiaries" of the Company
within the meaning of Regulation S-X under the Securities Act; to the
effect that the Company and the Lennox Significant Subsidiaries are
duly qualified to transact business and in good standing in the
jurisdictions indicated on the certificate; to the effect that the
representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date; and that the
Company has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied hereunder on
or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of Baker & Botts, L.L.P., outside counsel for the Company,
dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, and has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus;
(ii) each of Lennox Global Ltd. and LGL Europe
Holding Co. (the "DELAWARE SUBSIDIARIES") has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, and has the corporate power and authority to
own its property and to conduct its business as described in
the Prospectus;
(iii) the authorized capital stock of the Company
conforms in all material respects as to legal matters to the
description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(iv) the shares of Common Stock (including the Shares
to be sold by the Selling Stockholders) outstanding prior to
the issuance of the Shares to be sold by the Company have been
duly authorized and are validly issued, fully paid and
non-assessable;
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<PAGE> 15
(v) all of the issued shares of capital stock of the
Delaware Subsidiaries have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned of
record directly or indirectly by the Company;
(vi) the Shares to be sold by the Company have been
duly authorized and, when issued and delivered against payment
therefor in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive
or similar rights arising under the certificate of
incorporation or by-laws of the Company or the General
Corporation Law of the State of Delaware;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not violate any provision of (1)
Applicable Law (as defined below) (provided, however, that
such counsel need express no opinion with respect to
compliance with any federal or state securities or antifraud
law except as otherwise specifically stated in the opinion of
such counsel), (2) the certificate of incorporation or by-laws
of the Company, (3) any agreement or other instrument binding
upon the Company or any of its subsidiaries that is filed as
an exhibit to the Registration Statement or (4) any judgment,
order or decree of any governmental body, agency or court
which has been identified in a certificate provided by the
General Counsel of the Company as being material to the
Company and its subsidiaries, taken as a whole, except for
such violations referred to in clause (1), (2), (3) or (4)
above which, individually or in the aggregate, would not
prevent or adversely affect in any material respect the
performance by the Company of its obligations under this
Agreement or have a material adverse effect on the Company and
its subsidiaries, taken as a whole; no consent, approval,
authorization or order of, or qualification with, any
Applicable Governmental Authority (as defined below) is
required for the performance by the Company of its obligations
under this Agreement, except (x) such as have been obtained or
made or (y) such as may be required by the securities or blue
sky laws of the various states in connection with the offer
and sale of the Shares by the U.S. Underwriters;
(ix) the statements (A) in the Prospectus under the
captions "Business-Regulation," "Description of Capital Stock"
and "Shares Eligible for Future Sale" and (B) in the
Registration Statement in Item 14, in each case insofar as
such statements constitute summaries of the legal matters or
documents referred to therein, fairly present, in all material
respects, the information called for with respect to such
legal matters and documents;
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<PAGE> 16
(x) to such counsel's knowledge, relying as to
factual matters only on certificates of officers of the
Company, (A) there are no legal or governmental proceedings
pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of
the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described, and (B) there are no
statutes or regulations of the United States of America or the
State of Texas or (solely with respect to the General
Corporation Law of the State of Delaware) the State of
Delaware, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement that are
not described or filed as required;
(xi) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be
an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended; and
(xii) the Registration Statement and Prospectus
(except for financial statements (including the notes thereto
and auditors' report thereon) and schedules and other
financial and statistical data included therein as to which
such counsel need not express any opinion) appear on their
face to comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder.
Such counsel shall also include statements to the following
effect: Such counsel has participated in conferences with officers and
other representatives of the Company, representatives of the
independent public accountants and your representatives at which the
contents of the Registration Statement and Prospectus and related
matters were discussed. Although such counsel did not independently
verify such information and is not passing on, and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus
(except to the extent stated in subparagraphs (iii) and (ix) of this
paragraph (c)), such counsel advises you that, on the basis of the
foregoing (relying as to materiality as to matters of fact in part upon
officers and other representatives of the Company), no facts have come
to the attention of such counsel which lead such counsel to believe
that the Registration Statement (except for (A) the financial
statements (including the notes thereto and the auditors' reports
thereon) and schedules included therein, (B) the other financial and
statistical information included therein and (C) the exhibits thereto,
as to which such counsel has not been asked to comment), as of the time
it became effective, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (except for (x) the financial statements (including the
notes thereto
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<PAGE> 17
and the auditors' reports thereon) included therein and (y) the other
financial and statistical information included therein, as to which
such counsel has not been asked to comment), as of the issue date
thereof or as of the Closing Date, contained or contains any untrue
statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
"Applicable Laws" means the General Corporation Law of the
State of Delaware, the laws of the State of Texas and the laws of the
United States of America that, in the experience of such counsel, are
normally applicable to transactions of the type contemplated by this
Agreement. "Applicable Governmental Authority" means any governmental
body, agency or court of the United States of America or the State of
Texas or (solely with respect to the General Corporation Law of the
State of Delaware) the State of Delaware.
(d) The Underwriters shall have received on the Closing Date
an opinion of Carl E. Edwards, general counsel to the Company, dated
the Closing Date, to the effect that:
(i) each of Lennox Industries Inc., Armstrong Air
Conditioning Inc. and Heatcraft Inc. has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, and has the corporate power and authority to
own its property and to conduct its business as described in
the Prospectus;
(ii) all the issued shares of capital stock of the
Significant Subsidiaries have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned
(A) of record directly or indirectly by the Company and, (B)
to such counsel's knowledge, free and clear of all liens,
encumbrances, equities or claims that are (x) evidenced or
created by any agreement or other instrument binding on the
Company or a Significant Subsidiary or (y) material tax liens
other than for taxes not yet due and payable; and
(iii) the statements in the Registration Statement in
Item 15, insofar as such statements constitute summaries of
the legal matters or documents referred to therein, fairly
present, in all material respects, the information called for
with respect to such legal matters and documents.
(e) The Underwriters shall have received on the Closing Date
an opinion of _______________________, Canadian counsel to the Company,
dated the Closing Date, to the effect that:
(i) Lennox Industries (Canada) Ltd. has been duly
incorporated, is
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<PAGE> 18
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, and has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus; and
(ii) All of the issued shares of capital stock of
Lennox Industries (Canada) Ltd. have been duly and validly
authorized and issued, are fully paid and non-assessable and
owned of record directly or indirectly by the Company.
(f) The Underwriters shall have received on the Closing Date,
with respect to each Selling Stockholder who is a natural person (the
"INDIVIDUAL SELLING STOCKHOLDERS"), and, for the opinions set forth in
Sections (e)(iii) and (e)(vi), with respect to each Selling
Stockholder, an opinion of Baker & Botts, L.L.P., dated the Closing
Date, to the effect that:
(i) this Agreement has been duly executed and
delivered by each Individual Selling Stockholder;
(ii) the execution and delivery by each Individual
Selling Stockholder of, and the performance by such Individual
Selling Stockholder of its obligations under, this Agreement
and the Custody Agreement and Power of Attorney of such
Individual Selling Stockholder will not violate any provision
(A) of Applicable Law, (B) any agreement or other instrument
binding upon such Individual Selling Stockholder that has been
identified in a certificate provided by such Individual
Selling Stockholder as material to the transactions
contemplated by this Agreement or (C) any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over such Individual Selling Stockholder that has
been identified in a certificate provided by such Individual
Selling Stockholder as being material to such Individual
Selling Stockholder; no consent, approval, authorization or
order of, or qualification with, any Applicable Governmental
Authority is required for the performance by each Individual
Selling Stockholder of its obligations under this Agreement or
the Custody Agreement or Power of Attorney of such Individual
Selling Stockholder, except (x) such as have been obtained or
made or (y) such as may be required by the securities or blue
sky laws of the various states in connection with the offer
and sale of the Shares;
(iii) each Selling Stockholder is the sole registered
holder of the Shares to be sold by such Selling Stockholder;
(iv) each Individual Selling Stockholder has the
legal right and power, and all authorization and approval
required by law, to enter into this Agreement and the Custody
Agreement and Power of Attorney of such Individual Selling
Stockholder and to sell, transfer and deliver the Shares to be
sold by such Individual Selling Stockholder pursuant to this
Agreement;
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<PAGE> 19
(v) the Custody Agreement and the Power of Attorney
of each Individual Selling Stockholder have been duly executed
and delivered by such Individual Selling Stockholder and are
valid and binding agreements of such Individual Selling
Stockholder, except as limited by applicable bankruptcy,
moratorium, insolvency, other similar laws affecting generally
the rights of creditors, by principles of equity (regardless
of whether such enforcement is considered in a proceeding at
law or in equity) or by public policy; and
(vi) upon delivery of the Shares to be sold by each
Selling Stockholder under this Agreement and payment of the
purchase price therefor in accordance with this Agreement,
assuming that (A) the Underwriters have purchased such Shares
without notice of any "adverse claim" (within the meaning of
the Uniform Commercial Code) and (B) certificates evidencing
such Shares have been registered in the name of the
Underwriters or certificates evidencing the same which are
registered in the name of such Selling Stockholder have been
delivered to the Underwriters duly endorsed for transfer (or
accompanied by duly executed stock powers or other forms of
assignment in proper form for transfer), the Underwriters will
acquire such shares free of any "adverse claim" (within the
meaning of the Uniform Commercial Code).
(g) The Underwriters shall have received on the Closing Date,
with respect to the following Selling Stockholders: the Robert W.
Norris Revocable Trust, the Christina Marie Damman 1991 Revocable Trust
and the Nicholas W. Norris 1991 Revocable Trust, an opinion of Peabody
& Arnold, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of each such Selling
Stockholder;
(ii) the execution and delivery by each such Selling
Stockholder of, and the performance by such Selling
Stockholder of its obligations under, this Agreement and the
Custody Agreement and Power of Attorney of such Selling
Stockholder will not violate any provision (A) of the laws of
the State of Massachusetts and the laws of the United States
of America that, in the experience of such counsel, are
normally applicable to transactions of the type contemplated
by this Agreement, (B) the trust agreement, testamentary
document or similar document that governs the affairs of such
Selling Stockholder, (C) any agreement or other instrument
binding upon such Selling Stockholder that has been identified
in a certificate provided by such Selling Stockholder as
material to the transactions contemplated by this Agreement or
(D) any judgment, order or decree of any governmental body,
agency or court having jurisdiction over such Selling
Stockholder that has been identified in a certificate provided
by such Selling Stockholder as being material to such Selling
Stockholder; no consent, approval,
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<PAGE> 20
authorization or order of, or qualification with, any
governmental body, agency or court of the United States of
America or the State of Massachusetts is required for the
performance by each such Selling Stockholder of its
obligations under this Agreement or the Custody Agreement or
Power of Attorney of such Selling Stockholder, except (x) such
as have been obtained or made or (y) such as may be required
by the securities or blue sky laws of the various states in
connection with the offer and sale of the Shares;
(iii) each such Selling Stockholder has the legal
right and power, and all authorization and approval required
by law, to enter into this Agreement and the Custody Agreement
and Power of Attorney of such Selling Stockholder and to sell,
transfer and deliver the Shares to be sold by such Selling
Stockholder pursuant to this Agreement;
(iv) the Custody Agreement and the Power of Attorney
of each such Selling Stockholder have been duly executed and
delivered by such Selling Stockholder and are valid and
binding agreements of such Selling Stockholder, except as
limited by applicable bankruptcy, moratorium, insolvency,
other similar laws affecting generally the rights of
creditors, by principles of equity (regardless of whether such
enforcement is considered in a proceeding at law or in equity)
or by public policy;
(h) The Underwriters shall have received on the Closing Date,
with respect to the following Selling Stockholder: the David Anderson
Trust, an opinion of Hahn & Hahn, dated the Closing Date, to the effect
that:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Stockholder;
(ii) the execution and delivery by such Selling
Stockholder of, and the performance by such Selling
Stockholder of its obligations under, this Agreement and the
Custody Agreement and Power of Attorney of such Selling
Stockholder will not violate any provision (A) of the laws of
the State of California and the laws of the United States of
America that, in the experience of such counsel, are normally
applicable to transactions of the type contemplated by this
Agreement, (B) the trust agreement, testamentary document or
similar document that governs the affairs of such Selling
Stockholder, (C) any agreement or other instrument binding
upon such Selling Stockholder that has been identified in a
certificate provided by such Selling Stockholder as material
to the transactions contemplated by this Agreement or (D) any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Stockholder that
has been identified in a certificate provided by such Selling
Stockholder as being material to such Selling Stockholder; no
consent, approval, authorization or order
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<PAGE> 21
of, or qualification with, any governmental body, agency or
court of the United States of America or the State of
California is required for the performance by each such
Selling Stockholder of its obligations under this Agreement or
the Custody Agreement or Power of Attorney of such Selling
Stockholder, except (x) such as have been obtained or made or
(y) such as may be required by the securities or blue sky laws
of the various states in connection with the offer and sale of
the Shares;
(iii) such Selling Stockholder has the legal right
and power, and all authorization and approval required by law,
to enter into this Agreement and the Custody Agreement and
Power of Attorney of such Selling Stockholder and to sell,
transfer and deliver the Shares to be sold by such Selling
Stockholder pursuant to this Agreement; and
(iv) the Custody Agreement and the Power of Attorney
of each such Selling Stockholder have been duly executed and
delivered by such Selling Stockholder and are valid and
binding agreements of such Selling Stockholder, except as
limited by applicable bankruptcy, moratorium, insolvency,
other similar laws affecting generally the rights of
creditors, by principles of equity (regardless of whether such
enforcement is considered in a proceeding at law or in equity)
or by public policy.
(i) The Underwriters shall have received on the Closing Date
an opinion of Fulbright & Jaworski L.L.P., counsel for the
Underwriters, dated the Closing Date, covering the matters referred to
in Sections 6(c)(vi), 6(c)(vii), 6(c)(ix) (but only as to the
statements in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 6(c)(xii) above and the penultimate paragraph of
Section 6(c) above.
With respect to Section 6(c) above, Baker & Botts, L.L.P. may
rely upon an opinion or opinions of counsel for any Selling
Stockholders and, with respect to factual matters and to the extent
such counsel deems appropriate, upon the representations of each
Selling Stockholder contained herein and in the Custody Agreement and
Power of Attorney of such Selling Stockholder and in other documents
and instruments; provided that (A) each such counsel for the Selling
Stockholders is satisfactory to the U.S. Underwriters' counsel, (B) a
copy of each opinion so relied upon is delivered to the U.S.
Underwriters and is in form and substance satisfactory to the U.S.
Underwriters' counsel, and (C) copies of such Custody Agreements and
Powers of Attorney and of any such other documents and instruments
shall be delivered to the U.S. Underwriters and shall be in form and
substance satisfactory to the U.S. Underwriters' counsel.
The opinions of Baker & Botts, L.L.P. described in Sections
6(c) and 6(f) above, the opinion of Carl E. Edwards described in
Section 6(d) above, the opinion of [Canadian counsel] described in
Section 6(e) above, the opinion of Hahn & Hahn described in
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Section 6(g) above, the opinion of Peabody & Arnold described in
Section 6(h) above and any opinions of counsel for any Selling
Stockholder referred to in the immediately preceding paragraph shall
be rendered to the Underwriters at the request of the Company or one
or more of the Selling Stockholders, as the case may be, and shall so
state therein.
(j) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory
to the Underwriters, from Arthur Andersen LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(k) The "lock-up" agreements, each substantially in the form
of Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as the
U.S. Representatives may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the
Additional Shares.
7. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, such number of signed
copies of the Registration Statement (including exhibits thereto) as
you may reasonably request and for delivery to each other Underwriter a
conformed copy of the Registration Statement (without exhibits thereto)
and to furnish to you in New York City, without charge, prior to 5:00
p.m. New York City time on the business day next succeeding the date of
this Agreement and during the period mentioned in Section 7(c) below,
as many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
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<PAGE> 23
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus
is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare,
file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will
furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or blue sky laws of such jurisdictions as you shall
reasonably request; provided, however, that the Company shall not be
obligated (i) to qualify as a foreign corporation in any jurisdiction
in which it is not so qualified, (ii) to take any action that would
subject it to taxation in any jurisdiction or (iii) to execute a
consent to service of process under the laws of any jurisdiction
(except service of process with respect to the offering and sale of
Shares).
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending [SEPTEMBER 30,] 2000 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) That in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the National Association of Securities Dealers, Inc.
(the "NASD") or the NASD rules from sale, transfer, assignment, pledge
or hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Morgan Stanley will notify
the Company as to which Participants will need to be so restricted. The
Company will direct the transfer agent of the Common Stock to place
stop transfer restrictions upon such securities for such period of
time.
(g) To pay all fees and disbursements of Belgian, Canadian and
Australian counsel incurred by the Underwriters in connection with the
Directed Share Program and stamp duties, similar taxes or duties or
other taxes, if any, incurred by the Underwriters in connection with
the Directed Share Program.
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<PAGE> 24
(h) Furthermore, the Company covenants with Morgan Stanley
that the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in
which the Directed Shares are offered in connection with the Directed
Share Program.
8. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Stockholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any blue
sky or legal investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
(not in excess of $2,000) and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the blue sky or legal
investment memorandum, (iv) all filing fees and the fees (not in excess of
$7,500) and reasonable disbursements of counsel to the Underwriters (including
counsel fees incurred on behalf of or disbursements by Morgan Stanley in its
capacity as a "qualified independent underwriter") incurred in connection with
the review and qualification of the offering of the Shares by the NASD, (v) all
fees and expenses incurred in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to listing the Shares on the New York Stock Exchange and
other national securities exchanges and foreign stock exchanges, (vi) the cost
of printing certificates representing the Shares, (vii) the costs and charges of
any transfer agent, registrar or depositary of the Shares, (viii) the costs and
expenses of the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered in
connection with the road show, (ix) all fees and disbursements of Belgian,
Canadian and Australian counsel incurred by the Underwriters in connection with
the Directed Share Program and stamp duties, similar taxes or duties or other
taxes, if any, incurred by the Underwriters in connection with the Directed
Share Program, and (x) all other costs and expenses incident to the performance
of the obligations of the Company hereunder for which provision is not otherwise
made in this Section. It is understood, however, that, except as
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<PAGE> 25
provided in this Section, Section 9, and the last paragraph of Section 11 below,
the Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
The provisions of this Section shall not supersede or otherwise affect
any agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
9. Indemnity and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), from and against any and all losses, claims, damages
and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages or liabilities
purchased Shares, or any person controlling such Underwriter, if a copy
of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required
by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities, unless such
failure is the result of noncompliance by the Company with Section 7(a)
hereof.
The Company also agrees to indemnify and hold harmless Morgan
Stanley & Co. Incorporated ("MORGAN STANLEY") and each person, if any,
who controls Morgan Stanley within the meaning of either Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages, liabilities and judgments incurred as a result
of Morgan Stanley's participation as a "qualified independent
underwriter" within the meaning of Rule 2720 of the National
Association of Securities Dealers'
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<PAGE> 26
Conduct Rules in connection with the offering of the Shares, except
for any losses, claims, damages, liabilities and judgments resulting
from Morgan Stanley's, or such controlling person's, willful
misconduct.
(b) The Company agrees to indemnify and hold harmless Morgan
Stanley, each other Underwriter that sells Shares pursuant to the
Directed Share Program and each of their affiliates (including each
person, if any, that controls Morgan Stanley or such Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act) (collectively, the "DIRECTED SHARE UNDERWRITERS")
from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action
or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper
material prepared by or with the consent of the Company for
distribution in foreign jurisdictions in connection with the Directed
Share Program attached to the Prospectus or any preliminary prospectus,
or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statement therein, when considered in conjunction with the Prospectus
or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the
shares which, immediately following the effectiveness of the
Registration Statement, were subject to a properly confirmed agreement
to purchase; or (iii) related to, arising out of, or in connection with
the Directed Share Program, provided that the Company shall not be
responsible under this subparagraph (iii) for any losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross
negligence of Directed Share Underwriters; provided, however, that the
foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Directed Share
Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Shares, or any affiliate of such
Directed Share Underwriter, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on
behalf of such Directed Share Underwriter to such person, if required
by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities, unless such
failure is the result of noncompliance by the Company with Section 7(a)
hereof.
(c) Each Selling Stockholder agrees, severally and not
jointly, to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any
such action or claim) caused by any
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<PAGE> 27
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if
the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but only with reference to
information relating to such Selling Stockholder furnished to the
Company in writing by or on behalf of such Selling Stockholder
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto;
provided, however, that the foregoing indemnity agreement with respect
to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses,
claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 7(a) hereof; provided,
further, however, that with respect to any amount due an indemnified
person under this paragraph (c), each Selling Stockholder shall be
liable only to the extent of the net proceeds received by such Selling
Stockholder from such Selling Stockholder's Shares.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Stockholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the
Company in writing by or on behalf of such Underwriter through you
expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto.
(e) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 9(a), 9(b), 9(c) or
9(d), such person (the "INDEMNIFIED PARTY") shall promptly
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<PAGE> 28
notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such
proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named
parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in
respect of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same jurisdiction, be
liable for (x) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if
any, who control any Underwriter within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act, (y) the
fees and expenses of more than one separate firm (in addition to any
local counsel) for the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the
Company within the meaning of either such Section and (z) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all Selling Stockholders and all persons, if any, who
control any Selling Stockholder within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as
they are incurred. Notwithstanding anything contained herein to the
contrary, if indemnity may be sought pursuant to the second paragraph
of Section 9(a) hereof in respect of such action or proceeding, then in
addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses
of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley in its capacity as a "qualified independent
underwriter" and all persons, if any, who control Morgan Stanley within
the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act. In the case of any such separate firm for the
Underwriters and such control persons of any Underwriters, such firm
shall be designated in writing by Morgan Stanley. In the case of any
such separate firm for the Company, and such directors, officers and
control persons of the Company, such firm shall be designated in
writing by the Company. In the case of any such separate firm for the
Selling Stockholders and such control persons of any Selling
Stockholders, such firm shall be designated in writing by the persons
named as attorneys-in-fact for the Selling Stockholders under the
Powers of Attorney. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such
settlement or judgment. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any
pending or
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threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder
by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(f) To the extent the indemnification provided for in Section
9(a), 9(b), 9(c) or 9(d) is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph,
in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received
by the indemnifying party or parties on the one hand and the
indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause 9(f)(i) above is
not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 9(f)(i)
above but also the relative fault of the indemnifying party or parties
on the one hand and of the indemnified party or parties on the other
hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by
the Sellers on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the
same respective proportions as the net proceeds from the offering of
the Shares (before deducting expenses) received by each Seller and the
total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of
the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Sellers or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute
pursuant to this Section 9 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(g) The Sellers and the Underwriters agree that it would not
be just or equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations
referred to in Section 9(f). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9,
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(i) no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds
the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and (ii) no Selling Stockholder shall be
required to contribute any amount in excess of the amount by which the
proceeds received by such Selling Stockholder in connection herewith
exceed the aggregate amount such Selling Stockholder has otherwise been
requested to pay pursuant hereto. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 9 are not exclusive and shall not limit
any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(h) The indemnity and contribution provisions contained in
this Section 9 and the representations, warranties and other statements
of the Company and the Selling Stockholders contained in this Agreement
shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter, any person controlling any Underwriter, any
affiliate of any Underwriter that is selling Shares pursuant to the
Directed Share Program, any Selling Stockholder or any person
controlling any Selling Stockholder, or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
10. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more
-29-
<PAGE> 31
of the Underwriters shall fail or refuse to purchase Shares that it has or they
have agreed to purchase hereunder on such date, and the aggregate number of
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated
severally in the proportions that the number of Firm Shares set forth opposite
their respective names in Schedule II and Schedule III bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 11 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you, the Company and
the Selling Stockholders for the purchase of such Firm Shares are not made
within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholders. In any such case either you or the relevant Sellers shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. If, on the Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of any Seller to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
-30-
<PAGE> 32
13. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
LENNOX INTERNATIONAL INC.
By:
--------------------------------
Name:
Title:
The Selling Stockholders
named in Schedule I hereto,
acting severally
By:
--------------------------------
Attorney-in-Fact
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
CREDIT SUISSE FIRST BOSTON CORPORATION
WARBURG DILLON READ LLC, a subsidiary of UBS AG
Acting severally on behalf of themselves
and the several U.S. Underwriters named
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
--------------------------------
Name: John F. Spence
Title: Principal
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
UBS AG, acting through its division Warburg Dillon Read
Acting severally on behalf of themselves and the
several International Underwriters named in
Schedule III hereto.
By: Morgan Stanley & Co. International Limited
By:
--------------------------------
Name: John F. Spence
Title: Principal
-31-
<PAGE> 33
SCHEDULE I
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING STOCKHOLDER TO BE SOLD
<S> <C>
David Anderson Trust ........................................... 165,000
David W. Zink .................................................. 81,675
Frank E. Zink .................................................. 66,000
Eileen F. Murphy ............................................... 33,000
Robert W. Norris Revocable Trust ............................... 33,000
Christina Marie Damman 1991 Revocable Trust .................... 13,200
Nicholas W. Norris 1991 Revocable Trust ........................ 9,900
Zink Family Irrevocable Trust .................................. 3,399
Thomas R. Thompson ............................................. 1,980
Steven P. Miller ............................................... 1,683
David S. Miller ................................................ 1,683
William N. Consler ............................................. 990
-------
Total Firm Shares ....................................
