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<SEC-DOCUMENT>0000950134-99-002720.txt : 19990407

<SEC-HEADER>0000950134-99-002720.hdr.sgml : 19990407

ACCESSION NUMBER:     0000950134-99-002720

CONFORMED SUBMISSION TYPE:   S-1

PUBLIC DOCUMENT COUNT:       20

FILED AS OF DATE:     19990406

 

FILER:

 

    COMPANY DATA:

       COMPANY CONFORMED NAME:          LENNOX INTERNATIONAL INC

       CENTRAL INDEX KEY:           0001069202

       STANDARD INDUSTRIAL CLASSIFICATION: []

 

    FILING VALUES:

       FORM TYPE:    S-1

       SEC ACT:     

       SEC FILE NUMBER:  333-75725

       FILM NUMBER:      99587951

 

    BUSINESS ADDRESS:

       STREET 1:     2100 LAKE PARK BLVD

       CITY:         RICHARDSON

       STATE:        TX

       ZIP:          75080

       BUSINESS PHONE:       9724975000

 

    MAIL ADDRESS:

       STREET 1:     LENNOX INTERNATIONAL

       STREET 2:     2100 LAKE PARK BLVD

       CITY:         RICHARDSON

       STATE:        TX

       ZIP:          75080

</SEC-HEADER>

<DOCUMENT>

<TYPE>S-1

<SEQUENCE>1

<DESCRIPTION>FORM S-1

<TEXT>

 

<PAGE>   1

 

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1999

                                                     REGISTRATION NO. 333-

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

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

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

 

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

                                    FORM S-1

            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

                           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>

 

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

    Approximate date of commencement of proposed sale to the public: As soon as

practicable after this Registration Statement becomes effective.

 

    If any of the securities being registered on this Form are to be offered on

a delayed or continuous basis pursuant to Rule 415 under the Securities Act,

check the following box:  [ ]

 

    If this Form is filed to register additional securities for an offering

pursuant to Rule 462(b) under the Securities Act, check the following box and

list the Securities Act registration statement number of the earlier effective

registration statement for the same offering:  [ ]

- ---------

 

    If this Form is a post-effective amendment filed pursuant to Rule 462(c)

under the Securities Act, check the following box and list the Securities Act

registration statement number of the earlier effective registration statement

for the same offering:  [ ]

- ---------

 

    If this Form is a post-effective amendment filed pursuant to Rule 462(d)

under the Securities Act, check the following box and list the Securities Act

registration number of the earlier effective registration statement for the same

offering:  [ ]

 

    If delivery of the prospectus is expected to be made pursuant to Rule 434,

please check the following box:  [ ]

- ---------

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

                        CALCULATION OF REGISTRATION FEE

 

<TABLE>

<CAPTION>

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

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

                                                             PROPOSED MAXIMUM

                 TITLE OF EACH CLASS OF                     AGGREGATE OFFERING          AMOUNT OF

              SECURITIES TO BE REGISTERED                        PRICE(2)            REGISTRATION FEE

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

<S>                                                       <C>                     <C>

Common Stock, par value $.01 per share(1)...............       $10,000,000                $2,780

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

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

</TABLE>

 

(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended,

    the number of shares being registered and the proposed maximum offering

    price per share are not included in this table.

 

(2) Estimated solely for the purpose of calculating the registration fee.

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

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR

DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL

FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION

STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF

THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME

EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),

MAY DETERMINE.

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

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

<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 April 6, 1999

 

                                              Shares

                        [LENNOX INTERNATIONAL INC. LOGO]

                                  COMMON STOCK

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

 

 LENNOX INTERNATIONAL INC. IS