=======
</TABLE>
<PAGE> 34
SCHEDULE II
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
U. S. UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated.................................
Credit Suisse First Boston Corporation ...........................
Warburg Dillon Read LLC, a subsidiary of UBS AG...................
[NAMES OF OTHER UNDERWRITERS]
--------------
Total U.S. Firm Shares........
==============
</TABLE>
<PAGE> 35
SCHEDULE III
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
INTERNATIONAL UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. International Limited..........................
Credit Suisse First Boston (Europe) Limited.........................
UBS AG, acting through its division Warburg Dillon Read.............
[NAMES OF OTHER UNDERWRITERS]
---------------
Total International Firm Shares ........
===============
</TABLE>
<PAGE> 36
EXHIBIT A
FORM OF LOCK-UP LETTER
________________, 1999
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Warburg Dillon Read LLC
Morgan Stanley & Co. International Limited
Credit Suisse First Boston (Europe) Limited
UBS AG acting through its division
Warburg Dillon Read
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. Incorporated and
Morgan Stanley & Co. International Limited (collectively "MORGAN STANLEY")
propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT")
with Lennox International Inc., a Delaware corporation (the "COMPANY"),
providing for the public offering (the "PUBLIC OFFERING") by the several
Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of ______________
shares (the "SHARES") of the common stock, par value $.01 per share, of the
Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) 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, lend 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 (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise; PROVIDED, HOWEVER, that the undersigned shall be permitted to make
a bona fide gift of shares of Common Stock during such period if the undersigned
delivers to Morgan Stanley a letter substantially similar to this letter
executed by the donee. The foregoing sentence shall not apply to (a) the sale of
any Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date
<PAGE> 37
hereof and ending 180 days after the date of the Prospectus, make any demand for
or exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
--------------------------------
(Name)
--------------------------------
(Address)
<PAGE> 1
EXHIBIT 5.1
BAKER & BOTTS, L.L.P.
2001 ROSS AVENUE
DALLAS, TEXAS 75201
July 27, 1999
Lennox International Inc.
2100 Lake Park Boulevard
Richardson, Texas 75080
Ladies and Gentlemen:
As set forth in the Registration Statement on Form S-1
(Registration No. 333-75725), as amended (the "Registration Statement"), filed
by Lennox International Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"), relating to the issuance and sale of up to an
aggregate of 9,775,000 shares (the "Shares") of its Common Stock, par value
$0.01 per share, the validity of the Shares is being passed upon for you by us.
The Shares include (i) 8,088,490 Shares being issued and sold by the Company,
(ii) 411,510 Shares being sold by the selling stockholders identified in the
Registration Statement (the "Selling Stockholders") and (iii) 1,275,000 Shares
that may be issued and sold by the Company pursuant to an over-allotment option
(the "Over-Allotment Option") granted to the Underwriters named in the
Registration Statement. The Shares identified in clauses (i) and (iii) above are
hereinafter referred to as the "Company Shares" and the Shares identified in
clause (ii) above are hereinafter referred to as the "Selling Stockholder
Shares." At your request, this opinion is being furnished to you for filing as
Exhibit 5.1 to the Registration Statement.
In our capacity as counsel to the Company in connection with
the registration and proposed issuance and sale of the Shares, we have
familiarized ourselves with (i) the Company's Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation"), as filed as an
exhibit to the Registration Statement and (ii) the Company's Amended and
Restated Bylaws, as filed as an exhibit to the Registration Statement, and have
examined the originals, or copies certified or otherwise identified, of
corporate records of the Company, including minutes of the Company, certificates
of public officials and of representatives of the Company, statutes and other
instruments and documents as a basis for the opinions hereinafter expressed. In
giving such opinions, we have relied upon certificates of public officials and
representatives of the Company with respect to the accuracy of the material
factual matters contained in such certificates.
Based on our examination as aforesaid, and subject to the
assumptions, limitations and qualifications hereinafter set forth, we are of the
opinion that:
<PAGE> 2
Lennox International Inc. Page 2 July 27, 1999
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware.
2. When the Board of Directors of the Company or the duly
authorized Pricing Committee of the Board of Directors of the Company
shall have fixed the price at which the Shares are to be sold all
requisite corporate action on the part of the Company with respect to
the authorization of the Company Shares will have been taken. Upon the
occurrence of the event specified in the immediately preceding sentence
and upon the sale of the Company Shares for the price approved by the
Board of Directors of the Company or the duly authorized Pricing
Committee of the Board of Directors of the Company, the Company Shares
will be validly issued, fully paid and nonassessable.
3. The Selling Stockholder Shares have been duly authorized
and validly issued and are fully paid and nonassessable.
The opinions set forth above are limited to matters governed
by the General Corporation Law of the State of Delaware as in effect on the date
hereof.
We hereby consent to the filing of this opinion with the
Securities and Exchange Commission as an exhibit to the Registration Statement
and to the reference to us under the caption "Legal Matters" in the Prospectus
forming a part of the Registration Statement. In giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Very truly yours,
/s/ Baker & Botts, L.L.P.
<PAGE> 1
EXHIBIT 10.25
================================================================================
LENNOX INTERNATIONAL INC.
---------------------------------------------------------
REVOLVING CREDIT FACILITY AGREEMENT
Dated as of July 29, 1999
---------------------------------------------------------
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
with
CHASE SECURITIES INC.,
as Lead Book Runner and an Arranger
and
WACHOVIA SECURITIES, INC.
as an Arranger
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 1. DEFINITIONS......................................................................................1
SECTION 1.01. Defined Terms........................................................................1
SECTION 1.02. Terms Generally.....................................................................14
ARTICLE 2. THE CREDITS.....................................................................................14
SECTION 2.01. Commitments.........................................................................14
SECTION 2.02. Loans...............................................................................14
SECTION 2.03. Borrowing Procedure.................................................................16
SECTION 2.04. Fees 16
SECTION 2.05. Repayment of Loans; Evidence of Indebtedness........................................17
SECTION 2.06. Interest on Loans; Margin and Fees..................................................18
SECTION 2.07. Default Interest....................................................................19
SECTION 2.08. Alternate Rate of Interest..........................................................19
SECTION 2.09. Termination and Reduction of Commitments............................................20
SECTION 2.10. Prepayment Including Prepayment as a Result of a Change of Control..................20
SECTION 2.11. Reserve Requirements; Change in Circumstances.......................................22
SECTION 2.12. Change in Legality..................................................................24
SECTION 2.13. Pro Rata Treatment..................................................................24
SECTION 2.14. Sharing of Setoffs..................................................................24
SECTION 2.15. Payments............................................................................25
SECTION 2.16. Taxes 25
SECTION 2.17. Assignment of Commitments Under Certain Circumstances...............................28
SECTION 2.18. Payments by Agent to the Lenders....................................................28
ARTICLE 3. REPRESENTATIONS AND WARRANTIES..................................................................29
SECTION 3.01. Organization; Powers................................................................29
SECTION 3.02. Authorization.......................................................................29
SECTION 3.03. Enforceability......................................................................29
SECTION 3.04. Governmental Approvals..............................................................29
SECTION 3.05. Organization and Ownership of Shares of Subsidiaries................................30
SECTION 3.06. Financial Statements................................................................30
SECTION 3.07. Litigation; Observance of Statutes and Orders.......................................31
SECTION 3.08. Taxes...............................................................................31
SECTION 3.09. Title to Property; Leases...........................................................31
SECTION 3.10. Licenses, Permits, etc..............................................................31
SECTION 3.11. Compliance with ERISA...............................................................32
SECTION 3.12. Use of Proceeds; Termination of Existing Credit Agreements; Margin Regulation.......32
SECTION 3.13. Existing Indebtedness...............................................................33
SECTION 3.14. Foreign Assets Control Regulations, etc.............................................33
SECTION 3.15. Status under Certain Statutes.......................................................34
SECTION 3.16. No Material Misstatements...........................................................34
</TABLE>
TABLE OF CONTENTS, Page i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3.17. Year 2000 Matters...................................................................34
ARTICLE 4. CONDITIONS OF LENDING...........................................................................34
SECTION 4.01. All Borrowings......................................................................34
SECTION 4.02. Effective Date......................................................................35
ARTICLE 5. AFFIRMATIVE AND NEGATIVE COVENANTS..............................................................36
SECTION 5.01. Compliance with Law.................................................................36
SECTION 5.02. Insurance...........................................................................36
SECTION 5.03. Maintenance of Properties...........................................................37
SECTION 5.04. Payment of Taxes....................................................................37
SECTION 5.05. Corporate Existence, etc............................................................37
SECTION 5.06. Most Favored Lender Status..........................................................38
SECTION 5.07. Covenant to Secure Loans Equally....................................................38
SECTION 5.08. Environmental Matters...............................................................39
SECTION 5.09. Transactions with Affiliates........................................................39
SECTION 5.10. Merger, Consolidation, etc..........................................................39
SECTION 5.11. Sale of Assets, etc.................................................................40
SECTION 5.12. Incurrence of Indebtedness..........................................................41
SECTION 5.13. Liens...............................................................................42
SECTION 5.14. Restricted Payments.................................................................43
SECTION 5.15. Financial Covenants.................................................................43
SECTION 5.16. Limitation on Dividend Restrictions, etc............................................44
SECTION 5.17. Limitation on Restricted Indebtedness...............................................44
SECTION 5.18. Preferred Stock of Restricted Subsidiaries..........................................44
SECTION 5.19. No Redesignation of Restricted Subsidiaries.........................................44
SECTION 5.20. Financial and Business Information..................................................45
SECTION 5.21 Inspection; Confidentiality.........................................................48
SECTION 5.22 Books and Records...................................................................49
ARTICLE 6. EVENTS OF DEFAULT...............................................................................49
ARTICLE 7. THE ADMINISTRATIVE AGENT........................................................................51
ARTICLE 8. MISCELLANEOUS...................................................................................54
SECTION 8.01. Notices.............................................................................54
SECTION 8.02. Survival of Agreement...............................................................55
SECTION 8.03. Binding Effect......................................................................55
SECTION 8.04. Successors and Assigns..............................................................55
SECTION 8.05. Expenses; Indemnity.................................................................58
SECTION 8.06. Right of Setoff.....................................................................59
SECTION 8.07. Applicable Law......................................................................60
SECTION 8.08. Waivers; Amendment..................................................................60
SECTION 8.09. Entire Agreement....................................................................60
SECTION 8.10. Severability........................................................................61
SECTION 8.11. Counterparts........................................................................61
SECTION 8.12. Headings............................................................................61
SECTION 8.13. Interest Rate Limitation............................................................61
SECTION 8.14. Confidentiality.....................................................................62
SECTION 8.15. Non-Application of Chapter 346 of the Texas Finance Code............................63
SECTION 8.16. Waiver of Jury Trial................................................................63
</TABLE>
TABLE OF CONTENTS, Page ii
<PAGE> 4
EXHIBITS AND SCHEDULES
Exhibit A Form of Borrowing Request
Exhibit B Form of Assignment and Acceptance
Exhibit C Matters to be addressed by Opinion of Counsel
Schedule 2.01 Commitments
Schedule 3.05 Subsidiaries
Schedule 3.06 Financial Statements
Schedule 3.13 Indebtedness
TABLE OF CONTENTS, Page iii
<PAGE> 5
REVOLVING CREDIT FACILITY AGREEMENT
REVOLVING CREDIT FACILITY AGREEMENT (the "Agreement") dated as of July
29, 1999, and effective as of the Effective Date, among LENNOX INTERNATIONAL
INC., a Delaware corporation ("Borrower"); the lenders listed in Schedule 2.01
(together with their successors and assigns, the "Lenders"), CHASE BANK OF
TEXAS, NATIONAL ASSOCIATION, a national banking association, ("Chase"), as
administrative agent for the Lenders (in such capacity, the "Administrative
Agent"), WACHOVIA BANK, N.A., a national banking association ("Wachovia"), as
syndication agent (in such capacity, the "Syndication Agent") and THE BANK OF
NOVA SCOTIA, as documentation agent. (The Administrative Agent and the
Syndication Agent are referred to herein together as the "Agents").
The Lenders have been requested to extend credit to the Borrower to
enable it, upon the terms and subject to the conditions set forth herein, to
borrow on a revolving credit basis on and after the Effective Date and at any
time prior to the Maturity Date (as hereinafter defined) an aggregate principal
amount not in excess of the amount set forth herein at any time outstanding. The
proceeds of any such borrowings are to be used to refinance existing
indebtedness, to make acquisitions, for capital expenditures and working capital
and for other general corporate purposes. The Lenders are willing to extend such
credit on the terms and subject to the conditions herein set forth.
Accordingly, the parties hereto agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the following
terms shall have the meanings specified below:
"ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.
"ABR Loan" shall mean any Loan bearing interest at a rate determined by
reference to the Alternate Base Rate in accordance with the provisions of
Article 2.
"Additional Covenant" shall have the meaning assigned in Section 5.06.
"Additional Default" shall have the meaning assigned in Section 5.06.
"Adjusted EBITDA" shall mean, for any period (the "Subject Period"),
the sum of (a) EBITDA plus (b), to the extent not included in EBITDA, all
Acquired EBITDA. The term "Acquired EBITDA" shall mean, with respect to any
Person acquired, or substantially all of
REVOLVING CREDIT FACILITY AGREEMENT -- Page 1
<PAGE> 6
whose assets have been acquired, by the Borrower or any Restricted Subsidiary
during the Subject Period (herein a "Target"), the total of the following for
the portion of the Subject Period prior to the acquisition of such Person or its
assets (the "Test Period") determined on a consolidated basis in accordance with
GAAP consistently applied from financial statements audited by a certified
public accountant satisfactory to the Administrative Agent and covering the Test
Period (provided that audited financial statements are not required if the
annual earnings before interest, taxes, depreciation and amortization of the
Target for the completed twelve month period prior to its acquisition is less
than $5,000,000, calculated in the same manner as set forth in the definition of
Acquired EBITDA but for such twelve month period) and otherwise on a basis
acceptable to the Administrative Agent:
(i) the consolidated net income (or net loss) of the Target from
operations, excluding the following:
(a) the proceeds of any life insurance policy;
(b) any gain arising from (1) the sale or other disposition of
any assets (other than current assets) to the extent that the aggregate
amount of gains exceeds the aggregate amount of losses from the sale,
abandonment or other disposition of assets (other than current assets),
(2) any write-up of assets, or (3) the acquisition by the Target of its
outstanding securities constituting Indebtedness;
(c) any amount representing the interest of the Target in the
undistributed earnings of any other Person;
(d) any earnings of any other Person accrued prior to the date
it becomes a Subsidiary of the Target or is merged into or consolidated
with the Target or a Subsidiary of Target and any earnings, prior to
the date of acquisition, of any other Person acquired in any other
manner; and
(e) any deferred credit (or amortization of a deferred credit)
arising from the acquisition of any Person; plus
(ii) to the extent deducted in computing such consolidated net income
(or loss), without duplication, the sum of (a) any deduction for (or less any
gain from) income or franchise taxes included in determining such consolidated
net income (or loss); plus (b) interest expense (including the interest portion
of Capital Leases) deducted in determining such consolidated net income (or
loss); plus (c) amortization and depreciation expense deducted in determining
such consolidated net income (or loss); minus,
(iii) to the extent added in computing such consolidated net income (or
loss) all income that has been included in the calculation of such net income
for such period that will be eliminated in the future after the acquisition of
such Target, as approved by the Administrative Agent.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 2
<PAGE> 7
"Adjustment Date" shall have the meaning assigned to it in Section
2.06(d).
"Administrative Fees" shall have the meaning assigned to such term in
Section 2.04(b).
"Administrative Questionnaire" shall mean an administrative
questionnaire in the form provided by the Administrative Agent.
"Affiliate" shall mean, at any time, and with respect to any Person,
any other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person. As used in this definition, "Control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. Unless the context otherwise clearly
requires, any reference to an "Affiliate" is a reference to an Affiliate of the
Borrower.
"Alternate Base Rate" shall mean, for any day, a rate per annum
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of
(a) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, and
(b) the Prime Rate in effect on such day. For purposes hereof, "Prime Rate"
shall mean the rate of interest per annum publicly announced from time to time
by Chase as its prime rate in effect at its principal office in Houston, Texas;
each change in the Prime Rate shall be effective on the date such change is
publicly announced as effective; and "Federal Funds Effective Rate" shall mean,
for any day, the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as released on the next succeeding Business Day by the Federal
Reserve Bank of Dallas, or, if such rate is not so released for any day which is
a Business Day, the arithmetic average (rounded upwards to the next 1/100th of
1%), as determined by Chase, of the quotations for the day of such transactions
received by Chase from three Federal funds brokers of recognized standing
selected by it. If for any reason Chase shall have determined (which
determination shall be conclusive absent manifest error; provided that Chase,
shall, upon request, provide to the Borrower a certificate setting forth in
reasonable detail the basis for such determination) that it is unable to
ascertain the Federal Funds Effective Rate for any reason, including the
inability of Chase to obtain sufficient quotations in accordance with the terms
hereof, the Alternate Base Rate shall be determined without regard to clause (a)
of the first sentence of this definition until the circumstances giving rise to
such inability no longer exist. Any change in the Alternate Base Rate due to a
change in the Prime Rate or the Federal Funds Effective Rate shall be effective
on the effective date of such change in the Prime Rate or the Federal Funds
Effective Rate, respectively.
"Applicable Governmental Authority" means, a United States Governmental
Authority or the government of any jurisdiction in which the Borrower or any
Subsidiary conducts all or any part of its business, or which asserts
jurisdiction over any properties of the Borrower or any Subsidiary and any
agency, authority, instrumentality, regulatory body, court, central bank or
other entity exercising executive legislative, judicial, taxing, regulatory or
administrative powers or functions of, or pertaining to, any such government.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 3
<PAGE> 8
"Applicable Margin" shall have the meaning assigned in Section 2.06(d).
"Assignment and Acceptance" shall mean an assignment and acceptance
entered into by a Lender and an assignee in substantially the form of Exhibit B.
"Board" shall mean the Board of Governors of the Federal Reserve System
of the United States.
"Board of Directors" shall mean the Board of Directors of Borrower or
any duly authorized committee thereof.
"Borrower" shall have the meaning given such term in the preamble
hereto.
"Borrower Payments" shall have the meaning given such term in Section
2.16(a).
"Borrowing" shall mean a group of Loans of a single Type made by the
Lenders on a single date and, with respect to Eurodollar Loans, as to which a
single Interest Period is in effect.
"Borrowing Request" shall mean a request made pursuant to Section 2.03
in the form of Exhibit A.
"Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York or the State of
Texas) on which banks are open for business in New York City, New York and
Houston, Texas; provided, however, that, when used in connection with a
Eurodollar Loan, the term "Business Day" shall also exclude any day on which
banks are not open for dealings in dollar deposits in the London interbank
market.
"Calculation Period" shall have the meaning assigned it in Section
2.06(d).
"Capital Lease Obligation" shall mean, with respect to any Person and a
Capital Lease, the amount of the obligation of such Person as the lessee under
such Capital Lease which would, in accordance with GAAP, appear as a liability
on a balance sheet of such Person.
"Capital Lease" shall mean, at any time, a lease with respect to which
the lessee is required concurrently to recognize the acquisition of an asset and
the incurrence of a liability in accordance with GAAP.
"Cash Flow" shall have the meaning assigned it in Section 5.15(a).
"Change of Control" shall have the meaning assigned it in Section
2.10(c).
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder from time to
time.
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"Commitment" shall mean, with respect to each Lender, the Commitment of
such Lender set forth in Schedule 2.01 hereto, or in the most recent Assignment
and Acceptance executed by such Lender, as such Commitment may be permanently
terminated or reduced from time to time pursuant to Section 2.09. The Commitment
of each Lender shall automatically and permanently terminate on the Maturity
Date if not terminated earlier pursuant to the terms hereof.
"Commitment Fee" shall have the meaning assigned to such term in
Section 2.04(a).
"Commitment Fee Percentage" shall have the meaning assigned to it in
Section 2.06(d).
"Compliance Certificate" shall mean the certificate delivered pursuant
to Section 5.20(g).
"Confidential Information" shall have the meaning assigned it in
Section 8.14.
"Consolidated Assets" shall mean the total assets of the Borrower and
its Restricted Subsidiaries which would be shown as assets on a consolidated
balance sheet of the Borrower and its Restricted Subsidiaries prepared in
accordance with GAAP, after eliminating all amounts properly attributable to
minority interests, if any, in the stock and surplus of Restricted Subsidiaries.
"Consolidated Capitalization" shall mean, at any time, the sum of
Consolidated Net Worth and Consolidated Indebtedness.
"Consolidated Indebtedness" shall mean, as of any date of
determination, the total of all Indebtedness of the Borrower and its Restricted
Subsidiaries outstanding on such date, after eliminating all offsetting debits
and credits between the Borrower and its Restricted Subsidiaries and all other
items required to be eliminated in the course of the preparation of consolidated
financial statements of the Borrower and its Restricted Subsidiaries in
accordance with GAAP.
"Consolidated Net Income" shall mean, for any period, the net income
(or net loss) of the Borrower and its Restricted Subsidiaries for such period,
determined in accordance with GAAP, excluding
(a) the proceeds of any life insurance policy;
(b) any gain arising from (1) the sale or other disposition of any
assets (other than current assets) to the extent that the aggregate amount of
gains exceeds the aggregate amount of losses from the sale, abandonment or other
disposition of assets (other than current assets), (2) any write-up of assets,
or (3) the acquisition by the Borrower or any Restricted Subsidiary of its
outstanding securities constituting Indebtedness;
(c) any amount representing the interest of the Borrower or any
Restricted Subsidiary in the undistributed earnings of any other Person;
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(d) any earnings of any other Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Borrower or a Restricted Subsidiary and any earnings, prior to the date of
acquisition, of any other Person acquired in any other manner; and
(e) any deferred credit (or amortization of a deferred credit) arising
from the acquisition of any Person.
"Consolidated Net Worth" shall mean, at any time,
(a) the sum of (i) the par value (or value stated on the books of the
Borrower) of the capital stock (but excluding treasury stock and capital stock
subscribed and unissued) of the Borrower and its Restricted Subsidiaries at such
time plus (ii) the amount of paid-in-capital and retained earnings of the
Borrower and its Restricted Subsidiaries at such time, in each case as such
amounts would be shown on a consolidated balance sheet of the Borrower and its
Restricted Subsidiaries as of such time prepared in accordance with GAAP, minus
(b) to the extent included in clause (a), all amounts properly
attributable to minority interests, if any, in the stock and surplus of
Restricted Subsidiaries.
"Continue", "Continuation", and "Continued" shall refer to the
continuation pursuant to Section 2.02(d) of a Eurodollar Borrowing as a
Eurodollar Borrowing from one Interest Period to the next Interest Period.
"Convert", "Conversion", and "Converted" shall refer to a conversion
pursuant to Section 2.02(d) or Section 2.12 of one Type of Borrowing into
another Type of Borrowing.
"Debt to Adjusted EBITDA Ratio" shall mean, as of the end of any fiscal
quarter, the ratio expressed as a percentage, equal to the ratio of Consolidated
Indebtedness to Adjusted EBITDA calculated as of the end of such fiscal quarter
in accordance with Section 5.15 (b).
"Default" shall mean any event or condition which upon notice, lapse of
time or both would constitute an Event of Default.
"Distribution" shall mean, in respect of any corporation, association
or other business entity:
(a) dividends or other distributions or payments on capital stock or
other equity interest of such corporation, association or other business entity
(except distributions in such stock or other equity interests); and
(b) the redemption or acquisition of such stock or other equity
interests or of warrants, rights or other options to purchase such stock or
other equity interests (except when solely in
REVOLVING CREDIT FACILITY AGREEMENT -- Page 6
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exchange for such stock or other equity interests) unless made,
contemporaneously, from the net proceeds of a sale of such stock or other equity
interests.
"dollars" or "$" shall mean lawful money of the United States of
America.
"EBITDA" means, for any period, the total of the following calculated
for Borrower and the Restricted Subsidiaries without duplication on a
consolidated basis in accordance with GAAP consistently applied for such period:
(a) Consolidated Net Income from operations; plus (b) any deduction for (or less
any gain from) income or franchise taxes included in determining Consolidated
Net Income; plus (c) interest expense (including the interest portion of Capital
Leases) deducted in determining Consolidated Net Income; plus (d) amortization
and depreciation expense deducted in determining Consolidated Net Income.
"Effective Date" shall have the meaning assigned to such term in
Section 4.02.
"Environmental Laws" shall mean any and all Federal, state, local, and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the rules and regulations promulgated
thereunder from time to time in effect.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that is treated as a single employer together with the Borrower
under section 414 of the Code.
"Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar
Loans.
"Eurodollar Loan" shall mean any Loan bearing interest at a rate
determined by reference to the LIBO Rate in accordance with the provisions of
Article 2.
"Event of Default" shall have the meaning assigned to such term in
Article 6.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Excluded Transfer" shall have the meaning assigned to it in Section
5.11.
"Existing Credit Agreements" shall have the meaning assigned to it in
Section 3.12.
"Fair Market Value" shall mean, at any time and with respect to any
property, the sale value of such property that would be realized in an arm's
length sale at such time between an
REVOLVING CREDIT FACILITY AGREEMENT -- Page 7
<PAGE> 12
informed and willing buyer and an informed and willing seller (neither being
under a compulsion to buy or sell).
"Federal Funds Effective Rate" shall have the meaning specified in the
definition of Alternate Base Rate.
"Fee Letters" shall mean, collectively, each of the letters between the
Borrower and Chase dated June 4, 1999 and the letter between the Borrower and
Wachovia dated June 4, 1999.
"Fees" shall mean the Commitment Fee and the Administrative Fees.
"GAAP" shall mean generally accepted accounting principles as in effect
from time to time in the United States of America.
"Governmental Authority" shall mean:
(a) the government of
(i) the United States of America, any other nation or any
political subdivision thereof, whether state,
provincial or local, or
(ii) any jurisdiction in which the Borrower or any
Subsidiary conducts all or any part of its business,
or which asserts jurisdiction over any properties of
the Borrower or any Subsidiary, and
(b) any agency, authority, instrumentality, regulatory body,
court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative
powers or functions of, or pertaining to, any such government.
"Guaranty" shall mean, with respect to any Person, any obligation
(except the endorsement in the ordinary course of business of negotiable
instruments for deposit or collection) of such Person guaranteeing or in effect
guaranteeing any Indebtedness, dividend or other obligation of any other Person
in any manner, whether directly or indirectly, including (without limitation)
obligations incurred through an agreement, contingent or otherwise, by such
Person:
(a) to purchase such Indebtedness or obligation or any property
constituting security therefor;
(b) to advance or supply funds (i) for the purchase or payment of such
Indebtedness or obligation, or (ii) to maintain any working capital or other
balance sheet condition or any income statement condition of any other Person or
otherwise to advance or make available funds for the purchase or payment of such
Indebtedness or obligation;
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<PAGE> 13
(c) to lease properties or to purchase properties or services primarily
for the purpose of assuring the owner of such Indebtedness or obligation of the
ability of any other Person to make payment of the Indebtedness or obligation;
or
(d) otherwise to assure the owner of such Indebtedness or obligation
against loss in respect thereof. In any computation of the Indebtedness or other
liabilities of the obligor under any Guaranty, the Indebtedness or other
obligations that are the subject of such Guaranty shall be assumed to be direct
obligations of such obligor.
"Hazardous Substance" shall mean any contaminant, pollutant or toxic or
hazardous substance, and any substance that is defined or listed as a hazardous,
toxic or dangerous substance under any Environmental Law or that is otherwise
regulated or prohibited under any Environmental Law as a hazardous, toxic or
dangerous substance.
"Indebtedness" with respect to any Person shall mean, at any time,
without duplication:
(a) its liabilities for borrowed money and its redemption obligations
in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of property
acquired by such Person (excluding accounts payable arising in the ordinary
course of business but including all liabilities created or arising under any
conditional sale or other title retention agreement with respect to any such
property);
(c) all liabilities appearing on its balance sheet in accordance with
GAAP in respect of Capital Leases;
(d) all liabilities for borrowed money secured by any Lien with respect
to any property owned by such Person (whether or not it has assumed or otherwise
become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments
serving a similar function issued or accepted for its account by banks and other
financial institutions (whether or not representing obligations for borrowed
money, but excluding in any event obligations in respect of (1) trade or
commercial letters of credit issued for the account of such Person in the
ordinary course of its business and (2) stand-by letters of credit issued to
support obligations of such Person that are not of a type described in any of
clauses (a), (b), (c), (d), (f) or (g);
(f) Swaps of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type
described in any of clauses (a) through (f) hereof.
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<PAGE> 14
Indebtedness of any Person shall include all obligations of such Person
of the character described in clauses (a) through (g) above to the extent such
Person remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"Interest Expenses" shall have the meaning assigned to it in Section
5.15(a).
"Interest Payment Date" shall mean (a) with respect to any ABR
Borrowing, each March 31, June 30, September 30 and December 31, beginning on
the first such date after the date hereof; (b) with respect to any Eurodollar
Loan, the last day of the Interest Period applicable thereto and, in the case of
such a Eurodollar Loan with an Interest Period of more than three months, each
day that would have been an Interest Payment Date for such Eurodollar Loan had
successive Interest Periods of three months duration, as the case may be, been
applicable to such Eurodollar Loan; and (c) in addition, with respect to all
Loans, the date of any prepayment thereof and the Maturity Date.
"Interest Period" shall mean, the period commencing on the date of a
Eurodollar Borrowing and ending on the numerically corresponding day (or, if
there is no numerically corresponding day, on the last day) in the calendar
month that is 1, 2, 3 or 6 months thereafter, or, in addition, in the case of
any Eurodollar Borrowing made during the 30-day period ending on the Maturity
Date, the period commencing on the date of such Borrowing and ending on the
seventh or fourteenth day thereafter, as the Borrower may elect; provided,
however, that if any Interest Period would end on a day other than a Business
Day, such Interest Period shall be extended to the next succeeding Business Day
unless such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business Day.
Interest shall accrue from and including the first day of an Interest Period to
but excluding the last day of such Interest Period.
"Intergroup Transfer" shall have the meaning assigned it in Section
5.11(b)(iii).
"LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for
any Interest Period, an interest rate per annum (rounded upwards, if necessary,
to the next 1/16 of 1%) equal to the rate at which dollar deposits approximately
equal in principal amount to the Administrative Agent's portion of such
Eurodollar Borrowing and for a maturity comparable to such Interest Period are
offered to the principal London offices of Chase or one of its Affiliates in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period.
"Lien" shall mean, with respect to any Person, any mortgage, lien,
pledge, charge, security interest or other encumbrance, or any interest or title
of any vendor, lessor, lender or other secured party to or of such Person under
any conditional sale or other title retention agreement or Capital Lease, upon
or with respect to any property or asset of such Person (including in the case
of stock, stockholder agreements, voting trust agreements and all similar
arrangements).
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<PAGE> 15
"Loan" shall have the meaning assigned it in Section 2.01. Each Loan
shall be a Eurodollar Loan or an ABR Loan.
"Material" shall mean material in relation to the business, operations,
affairs, financial condition, assets, or properties of the Borrower and its
Subsidiaries taken as a whole.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business, operations, affairs, financial condition, assets or properties of
the Borrower and its Restricted Subsidiaries taken as a whole, or (b) the
ability of the Borrower to perform its obligations under this Agreement, or (c)
the validity or enforceability of this Agreement.
"Maturity Date" shall mean August 2, 2004.
"Multiemployer Plan" shall mean any Plan that is a "multiemployer plan"
(as such term is defined in section 4001(a)(3) of ERISA).
"New Lending Office" shall have the meaning assigned it in Section
2.16(g).
"New Owner" shall have the meaning assigned it in Section 2.10(c).
"Non-U.S. Agent" shall have the meaning assigned it in Section 2.16(g).
"Non-U.S. Lender" shall have the meaning assigned it in Section
2.16(g).
"Norris Family" shall have the meaning assigned it in Section 2.10(c).
"Ordinary Course Transfer" shall have the meaning assigned it in
Section 5.11.
"Other Taxes" shall have the meaning assigned it in Section 2.16(b).
"Prepayment Date" shall have the meaning assigned it in Section
2.10(c).
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
and defined in ERISA or any successor thereto.
"Person" shall mean an individual, partnership, corporation, limited
liability company, association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.
"Plan" shall mean an "employee benefit plan" (as defined in section
3(3) of ERISA) that is or, within the preceding five years, has been established
or maintained, or to which contributions are or, within the preceding five
years, have been made or required to be made, by
REVOLVING CREDIT FACILITY AGREEMENT -- Page 11
<PAGE> 16
the Borrower or any ERISA Affiliate or with respect to which the Borrower or any
ERISA Affiliate may have any liability.
"Preferred Stock" shall mean any class of capital stock of a
corporation that is preferred over any other class of capital stock of such
corporation as to the payment of dividends or the payment of any amount upon
liquidation or dissolution of such corporation.
"property" or "properties" shall mean, unless otherwise specifically
limited, real or personal property of any kind, tangible or intangible, choate
or inchoate.
"Property Disposition Date" shall have the meaning assigned to it in
Section 5.11.
"Register" shall have the meaning given such term in Section 8.04 (d)
"Required Lenders" shall mean, at any time, Lenders having Commitments
representing at least 66 2/3% of the Total Commitment or, for purposes of
acceleration pursuant to clause (ii) of Article 6, Lenders holding Loans
representing at least 66 2/3% of the aggregate principal amount of the Loans
outstanding.
"Responsible Officer" shall mean any Senior Financial Officer and any
other officer of the Borrower with responsibility for the administration of the
relevant portion of this Agreement.
"Restricted Indebtedness" shall mean Indebtedness of a Restricted
Subsidiary owing to any Person other than the Borrower or a Wholly-Owned
Subsidiary.
"Restricted Payment" shall mean any Distribution in respect of the
Borrower or any Restricted Subsidiary (other than on account of capital stock or
other equity interests of a Restricted Subsidiary owned legally and beneficially
by the Borrower or another Restricted Subsidiary), including, without
limitation, any Distribution resulting in the acquisition by the Borrower of
Securities which would constitute treasury stock. For purposes of this
Agreement, the amount of any Restricted Payment made in property shall be the
greater of (x) the Fair Market Value of such property (as determined in good
faith by the board of directors (or equivalent governing body) of the Person
making such Restricted Payment) and (y) the net book value thereof on the books
of such Person, in each case determined as of the date on which such Restricted
Payment is made.
"Restricted Subsidiary" shall mean any Subsidiary of the Borrower which
is (a) listed as a Restricted Subsidiary in Schedule 3.05 or (b) organized under
the laws of, and conducts substantially all of its business and maintains
substantially all of its property and assets within, the United States or any
state thereof (including the District of Columbia).
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
"Security" shall have the meaning set forth in Section 2(1) of the
Securities Act.
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"Senior Financial Officer" shall mean the chief financial officer,
principal accounting officer, treasurer or controller of the Borrower; provided
that any executive vice president, the treasurer or the corporate controller of
Borrower is authorized by Borrower to execute and deliver any Borrowing Request.
"Senior Note Purchase Agreements" shall mean those certain Note
Purchase Agreements dated April 3, 1998 pursuant to which Borrower issued its
6.56% Senior Notes due April 3, 2005 and its 6.75% Senior Notes due April 3,
2008.
"Subsidiary" shall mean, as to any Person, any corporation, association
or other business entity in which such Person or one or more of its Subsidiaries
or such Person and one or more of its Subsidiaries owns sufficient equity or
voting interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to a
"Subsidiary" is a reference to a Subsidiary of the Borrower.
"Swaps" shall mean, with respect to any Person, payment obligations
with respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. For the purposes of this Agreement, the amount of
the obligation under any Swap shall be the amount determined in respect thereof
as of the end of the then most recently ended fiscal quarter of such Person,
based on the assumption that such Swap had terminated at the end of such fiscal
quarter, and in making such determination, if any agreement relating to such
Swap provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment of
amounts by and to such Person, then in each such case, the amount of such
obligation shall be the net amount so determined.
"Taxes" shall have the meaning assigned it in Section 2.16(a).
"Total Commitment" shall mean, at any time, the aggregate amount of
Commitments of all the Lenders, as in effect at such time.
"Transactions" shall have the meaning assigned it in Section 3.02.
"Transfer" shall mean, with respect to any Person, any transaction in
which such Person sells, conveys, transfers or leases (as lessor) any of its
property, including capital stock of, or a Security issued by, a Subsidiary.
"Transferee" shall have the meaning assigned to it in Section 2.16(a).
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"Type", when used in respect of any Loan or Borrowing, shall refer to
the Rate by reference to which interest on such Loan or on the Loans comprising
such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO
Rate and the Alternate Base Rate.
"Unrestricted Subsidiary" shall mean any Subsidiary other than a
Restricted Subsidiary.
"Voting Rights" shall have the meaning assigned it in Section 2.10.
"Wholly-Owned Restricted Subsidiary" or "Wholly-Owned Subsidiary"
means, at any time, any Restricted Subsidiary or Subsidiary, respectively, one
hundred percent (100%) of all of the equity interests (except directors'
qualifying shares) and voting interests of which are owned by any one or more of
the Borrower and the Borrower's other Wholly-Owned Restricted Subsidiaries or
Wholly-Owned Subsidiaries, respectively, at such time.
SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include," "includes" and
"including" shall be deemed to be followed by the phrase "without limitation."
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time.
ARTICLE 2. THE CREDITS
SECTION 2.01. Commitments.
Subject to the terms and conditions and relying upon the
representations and warranties herein set forth, each Lender agrees, severally
and not jointly, to make advances (each such advance a "Loan") to the Borrower,
at any time and from time to time on and after the date hereof and until the
earlier of the Maturity Date or the termination of the Commitment of such
Lender, in an aggregate principal amount at any time outstanding not to exceed
such Lender's Commitment, subject, however, to the conditions that the
outstanding aggregate principal amount of all Loans shall not exceed the Total
Commitment. Within the foregoing limits, the Borrower may borrow, pay or prepay
and reborrow Loans hereunder, on and after the Effective Date and prior to the
Maturity Date, subject to the terms, conditions and limitations set forth
herein.
SECTION 2.02. Loans.
(a) Each Loan shall be made as part of a Borrowing consisting of Loans
made by the Lenders ratably in accordance with the percentage of their
respective Commitments to the Total
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Commitment; provided, however, that the failure of any Lender to make any Loan
shall not in itself relieve any other Lender of its obligation to lend hereunder
(it being understood, however, that no Lender shall be responsible for the
failure of any other Lender to make any Loan required to be made by such other
Lender). The Loans comprising any Borrowing shall be in an aggregate principal
amount which is an integral multiple of $1,000,000 and not less than $5,000,000
(or an aggregate principal amount equal to the remaining balance of the
Commitments).
(b) Each Borrowing shall be comprised entirely of Eurodollar Loans or
ABR Loans, as the Borrower may request pursuant to Section 2.03. Each Lender may
at its option make any Eurodollar Loan by causing any domestic or foreign branch
or Affiliate of such Lender to make such Loan; provided that any exercise of
such option shall not affect the obligation of the Borrower to repay such Loan
in accordance with the terms of this Agreement. Borrowings of more than one Type
may be outstanding at the same time.
(c) Subject to paragraph (d) below, each Lender shall make each Loan to
be made by it hereunder on the proposed date thereof by wire transfer of
immediately available funds to the Administrative Agent in New York, New York,
not later than 11:00 a.m., New York, New York time, and the Administrative Agent
shall by 2:00 p.m., New York, New York time, credit the amounts so received to
the account or accounts specified from time to time in one or more notices
delivered by the Borrower to the Administrative Agent or, if a Borrowing shall
not occur on such date because any condition precedent herein specified shall
not have been met, return the amounts so received to the respective Lenders.
Loans shall be made by the Lenders pro rata in accordance with Section 2.13.
Unless the Administrative Agent shall have received notice from a Lender prior
to the date of any Borrowing that such Lender will not make available to the
Administrative Agent such Lender's portion of such Borrowing, the Administrative
Agent may assume that such Lender has made such portion available to the
Administrative Agent on the date of such Borrowing in accordance with this
paragraph (c) and the Administrative Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Lender shall not have made such portion available
to the Administrative Agent, such Lender and the Borrower (without waiving any
claim against such Lender for such Lender's failure to make such portion
available) severally agree to repay to the Administrative Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Administrative Agent at (i) in the case of the Borrower,
the interest rate applicable at the time to the Loans comprising such Borrowing
and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such
Lender shall repay to the Administrative Agent such corresponding amount, such
amount shall constitute such Lender's Loan as part of such Borrowing for
purposes of this Agreement.
(d) Borrower may Convert all or any part of any Borrowing to a
Borrowing of a different Type and Borrower may Continue all or any part of any
Eurodollar Borrowing as a Borrowing of the same Type, by giving the
Administrative Agent written notice on the Business Day of the Conversion into
an ABR Borrowing and on the Business Day at least three Business Days before
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<PAGE> 20
Conversion into or Continuation of a Eurodollar Borrowing specifying: (i) the
Conversion or Continuation date, (ii) the amount of the Borrowing to be
Converted or Continued, (iii) in the case of Conversions, the Type of Borrowing
to be Converted into, and (iv) in the case of a Continuation of or Conversion
into a Eurodollar Borrowing, the duration of the Interest Period applicable
thereto; provided that (a) Eurodollar Borrowings may only be Converted on the
last day of the Interest Period; (b) except for Conversions to ABR Borrowings,
no Conversions shall be made while an Event of Default has occurred and is
continuing; (c) only ten (10) Eurodollar Borrowings may be in existence at any
one time; and (d) no Interest Period may end after the Maturity Date. All
notices given under this Section shall be irrevocable and shall be given not
later than 11:00 a.m. New York, New York time on the Business Day which is not
less than the number of Business Days specified above for such notice. If the
Borrower shall fail to give the Agent the notice as specified above for
Continuation or Conversion of a Eurodollar Borrowing prior to the end of the
Interest Period with respect thereto, such Eurodollar Borrowing shall
automatically be continued as a Eurodollar Borrowing with an Interest Period of
one month's duration unless any Event of Default exists in which case such
Eurodollar Borrowing shall be automatically converted to an ABR Borrowing. The
Agent shall promptly advise the Lenders of any notice given pursuant to this
Section 2.02.
SECTION 2.03. Borrowing Procedure. In order to request a Borrowing, the
Borrower shall hand deliver or telecopy to the Administrative Agent a duly
completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later
than 11:00 a.m., New York, New York time, three Business Days before such
Borrowing, and (b) in the case of an ABR Borrowing, not later than 11:00 a.m.,
New York, New York time, on the day of such Borrowing. Such notice shall be
irrevocable and shall in each case specify (i) whether the Borrowing then being
requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of
such Borrowing (which shall be a Business Day) and the amount thereof; and (iii)
if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with
respect thereto, which shall not end after the Maturity Date. If no election as
to the Type of Borrowing is specified in any such notice, then the requested
Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any
Eurodollar Borrowing is specified in any such notice, then the Borrower shall be
deemed to have selected an Interest Period of one month's duration.
Notwithstanding any other provision of this Agreement to the contrary, no
Borrowing shall be requested if the Interest Period with respect thereto would
end after the Maturity Date. The Administrative Agent shall promptly advise the
Lenders of any notice given pursuant to this Section 2.03 and of each Lender's
portion of the requested Borrowing.
SECTION 2.04. Fees.
(a) The Borrower agrees to pay to each Lender, through the
Administrative Agent, on each March 31, June 30, September 30 and December 31
(with the first payment being due on September 30, 1999) and on each date on
which the Commitment of such Lender shall be terminated as provided herein, a
commitment fee (a "Commitment Fee"), at a rate per annum equal to the Commitment
Fee Percentage from time to time in effect on the amount of the daily
REVOLVING CREDIT FACILITY AGREEMENT -- Page 16
<PAGE> 21
average of the unused Commitment of such Lender, during the preceding quarter
(or other period commencing on the Effective Date or ending with the Maturity
Date or any date on which the Commitment of such Lender shall be terminated).
All Commitment Fees shall be computed on the basis of the actual number of days
elapsed in a year of 365 or 366 days, as the case may be. The Commitment Fee due
to each Lender shall commence to accrue on the Effective Date, and shall cease
to accrue on the earlier of the Maturity Date or the termination of the
Commitment of such Lender as provided herein.
(b) The Borrower agrees to pay the Agents the fees provided for in the
Fee Letters on the dates required thereby (the "Administrative Fees").
(c) The Fees shall be paid on the dates due, in immediately available
funds, to the Administrative Agent for distribution, if and as appropriate,
among the Lenders or to the Agents. Once paid, none of such Fees shall be
refundable under any circumstances.
SECTION 2.05. Repayment of
Loans; Evidence of Indebtedness.
(a) The outstanding principal balance of each Loan shall be due and
payable on the Maturity Date.
(b) Each Lender shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness to such Lender resulting from
each Loan made by such Lender from time to time, including the amounts of
principal and interest payable and paid to such Lender from time to time under
this Agreement.
(c) The Administrative Agent shall maintain accounts in which it will
record (i) the amount of each Loan made hereunder, the Type of each Loan made
and the Interest Period applicable thereto, if any, (ii) the amount of any
principal or interest due and payable or to become due and payable from the
Borrower to each Lender hereunder in respect of Loans and (iii) the amount of
any sum received by the Administrative Agent hereunder from the Borrower and
each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to paragraphs
(b) and (c) of this Section 2.05 shall, to the extent permitted by applicable
law, be prima facie evidence of the existence and amounts of the obligations
therein recorded; provided, however, that the failure of any Lender or the
Administrative Agent to maintain such accounts or any error therein or an
inconsistency between such accounts of a Lender and the accounts of the
Administrative Agent shall not in any manner affect the obligations of the
Borrower to repay the Loans in accordance with their terms.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 17
<PAGE> 22
SECTION 2.06. Interest on Loans; Margin and Fees.
(a) Subject to the provisions of Section 2.07, the Loans comprising
each Eurodollar Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 360 days) at a rate per annum equal
to the LIBO Rate for the Interest Period in effect for such Borrowing plus the
Applicable Margin from time to time in effect.
(b) Subject to the provisions of Section 2.07, the Loans comprising
each ABR Borrowing shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 365 or 366 days, as the case may be, for
periods during which the Alternate Base Rate is determined by reference to the
Prime Rate and 360 days for other periods and including for all calculations the
first day of any period but excluding the last) at a rate per annum equal to the
Alternate Base Rate.
(c) Interest on each Loan shall be payable on each Interest Payment
Date applicable to such Loan except as otherwise provided in this Agreement. The
applicable LIBO Rate or Alternate Base Rate shall be determined by the
Administrative Agent, and such determination shall be conclusive absent manifest
error; provided that the Administrative Agent shall, upon request, provide to
the Borrower a certificate setting forth in reasonable detail the basis for such
determination.
(d) The Applicable Margin identified in this Section 2.06 and the
Commitment Fee Percentage identified in Section 2.04 shall be defined and
determined as follows:
"Applicable Margin" shall mean (i) during the period
commencing on the Effective Date and ending on but not including the
first Adjustment Date (as defined below), 0.75% per annum and (ii)
during each period from and including one Adjustment Date to but
excluding the next Adjustment Date (herein a "Calculation Period"), the
percent per annum set forth in the table below under the heading
"Margin" opposite the Debt to Adjusted EBITDA Ratio which corresponds
to the Debt to Adjusted EBITDA Ratio set forth in, and as calculated in
accordance with, the applicable Compliance Certificate.
"Commitment Fee Percentage" shall mean (1) during the period
commencing on the Effective Date and ending on but not including the
first Adjustment Date, 0.20% per annum and (2) during each Calculation
Period, the percent per annum set forth in the table below under the
heading "Commitment Fee Percentage" opposite the Debt to Adjusted
EBITDA Ratio which corresponds to the Debt to Adjusted EBITDA Ratio set
forth in, and as calculated in accordance with, the applicable
Compliance Certificate.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 18
<PAGE> 23
<TABLE>
<CAPTION>
Commitment Fee
Debt to Adjusted EBITDA Ratio Margin Percentage
- ----------------------------- ------ --------------
<S> <C> <C>
Greater than 2.50 to 1.00 1.125% 0.300%
Greater than 2.0 to 1.0 but less than or equal to 2.5 to 1.0 0.875% 0.250%
Greater than 1.5 to 1.0 but less than or equal to 2.0 to 1.0 0.750% 0.200%
Greater than 1.0 to 1.0 but less than or equal to 1.5 to 1.0 0.625% 0.1875%
Less than or equal to 1.00 to 1.00 0.500% 0.150%
</TABLE>
Upon delivery of the Compliance Certificate pursuant to Section 5.20(g)
in connection with the financial statements of the Borrower and its Subsidiaries
required to be delivered pursuant to Sections 5.20(a) and (b), commencing with
such Compliance Certificate delivered with respect to the fiscal quarter ending
on June 30, 1999, the Applicable Margin (for Interest Periods commencing after
the applicable Adjustment Date) and the Commitment Fee Percentage shall
automatically be adjusted in accordance with the Debt to Adjusted EBITDA Ratio
set forth therein and the table set forth above, such automatic adjustment to
take effect as of the first Business Day after the receipt by the Agent of the
related Compliance Certificate pursuant to Section 5.20(g) (each such Business
Day when such margin or fees change pursuant to this sentence or the next
following sentence, herein an "Adjustment Date"). If the Borrower fails to
deliver such Compliance Certificate which so sets forth the Debt to Adjusted
EBITDA Ratio within the period of time required by Section 5.20(g): (i) the
Applicable Margin (for Interest Periods commencing after the applicable
Adjustment Date) shall automatically be adjusted to 1.125.% per annum; and (ii)
the Commitment Fee Percentage shall automatically be adjusted to 0.300% per
annum, such automatic adjustments to take effect as of the first Business Day
after the last day on which the Borrower was required to deliver the applicable
Compliance Certificate in accordance with Section 5.20(g) and to remain in
effect until subsequently adjusted in accordance herewith upon the delivery of a
Compliance Certificate.
SECTION 2.07. Default Interest. If the Borrower shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, whether by scheduled maturity, notice of prepayment, acceleration
or otherwise, the Borrower shall on demand from time to time from the
Administrative Agent pay interest, to the extent permitted by law, on such
defaulted amount up to (but not including) the date of actual payment (after as
well as before judgment) at a rate per annum (computed as provided in Section
2.06(b)) equal to the Alternate Base Rate plus 2%.
SECTION 2.08. Alternate Rate of Interest. In the event, and on each
occasion, that prior to the commencement of any Interest Period for a Eurodollar
Borrowing the Administrative Agent shall have determined (i) that dollar
deposits in the principal amounts of the Eurodollar Loans comprising such
Borrowing are not generally available in the London interbank market or (ii)
that reasonable means do not exist for ascertaining the LIBO Rate, the
Administrative Agent shall, as soon as practicable thereafter, give telecopy
notice of such determination to the Borrower and the Lenders. In the event of
any such determination under clauses (i) or (ii) above, until the Administrative
Agent shall have advised the Borrower and the Lenders that the circumstances
giving rise to such notice no longer exist, any request by the Borrower for a
Eurodollar Borrowing pursuant to Section 2.03 shall be deemed to be a request
for an ABR Borrowing. In the event the
REVOLVING CREDIT FACILITY AGREEMENT -- Page 19
<PAGE> 24
Required Lenders notify the Administrative Agent that the rates at which dollar
deposits are being offered will not adequately and fairly reflect the cost to
such Lenders of making or maintaining Eurodollar Loans during such Interest
Period, the Administrative Agent shall notify the Borrower of such notice and
until the Required Lenders shall have advised the Administrative Agent that the
circumstances giving rise to such notice no longer exist, any request by the
Borrower for a Eurodollar Borrowing shall be deemed a request for an ABR
Borrowing. Each determination by the Administrative Agent hereunder shall be
made in good faith and shall be conclusive absent manifest error; provided that
the Administrative Agent, shall, upon request, provide to the Borrower a
certificate setting forth in reasonable detail the basis for such determination.
SECTION 2.09. Termination and Reduction of Commitments.
(a) The Commitments shall be automatically terminated on the Maturity
Date. A Commitment of a Lender may also terminate as provided in Section
2.10(c).
(b) Upon at least three Business Days' prior irrevocable written notice
to the Administrative Agent, the Borrower may, at any time, in whole permanently
terminate, or, from time to time, in part permanently reduce, the Total
Commitment; provided, however, that (i) each partial reduction of the Total
Commitment shall be in an integral multiple of $5,000,000 and in a minimum
principal amount of $5,000,000 and (ii) no such termination or reduction shall
be made which would reduce the Total Commitment to an amount less than
$50,000,000, unless the result of such termination or reduction is to reduce the
Total Commitment to $0. The Administrative Agent shall advise the Lenders of any
notice given pursuant to this Section 2.09(b) and of each Lender's portion of
any such termination or reduction of the Total Commitment.
(c) Each reduction in the Total Commitment hereunder shall be made
ratably among the Lenders in accordance with their respective Commitments. The
Borrower shall pay to the Administrative Agent for the account of the Lenders,
on the date of each termination or reduction of the Total Commitment, the
Commitment Fees on the amount of the Commitments so terminated or reduced
accrued through the date of such termination or reduction.
SECTION 2.10. Prepayment Including Prepayment as a Result of a Change
of Control.
(a) The Borrower shall have the right at any time and from time to time
to prepay any Borrowing, in whole or in part, upon giving telecopy notice (or
telephone notice promptly confirmed by telecopy) to the Administrative Agent:
(i) before 11:00 a.m., New York, New York time, three Business Days prior to
prepayment, in the case of Eurodollar Loans which prepayment shall be
accompanied by any amount owed under Section 8.05(b), and (ii) before 11:00
a.m., New York, New York time, one Business Day prior to prepayment, in the case
of ABR Loans; provided, however, that each partial prepayment shall be in an
amount which is an integral multiple of $1,000,000 and not less than $3,000,000.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 20
<PAGE> 25
(b) On the date of any termination or reduction of the Total Commitment
pursuant to Section 2.09, the Borrower shall pay or prepay so much of the
Borrowings as shall be necessary in order that the aggregate principal amount of
the Loans outstanding will not exceed the Total Commitment, after giving effect
to such termination or reduction.
(c) At least 15 Business Days (or, in the case of any transaction
permitted by Section 5.10 resulting in a Change of Control, at least 45 days)
and not more than 90 days prior to the occurrence of any Change of Control, the
Borrower will give written notice thereof to each Lender. Such notice shall
contain (i) an offer by the Borrower to prepay, on the date of such Change of
Control or, if such notice shall be delivered less than 35 days prior to the
date of such Change of Control, on the date 35 days after the date of such
notice (the "Prepayment Date"), all Loans made by each Lender, together with
interest accrued thereon to the Prepayment Date and all other obligations owed
to such Lender under the terms hereof, (ii) the estimated amount of accrued
interest, showing in reasonable detail the calculation thereof and (iii) the
Borrower's estimate of the date on which such Change of Control shall occur.
Said offer shall be deemed to lapse as to any such Lender which has not replied
affirmatively thereto in writing within 35 days of the giving of such notice. As
soon as practicable (and in any event at least 24 hours) prior to such Change of
Control, the Borrower shall give written confirmation of the date thereof to
each such Lender that has affirmatively replied to the notice given pursuant to
the first sentence of this Section 2.10(c). Borrower shall, on the Prepayment
Date, prepay to each Lender that has affirmatively replied to the notice given
pursuant to the first sentence of this Section 2.10(c) all Loans then held by
such Lender together with accrued interest thereon and all other obligations
owed to such Lender under the terms hereof. Upon such payment, the Commitment of
each Lender that shall have received such prepayment shall terminate and the
Total Commitment shall be reduced accordingly.
For the purposes of this Section 2.10(c), a "Change of Control" shall
be deemed to occur if any New Owner shall acquire beneficial ownership of shares
in the Borrower having Voting Rights pertaining thereto which would allow such
New Owner to elect more members of the Board of Directors than could be elected
by the exercise of all Voting Rights pertaining to shares in the Borrower then
owned beneficially by the Norris Family. As used in this Section 2.10(c):
(i) "Voting Rights" pertaining to shares of a corporation
means the rights to cast votes for the election of directors of such
corporation in ordinary circumstances (without consideration of voting
rights which exist only in the event of contingencies).
(ii) "Norris Family" means all persons who are lineal
descendants of D.W. Norris (by birth or adoption), all spouses of such
descendants, all estates of such descendants or spouses which are in
the course of administration, all trusts for the benefit of such
descendants or spouses, and all corporations or other entities in
which, directly or indirectly, such descendants or spouses (either
alone or in conjunction with other such descendants or spouses) have
the right, whether by ownership of stock or other equity interests or
otherwise, to direct the management and policies of such corporations
or other
REVOLVING CREDIT FACILITY AGREEMENT -- Page 21
<PAGE> 26
entities (each such person, spouse, estate, trust, corporation or
entity being referred to herein as a "member" of the Norris Family). In
addition, so long as any employee stock ownership plan exercises its
Voting Rights in the same manner as members of the Norris Family
(exclusive of employee stock ownership plans) who have a majority of
the Voting Rights exercised by all such members of the Norris Family,
such employee stock ownership plan shall be deemed a member of the
Norris Family.
(iii) "New Owner" means any Person (other than a member of the
Norris Family), or any syndicate or group of Persons (exclusive of all
members of the Norris Family) which would be deemed a "person" for the
purposes of Section 13(d) of the Exchange Act, who directly or
indirectly acquires shares in the Borrower.
(d) Each notice of prepayment shall specify the prepayment date and the
principal amount of each Borrowing (or portion thereof) to be prepaid, shall be
irrevocable and shall commit the Borrower to prepay such Borrowing (or portion
thereof) by the amount stated therein on the date stated therein. All
prepayments under this Section 2.10 shall be subject to Section 8.05 but
otherwise without premium or penalty. All prepayments under this Section 2.10
shall be accompanied by accrued interest on the principal amount being prepaid
to the date of payment.
SECTION 2.11. Reserve Requirements; Change in Circumstances.
(a) Notwithstanding any other provision herein, if after the date of
this Agreement any change in applicable law or regulation or in the
interpretation or administration thereof by any Governmental Authority charged
with the interpretation or administration thereof (whether or not having the
force of law) shall change the basis of taxation of payments to any Lender
hereunder (except for changes in respect of taxes on the overall net income of
such Lender or its lending office imposed by the jurisdiction in which such
Lender's principal executive office or lending office is located), or shall
result in the imposition, modification or applicability of any reserve, special
deposit or similar requirement against assets of, deposits with or for the
account of or credit extended by any Lender, or shall result in the imposition
on any Lender or the London interbank market of any other condition affecting
this Agreement, such Lender's Commitment or any Eurodollar Loan made by such
Lender, and the result of any of the foregoing shall be to increase the cost to
such Lender of making or maintaining any Eurodollar Loan or to reduce the amount
of any sum received or receivable by such Lender hereunder (whether of
principal, interest or otherwise) by an amount deemed by such Lender to be
material, then the Borrower shall, upon receipt of the notice and certificate
provided for in Section 2.11(c), promptly pay to such Lender such additional
amount or amounts as will compensate such Lender for such additional costs
incurred or reduction suffered.
(b) If any Lender shall have determined that the adoption of any law,
rule, regulation or guideline arising out of the July 1988 report of the Basle
Committee on Banking Regulations and Supervisory Practices entitled
"International Convergence of Capital Measurement and Capital Standards," or the
adoption after the date hereof of any other law, rule, regulation or guideline
REVOLVING CREDIT FACILITY AGREEMENT -- Page 22
<PAGE> 27
regarding capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Lender (or any lending office of
such Lender) or any Lender's holding company with any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Lender's capital or on the capital of such
Lender's holding company, if any, as a consequence of this Agreement, such
Lender's Commitment or the Loans made by such Lender pursuant hereto to a level
below that which such Lender or such Lender's holding company could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's policies and the policies of such Lender's holding company with
respect to capital adequacy) by an amount deemed by such Lender to be material,
then from time to time such additional amount or amounts as will compensate such
Lender for any such reduction suffered will be paid by the Borrower to such
Lender.
(c) A certificate of each affected Lender setting forth such amount or
amounts as shall be necessary to compensate such Lender or its holding company
as specified in paragraph (a) or (b) above, as the case may be, and containing
an explanation in reasonable detail of the manner in which such amount or
amounts shall have been determined, shall be delivered to the Borrower, and
shall be conclusive absent manifest error. The Borrower shall pay each Lender
the amount shown as due on any such certificate delivered by it within 10 days
after its receipt of the same. Each Lender shall give prompt notice to the
Borrower of any event of which it has knowledge, occurring after the date
hereof, that it has determined will require compensation by the Borrower
pursuant to this Section; provided, however, that failure by such Lender to give
such notice shall not constitute a waiver of such Lender's right to demand
compensation hereunder.
(d) Failure on the part of any Lender to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
return on capital of the type described in paragraph (a) or (b) of this Section
2.11 with respect to any period shall not constitute a waiver of such Lender's
right to demand compensation with respect to such period or any other period;
provided, however, that no Lender shall be entitled to compensation under this
Section 2.11 for any costs incurred or reductions suffered with respect to any
date unless it shall have notified the Borrower that it will demand compensation
for such costs or reductions under paragraph (c) above not more than 90 days
after the later of (i) such date and (ii) the date on which it shall have become
aware of such costs or reductions. The protection of this Section shall be
available to each Lender regardless of any possible contention of the invalidity
or inapplicability of the law, rule, regulation, guideline or other change or
condition which shall have occurred or been imposed.
(e) Each Lender agrees that it will designate a different lending
office if such designation will avoid the need for, or reduce the amount of,
such compensation and will not, in the reasonable judgment of such Lender, be
disadvantageous to such Lender.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 23
<PAGE> 28
SECTION 2.12. Change in Legality.
(a) Notwithstanding any other provision herein, if any change in any
law or regulation or in the interpretation thereof by any Governmental Authority
charged with the administration or interpretation thereof shall make it unlawful
for any Lender to make or maintain any Eurodollar Loan or to give effect to its
obligations as contemplated hereby with respect to any Eurodollar Loan, then, by
written notice to the Borrower and to the Administrative Agent, such Lender may:
(i) declare that Eurodollar Loans will not thereafter be made
by such Lender hereunder, whereupon any request for a Eurodollar
Borrowing shall, as to such Lender only, be deemed a request for an ABR
Loan unless such declaration shall be subsequently withdrawn (any
Lender delivering such a declaration hereby agreeing to withdraw such
declaration promptly upon determining that such event of illegality no
longer exists); and
(ii) require that all outstanding Eurodollar Loans made by it
be converted to ABR Loans, in which event all such Eurodollar Loans
shall be automatically converted to ABR Loans as of the effective date
of such notice as provided in paragraph (b) below.
In the event any Lender shall exercise its rights under (i) or (ii)
above, all payments and prepayments of principal which would otherwise have been
applied to repay the Eurodollar Loans that would have been made by such Lender
or the Converted Eurodollar Loans of such Lender shall instead be applied to
repay the ABR Loans made by such Lender in lieu of, or resulting from the
Conversion of, such Eurodollar Loans.
(b) For purposes of this Section 2.12, a notice by any Lender shall be
effective as to each Eurodollar Loan, if lawful, on the last day of the Interest
Period currently applicable to such Eurodollar Loan; in all other cases such
notice shall be effective on the date of receipt.
SECTION 2.13. Pro Rata Treatment. Except as required under Sections
2.12 and 2.17, each Borrowing, each payment or prepayment of principal of any
Borrowing, each payment of interest on the Loans, each payment of the Commitment
Fees, each Conversion or Continuation of any Loans, and each reduction of the
Total Commitment, shall be allocated pro rata among the Lenders in accordance
with their respective Commitments (or, if such Commitments shall have expired or
been terminated, in accordance with the respective principal amounts of their
outstanding Loans).
SECTION 2.14. Sharing of Setoffs. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, setoff or counterclaim, or
pursuant to a secured claim under Section 506 of Title 11 of the United States
Code or other security or interest arising from, or in lieu of, such secured
claim, received by such Lender under any applicable bankruptcy, insolvency or
other similar law or otherwise, or by any other means, obtain payment (voluntary
or involuntary) in respect of any Loan or Loans as a result of which the unpaid
principal portion of its Loans shall be proportionately less than the unpaid
principal portion of the Loans of any other
REVOLVING CREDIT FACILITY AGREEMENT -- Page 24
<PAGE> 29
Lender, it shall be deemed simultaneously to have purchased from such other
Lender at face value, and shall promptly pay to such other Lender the purchase
price for, a participation in the Loans of such other Lender, so that the
aggregate unpaid principal amount of the Loans and participations in the Loans
held by each Lender shall be in the same proportion to the aggregate unpaid
principal amount of all Loans then outstanding as the principal amount of its
Loans prior to such exercise of banker's lien, setoff or counterclaim or other
event was to the principal amount of all Loans outstanding prior to such
exercise of banker's lien, setoff or counterclaim or other event; provided,
however, that, if any such purchase or purchases or adjustments shall be made
pursuant to this Section 2.14 and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustment restored without interest. The Borrower expressly consents to the
foregoing arrangements and agrees that any Lender holding a participation in a
Loan deemed to have been so purchased may exercise any and all rights of
banker's lien, setoff or counterclaim with respect to any and all moneys owing
by the Borrower to such Lender by reason thereof as fully as if such Lender had
made a Loan in the amount of such participation.
SECTION 2.15. Payments.
(a) The Borrower shall make each payment (including principal of or
interest on any Borrowing or any Fees or other amounts, hereunder from an
account in the United States not later than 12:00 noon, New York, New York time,
on the date when due in dollars to the Administrative Agent at its offices at 1
Chase Manhattan Plaza, 8th Floor, New York, New York 10081, in immediately
available funds.
(b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder shall become due, or otherwise
would occur, on a day that is not a Business Day, such payment may be made on
the next succeeding Business Day, and such extension of time shall in such case
be included in the computation of interest or Fees, if applicable.
SECTION 2.16. Taxes.
(a) Any and all payments of principal and interest on any Borrowings,
or of any Fees or indemnity or expense reimbursements by the Borrower hereunder
("Borrower Payments") shall be made, in accordance with Section 2.15, free and
clear of and without deduction for any and all current or future federal, state,
local and other governmental taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect to the Borrower Payments, but
only to the extent reasonably attributable to the Borrower Payments, excluding
(i) income taxes imposed on the net income of either Agent or any Lender (or any
transferee or assignee thereof, including a participation holder (any such
entity a "Transferee")) and (ii) franchise taxes imposed on the net income of
either Agent or any Lender (or Transferee), in each case by the jurisdiction
under the laws of which such Agent or such Lender (or Transferee) is organized
or doing business through offices or branches located therein, or any political
subdivision thereof (all such nonexcluded
REVOLVING CREDIT FACILITY AGREEMENT -- Page 25
<PAGE> 30
taxes, levies, imposts, deductions, charges, withholdings and liabilities,
collectively or individually, "Taxes"). If the Borrower shall be required to
deduct any Taxes from or in respect of any sum payable hereunder to any Lender
(or any Transferee) or the respective Agent, (i) the sum payable shall be
increased by the amount (an "additional amount") necessary so that after making
all required deductions (including deductions applicable to additional sums
payable under this Section 2.16) such Lender (or Transferee) or Agent (as the
case may be) shall receive an amount equal to the sum it would have received had
no such deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay to the relevant Governmental
Authority in accordance with applicable law any current or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement or the
Fee Letters ("Other Taxes").
(c) The Borrower shall indemnify each Lender (or Transferee thereof)
and each Agent for the full amount of Taxes and Other Taxes with respect to
Borrower Payments paid by such Lender (or Transferee) or such Agent, as the case
may be, and any liability (including penalties, interest and expenses (including
reasonable attorney's fees and expenses)) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted by the relevant Governmental Authority. A certificate setting forth and
containing an explanation in reasonable detail of the manner in which such
amount shall have been determined and the amount of such payment or liability
prepared by a Lender or an Agent on their behalf, absent manifest error, shall
be final, conclusive and binding for all purposes. Such indemnification shall be
made within 30 days after the date the Lender (or Transferee) or any Agent, as
the case may be, makes written demand therefor.
(d) If a Lender (or Transferee) or any Agent shall become aware that it
is entitled to claim a refund from a Governmental Authority in respect of Taxes
or Other Taxes as to which it has been indemnified by the Borrower, or with
respect to which the Borrower has paid additional amounts, pursuant to this
Section 2.16, it shall promptly notify the Borrower of the availability of such
refund claim and shall, within 30 days after receipt of a request by the
Borrower, make a claim to such Governmental Authority for such refund at the
Borrower's expense. If a Lender (or Transferee) or any Agent receives a refund
(including pursuant to a claim for refund made pursuant to the preceding
sentence) in respect of any Taxes or Other Taxes as to which it has been
indemnified by the Borrower or with respect to which the Borrower had paid
additional amounts pursuant to this Section 2.16, it shall within 30 days from
the date of such receipt pay over such refund to the Borrower (but only to the
extent of indemnity payments made, or additional amounts paid, by the Borrower
under this Section 2.16 with respect to the Taxes or Other Taxes giving rise to
such refund), net of all out-of-pocket expenses of such Lender (or Transferee)
or such Agent and without interest (other than interest paid by the relevant
Governmental Authority with respect to such refund); provided, however, that the
Borrower, upon the request of such Lender (or
REVOLVING CREDIT FACILITY AGREEMENT -- Page 26
<PAGE> 31
Transferee) or such Agent, agrees to repay the amount paid over to the Borrower
(plus penalties, interest or other charges) to such Lender (or Transferee) or
such Agent in the event such Lender (or Transferee) or such Agent is required to
repay such refund to such Governmental Authority.
(e) As soon as practicable, but in any event within 30 days, after the
date of any payment of Taxes or Other Taxes by the Borrower to the relevant
Governmental Authority, the Borrower will deliver to the Administrative Agent,
at its address referred to in Section 8.01, the original or a certified copy of
a receipt issued by such Governmental Authority evidencing payment thereof.
(f) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section 2.16 shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.
(g) Each Lender or Agent (or Transferee) that is organized under the
laws of a jurisdiction other than the United States, any State thereof or the
District of Columbia (a "Non-U.S. Lender" or "Non U.S. Agent", as applicable)
shall deliver to the Borrower and the Administrative Agent two copies of either
United States Internal Revenue Service Form 1001 or Form 4224, properly
completed and duly executed by such Non-U.S. Lender claiming complete exemption
from, or reduced rate of, United States Federal withholding tax on payments by
the Borrower under this Agreement. Such forms shall be delivered by each
Non-U.S. Lender on or before the date it becomes a party to this Agreement (or,
in the case of a Transferee that is a participation holder, on or before the
date such participation holder becomes a Transferee hereunder) and on or before
the date, if any, such Non-U.S. Lender changes its applicable lending office by
designating a different lending office (a "New Lending Office"). In addition,
each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or
invalidity of any form previously delivered by such Non-U.S. Lender.
Notwithstanding any other provision of this Section 2.16(g), a Non-U.S. Lender
shall not be required to deliver any form pursuant to this Section 2.16(g) that
such Non-U.S. Lender is not legally able to deliver.
(h) The Borrower shall not be required to indemnify any Non-U.S. Lender
or Non-U.S. Agent (including any Transferee), or to pay any additional amounts
to any Non-U.S. Lender or Non-U.S. Agent (including any Transferee), in respect
of federal, state, local or other governmental withholding tax pursuant to
paragraph (a) or (c) above to the extent that (i) the obligation to withhold
amounts with respect to federal, state, local or other governmental withholding
tax existed on the date such Non-U.S. Lender became a party to this Agreement
(or, in the case of a Transferee that is a participation holder, on the date
such participation holder became a Transferee hereunder) or, with respect to
payments to a New Lending Office, the date such Non-U.S. Lender designated such
New Lending Office with respect to a Loan; provided, however, that this clause
(i) shall not apply to any Transferee or New Lending Office that becomes a
Transferee or New Lending Office as a result of an assignment, participation,
transfer or designation made at the request of the Borrower; and provided
further, however, that this clause (i) shall not apply to the extent the
indemnity payment or additional amounts any Transferee, or Lender (or
Transferee) through a New Lending Office, would be entitled to receive
REVOLVING CREDIT FACILITY AGREEMENT -- Page 27
<PAGE> 32
(without regard to this clause (h)) do not exceed the indemnity payment or
additional amounts that the Person making the assignment, participation or
transfer to such Transferee, or Lender (or Transferee) making the designation of
such New Lending Office, would have been entitled to receive in the absence of
such assignment, participation, transfer or designation or (ii) the obligation
to pay such additional amounts or such indemnity payments would not have arisen
but for a failure by such Non-U.S. Lender (including any Transferee) to comply
with the provisions of paragraph (g) above and (i) below.
(i) Any Lender (or Transferee) claiming any indemnity payment or
additional amounts payable pursuant to this Section 2.16 shall use reasonable
efforts (consistent with legal and regulatory restrictions) to file any
certificate or document reasonably requested in writing by the Borrower or to
change the jurisdiction of its applicable lending office if the making of such a
filing or change would avoid the need for or reduce the amount of any such
indemnity payment or additional amounts that may thereafter accrue and would
not, in the good faith determination of such Lender (or Transferee), be
otherwise disadvantageous to such Lender (or Transferee).
(j) Nothing contained in this Section 2.16 shall require any Lender (or
Transferee) or any Agent to make available to the Borrower any of its tax return
(or any other information) that it deems to be confidential or proprietary.
SECTION 2.17. Assignment of Commitments Under Certain Circumstances. In
the event that any Lender shall have delivered a notice or certificate pursuant
to Section 2.11 or 2.12, or the Borrower shall be required to make additional
payments to any Lender under Section 2.16, the Borrower shall have the right, at
its own expense, upon notice to such Lender and the Agents, to require such
Lender to transfer and assign without recourse (in accordance with and subject
to the restrictions contained in Section 8.04) all such Lender's interests,
rights and obligations contained hereunder to another financial institution
approved by the Administrative Agent and the Borrower (which approval shall not
be unreasonably withheld) which shall assume such obligations; provided that (i)
no such assignment shall conflict with any law, rule or regulation or order of
any Governmental Authority and (ii) the assignee or the Borrower, as the case
may be, shall pay to the affected Lender in immediately available funds on the
date of such assignment the principal of and interest accrued to the date of
payment on the Loan made by it hereunder and all other amounts accrued for its
account or owed to it hereunder.
SECTION 2.18. Payments by Administrative Agent to the Lenders. Any
payment received by the Administrative Agent hereunder for the account of a
Lender shall be paid to such Lender by 4:00 p.m. New York, New York time on (a)
the Business Day the payment is received in immediately available funds, if such
payment is received by 11:00 a.m. New York, New York time and (b) if such
payment is received after 11:00 a.m. New York, New York time, on the next
Business Day.
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ARTICLE 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to each of the Lenders as follows:
SECTION 3.01. Organization; Powers. Borrower (a) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) has all requisite power and authority to
own its property and assets and to carry on its business as now conducted and as
proposed to be conducted, (c) is qualified to do business in every jurisdiction
where such qualification is required, except where the failure so to qualify
would not result in a Material Adverse Effect, and (d) has the corporate power
and authority to execute, deliver and perform its obligations under this
Agreement and to borrow hereunder.
SECTION 3.02. Authorization. The execution, delivery and performance by
the Borrower of this Agreement and the Borrowings hereunder (collectively, the
"Transactions") (a) have been duly authorized by all requisite corporate action
and (b) will not (i) violate (A) any provision of any law, statute, rule or
regulation to which the Borrower is subject or of the certificate of
incorporation or other constituent documents or by-laws of the Borrower or any
of its Subsidiaries, (B) any order of any Applicable Governmental Authority or
(C), after giving effect to the consents required by Section 4.02 (g), any
provision of any Material indenture, agreement or other instrument to which the
Borrower or any of its Subsidiaries is a party or by which it or any of its
property is or may be bound (including the Senior Note Purchase Agreements and
the Indebtedness limitations set forth in Sections 10.4 and 10.9 thereof), (ii)
be in conflict with, result in a breach of or constitute (alone or with notice
or lapse of time or both) a default under any such indenture, agreement or other
instrument or (iii) result in the creation or imposition of any Lien upon any
property or assets of the Borrower.
SECTION 3.03. Enforceability. This Agreement constitutes a legal, valid
and binding obligation of the Borrower enforceable in accordance with its terms,
as such enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
SECTION 3.04. Governmental Approvals. No action, consent or approval
of, registration or filing with or other action by any Applicable Governmental
Authority is or will be required in connection with the Transactions, to the
extent they relate to the Borrower.
SECTION 3.05. Organization and Ownership of Shares of Subsidiaries.
(a) Schedule 3.05 is (except as noted therein) a complete and correct
list of the Borrower's Subsidiaries as of June 30, 1999, showing, as to each
Subsidiary, the correct name thereof, the jurisdiction of its organization, the
percentage of shares of each class of its capital stock or similar equity
interests outstanding owned by the Borrower and each other Subsidiary, and
specifying whether such Subsidiary is designated a Restricted Subsidiary.
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<PAGE> 34
(b) All of the outstanding shares of capital stock or similar equity
interests of each Subsidiary shown in Schedule 3.05 as being owned by the
Borrower and its Subsidiaries have been validly issued, are fully paid and
nonassessable and are owned by the Borrower or another Subsidiary free and clear
of any Lien (except as otherwise disclosed in Schedule 3.05).
(c) Each Subsidiary identified in Schedule 3.05 is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization, and is duly qualified as a foreign
corporation or other legal entity and is in good standing in each jurisdiction
in which such qualification is required by law, other than those jurisdictions
as to which the failure to be so qualified or in good standing would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has the corporate or other power and
authority to own or hold under lease the properties it purports to own or hold
under lease and to transact the business it transacts and proposes to transact.
SECTION 3.06. Financial Statements. The Borrower has delivered to some
or all of the Lenders copies of the financial statements of the Borrower and its
Subsidiaries listed on Schedule 3.06. All of the financial statements listed on
Schedule 3.06 (including in each case the related schedules and notes) fairly
present in all material respects the consolidated financial position of the
Borrower and its Subsidiaries, and of the Borrower and its Restricted
Subsidiaries, as of the respective dates specified in such Schedule and the
consolidated results of their operations and cash flows for the respective
periods so specified and have been prepared in accordance with GAAP consistently
applied throughout the periods involved except as set forth in the notes thereto
(subject, in the case of any interim financial statements, to normal year-end
adjustments). Except as disclosed in the financial statements listed in Schedule
3.06 or the most recently delivered financial statements delivered in accordance
with Section 5.20, since March 31, 1999, there has been no change in the
financial condition, operations, business, properties or prospects of the
Borrower or any of its Subsidiaries except changes that individually or in the
aggregate would not reasonably be expected to have a Material Adverse Effect.
There is no fact known to the Borrower that could reasonably be expected to have
a Material Adverse Effect that has not been set forth herein or in the financial
statements listed in Schedule 3.06.
SECTION 3.07. Litigation; Observance of Statutes and Orders.
(a) There are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
Subsidiary or any property of the Borrower or any Subsidiary in any court or
before any arbitrator of any kind or before or by any Applicable Governmental
Authority that, individually or in the aggregate, would reasonably be expected
to have a Material Adverse Effect.
(b) Neither the Borrower nor any Subsidiary is in default under any
agreement or instrument to which it is a party or by which it is bound, or any
order, judgment, decree or ruling of any court, arbitrator or Applicable
Governmental Authority or is in violation of any applicable law, ordinance, rule
or regulation (including without limitation Environmental Laws) of any
REVOLVING CREDIT FACILITY AGREEMENT -- Page 30
<PAGE> 35
Applicable Governmental Authority, which default or violation, individually or
in the aggregate, would reasonably be expected to have a Material Adverse
Effect.
SECTION 3.08. Taxes. The Borrower and its Subsidiaries have filed all
income tax returns that are required to have been filed in any jurisdiction, and
have paid all taxes shown to be due and payable on such returns and all other
taxes and assessments payable by them, to the extent such taxes and assessments
have become due and payable and before they have become delinquent, except for
any taxes and assessments (i) the amount of which is not individually or in the
aggregate Material or (ii) the amount, applicability or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which the Borrower or a Subsidiary, as the case may be, has
established adequate reserves in accordance with GAAP. The Federal income tax
liabilities of the Borrower and its Subsidiaries have been determined by the
Internal Revenue Service and paid for all fiscal years up to and including the
fiscal year ended December 31, 1995.
SECTION 3.09. Title to Property; Leases. The Borrower and its
Subsidiaries have good and sufficient title to their respective Material
properties, including all such properties reflected in the most recent audited
balance sheet referred to in Section 3.06 or purported to have been acquired by
the Borrower or any Subsidiary after said date (except as sold or otherwise
disposed of in the ordinary course of business), in each case free and clear of
Liens prohibited by this Agreement, except for those defects in title and Liens
that, individually or in the aggregate, would not have a Material Adverse
Effect. All Material leases are valid and subsisting and are in full force and
effect in all material respects.
SECTION 3.10. Licenses, Permits, etc. The Borrower and its Subsidiaries
own or possess all licenses, permits, franchises, authorizations, patents,
copyrights, service marks, trademarks and trade names, or rights thereto, that
are Material, without known conflict with the rights of others, except for those
conflicts that, individually or in the aggregate, would not have a Material
Adverse Effect.
SECTION 3.11. Compliance with ERISA.
(a) The Borrower and each ERISA Affiliate have operated and
administered each Plan in compliance with all applicable laws except for such
instances of noncompliance as have not resulted in and could not reasonably be
expected to result in a Material Adverse Effect. Neither the Borrower nor any
ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or
the penalty or excise tax provisions of the Code relating to employee benefit
plans (as defined in Section 3 of ERISA), and no event, transaction or condition
has occurred or exists that would reasonably be expected to result in the
incurrence of any such liability by the Borrower or any ERISA Affiliate, or in
the imposition of any Lien on any of the rights, properties or assets of the
Borrower or any ERISA Affiliate, in either case pursuant to Title I or IV of
ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or
412 of the Code, other than such liabilities or Liens as would not be
individually or in the aggregate Material.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 31
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(b) The present value of the aggregate accrued plan benefit liabilities
under each of the Plans that are subject to Title IV of ERISA (other than
Multiemployer Plans), determined in accordance with Financial Accounting
Standards Board Statement No. 87 as of the end of such Plan's most recently
ended plan year on the basis of the actuarial assumptions specified for funding
purposes in such Plan's most recent actuarial valuation report, did not exceed
the aggregate current value of the assets of such Plan allocable to such benefit
liabilities by more than $3,000,000 in the case of any single Plan and by more
than $3,000,000 in the aggregate for all Plans.
(c) The Borrower and its ERISA Affiliates have not incurred withdrawal
liabilities (and are not subject to contingent withdrawal liabilities) under
section 4201 or 4204 of ERISA in respect of Multiemployer Plans that
individually or in the aggregate are Material.
(d) The expected post-retirement benefit obligation (determined as of
the last day of the Borrower's most recently ended fiscal year in accordance
with Financial Accounting Standards Board Statement No. 106, without regard to
liabilities attributable to continuation coverage mandated by section 4980B of
the Code) of the Borrower and its Subsidiaries was approximately $17,955,591 as
of December 31, 1998.
SECTION 3.12. Use of Proceeds; Termination of Existing Credit
Agreements; Margin Regulation. The Borrower will apply the proceeds of the Loans
to refinance existing indebtedness, make acquisitions, for capital expenditures
and for working capital and other general corporate purposes. Without limiting
the generality of the forgoing, the Borrower agrees to use the proceeds of the
first Loans made hereunder and the net proceeds of its initial public offering
consummated in 1999 to repay in full all obligations outstanding in connection
with the following agreements (the "Existing Credit Agreements"):
(i) The Advance Term Credit Agreement dated March 16, 1999
among Borrower, Chase Bank of Texas, National Association, as
administrative agent, and Wachovia Bank, N. A., as documentation agent;
and
(ii) The Revolving Credit Facility Agreement dated July 13,
1998 among Borrower, Chase Bank of Texas, National Association, as
administrative agent, Wachovia Bank, N. A., as documentation agent and
the lenders named therein.
The Borrower agrees that on the date that the first Loans are made hereunder all
the commitments of the lenders under the Existing Credit Agreements are
terminated and of no further force or effect. No part of the proceeds from the
Loans will be used, directly or indirectly, for the purpose of buying or
carrying any margin stock within the meaning of Regulation U of the Board (12
CFR 221), or for the purpose of buying or carrying or trading in any securities
under such circumstances as to involve the Borrower in a violation of Regulation
X of the Board (12 CFR 224) or to involve any broker or dealer in a violation of
Regulation T of the Board (12 CFR 220). Margin stock does not constitute more
than 5% of the value of the consolidated assets of the
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Borrower and its Restricted Subsidiaries and the Borrower does not have any
present intention that margin stock will constitute more than 5% of the value of
such assets. As used in this Section, the terms "margin stock" and "purpose of
buying or carrying" shall have the meanings assigned to them in said Regulation
U.
SECTION 3.13. Existing Indebtedness. Except as described therein,
Schedule 3.13 sets forth a complete and correct list of all outstanding
Indebtedness of the Borrower and its Restricted Subsidiaries (other than
Indebtedness of Restricted Subsidiaries to the Borrower or to Wholly-Owned
Restricted Subsidiaries) as of June 30, 1999, since which date there has been no
Material change in the amounts, interest rates, sinking funds, installment
payments or maturities of the Indebtedness of the Borrower or its Restricted
Subsidiaries. Neither the Borrower nor any Restricted Subsidiary is in default,
and no waiver of default is currently in effect, in the payment of any principal
or interest on any Indebtedness of the Borrower or such Restricted Subsidiary,
and no event or condition exists with respect to any Indebtedness of the
Borrower or any Restricted Subsidiary the outstanding principal amount of which
exceeds $3,000,000 in the aggregate that would permit (or that with notice or
the lapse of time, or both, would permit) one or more Persons to cause such
Indebtedness to become due and payable before its stated maturity or before its
regularly scheduled dates of payment. To the knowledge of the Responsible
Officers of the Borrower, no event or condition exists with respect to any
Indebtedness of the Borrower or any Restricted Subsidiary that would permit (or
that with notice or the lapse of time, or both, would permit) one or more
Persons to cause such Indebtedness to become due and payable before its stated
maturity or before its regularly scheduled dates of payment.
SECTION 3.14. Foreign Assets Control Regulations, etc. The use of the
proceeds of the Loans will not violate the Trading with the Enemy Act, as
amended, or any of the foreign assets control regulations of the United States
Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
SECTION 3.15. Status under Certain Statutes. Neither the Borrower nor
any Subsidiary is subject to regulation under the Investment Company Act of
1940, as amended, the Public Utility Holding Company Act of 1935, as amended,
the Interstate Commerce Act, as amended, or the Federal Power Act, as amended.
SECTION 3.16. No Material Misstatements. No report, financial statement
or other information furnished by or on behalf of the Borrower to the Agents or
any Lender pursuant to or in connection with this Agreement contains or will
contain any material misstatement of fact or omits or will omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were or will be made, not misleading.
SECTION 3.17. Year 2000 Matters. Any programming required to permit the
proper functioning, in and following the year 2000, of the Borrower's and its
Subsidiaries' Material (i) computer systems and (ii) equipment containing
imbedded microchips (including systems and equipment supplied by others or with
which the Borrower's or its Subsidiaries' systems interface)
REVOLVING CREDIT FACILITY AGREEMENT -- Page 33
<PAGE> 38
and the testing of all such systems and equipment, as so reprogrammed, is
expected to be completed by October 31, 1999. The cost to the Borrower and its
Subsidiaries of such reprogramming and testing and of the reasonably foreseeable
consequences of year 2000 to the Borrower and its Subsidiaries (including,
without limitation, reprogramming errors and the failure of others' systems or
equipment) will not result in a Default or a Material Adverse Effect. Except for
such of the reprogramming referred to in the preceding sentence as may be
necessary, the computer and management information systems of the Borrower and
its Subsidiaries are, and with ordinary course upgrading and maintenance, will
continue for the term of this Agreement to be, sufficient to permit the Borrower
and its Subsidiaries to conduct its business without Material Adverse Effect.
ARTICLE 4. CONDITIONS OF LENDING
SECTION 4.01. All Borrowings. The obligations of the Lenders to make
Loans hereunder are subject to the satisfaction of the following conditions on
the date of each Borrowing:
(a) The Administrative Agent shall have received a notice of such
Borrowing as required by Section 2.03.
(b) The representations and warranties set forth in Article 3 hereof
shall be true and correct in all material respects on and as of the date of such
Borrowing with the same effect as though made on and as of such date, except to
the extent such representations and warranties expressly relate to an earlier
date.
(c) At the time of and immediately after such Borrowing no Event of
Default or Default shall have occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and
warranty by the Borrower on the date of such Borrowing as to the matters
specified in paragraphs (b) and (c) of this Section 4.01.
SECTION 4.02. Effective Date. The effectiveness of the obligations of
the Lenders to make Loans hereunder are subject to following conditions being
satisfied on or before August 15, 1999, and such obligations shall not be
effective until the date that each such condition is satisfied (the "Effective
Date"):
(a) The Administrative Agent shall have received a favorable written
opinion from Anne W. Teeling, Assistant General Counsel to the Borrower, dated
the Effective Date and addressed to the Lenders and satisfactory to Jenkens &
Gilchrist, a Professional Corporation, counsel for the Administrative Agent, to
the effect set forth in Exhibit C hereto (and the Borrower hereby instructs its
counsel to deliver such opinion to the Administrative Agent for the benefit of
the Lenders).
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(b) The Administrative Agent shall have received (i) a copy of the
certificate of incorporation, including all amendments thereto, of the Borrower,
certified as of a recent date by the Secretary of State of its state of
incorporation, and a certificate as to the good standing of the Borrower as of a
recent date from such Secretary of State; (ii) a certificate of the Secretary or
an Assistant Secretary of the Borrower dated the Effective Date and certifying
(A) that attached thereto is a true and complete copy of the by-laws of the
Borrower as in effect on the Effective Date and at all times since a date prior
to the date of the resolutions described in clause (B) below, (B) that attached
thereto is a true and complete copy of resolutions, duly adopted by the Board of
Directors authorizing the execution, delivery and performance of this Agreement
and the Transactions, and that such resolutions have not been modified,
rescinded or amended and are in full force and effect, (C) that the certificate
of incorporation referred to in clause (i) above has not been amended since the
date of the last amendment thereto shown on the certificate of good standing
furnished pursuant to such clause (i) and (D) as to the incumbency and specimen
signature of each officer executing this Agreement or any other document
delivered in connection herewith on behalf of the Borrower; (iii) a certificate
of another officer of the Borrower as to the incumbency and specimen signature
of the Secretary or Assistant Secretary executing the certificate pursuant to
(ii) above; and (iv) such other documents as the Lenders or the Administrative
Agent, shall reasonably request.
(c) The Administrative Agent shall have received a certificate, dated
the Effective Date and signed by a Senior Financial Officer of the Borrower
confirming compliance with the conditions precedent set forth in paragraphs (b)
and (c) of Section 4.01.
(d) The Agents shall have received all Fees and other amounts due and
payable on or prior to the Effective Date.
(e) The Borrower shall have issued and sold its equity securities in an
initial public offering, shall have received not less than $140,000,000 in net
proceeds therefrom and shall have provided the Administrative Agent a copy of
the final Registration Statement for such offering.
(f) The Administrative Agent shall have received a Compliance
Certificate, duly completed and executed, dated as of the Effective Date.
(g) The Administrative Agent shall have received evidence that all
Persons who have the benefit of the provisions similar or substantially similar
to the terms of Section 5.06 hereof (including without limitation, the holders
of the notes under the Senior Note Purchase Agreements) shall have consented to
the terms of this Agreement and waived any default arising as a result of the
execution and delivery of this Agreement and such provisions.
ARTICLE 5. AFFIRMATIVE AND NEGATIVE COVENANTS
The Borrower agrees that, so long as any Lender has any Commitment
hereunder or any amount payable hereunder remains unpaid:
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SECTION 5.01. Compliance with Laws. The Borrower will and will cause
each of its Subsidiaries to comply with all laws, ordinances or governmental
rules or regulations to which each of them is subject, including, without
limitation, Environmental Laws, and will obtain and maintain in effect all
licenses, certificates, permits, franchises and other governmental
authorizations necessary to the ownership of their respective properties or to
the conduct of their respective businesses, in each case to the extent necessary
to ensure that non-compliance with such laws, ordinances or governmental rules
or regulations or failures to obtain or maintain in effect such licenses,
certificates, permits, franchises and other governmental authorizations would
not reasonably be expected, individually or in the aggregate, to have a material
adverse effect on the business, operations, affairs, financial condition,
properties or assets of the Borrower and its Restricted Subsidiaries taken as a
whole.
SECTION 5.02. Insurance. The Borrower will and will cause each of its
Subsidiaries to maintain, with financially sound and reputable insurers,
insurance with respect to their respective properties and businesses against
such casualties and contingencies, of such types, on such terms and in such
amounts (including deductibles, co-insurance and self-insurance, if adequate
reserves are maintained with respect thereto) as is customary in the case of
entities of established reputations engaged in the same or a similar business
and similarly situated.
SECTION 5.03. Maintenance of Properties and Lines of Business. The
Borrower will and will cause each of its Subsidiaries to maintain and keep, or
cause to be maintained and kept, their respective properties in good repair,
working order and condition (other than ordinary wear and tear), so that the
business carried on in connection therewith may be properly conducted at all
times, provided that this Section shall not prevent the Borrower or any
Subsidiary from discontinuing the operation and the maintenance of any of its
properties if such discontinuance is desirable in the conduct of its business
and the Borrower has concluded that such discontinuance would not, individually
or in the aggregate, have a materially adverse effect on the business,
operations, affairs, financial condition, properties or assets of the Borrower
and its Restricted Subsidiaries taken as a whole. The Borrower will not and will
not permit any of its Restricted Subsidiaries to engage in any line of business
other than such lines of business in which it is presently engaged and those
businesses reasonably related thereto.
SECTION 5.04. Payment of Taxes. The Borrower will and will cause each
of its Subsidiaries to file all income tax or similar tax returns required to be
filed in any jurisdiction and to pay and discharge all taxes shown to be due and
payable on such returns and all other taxes, assessments, governmental charges,
or levies payable by any of them, to the extent such taxes and assessments have
become due and payable and before they have become delinquent, provided that
neither the Borrower nor any Subsidiary need pay any such tax or assessment if
(i) the amount, applicability or validity thereof is contested by the Borrower
or such Subsidiary on a timely basis in good faith and in appropriate
proceedings, and the Borrower or a Subsidiary has established adequate reserves
therefor in accordance with GAAP on the books of the Borrower or such Subsidiary
or (ii) the nonpayment of all such taxes and assessments in the aggregate would
not reasonably be expected to have a materially adverse effect on the business,
operations, affairs,
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<PAGE> 41
financial condition, properties or assets of the Borrower and its Restricted
Subsidiaries taken as a whole.
SECTION 5.05. Corporate Existence, etc. The Borrower will at all times
preserve and keep in full force and effect its corporate existence. Subject to
Sections 5.10 and 5.11, the Borrower will at all times preserve and keep in full
force and effect the corporate existence of each of its Restricted Subsidiaries
(unless merged into the Borrower or a Restricted Subsidiary) and all rights and
franchises of the Borrower and its Restricted Subsidiaries unless, in the good
faith judgment of the Borrower, the termination of or failure to preserve and
keep in full force and effect such corporate existence, right or franchise would
not, individually or in the aggregate, have a Material Adverse Effect on the
business, operations, affairs, financial condition, properties or assets of the
Borrower and its Restricted Subsidiaries taken as a whole.
SECTION 5.06. Most Favored Lender Status. The Borrower will not and
will not permit any Restricted Subsidiary to enter into, assume or otherwise be
bound or obligated under any agreement creating or evidencing Indebtedness or
any agreement executed and delivered in connection with any Indebtedness
containing one or more Additional Covenants or Additional Defaults (as defined
below), unless prior written consent to such agreement shall have been obtained
from the Required Lenders; provided, however, in the event the Borrower or any
Restricted Subsidiary shall enter into, assume or otherwise become bound by or
obligated under any such agreement without the prior written consent of the
Required Lenders, the terms of this Agreement shall, without any further action
on the part of the Borrower or any of the Lenders, be deemed to be amended
automatically to include each Additional Covenant and each Additional Default
contained in such agreement. The Borrower further covenants to promptly execute
and deliver at its expense an amendment to this Agreement in form and substance
satisfactory to the Required Lenders evidencing the amendment of this Agreement
to include such Additional Covenants and Additional Defaults, provided that the
execution and delivery of such amendment shall not be a precondition to the
effectiveness of such amendment as provided for in this Section 5.06, but shall
merely be for the convenience of the parties hereto.
For purposes of this Agreement, (i) the term "Additional Covenant"
shall mean any affirmative or negative covenant or similar restriction
applicable to the Borrower or any Restricted Subsidiary (regardless of whether
such provision is labeled or otherwise characterized as a covenant) the subject
matter of which either (A) is similar to that of the covenants in Article 5 of
this Agreement, but contains one or more percentages, amounts or formulas that
is more restrictive than those set forth herein or more beneficial to the holder
or holders of such other Indebtedness (and such covenant or similar restriction
shall be deemed an "Additional Covenant" only to the extent that it is more
restrictive or more beneficial) or (B) is different from the subject matter of
the covenants in Article 5 of this Agreement; and (ii) the term "Additional
Default" shall mean any provision which permits the holder of such Indebtedness
to accelerate (with the passage of time or giving of notice or both) the
maturity thereof or otherwise require the Borrower or any Restricted Subsidiary
to purchase such Indebtedness prior to the stated maturity of such Indebtedness
and which either (A) is similar to the Defaults and Events of Default contained
in
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<PAGE> 42
Article 6 of this Agreement, but contains one or more percentages, amounts or
formulas that is more restrictive or has a shorter grace period than those set
forth herein or is more beneficial to the holder or holders of such other
Indebtedness (and such provision shall be deemed an "Additional Default" only to
the extent that it is more restrictive, has a shorter grace period or is more
beneficial) or (B) is different from the subject matter of the Defaults and
Events of Default contained in Article 6 of this Agreement.
SECTION 5.07. Covenant to Secure Loans Equally. If the Borrower shall
create, assume or permit to exist any Lien upon any of its property or assets,
or permit any Restricted Subsidiary to create, assume or permit to exist any
Lien upon any of its property or assets, whether now owned or hereafter
acquired, other than those Liens permitted by the provisions of Section 5.13 the
Borrower shall make or cause to be made effective provision whereby the Loans
will be secured equally and ratably with any and all other obligations thereby
secured, with the documentation for such security to be reasonably satisfactory
to the Required Lenders and, in any such case, the Loans shall have the benefit,
to the fullest extent that, and with such priority as, the holders thereof may
be entitled under applicable law, of an equitable Lien on such property. Any
violation of Section 5.13 will constitute an Event of Default, whether or not
provision is made for an equal and ratable Lien pursuant to this Section 5.07.
SECTION 5.08. Environmental Matters.
(a) The Borrower will and will cause each of its Subsidiaries to comply
in all material respects with all applicable Environmental Laws if, individually
or in the aggregate, failure to comply therewith could reasonably be expected to
have a material adverse effect on the financial condition or results of
operations of the Borrower or the Borrower and its Subsidiaries, taken as a
whole.
(b) The Borrower will not and will not permit any of its Subsidiaries
to cause or allow any Hazardous Substance to be present at any time on, in,
under or above any real property or any part thereof in which the Borrower or
any Subsidiary has a direct interest (including without limitation ownership
thereof or any arrangement for the lease, rental or other use thereof, or the
retention of any mortgage or security interest therein or thereon), except in a
manner and to an extent that is in compliance in all material respects with all
applicable Environmental Laws or that will not have a material adverse effect on
the financial condition or results of operations of the Borrower or the Borrower
and its Subsidiaries, taken as a whole.
SECTION 5.09. Transactions with Affiliates. The Borrower will not
permit any Restricted Subsidiary to enter into directly or indirectly any
Material transaction or Material group of related transactions (including
without limitation the purchase, lease, sale or exchange of properties of any
kind or the rendering of any service) with any Affiliate (other than the
Borrower or another Restricted Subsidiary), except pursuant to the reasonable
requirements of the Borrower's or such Restricted Subsidiary's business and upon
fair and reasonable terms no less
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<PAGE> 43
favorable to the Borrower or such Restricted Subsidiary than would be obtainable
in a comparable arm's-length transaction with a Person not an Affiliate.
SECTION 5.10. Merger, Consolidation, etc. The Borrower will not
consolidate with or merge with any other corporation or convey, transfer or
lease substantially all of its assets in a single transaction or series of
transactions to any Person unless:
(a) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Borrower as an entirety, as the case may
be, shall be a solvent corporation organized and existing under the laws of the
United States or any State thereof (including the District of Columbia), and, if
the Borrower is not such corporation, such corporation shall have executed and
delivered to each Lender its assumption of the due and punctual performance and
observance of each covenant and condition of this Agreement, together with a
favorable opinion of counsel satisfactory to each such Lender covering such
matters relating to such corporation and such assumption as such Lender may
reasonably request; and
(b) immediately after giving effect to such transaction, no Default or
Event of Default would exist; and
(c) immediately prior to and after giving effect to such transaction,
the Borrower or such successor, as the case may be, would be permitted by the
provisions of Sections 5.12 and 5.17 to incur at least $1.00 of additional
Indebtedness and $1.00 of additional Restricted Indebtedness, respectively.
No such conveyance, transfer or lease of substantially all of the
assets of the Borrower shall have the effect of releasing the Borrower or any
successor corporation that shall theretofore have become such in the manner
prescribed in this Section 5.10 from its liability under this Agreement.
SECTION 5.11. Sale of Assets, etc. The Borrower will not, and will not
permit any of its Restricted Subsidiaries to, make any Transfer, provided that
the foregoing restriction does not apply to a Transfer if:
(a) the property that is the subject of such Transfer constitutes
either (i) inventory held for sale, or (ii) equipment, fixtures, supplies or
materials no longer required in the operation of the business of the Borrower or
such Restricted Subsidiary or that is obsolete, and, in the case of any Transfer
described in clause (i) or (ii), such Transfer is in the ordinary course of
business (each such Transfer, an "Ordinary Course Transfer"); or
(b) such Transfer is from
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<PAGE> 44
(i) a Restricted Subsidiary to the Borrower or another
Restricted Subsidiary, or
(ii) the Borrower to a Restricted Subsidiary, or
(iii) the Borrower to a Subsidiary (other than a Restricted
Subsidiary) or from a Restricted Subsidiary to another Subsidiary
(other than a Restricted Subsidiary) and in either case is for Fair
Market Value, so long as immediately before and immediately after the
consummation of such transaction, and after giving effect thereto, no
Default or Event of Default exists or would exist (each such Transfer,
an "Intergroup Transfer"); or
(c) such Transfer is not an Ordinary Course Transfer or an Intergroup
Transfer (such Transfers which are not Ordinary Course Transfers or Intergroup
Transfers collectively referred to as "Excluded Transfers"), and all of the
following conditions shall have been satisfied with respect thereto (the date of
the consummation of such Transfer being referred to herein as the "Property
Disposition Date"):
(i) the book value of the assets included in such Transfer,
together with the book value of the assets included in all other
Transfers (other than Excluded Transfers) during the fiscal year which
includes the Property Disposition Date, shall not exceed fifteen
percent (15%) of Consolidated Assets as of the end of the most recent
fiscal year;
(ii) the book value of the assets included in such Transfer,
together with the book value of the assets included in all other
Transfers (other than Excluded Transfers) from the Effective Date
through the Property Disposition Date, shall not exceed thirty percent
(30%) of Consolidated Assets as of the end of the most recent fiscal
year; and
(iii) immediately after giving effect to such Transfer, no
Default or Event of Default would exist and the Borrower would be
permitted by the provisions of Sections 5.12 and 5.17 to incur at least
$1.00 of additional Indebtedness and $1.00 of additional Restricted
Indebtedness, respectively.
If, within twelve (12) months after the Property Disposition Date, the
Borrower or a Restricted Subsidiary acquires assets similar to the assets
included in the Transfer, then, only for the purpose of determining compliance
with Sections 5.11(c)(i) and (ii), the lesser of the book value of the assets
acquired or the book value of the assets included in the Transfer shall not be
taken into account.
SECTION 5.12. Incurrence of Indebtedness. The Borrower will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume, guarantee, or otherwise become directly or indirectly liable with
respect to any Indebtedness, unless on the date the Borrower or such Restricted
Subsidiary becomes liable with respect to any such Indebtedness and
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<PAGE> 45
immediately after giving effect thereto and to the substantially concurrent
retirement of any other Indebtedness,
(a) no Default or Event of Default would exist, and
(b) Consolidated Indebtedness would not exceed sixty percent (60%) of
Consolidated Capitalization.
For purposes of this Section 5.12 any Person becoming a Restricted
Subsidiary after the date of this Agreement shall be deemed to have incurred all
of its then outstanding Indebtedness at the time it becomes a Restricted
Subsidiary.
SECTION 5.13. Liens. The Borrower will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly create, incur, assume or
permit to exist (upon the happening of a contingency or otherwise) any Lien on
or with respect to any property or asset (including, without limitation, any
document or instrument in respect of goods or accounts receivable) of the
Borrower or any such Restricted Subsidiary, whether now owned or held or
hereafter acquired, or any income or profits therefrom, or assign or otherwise
convey any right to receive income or profits, except:
(a) Liens for taxes, assessments or other governmental charges the
payment of which is not at the time required by Section 5.04;
(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen and other similar Liens, in each case, incurred in the
ordinary course of business for sums not yet due;
(c) Liens (other than any Lien imposed by ERISA) incurred or deposits
made in the ordinary course of business (i) in connection with workers'
compensation, unemployment insurance and other types of social security or
retirement benefits, or (ii) to secure (or to obtain letters of credit that
secure) the performance of tenders, statutory obligations, surety bonds, appeal
bonds, bids, leases (other than Capital Leases), performance bonds, purchase,
construction or sales contracts and other similar obligations, in each case not
incurred or made in connection with the borrowing of money, the obtaining of
advances or credit or the payment of the deferred purchase price of property;
(d) any attachment or judgment Lien, unless the judgment or other
obligation it secures (i) shall not, within ninety (90) days after the entry
thereof, have been discharged or execution thereof stayed pending appeal, or
shall not have been discharged within ninety (90) days after the expiration of
any such stay or (ii) exceeds, together with the amounts of all other
obligations secured by attachment or judgment Liens at the time existing in
respect of property of the Borrower and its Restricted Subsidiaries, $5,000,000;
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(e) leases or subleases granted to others, easements, rights-of-way,
restrictions and other similar charges or encumbrances, in each case incidental
to, and not interfering with, the ordinary conduct of the business of the
Borrower or any of its Restricted Subsidiaries, provided that such Liens do not,
in the aggregate, materially detract from the value of such property;
(f) Liens on property or assets of the Borrower or any of its
Restricted Subsidiaries securing Indebtedness or other obligations owing to the
Borrower or to a Wholly Owned Restricted Subsidiary;
(g) Liens existing on the date of this Agreement on the building
referred to in item C of Schedule 3.13 and securing the Indebtedness referred to
in item C of Schedule 3.13;
(h) any Lien renewing, extending or refunding any Lien permitted by
Subsection (g) above, provided that (i) the principal amount of Indebtedness
secured by such Lien immediately prior to such extension, renewal or refunding
is not increased or the maturity thereof reduced, (ii) such Lien is not extended
to any other property, and (iii) immediately after such extension, renewal or
refunding no Default or Event of Default would exist and the Borrower would be
permitted by the provisions of Sections 5.12 and 5.17 to incur at least $1.00 of
additional Indebtedness and $1.00 of additional Restricted Indebtedness,
respectively; and
(i) other Liens not otherwise permitted by Subsections (a) through (h)
above, provided that (i) the fair market value of the assets subject to such
other Liens shall not exceed 15% of Consolidated Net Worth and (ii) immediately
after giving effect to the creation thereof, the Borrower would be permitted by
the provisions of Sections 5.12 and 5.17 to incur at least $1.00 of additional
Indebtedness and $1.00 of additional Restricted Indebtedness, respectively.
For purposes of this Section 5.13, any Person becoming a Restricted
Subsidiary after the date of this Agreement shall be deemed to have incurred all
of its then outstanding Liens at the time it becomes a Restricted Subsidiary,
and any Person extending, renewing or refunding any Indebtedness secured by any
Lien shall be deemed to have incurred such Lien at the time of such extension,
renewal or refunding.
SECTION 5.14. Restricted Payments. The Borrower will not, and will not
permit any of its Restricted Subsidiaries to, declare or make, or incur any
liability to declare or make, any Restricted Payment, unless immediately after
giving effect to such action:
(a) no Default or Event of Default would exist; and
(b) the Borrower would be permitted by the provisions of Sections 5.12
and 5.17 to incur at least $1.00 of additional Indebtedness and $1.00 of
additional Restricted Indebtedness, respectively.
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SECTION 5.15. Financial Covenants. The Borrower covenants and agrees
that, as long as any obligation hereunder is outstanding or any Bank has any
Commitment hereunder, the Borrower will perform and observe the following
financial covenants:
(a) Coverage Ratio. As of the end of each fiscal quarter, the Borrower
shall not permit the ratio of Cash Flow for the four (4) fiscal quarters then
ending to Interest Expenses for such period to be less than 3.00 to 1.00. As
used herein the following terms have the following meanings:
"Cash Flow" means, for any period, the total of the following
for the Borrower and the Restricted Subsidiaries calculated on a
consolidated basis without duplication for such period in accordance
with GAAP: (A) EBITDA; minus (B) capital expenditures.
"Interest Expenses" means, for any period, the total interest
expenses (including the interest portion of Capital Leases) for the
Borrower and the Restricted Subsidiaries calculated on a consolidated
basis without duplication in accordance with GAAP.
(b) Consolidated Indebtedness to Adjusted EBITDA. As of the last day of
each fiscal quarter, the Borrower shall not permit the ratio of Consolidated
Indebtedness outstanding as of such day to the Adjusted EBITDA for the four (4)
fiscal quarters then ended to exceed 3.00 to 1.00.
(c) Consolidated Net Worth. The Borrower will not permit Consolidated
Net Worth as at the last day of any fiscal quarter of the Borrower to be less
than the sum of (a) $261,000,000, plus (b) 15% of its aggregate Consolidated Net
Income (but only if a positive number) for the period beginning April 1, 1998
and ending at the end of each fiscal quarter thereafter.
SECTION 5.16. Limitation on Dividend Restrictions, etc. The Borrower
will not permit any Restricted Subsidiary to enter into, adopt, create or
otherwise be or become bound by or subject to any contract or charter or by-law
provision limiting the amount of, or otherwise imposing restrictions on the
declaration, payment or setting aside of funds for the making of, any
Distributions in respect of the capital stock of such Restricted Subsidiary to
the Borrower or another Restricted Subsidiary.
SECTION 5.17. Limitation on Restricted Indebtedness. The Borrower will
not at any time permit the aggregate amount of Restricted Indebtedness to exceed
15% of Consolidated Net Worth.
SECTION 5.18. Preferred Stock of Restricted Subsidiaries. The Borrower
will not permit any Restricted Subsidiary to issue or permit to remain
outstanding any Preferred Stock unless such
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Preferred Stock is issued to and at all times owned and held by the Borrower or
a Wholly-Owned Restricted Subsidiary.
SECTION 5.19. No Redesignation of Restricted Subsidiaries. The Borrower
will not designate any Restricted Subsidiary as, or take or permit to be taken
any action that would cause any Restricted Subsidiary to become, an Unrestricted
Subsidiary.
SECTION 5.20. Financial and Business Information. The Borrower will
furnish to the Agents and each Lender:
(a) Quarterly Statements. Within 45 days after the end of each
quarterly fiscal period in each fiscal year of the Borrower (other than the last
quarterly fiscal period of each such fiscal year), duplicate copies of
(i) consolidated and consolidating balance sheets of the
Borrower and its Restricted Subsidiaries and of the Borrower and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated and consolidating statements of income,
changes in shareholders' equity and cash flows of the Borrower and its
Restricted Subsidiaries and of the Borrower and its Subsidiaries, for
such quarter and (in the case of the second and third quarters) for the
portion of the fiscal year ending with such quarter,
all in reasonable detail and setting forth, in the case of such consolidated
statements, in comparative form the figures for the corresponding periods in the
previous fiscal year, prepared in accordance with GAAP applicable to quarterly
financial statements generally, and certified by a Senior Financial Officer as
fairly presenting, in all material respects, the financial position of the
companies being reported on and their results of operations and cash flows,
subject to changes resulting from year-end adjustments, provided that delivery
within the time period specified above of copies of the Borrower's Quarterly
Report on Form 10-Q prepared in compliance with the requirements therefor and
filed with the Securities and Exchange Commission shall be deemed to satisfy the
requirements of this Section 5.20(a); provided further that if such Form 10-Q
does not contain consolidating information for the Borrower and its Restricted
Subsidiaries, the Borrower shall also deliver to each such holder the
consolidating information described in this Section 5.20(a);
(b) Annual Statements. Within 90 days after the end of each fiscal year
of the Borrower, duplicate copies of
(i) consolidated and consolidating balance sheets of the
Borrower and its Restricted Subsidiaries and of the Borrower and its
Subsidiaries, as at the end of such year, and
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(ii) consolidated and consolidating statements of income,
changes in shareholders' equity and cash flows of the Borrower and its
Restricted Subsidiaries and of the Borrower and its Subsidiaries, for
such year
setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail, prepared in accordance
with GAAP, and accompanied, (1) in the case of the consolidated
statements, by an opinion thereon of independent certified public
accountants of recognized national standing, which opinion shall state
that such financial statements present fairly, in all material
respects, the financial position of the companies being reported upon
and their results of operations and cash flows and have been prepared
in conformity with GAAP, and that the examination of such accountants
in connection with such financial statements has been made in
accordance with generally accepted auditing standards, and that such
audit provides a reasonable basis for such opinion in the
circumstances, and (2) in the case of the consolidating statements,
either certified by a Senior Financial Officer as fairly stating, or
accompanied by a report thereon by such accountants containing a
statement to the effect that such consolidating financial statements
fairly state, the financial position and the results of operations and
cash flows of the companies being reported upon in all material
respects in relation to the consolidated financial statements for the
periods indicated as a whole; provided that the delivery within the
time period specified above of the Borrower's Annual Report on Form
10-K for such fiscal year (together with the Borrower's annual report
to shareholders, if any, prepared pursuant to Rule 14a-3 under the
Exchange Act) prepared in accordance with the requirements therefor and
filed with the Securities and Exchange Commission shall be deemed to
satisfy the requirements of clauses (i) and (ii) of this Section 5.20
(b); provided further that if such Form 10-K does not contain
consolidating information for the Borrower and its Restricted
Subsidiaries, the Borrower shall also deliver to each such holder the
consolidating information described in this Section 5.20(b); and
(iii) a certificate of such accountants stating that in making
the examination for such report, they have obtained no knowledge of any
Default or Event of Default, or, if they have obtained knowledge of any
Default or Event of Default, specifying the nature and period of
existence thereof and the action the Borrower has taken or proposes to
take with respect thereto.
(c) SEC and Other Reports. If the Borrower or any Restricted Subsidiary
shall be required to file reports with the Securities and Exchange Commission,
promptly upon their becoming available, one copy of (i) each financial
statement, report, notice or proxy statement sent by the Borrower or any
Restricted Subsidiary to public securities holders generally, and (ii) each
regular or periodic report, each registration statement that shall have become
effective (without exhibits except as expressly requested by such holder), and
each final prospectus and all amendments thereto filed by the Borrower or any
Restricted Subsidiary with the Securities and Exchange Commission;
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(d) Notice of Default or Event of Default. Promptly, and in any event
within five days after a Responsible Officer becoming aware of the existence of
any Default or Event of Default, a written notice specifying the nature and
period of existence thereof and what action the Borrower is taking or proposes
to take with respect thereto;
(e) ERISA Matters. Promptly, and in any event within five days after a
Responsible Officer becomes aware of any of the following, a written notice
setting forth the nature thereof and the action, if any, that the Borrower or an
ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event, as defined
in section 4043(b) of ERISA and the regulations thereunder, for which
notice thereof has not been waived pursuant to such regulations as in
effect on the date hereof and the potential cost to the Borrower or
such ERISA Affiliate resulting therefrom exceeds $500,000; or
(ii) the taking by the PBGC of steps to institute, or the
threatening in writing by the PBGC of the institution of, proceedings
under section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan, or the receipt by the Borrower or
any ERISA Affiliate of a notice from a Multiemployer Plan that such
action has been taken by the PBGC with respect to such Multiemployer
Plan; or
(iii) any event, transaction or condition that could result in
the incurrence of any liability by the Borrower or any ERISA Affiliate
pursuant to Title I or IV of ERISA or the penalty or excise tax
provisions of the Code relating to employee benefit plans, or in the
imposition of any Lien on any of the rights, properties or assets of
the Borrower or any ERISA Affiliate pursuant to Title I or IV of ERISA
or such penalty or excise tax provisions, if such liability or Lien,
taken together with any other such liabilities or Liens then existing,
would reasonably be expected to have a Material Adverse Effect.
(f) Requested Information. With reasonable promptness, such other data
and information relating to the business, operations, affairs, financial
condition, assets or properties of the Borrower or any of its Restricted
Subsidiaries or relating to the ability of the Borrower to perform its
obligations hereunder as from time to time may be reasonably requested by any
Lender.
(g) Officer's Certificate. Each set of financial statements delivered
pursuant to Section 5.20(a) or Section 5.20(b) hereof shall be accompanied by a
certificate of a Senior Financial Officer setting forth:
(i) Covenant Compliance. The information (including detailed
calculations) required in order to establish the Debt to Adjusted
EBITDA Ratio, the Applicable Margin, the Commitment Fee Percentage and
whether the Borrower was in compliance with the requirements of Section
5.11 through Section 5.17 hereof, inclusive, and with all Additional
Covenants, if any, that involve calculations during the quarterly or
annual
REVOLVING CREDIT FACILITY AGREEMENT -- Page 46
<PAGE> 51
period covered by the statements then being furnished (including with
respect to each such Section or Additional Covenant, as the case may
be, where applicable, the calculations of the maximum or minimum
amount, ratio or percentage, as the case may be, permissible under the
terms of such Sections or Additional Covenants, as the case may be, and
the calculation of the amount, ratio or percentage then in existence);
(ii) Event of Default. A statement that such officer has
reviewed the relevant terms hereof and has made, or caused to be made,
under his or her supervision, a review of the transactions and
conditions of the Borrower and its Subsidiaries from the beginning of
the quarterly or annual period covered by the statements then being
furnished to the date of the certificate and that such review shall not
have disclosed the existence during such period of any condition or
event that constitutes a Default or an Event of Default or, if any such
condition or event existed or exists (including, without limitation,
any such event or condition resulting from the failure of the Borrower
or any Subsidiary to comply with any Environmental Law), specifying the
nature and period of existence thereof and what action the Borrower
shall have taken or proposes to take with respect thereto;
(iii) Management's Discussion and Analysis. A written
discussion and analysis by management of the financial condition and
results of operations of the lines of business conducted by each
material Restricted Subsidiary for such accounting period; provided
that delivery within the time period specified above of copies of, in
the case of Section 5.20(a), the Borrower's Quarterly Report on Form
10-Q, or, in the case of Section 5.20(b) the Borrower's Annual Report
on Form 10-K, in each case prepared in compliance with the requirements
therefor and filed with the Securities and Exchange Commission shall be
deemed to satisfy this clause (iii); and
(iv) Litigation. A written statement that, to the best of such
Officer's knowledge after due inquiry, except as otherwise disclosed in
writing to you, there is no litigation (including derivative actions),
arbitration proceeding or governmental proceeding pending to which the
Borrower or any Subsidiary is a party, or with respect to the Borrower
or any Subsidiary or their respective properties, which has a
significant possibility of materially and adversely affecting the
business, operations, properties or condition of the Borrower or of the
Borrower and its Subsidiaries taken as a whole.
SECTION 5.21. Inspection; Confidentiality. The Borrower shall permit
the representatives of each Agent and each Lender:
(a) No Default. If no Default or Event of Default then exists, at the
expense of such Agent or Lender and upon reasonable prior notice to the
Borrower, to visit the principal executive office of the Borrower, to discuss
the affairs, finances and accounts of the Borrower and its Restricted
Subsidiaries with the Borrower's officers and (with the consent of the Borrower,
which consent will not be unreasonably withheld) its independent public
accountants, and (with the consent of the Borrower, which consent will not be
unreasonably withheld) to visit the other
REVOLVING CREDIT FACILITY AGREEMENT -- Page 47
<PAGE> 52
offices and properties of the Borrower and each Restricted Subsidiary, all at
such reasonable times and as often as may be reasonably requested in writing;
(b) Default. If a Default or Event of Default then exists, at the
expense of the Borrower to visit and inspect any of the offices or properties of
the Borrower or any Subsidiary, to examine all their respective books of
account, records, reports and other papers, to make copies and extracts
therefrom, and to discuss their respective affairs, finances and accounts with
their respective officers and independent public accountants (and by this
provision the Borrower authorizes said accountants to discuss the affairs,
finances and accounts of the Borrower and its Subsidiaries), all at such times
and as often as may be requested; and
(c) Technical Data. Anything herein to the contrary notwithstanding,
neither the Borrower nor any of its Subsidiaries shall have any obligations to
disclose pursuant to this Agreement any engineering, scientific, or other
technical data without significance to the analysis of the financial position of
the Borrower and its Subsidiaries.
SECTION 5.22. Books and Records. The Borrower shall maintain its
financial records in accordance with GAAP and all other business and operating
records in accordance with reasonably prudent business practices.
ARTICLE 6. EVENTS OF DEFAULT
In case of the happening of any of the following events (each an "Event
of Default"):
(a) the Borrower defaults in the payment of any principal on any Loan
when the same becomes due and payable, whether at maturity or at a date fixed
for prepayment or by declaration or otherwise; or
(b) the Borrower defaults in the payment of any interest on any Loan
for more than five Business Days after the same becomes due and payable; or
(c) the Borrower defaults in the performance of or compliance with any
term contained in Section 5.20(d) or Sections 5.10 through 5.19; or
(d) the Borrower defaults in the performance of or compliance with any
term contained herein (other than those referred to in paragraphs (a), (b) and
(c) of this Article 6) or any Additional Covenant and such default is not
remedied within 30 days after the earlier of (i) a Responsible Officer obtaining
actual knowledge of such default and (ii) the Borrower receiving written notice
of such default from either Agent or any Lender (any such written notice to be
identified as a "notice of default" and to refer specifically to this paragraph
(d) of Article 6); or
(e) any representation or warranty made in writing by or on behalf of
the Borrower or by any officer of the Borrower in this Agreement or in any
writing furnished in connection with the
REVOLVING CREDIT FACILITY AGREEMENT -- Page 48
<PAGE> 53
transactions contemplated hereby proves to have been false or incorrect in any
material respect on the date as of which made; or
(f) (i) the Borrower or any Restricted Subsidiary is in default (as
principal or as guarantor or other surety) in the payment of any principal of or
premium or make-whole amount or interest on any Indebtedness that is outstanding
in an aggregate principal amount of at least $5,000,000 beyond any period of
grace provided with respect thereto, or (ii) the Borrower or any Restricted
Subsidiary is in default in the performance of or compliance with any term of
any evidence of any Indebtedness in an aggregate outstanding principal amount of
at least $5,000,000 or of any mortgage, indenture or other agreement relating
thereto or any other condition exists, and as a consequence of such default or
condition such Indebtedness has become, or has been declared due and payable
before its stated maturity or before its regularly scheduled dates of payment;
or
(g) the Borrower or any Restricted Subsidiary (i) is generally not
paying, or admits in writing its inability to pay, its debts as they become due,
(ii) files, or consents by answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or any other petition in
bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency,
reorganization, moratorium or other similar law of any jurisdiction, (iii) makes
an assignment for the benefit of its creditors, (iv) consents to the appointment
of a custodian, receiver, trustee or other officer with similar powers with
respect to it or with respect to any substantial part of its property, (v) is
adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for
the purpose of any of the foregoing; or
(h) a court or governmental authority of competent jurisdiction enters
an order appointing, without consent by the Borrower or any of its Restricted
Subsidiaries, a custodian, receiver, trustee or other officer with similar
powers with respect to it or with respect to any substantial part of its
property, or constituting an order for relief or approving a petition for relief
or reorganization or any other petition in bankruptcy or for liquidation or to
take advantage of any bankruptcy or insolvency law of any jurisdiction, or
ordering the dissolution, winding-up or liquidation of the Borrower or any of
its Restricted Subsidiaries, or any such petition shall be filed against the
Borrower or any of its Restricted Subsidiaries and such petition shall not be
dismissed within 60 days; or
(i) a final judgment or judgments for the payment of money aggregating
in excess of $5,000,000 are rendered against one or more of the Borrower and its
Restricted Subsidiaries and which judgments are not, within 60 days after entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged
within 60 days after the expiration of such stay; or
(j) if (i) any Plan subject to the minimum funding standards of ERISA
or the Code shall fail to satisfy such standards for any plan year or part
thereof or a waiver of such standards or extension of any amortization period is
sought or granted under section 412 of the Code, (ii) a notice of intent to
terminate any Plan shall have been or is reasonably expected to be filed with
the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042
to terminate
REVOLVING CREDIT FACILITY AGREEMENT -- Page 49
<PAGE> 54
or appoint a trustee to administer any Plan or the PBGC shall have notified the
Borrower or any ERISA Affiliate that a Plan may become a subject of any such
proceedings, (iii) the aggregate amount of unfunded accrued plan benefit
liabilities under all Plans subject to Title IV of ERISA, determined in
accordance with Financial Accounting Standards Board Statement No. 87 or 132, as
the case may be, as of the end of such Plans' most recently ended plan year on
the basis of actuarial assumptions specified for funding purposes in such Plans'
most recent actuarial valuation report, shall exceed $5,000,000, (iv) the
Borrower or any ERISA Affiliate shall have incurred or is reasonably expected to
incur any liability pursuant to Title I or IV of ERISA or the penalty or excise
tax provisions of the Code relating to employee benefit plans, (v) the Borrower
or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the
Borrower or any Restricted Subsidiary establishes or amends any employee welfare
benefit plan that provides post-employment welfare benefits in a manner that
would increase the liability of the Borrower or any Restricted Subsidiary
thereunder; and any such event or events described in clauses (i) through (vi)
above, either individually or together with any other such event or events,
would reasonably be expected to have a Materially Adverse Effect (as used in
Article 6, the terms "employee benefit plan" and "employee welfare benefit plan"
shall have the respective meanings assigned to such terms in Section 3 of
ERISA);
then, and in every such event, and at any time thereafter during the continuance
of such event, the Administrative Agent, at the request of the Required Lenders,
shall, by notice to the Borrower, take either or both of the following actions,
at the same or different times: (i) terminate forthwith the right of the
Borrower to borrow pursuant to the Commitments and (ii) declare the Loans of the
Borrower then outstanding to be forthwith due and payable in whole or in part,
whereupon the principal of the Loans so declared to be due and payable, together
with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder, shall become forthwith due and
payable, without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or any other notice of any kind, all of which are hereby
expressly waived, anything contained herein to the contrary notwithstanding;
provided that in the case of any event described in paragraph (g) or (h) above
with respect to the Borrower, the Commitments of the Lenders with respect to the
Borrower shall automatically terminate and the principal of the Loans then
outstanding of the Borrower with respect to which such event has occurred,
together with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder shall automatically become due and
payable, without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or any other notice of any kind, all of which are hereby
expressly waived by the Borrower, anything contained herein to the contrary
notwithstanding.
ARTICLE 7. THE ADMINISTRATIVE AGENT
In order to expedite the transactions contemplated by this Agreement,
Chase Bank of Texas, National Association is hereby appointed to act as
Administrative Agent, on behalf of the Lenders. Each of the Lenders hereby
irrevocably authorizes the Administrative Agent to take such actions on behalf
of such Lender and to exercise such powers as are specifically delegated to the
REVOLVING CREDIT FACILITY AGREEMENT -- Page 50
<PAGE> 55
Administrative Agent by the terms and provisions hereof, together with such
actions and powers as are reasonably incidental thereto. The Administrative
Agent is hereby expressly authorized by the Lenders, without hereby limiting any
implied authority, (a) to receive on behalf of the Lenders all payments of
principal of and interest on the Loans and all other amounts due to the Lenders
hereunder, and promptly to distribute to each Lender its share of each payment
so received; (b) to give notice on behalf of each of the Lenders to the Borrower
of any Event of Default of which the Administrative Agent has actual knowledge
acquired in connection with its agency hereunder; and (c) to distribute to each
Lender copies of all notices, financial statements and other materials delivered
by the Borrower pursuant to this Agreement as received by the Administrative
Agent.
Neither Administrative Agent nor any of its directors, officers,
employees or agents shall be liable as such for any action taken or omitted by
any of them except for its or his or her own gross negligence or willful
misconduct, or be responsible for any statement, warranty or representation
herein or the contents of any document delivered in connection herewith, or be
required to ascertain or to make any inquiry concerning the performance or
observance by the Borrower of any of the terms, conditions, covenants or
agreements contained in this Agreement. The Administrative Agent shall not be
responsible to the Lenders for the due execution, genuineness, validity,
enforceability or effectiveness of this Agreement or other instruments or
agreements; provided that the foregoing exclusion shall not have the effect of
releasing the Administrative Agent from its stated responsibilities herein to
receive executed agreements, documents and instruments on behalf of the Lenders.
The Administrative Agent may deem and treat the Lender which makes any Loan as
the holder of the indebtedness resulting therefrom for all purposes hereof until
it shall have received notice from such Lender, given as provided herein, of the
transfer thereof. The Administrative Agent shall in all cases be fully protected
in acting, or refraining from acting, in accordance with written instructions
signed by the Required Lenders and, except as otherwise specifically provided
herein, such instructions and any action or inaction pursuant thereto shall be
binding on all the Lenders. The Administrative Agent shall, in the absence of
knowledge to the contrary, be entitled to rely on any instrument or document
believed by it in good faith to be genuine and correct and to have been signed
or sent by the proper Person or Persons. Neither the Administrative Agent nor
any of its directors, officers, employees or agents shall have any
responsibility to the Borrower on account of the failure of or delay in
performance or breach by any Lender of any of its obligations hereunder or any
Lender on account of the failure of or delay in performance or breach by any
Lender or the Borrower of any of their respective obligations hereunder or in
connection herewith. The Administrative Agent may execute any and all duties
hereunder by or through agents or employees and shall be entitled to rely upon
the advice of legal counsel selected by it with respect to all matters arising
hereunder and shall not be liable for any action taken or suffered in good faith
by it in accordance with the advice of such counsel.
The Lenders hereby acknowledge that the Administrative Agent shall be
under no duty to take any discretionary action permitted to be taken by it
pursuant to the provisions of this Agreement unless it shall be requested in
writing to do so by the Required Lenders.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 51
<PAGE> 56
Subject to the appointment and acceptance of a successor Administrative
Agent as provided below, the Administrative Agent may resign at any time by
notifying the Lenders and the Borrower. Upon any such resignation, the Required
Lenders shall have the right to appoint a successor Administrative Agent who
must be acceptable to the Borrower and shall be selected from the Lenders unless
no Lender agrees to accept such appointment. If no successor shall have been so
appointed by the Required Lenders, no approval of the Borrower obtained and such
successor shall not have accepted such appointment, all within 30 days after the
retiring Administrative Agent gives notice of its resignation, then the retiring
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent, which shall be a bank having a combined capital and
surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the
acceptance of any appointment as Administrative Agent hereunder by a successor
bank, such successor shall succeed to and become vested with all the rights,
powers, privileges and duties of the retiring Administrative Agent and the
retiring Administrative Agent shall be discharged from its duties and
obligations hereunder. After the Administrative Agent's resignation hereunder,
the provisions of this Article and Section 8.05 shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as Administrative Agent.
With respect to the Loans made by it hereunder, the Administrative
Agent, in its individual capacity and not as Administrative Agent shall have the
same rights and powers as any other Lender and may exercise the same as though
it were not the Administrative Agent, and the Administrative Agent and its
Affiliates may accept deposits from, lend money to and generally engage in any
kind of business with the Borrower or any Subsidiary or other Affiliate thereof
as if it were not the Administrative Agent.
Each Lender agrees (i) to reimburse the Administrative Agent, on
demand, in the amount of its pro rata share (based on its Commitment hereunder
or, if the Total Commitment shall have been terminated, the amount of its
outstanding Loans) of any expenses incurred for the benefit of the Lenders in
its role as Administrative Agent, including reasonable counsel fees and
compensation of agents and employees paid for services rendered on behalf of the
Lenders, which shall not have been reimbursed by the Borrower AND (II) TO
INDEMNIFY AND HOLD HARMLESS THE ADMINISTRATIVE AGENT AND ANY OF ITS DIRECTORS,
OFFICERS, EMPLOYEES OR AGENTS, ON DEMAND, IN THE AMOUNT OF SUCH PRO RATA SHARE,
FROM AND AGAINST ANY AND ALL LIABILITIES, TAXES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY
KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED
AGAINST IT IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION
TAKEN OR OMITTED BY IT UNDER THIS AGREEMENT TO THE EXTENT THE SAME SHALL NOT
HAVE BEEN REIMBURSED BY THE BORROWER (INCLUDING WITHOUT LIMITATION, ALL
LIABILITIES, TAXES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS,
SUITS, COSTS, EXPENSES, OR DISBURSEMENTS ARISING FROM THE SOLE OR CONTRIBUTORY
NEGLIGENCE OF THE ADMINISTRATIVE AGENT); PROVIDED THAT NO LENDER SHALL BE LIABLE
TO THE ADMINISTRATIVE AGENT FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS,
LOSSES, DAMAGES,
REVOLVING CREDIT FACILITY AGREEMENT -- Page 52
<PAGE> 57
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING
FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE ADMINISTRATIVE AGENT OR
ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS.
Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement
or any related agreement or any document furnished hereunder or thereunder.
Wachovia Bank, N.A. has been designated as the Syndication Agent
hereunder and The Bank of Nova Scotia has been designated as the documentation
agent in recognition of the level of their respective Commitments. Neither
Wachovia Bank, N.A. nor The Bank of Nova Scotia is an agent for the Lenders and
shall not have any obligation hereunder other than those existing in its
capacity as Lender.
ARTICLE 8. MISCELLANEOUS
SECTION 8.01. Notices. Notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed or sent by telecopy, as follows:
(a) if to Borrower, at its principal executive offices at 2140 Lake
Park Blvd., Richardson, Texas 75080, to the attention of Chief Financial
Officer, telecopy number 972-497-6042 with a copy to the Corporate Controller,
Telecopy 972- 497- 5015;
(b) if to the Administrative Agent, to Chase Bank of Texas, National
Association, 2200 Ross Avenue, 3rd Floor, Dallas, TX 75201, Attention of Mae
Reeves, (Telecopy No. 214-965-2044), with a copy to Chase Bank of Texas,
National Association, c/o The Chase Manhattan Bank, 1 Chase Manhattan Plaza, 8th
Floor, New York, New York 10081; Attention: Muniram Appanna, Telephone 212552
7943; Telecopy number 212-552-7490;
(c) if to the Syndication Agent, to Wachovia Bank, N.A., 191 Peachtree
Street, N.E., Atlanta, Georgia 30303, Attention: Paige Mesaros, telecopy number
(404) 332-6898; and
(d) if to a Lender, to it at its address (or telecopy number) set forth
in the Administrative Questionnaire delivered to the Administrative Agent by
such Lender in connection with the execution of this Agreement or in the
Assignment and Acceptance pursuant to which such Lender became a party hereto.
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<PAGE> 58
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy to such party as provided in this Section or in accordance with the
latest unrevoked direction from such party given in accordance with this
Section.
SECTION 8.02. Survival of Agreement. All covenants, agreements,
representations and warranties made by the Borrower herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement shall be considered to have been relied upon by the
Lenders and shall survive the making by the Lenders of the Loans regardless of
any investigation made by the Lenders or on their behalf, and shall continue in
full force and effect as long as the principal of or any accrued interest on any
Loan or any Fee or any other amount payable under this Agreement is outstanding
and unpaid or the Commitments have not been terminated.
SECTION 8.03. Binding Effect. This Agreement shall become effective
when it shall have been executed by the Borrower and each Agent and when the
Administrative Agent shall have received copies hereof (telecopied or otherwise)
which, when taken together, bear the signature of each Lender, and thereafter
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Borrower shall not have the
right to assign any rights hereunder or any interest herein without the prior
consent of all the Lenders (except as a consequence of a transaction expressly
permitted under Section 5.10).
SECTION 8.04. Successors and Assigns.
(a) Whenever in this Agreement any of the parties hereto is referred
to, such reference shall be deemed to include the successors and assigns of such
party; and all covenants, promises and agreements by or on behalf of any party
that are contained in this Agreement shall bind and inure to the benefit of its
successors and assigns.
(b) Each Lender may assign to one or more assignees all or a portion of
its interests, rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans at the time owing to it); provided,
however, that (i) except in the case of an assignment to a Lender or an
Affiliate of such Lender or an assignment to a Federal Reserve Bank, the
Borrower and the Administrative Agent must give their prior written consent to
such assignment (which consent shall not be unreasonably withheld); provided,
however, that if an Event of Default shall have occurred and be continuing, the
Borrower's consent will not be necessary, (ii) the amount of the Commitment of
the assigning Lender being assigned pursuant to each such assignment (other than
an assignment pursuant to Section 8.04(i)) and the amount of the Commitment
retained by the assigning Lender (each determined as of the date the Assignment
and Acceptance with respect to such assignment is delivered to the
Administrative Agent) shall not be less than $10,000,000 unless the assigning
Lender is assigning its entire Commitment, (iii) each such
REVOLVING CREDIT FACILITY AGREEMENT -- Page 54
<PAGE> 59
assignment shall be of a constant, and not a varying, percentage of all the
assigning Lender's rights and obligations under this Agreement, (iv) the parties
to each such assignment shall execute and deliver to the Administrative Agent an
Assignment and Acceptance and a processing and recordation fee of $3,000, and
the assignee, if it shall not be a Lender, shall deliver to the Administrative
Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to
Section 8.04(e), from and after the effective date specified in each Assignment
and Acceptance, which effective date shall be at least five Business Days after
the execution thereof unless otherwise agreed by the Administrative Agent (the
Borrower to be given reasonable notice of any shorter period), (A) the assignee
thereunder shall be a party hereto and, to the extent of the interest assigned
by such Assignment and Acceptance, have the rights and obligations of a Lender
under this Agreement and (B) the assigning Lender thereunder shall, to the
extent of the interest assigned by such Assignment and Acceptance, be released
from its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto (but shall continue to be entitled to the benefits of Sections 2.11, 2.16
and 8.05 afforded to such Lender prior to its assignment as well as to any Fees
accrued for its account hereunder and not yet paid)).
(c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the assignee thereunder shall be deemed to
confirm to and agree with each other and the other parties hereto as follows:
(i) such assigning Lender warrants that it is the legal and beneficial owner of
the interest being assigned thereby free and clear of any adverse claim, (ii)
except as set forth in (i) above, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement, or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto or the financial condition of the Borrower or the performance or
observance by the Borrower of any obligations under this Agreement or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.20 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; such assignee will independently and
without reliance upon the Agents, such assigning Lender or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (vi) such assignee appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Administrative Agent by
the terms hereof, together with such powers as are reasonably incidental
thereto; and (vii) such assignee agrees that it will perform in accordance with
their terms all the obligations which by the terms of this Agreement are
required to be performed by it as a Lender.
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(d) The Administrative Agent shall maintain at one of its offices in
New York, New York a copy of each Assignment and Acceptance delivered to it and
a register for the recordation of the names and addresses of the Lenders, and
the Commitment of, and the principal amount of the Loans owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive in the absence of manifest error and the
Borrower, the Agents and the Lenders may treat each Person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement. The Register shall be available for inspection
by each party hereto, at any reasonable time and from time to time upon
reasonable prior notice.
(e) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee together with an Administrative
Questionnaire completed in respect of the assignee (unless the assignee shall
already be a Lender hereunder), the processing and recordation fee referred to
in paragraph (b) above and, if required, the written consent of the Borrower and
the Administrative Agent to such assignment, the Administrative Agent shall (i)
accept such Assignment and Acceptance and (ii) record the information contained
therein in the Register.
(f) Each Lender may without the consent of the Borrower or the Agents
sell participations to one or more banks or other entities in all or a portion
of its rights and obligations under this Agreement (including all or a portion
of its Commitment and the Loans owing to it); provided, however, that (i) such
Lender's obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) each participating bank or other entity
shall be entitled to the benefit of the cost protection provisions contained in
Sections 2.11, 2.16 and 8.05 to the same extent as if it were the selling Lender
(and limited to the amount that could have been claimed by the selling Lender
had it continued to hold the interest of such participating bank or other
entity), except that all claims made pursuant to such Sections shall be made
through such selling Lender, and (iv) the Borrower, the Agents, and the other
Lenders shall continue to deal solely and directly with such selling Lender in
connection with such Lender's rights and obligations under this Agreement.
(g) Any Lender or participant may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section,
disclose to the assignee or participant or proposed assignee or participant any
information relating to the Borrower furnished to such Lender by or on behalf of
the Borrower; provided that, prior to any such disclosure, each such assignee or
participant or proposed assignee or participant shall execute an agreement
whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of any such information which
constitutes Confidential Information in accordance with Section 8.14.
(h) The Borrower shall not assign or delegate any rights and duties
hereunder without the prior written consent of all Lenders, and any attempted
assignment or delegation (except as a
REVOLVING CREDIT FACILITY AGREEMENT -- Page 56
<PAGE> 61
consequence of a transaction expressly permitted under Section 5.10) by the
Borrower without such consent shall be void.
(i) Any Lender may at any time assign or pledge all or any portion of
its rights under this Agreement to a Federal Reserve Bank; provided that no such
assignment or pledge shall release any Lender from its obligations hereunder or
substitute any such Federal Reserve Bank for such Lender as a party hereto. In
order to facilitate such an assignment to a Federal Reserve Bank, the Borrower
shall, at the request of the assigning Lender, duly execute and deliver to the
assigning Lender a promissory note or notes evidencing the Loans made to the
Borrower by the assigning Lender hereunder.
SECTION 8.05. Expenses; Indemnity.
(a) The Borrower agrees to pay all reasonable out-of-pocket expenses
incurred by either Agent, Chase Securities Inc. or Wachovia Securities, Inc. in
connection with entering into this Agreement or in connection with any
amendments, modifications or waivers of the provisions hereof (but only if such
amendments, modifications or waivers are requested by the Borrower) (whether or
not the transactions hereby contemplated are consummated), or incurred by either
Agent or any Lender in connection with the enforcement of their rights in
connection with this Agreement or in connection with the Loans made hereunder,
including the reasonable fees and disbursements of counsel for either Agent or,
in the case of enforcement following an Event of Default, the Lenders.
(b) THE BORROWER AGREES TO INDEMNIFY EACH LENDER AGAINST ANY LOSS,
CALCULATED IN ACCORDANCE WITH THE NEXT SENTENCE, OR REASONABLE EXPENSE WHICH
SUCH LENDER MAY SUSTAIN OR INCUR AS A CONSEQUENCE OF (A) ANY FAILURE BY THE
BORROWER TO BORROW OR TO CONVERT OR CONTINUE ANY LOAN HEREUNDER (INCLUDING AS A
RESULT OF THE BORROWER'S FAILURE TO FULFILL ANY OF THE APPLICABLE CONDITIONS SET
FORTH IN ARTICLE 4) AFTER IRREVOCABLE NOTICE OF SUCH BORROWING, CONVERSION OR
CONTINUATION HAS BEEN GIVEN PURSUANT TO SECTION 2.03, (B) ANY PAYMENT,
PREPAYMENT OR CONVERSION, OR ASSIGNMENT OF A EURODOLLAR LOAN REQUIRED BY ANY
OTHER PROVISION OF THIS AGREEMENT OR OTHERWISE MADE OR DEEMED MADE ON A DATE
OTHER THAN THE LAST DAY OF THE INTEREST PERIOD, IF ANY, APPLICABLE THERETO, (C)
ANY DEFAULT IN PAYMENT OR PREPAYMENT OF THE PRINCIPAL AMOUNT OF ANY LOAN OR ANY
PART THEREOF OR INTEREST ACCRUED THEREON, AS AND WHEN DUE AND PAYABLE (AT THE
DUE DATE THEREOF, WHETHER BY SCHEDULED MATURITY, ACCELERATION, IRREVOCABLE
NOTICE OF PREPAYMENT OR OTHERWISE) OR (D) THE OCCURRENCE OF ANY EVENT OF
DEFAULT, INCLUDING, IN EACH SUCH CASE, ANY LOSS OR REASONABLE EXPENSE SUSTAINED
OR INCURRED OR TO BE SUSTAINED OR INCURRED BY SUCH LENDER IN LIQUIDATING OR
EMPLOYING DEPOSITS FROM THIRD PARTIES, OR WITH RESPECT TO COMMITMENTS MADE OR
REVOLVING CREDIT FACILITY AGREEMENT -- Page 57
<PAGE> 62
OBLIGATIONS UNDERTAKEN WITH THIRD PARTIES, TO EFFECT OR MAINTAIN ANY LOAN
HEREUNDER OR ANY PART THEREOF AS A EURODOLLAR LOAN. SUCH LOSS SHALL INCLUDE AN
AMOUNT EQUAL TO THE EXCESS, IF ANY, AS REASONABLY DETERMINED BY SUCH LENDER, OF
(I) ITS COST OF OBTAINING THE FUNDS FOR THE LOAN BEING PAID, PREPAID, CONVERTED
OR NOT BORROWED (ASSUMED TO BE THE LIBO RATE) FOR THE PERIOD FROM THE DATE OF
SUCH PAYMENT, PREPAYMENT OR FAILURE TO BORROW TO THE LAST DAY OF THE INTEREST
PERIOD FOR SUCH LOAN (OR, IN THE CASE OF A FAILURE TO BORROW THE INTEREST PERIOD
FOR SUCH LOAN WHICH WOULD HAVE COMMENCED ON THE DATE OF SUCH FAILURE) OVER (II)
THE AMOUNT OF INTEREST (AS REASONABLY DETERMINED BY SUCH LENDER) THAT WOULD BE
REALIZED BY SUCH LENDER IN REEMPLOYING THE FUNDS SO PAID, PREPAID OR NOT
BORROWED FOR SUCH PERIOD OR INTEREST PERIOD, AS THE CASE MAY BE.
(c) THE BORROWER AGREES TO INDEMNIFY THE AGENTS, EACH LENDER, EACH OF
THEIR AFFILIATES AND THE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS OF, THE
FOREGOING (EACH SUCH PERSON BEING CALLED AN "INDEMNITEE") AGAINST, AND TO HOLD
EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES
AND RELATED EXPENSES, INCLUDING REASONABLE COUNSEL FEES AND EXPENSES, INCURRED
BY OR ASSERTED AGAINST ANY INDEMNITEE ARISING OUT OF (I) THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, (II) THE USE OF THE PROCEEDS OF THE
LOANS OR (III) ANY CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO
ANY OF THE FOREGOING, WHETHER OR NOT ANY INDEMNITEE IS A PARTY THERETO
(INCLUDING, WITHOUT LIMITATION, ANY LOSSES, CLAIMS, DAMAGES, LIABILITIES AND
RELATED EXPENSES ARISING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE
INDEMNITEE); PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE
AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR
RELATED EXPENSES (I) ARE DETERMINED TO HAVE RESULTED FROM THE GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE OR (II) RESULT FROM ANY LITIGATION
BROUGHT BY SUCH INDEMNITEE AGAINST THE BORROWER OR BY THE BORROWER AGAINST SUCH
INDEMNITEE, IN WHICH THE BORROWER IS THE PREVAILING PARTY.
(d) The provisions of this Section shall remain operative and in full
force and effect regardless of the expiration of the term of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of any of
the Loans, the invalidity or unenforceability of any term or provision of this
Agreement or any investigation made by or on behalf of any Agent or any Lender.
All amounts due under this Section shall be payable on written demand therefor.
SECTION 8.06. Right of Setoff. If an Event of Default shall have
occurred and be continuing, each Lender is hereby authorized at any time and
from time to time, to the fullest
REVOLVING CREDIT FACILITY AGREEMENT -- Page 58
<PAGE> 63
extent permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by such Lender to or for the credit or the
account of the Borrower against any of and all the obligations of the Borrower
now or hereafter existing under this Agreement held by such Lender, irrespective
of whether or not such Lender shall have made any demand under this Agreement
and although such obligations may be unmatured. The rights of each Lender under
this Section are in addition to other rights and remedies (including other
rights of setoff) which such Lender may have.
SECTION 8.07. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
SECTION 8.08. Waivers; Amendment.
(a) No failure or delay of Borrower, any Agent or any Lender in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Agents and the Lenders hereunder
are cumulative and are not exclusive of any rights or remedies which they would
otherwise have. No waiver of any provision of this Agreement or consent to any
departure therefrom shall in any event be effective unless the same shall be
permitted by paragraph (b) below, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice or demand on the Borrower or any Subsidiary in any case shall entitle
such party to any other or further notice or demand in similar or other
circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Lenders; provided, however, that
no such agreement shall (i) decrease the principal amount of, or extend the
maturity of or any scheduled principal payment date or date for the payment of
any interest on any Loan, or waive or excuse any such payment or any part
thereof, or decrease the rate of interest on any Loan, without the prior written
consent of each Lender affected thereby, (ii) increase any Commitment or
decrease the Commitment Fee Percentage or change the date on which the
Commitment Fees are due and payable, or (iii) amend or modify the provisions of
Section 2.13, Section 4.02(e) or Section 8.04(h), the provisions of this Section
or the definition of the "Required Lenders", without the prior written consent
of each Lender; provided further, however, that no such agreement shall amend,
modify or otherwise affect the rights or duties of the Administrative Agent
hereunder without the prior written consent of the Administrative Agent. Each
Lender shall be bound by any waiver, amendment or modification authorized by
this Section and any consent by any Lender pursuant to this Section shall bind
any assignee of its rights and interests hereunder.
SECTION 8.09. Entire Agreement. THIS AGREEMENT (INCLUDING THE SCHEDULES
AND EXHIBITS HERETO) AND THE FEE LETTERS CONSTITUTE A "LOAN
REVOLVING CREDIT FACILITY AGREEMENT -- Page 59
<PAGE> 64
AGREEMENT" AS DEFINED IN SECTION 26.03(A) OF THE TEXAS BUSINESS AND COMMERCE
CODE, AND REPRESENT THE ENTIRE CONTRACT AMONG THE PARTIES RELATIVE TO THE
SUBJECT MATTER HEREOF AND THEREOF. ANY PREVIOUS AGREEMENT AMONG THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF IS SUPERSEDED BY THIS AGREEMENT AND THE FEE
LETTERS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NOTHING IN
THIS AGREEMENT, EXPRESSED OR IMPLIED, IS INTENDED TO CONFER UPON ANY PARTY OTHER
THAN THE PARTIES HERETO ANY RIGHTS, REMEDIES, OBLIGATIONS OR LIABILITIES UNDER
OR BY REASON OF THIS AGREEMENT.
SECTION 8.10. Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
SECTION 8.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract, and shall become
effective as provided in Section 8.03.
SECTION 8.12. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 8.13. Interest Rate Limitation.
(a) Notwithstanding anything herein to the contrary, if at any time the
applicable interest rate, together with all fees and charges which are treated
as interest under applicable law (collectively the "Charges"), as provided for
herein or in any other document executed in connection herewith, or otherwise
contracted for, charged, received, taken or reserved by any Lender, shall exceed
the maximum lawful rate (the "Maximum Rate") which may be contracted for,
charged, taken, received or reserved by such Lender in accordance with
applicable law, the rate of interest payable on the Loans of such Lender,
together with all Charges payable to such Lender, shall be limited to the
Maximum Rate.
(b) If the amount of interest, together with all Charges, payable for
the account of any Lender in respect of any interest computation period is
reduced pursuant to paragraph (a) of this Section and the amount of interest,
together with all Charges, payable for such Lender's account in respect of any
subsequent interest computation period, computed pursuant to Section 2.06, would
be less than the Maximum Rate, then the amount of interest, together with all
Charges, payable for such Lender's account in respect of such subsequent
interest computation period shall, to the extent permitted by applicable law, be
automatically increased to such Maximum Rate;
REVOLVING CREDIT FACILITY AGREEMENT -- Page 60
<PAGE> 65
provided that at no time shall the aggregate amount by which interest paid for
the account of any Lender has been increased pursuant to this paragraph (b)
exceed the aggregate amount by which interest, together with all Charges, paid
for its account has theretofore been reduced pursuant to paragraph (a) of this
Section.
(c) No provision of this Agreement shall require the payment or the
collection of interest in excess of the maximum amount permitted by applicable
law. If any excess of interest in such respect is hereby provided for, or shall
be adjudicated to be so provided, in this Agreement or otherwise in connection
with this loan transaction, the provisions of this Section shall govern and
prevail and neither the Borrower nor the sureties, guarantors, successors, or
assigns of the Borrower shall be obligated to pay the excess amount of such
interest or any other excess sum paid for the use, forbearance, or detention of
sums loaned pursuant hereto. In the event any Lender ever receives, collects, or
applies as interest any such sum, such amount which would be in excess of the
maximum amount permitted by applicable law shall be applied as a payment and
reduction of the principal of the Loans; and, if the principal of the Loans has
been paid in full, any remaining excess shall forthwith be paid to the Borrower.
In determining whether or not the interest paid or payable exceeds the Maximum
Rate, the Borrower and each Lender shall, to the extent permitted by applicable
law, (a) characterize any non-principal payment as an expense, fee, or premium
rather than as interest, (b) exclude voluntary prepayments and the effects
thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal
parts the total amount of interest throughout the entire contemplated term of
the Loans so that interest for the entire term does not exceed the Maximum Rate.
SECTION 8.14. Confidentiality. For the purposes of this Section 8.14,
"Confidential Information" means information delivered to an Agent or a Lender
by or on behalf of the Borrower or any Subsidiary in connection with the
transactions contemplated by or otherwise pursuant to this Agreement that is
proprietary in nature and that was clearly marked or labeled or otherwise
adequately identified when received by an Agent or a Lender as being
confidential information of the Borrower or such Subsidiary, provided that such
term does not include information that (a) was publicly known or otherwise known
to an Agent or a Lender prior to the time of such disclosure, (b) subsequently
becomes publicly known through no act or omission by an Agent or a Lender or any
Person acting on their behalf, (c) otherwise becomes known to an Agent or a
Lender other than through disclosure by the Borrower or any Subsidiary or (d)
constitutes financial statements delivered to you under Section 5.20 that are
otherwise publicly available. Each Agent and each Lender agree that they will
maintain the confidentiality of such Confidential Information in accordance with
procedures adopted by them in good faith to protect confidential information of
third parties delivered to them, provided that an Agent or a Lender may deliver
or disclose Confidential Information to (i) its directors, officers, employees,
agents, attorneys and affiliates (to the extent such disclosure reasonably
relates to the administration of this Agreement), (ii) its financial advisors
and other professional advisors who agree to hold confidential the Confidential
Information substantially in accordance with the terms of this Section 8.14,
(iii) any other Agent or Lender, (iv) any Transferee (if such Person has agreed
in writing prior to its receipt of such Confidential Information to be bound by
the provisions of this Section
REVOLVING CREDIT FACILITY AGREEMENT -- Page 61
<PAGE> 66
8.14), (v) any Person from which it offers to purchase any Security of the
Borrower or a Subsidiary (if such Person has agreed in writing prior to its
receipt of such Confidential Information to be bound by the provisions of this
Section 8.14), (vi) any federal or state regulatory authority having
jurisdiction over it, (vii) any nationally recognized rating agency that
requires access to information about its investment portfolio, or (viii) any
other Person to which such delivery or disclosure may be necessary or
appropriate (w) to effect compliance with any law, rule, regulation or order
applicable to it, (x) in response to any subpoena or other legal process, (y) in
connection with any litigation to which it is a party or (z) if an Event of
Default has occurred and is continuing, to the extent an Agent or a Lender may
reasonably determine such delivery and disclosure to be necessary or appropriate
in the enforcement or for the protection of the rights and remedies under this
Agreement.
SECTION 8.15. Non-Application of Chapter 346 of the Texas Finance Code.
The provisions of Chapter 346 of the Texas Finance Code are specifically
declared by the parties hereto not to be applicable to this Agreement or to the
transactions contemplated hereby.
SECTION 8.16. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER
BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
REVOLVING CREDIT FACILITY AGREEMENT -- Page 62
<PAGE> 67
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
<TABLE>
<S> <C>
LENNOX INTERNATIONAL INC.,
as Borrower
By: /s/ CLYDE WYANT
-----------------------------------------
Clyde Wyant
Executive Vice President,
Chief Financial Officer and Treasurer
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION,
individually as a Lender and as Administrative Agent
By: /s/ MAE REEVES
-----------------------------------------
Mae Reeves
Vice President
WACHOVIA BANK, N.A.,
individually as a Lender and as Syndication Agent
By: /s/ PAIGE MESAROS
-----------------------------------------
Paige Mesaros
Vice President
THE BANK OF NOVA SCOTIA
individually as a Lender and as documentation agent
By: /s/ R. D. SMITH
-----------------------------------------
Name: R. D. Smith
-----------------------------------------
Title: Agent Operations
-----------------------------------------
</TABLE>
REVOLVING CREDIT FACILITY AGREEMENT -- Page 63
<PAGE> 68
<TABLE>
<S> <C>
THE NORTHERN TRUST COMPANY,
individually as a Lender and as a co-agent
By: /s/ JARON GRIMM
-----------------------------------------
Name: Jaron Grimm
-----------------------------------------
Title: Vice President
-----------------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ GINA NORRIS
-----------------------------------------
Name: Gina Norris
-----------------------------------------
Title: Managing Director, Corporate Banking
-----------------------------------------
BANK OF TEXAS, N.A.
By: /s/ DAVID BROUSSARD, JR.
-----------------------------------------
Name: David Broussard, Jr.
-----------------------------------------
Title: Vice President
-----------------------------------------
THE BANK OF TOKYO - MITSUBISHI, LTD.
By: /s/ D. BARNELL
-----------------------------------------
Name: D. Barnell
-----------------------------------------
Title: Vice President
-----------------------------------------
WELLS FARGO BANK (Texas), N.A.
By: /s/ JUAN SANCHEZ
-----------------------------------------
Name: Juan Sanchez
-----------------------------------------
Title: Assistant Vice President
-----------------------------------------
</TABLE>
REVOLVING CREDIT FACILITY AGREEMENT -- Page 64
<PAGE> 69
<TABLE>
<S> <C>
ROYAL BANK OF CANADA
By: /s/ N. G. MILLAR
-----------------------------------------
Name: N. G. Millar
-----------------------------------------
Title: Senior Manager
-----------------------------------------
ABN AMRO BANK N.V.
By: /s/ LAURIE G. TUZO
-----------------------------------------
Name: Laurie G. Tuzo
-----------------------------------------
Title: Senior Vice President
-----------------------------------------
THE BANK OF NEW YORK
By: /s/ RONALD R. REEDY
-----------------------------------------
Name: Ronald R. Reedy
-----------------------------------------
Title: Vice President
-----------------------------------------
COMPASS BANK
By: /s/ PAUL HOWELL
-----------------------------------------
Name: Paul Howell
-----------------------------------------
Title: Assistant Vice President
-----------------------------------------
</TABLE>
REVOLVING CREDIT FACILITY AGREEMENT--Page 65
<PAGE> 70
EXHIBITS AND SCHEDULES
Exhibit A Form of Borrowing Request
Exhibit B Form of Assignment and Acceptance
Exhibit C Matters to be addressed by Opinion of Counsel
Schedule 2.01 Commitments
Schedule 3.05 Subsidiaries
Schedule 3.06 Financial Statements
Schedule 3.13 Indebtedness
<PAGE> 1
EXHIBIT 21.1
LENNOX INTERNATIONAL INC. SUBSIDIARIES*
AS OF JULY 1, 1999
PAGE 1
<TABLE>
<CAPTION>
NAME OWNERSHIP JURISDICTION OF INC. NO. OF SHARES OUTSTANDING
- ---- --------- -------------------- -------------------------
<S> <C> <C> <C>
Lennox Industries Inc. 100% Iowa 994,394 Common
SEE ATTACHED CHART
Heatcraft Inc. 100% Mississippi 20 Common
Frigus-Bohn S.A. de C.V. 50% Mexico
LGL de Mexico, S.A. de C.V. 1% Mexico 50,000 Common
Lennox Participacoes Ltda. 1% Brazil
Frigo-Bohn do Brasil Ltda. 99% Brazil
Armstrong Air Conditioning Inc. 100% Ohio 1,030 Common
Jensen-Klich Supply Co. 100% Nebraska 1,750 Common
Armstrong Distributors Inc. 100% Delaware 1,000 Common
Lennox Global Ltd. 100% Delaware 1,000 Common
SEE ATTACHED CHART
Lennox Commercial Realty Inc. 100% Iowa 10 Common
Heatcraft Technologies Inc. 100% Delaware 1,000 Common
Lennox Industries 1% United Kingdom 300,000 Cum. Preference
13,900 Ordinary
Strong LGL Colombia Ltda. 50% Colombia 10,000
Alliance Compressors 24.5% Delaware (LLC)
LGL Peru S.A.C. 10% Peru
Livernois Engineering Co. 100% Michigan
<CAPTION>
LOCATION OF SUBSTANTIAL
NAME OPERATING ASSETS
- ---- ---------------------------
<S> <C>
Lennox Industries Inc. United States
SEE ATTACHED CHART
Heatcraft Inc. United States
Frigus-Bohn S.A. de C.V. Mexico
LGL de Mexico, S.A. de C.V. Mexico
Lennox Participacoes Ltda.
Frigo-Bohn do Brasil Ltda.
Armstrong Air Conditioning Inc. United States
Jensen-Klich Supply Co. United States
Armstrong Distributors Inc. United States
Lennox Global Ltd. United States
SEE ATTACHED CHART
Lennox Commercial Realty Inc. United States
Heatcraft Technologies Inc. United States
Lennox Industries United Kingdom
Strong LGL Colombia Ltda. Colombia
Alliance Compressors Delaware
LGL Peru S.A.C. Peru
Livernois Engineering Co. Michigan
</TABLE>
<PAGE> 2
LENNOX INTERNATIONAL INC. SUBSIDIARIES
AS OF JULY 1, 1999
PAGE 2
<TABLE>
<CAPTION>
NAME OWNERSHIP JURISDICTION OF INC. NO. OF SHARES OUTSTANDING
- ---- --------- -------------------- -------------------------
<S> <C> <C> <C>
Lennox Industries Inc.
Lennox Industries (Canada) Ltd. 100% Canada 5,250 Pref.
SEE ATTACHED CHART 35,031 Cl. A Common
1,180 Cl. B Common
Lennox Industries SW Inc. 100% Iowa 1,000 Common
Hearth Products Inc. 100% Delaware 1,000 Common
Superior Fireplace Company 100% Delaware 1,000 Common
Marco Mfg., Inc. 100% California
Marcomp
Pyro Industries, Inc. 100% Washington
Securite Cheminees International Ltee 100% Canada
-Security Chimneys International USA Ltd. 100%
-Cheminees Securite SARL 100% France
Products Acceptance Corporation 100% Iowa 3,500 Common
Lennox Manufacturing Inc. 100% Delaware 1,000 Common
Lennox Retail Inc. 100% Delaware 1,000 Common
-Lennox Inc. Canada
-D.A. Bennett, Inc. 100% New York 105 Common
581 Preferred
<CAPTION>
LOCATION OF SUBSTANTIAL
NAME OPERATING ASSETS
- ---- ---------------------
<S> <C>
Lennox Industries Inc.
Lennox Industries (Canada) Ltd. Canada
SEE ATTACHED CHART
Lennox Industries SW Inc. N/A
Hearth Products Inc. United States
Superior Fireplace Company United States
Marco Mfg., Inc. United States
Marcomp
Pyro Industries, Inc. United States
Securite Cheminees International Ltee Canada
-Security Chimneys International USA Ltd. United States
-Cheminees Securite SARL France
Products Acceptance Corporation N/A
Lennox Manufacturing Inc. United States
Lennox Retail Inc. United States
-Lennox Inc. Canada
-D.A. Bennett, Inc. New York
</TABLE>
<PAGE> 3
LENNOX INTERNATIONAL INC. SUBSIDIARIES
AS OF JULY 1, 1999
PAGE 3
Lennox Industries (Canada) Ltd.
The following are all in Canada and are all owned 100% by Lennox Industries
(Canada) unless otherwise noted:
A+ Heating and Air Conditioning
1054413 Ontario Inc.
Cronin-Emery Mechanical Ltd.
C-E-V Heating-Cooling Service Ltd.
Tri-Energy Heating Ltd.
Tomahdia Associates Inc.
Overland Plumbing & Heating
Accent Heating & Cooling Services, Inc.
Lexington Electric Ltd.
1069395 Ontario Ltd.
1068312 Ontario Ltd.
K&M Combustion Services Limited
Peel Gas Services Limited
Peel Heating & Air Conditioning Ltd.
Peel Duct Cleaning Services Ltd. (Inactive)
1057664 Ontario Inc.
Bering Inc.
Bering Refrigeration Ltd.
Kimian Mechanical Corp.
Mersey Gas Services Limited
Goldberg Heating Ltd.
MKG Precision Mechanical Inc.
1149530 Ontario Inc.
Debruyn Enterprises Ltd.
The Home Environment Centre Ltd.
Francis H.E.C. Protection Services Ltd.
Home Environment Appliance Technologies Distribution Limited
Fahrhall Mechanical Contractors Limited
510799 Ontario Ltd. (dba Campeau Heating)
M&T Heating Company Limited
Bryant Heating & Cooling Company - 90%
413899 Ontario Limited (Limcan Heating & Air Conditioning Sales)
M. E. L. Development Limited
Foster Air Conditioning Company, Limited - 50%
DAC Holdings Limited
Foster Air Conditioning Company, Limited - 50%
Roy Inch & Sons Limited
McRae Heating & Air Conditioning Limited
Aries Mechanical Systems Ltd.
HeatCraft Heating Ltd.
A. R. Dyck Heating and Air Conditioning Ltd.
United Air Systems Inc.
Accent Heating Ltd.
Wightman Mechanical Services Ltd.
Airflo Heating & Air Conditioning Ltd.
Gerry's Heating North Bay (1993) Ltd.
RZH Holdings Limited (Merriman Sheet Metal)
Kohdac Heating & Air Conditioning Limited (Central Gas)
Winnipeg Supply & Services Ltd.
Doole Holding Ltd.
<PAGE> 4
LENNOX INTERNATIONAL INC. SUBSIDIARIES
AS OF JULY 1, 1999
PAGE 4
3502198 Canada Inc. (Dearie Contracting)
471512 Ontario Ltd.
Dearie Martino Contractors Ltd.
3502201 Canada Inc. (Dearie Contractors)
R. W. Galbraith Holdings Inc.
Dearie Galbraith Fireplaces Limited Partnership
Niagra Heating and Air Conditioning Inc.
AG Enertich Corporation
Elmwood Heating & Cooling Ltd.
Elmwood Plumbing & Heating Ltd.
Central Aire Heating & Air Conditioning Ltd.
331323 Alberta Ltd
Abbey Air Systems Inc.
Valley Refrigeration Limited
The Energy Miser Inc. (Hearth Manor)
Heating Engineering Installations (1981) Ltd.
1324616 Ontario Inc. (Tri-Heat TLC)
Alberton Heating Ltd.
J&A Heating Ltd.
1302070 Ontario Inc. (McCrea's Heating and Air Conditioning)
Lakeshore Heating, Air Conditiong & Home Improvement Inc.
Walker Heating, Plumbing, A/C Equipment & Natural Gas Service Inc.
Havencrest Holdings Inc.
-Pinnacle Fireplace & Facings LP (50%)
Hearth Holdings Inc.
-Pinnacle Fireplace & Facings LP (50%)
Commercial Equipment Service Co. Limited
Robert Energy Management Company Ltd.
1095558 Ontario Limited [20% of Montwest Air (Partnership)]
1225009 Ontario Limited [20% of Montwest Air (Partnership)]
1225007 Ontario Limited [20% of Montwest Air (Partnership)]
1225008 Ontario Limited [20% of Montwest Air (Partnership)]
Marchwood Heating & Air Conditioning Ltd. [20% of Montwest Air (Partnership)]
-Tyell Holdings Inc.
-Montwest Air Ltd.
Montwest Air (Partnership)
<PAGE> 5
LENNOX INTERNATIONAL INC. SUBSIDIARIES
AS OF JULY 1, 1999
PAGE 5
<TABLE>
<CAPTION>
LOCATION OF SUBSTANTIAL
NAME OWNERSHIP JURISDICTION OF INC. NO. OF SHARES OUTSTANDING OPERATING ASSETS
- ---- --------- -------------------- ------------------------- -----------------------
<S> <C> <C> <C> <C>
Lennox Global Ltd.
Lennox Australia Pty. Ltd. 100% Australia 1,575,000 Com/Cl.A Australia
1,575,000 Com/Cl.B
LGL Asia-Pacific Pte. Ltd. 100% Rep. of Singapore 2 Ordinary Singapore
Fairco S.A. 50% Argentina Argentina
LGL Europe Holding Co. 100% Delaware 1,000 Common N/A
SEE ATTACHED CHART
LGL (Australia) Pty. Ltd. 100% Australia Australia
UK Industries Inc. 100% Delaware 1,000 Common N/A
LGL de Mexico, S.A. de C.V. 99% Mexico 50,000 Common Mexico
Lennox Participacoes Ltda. 99% Brazil
Frigo-Bohn do Brasil Ltda. 1% Brazil Brazil
McQuay do Brasil 79% Brazil Brazil
SIWA S.A. 100% Uruguay Uruguay
Str. LGL Dominicana, S.A. 100% Dominican Republic
Strong LGL Colombia Ltda. 50% Colombia
LGL Belgium S.P.R.L. .4% Belgium 1 Common Belgium
LGL Refrigeration Pty. Ltd. 100% Australia Australia
LGL (Thailand) Ltd. 100% Thailand Thailand
LGL Peru S.A.C. 90% Peru Peru
LGL Australia (US) Inc. 100% Delaware 1,000 Common Delaware
SEE ATTACHED CHART
</TABLE>
<PAGE> 6
LENNOX INTERNATIONAL INC. SUBSIDIARIES
AS OF JULY 1, 1999
PAGE 6
<TABLE>
<CAPTION>
LOCATION OF SUBSTANTIAL
NAME OWNERSHIP JURISDICTION OF INC. NO. OF SHARES OUTSTANDING OPERATING ASSETS
- ---- --------- -------------------- ------------------------- -----------------------
<S> <C> <C> <C>
LGL Australia (US) Inc.
LGL Co Pty Ltd 100% Australia Australia
LGL Australia Investment Pty Ltd 100% Australia Australia
LGL Australia Finance Pty Ltd 10% Australia Australia
LGL Australia Finance Pty Ltd 90% Australia Australia
LGL Australia Holdings Pty Ltd 100% Australia Australia
James N Kirby Pty Ltd 100% Australia Australia
</TABLE>
<PAGE> 7
LENNOX INTERNATIONAL INC. SUBSIDIARIES
AS OF JULY 1, 1999
PAGE 7
<TABLE>
<CAPTION>
NO. OF SHARES LOCATION OF SUBSTANTIAL
NAME OWNERSHIP JURISDICTION OF INC. OUTSTANDING OPERATING ASSETS
- ---- --------- -------------------- ----------- ----------------
<S> <C> <C> <C> <C>
LGL Europe Holding Co.
- -LGL Holland B.V. 100% Holland Holland
-Ets. Brancher S.A. 70% France France
-Frinotec S.A. 99.68% France France
-LGL France 100% France France
-Herac Ltd. 100% United Kingdom N/A
-Friga-Coil S.R.O 50% Czech Republic Czech Republic
-LGL Germany GmbH 100% Germany 500 Common Germany
-Friga-Bohn Warmeaustauscher GmbH 100% Germany
-Hyfra Ind. GmbH 99.9% Germany Germany
-Ruhaak 100% Germany Germany
-Refac Nord GmbH 100% Germany Germany
-Refac West 100% Germany Germany
-Lennox Global Spain S.L. 100% Spain
-ERSA 90.1% Spain
-Aldo Marine 70% Spain
-Lennox Refac, S.A. 100% Spain
-Redi sur Andalucia 70% Spain Spain
-RefacPortugal Lda. 50% Portugal Portugal
-LGL Belgium S.P.R.L. 99.6% Belgium 249 Common Belgium
-Refac B.V. 100% Netherlands Netherlands
-Refac N.V 100% Belgium Belgium
-Refac Kalte-Klima Technik
Vertriebs GmbH 50%
-HCF Lennox Limited 100% United Kingdom 100 Ordinary United Kingdom
-Lennox Industries 99% United Kingdom 300,000 Cum. Preference United Kingdom
13,900 Ordinary
-Environheat Limited 100% United Kingdom 32,765 Ordinary N/A
-West S.R.L. 100% Italy Italy
Janka Radotin a.s. 100% Czech Republic Czech Republic
-Friga Coil S.R.O. 50% Czech Republic Czech Republic
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
July 22, 1999
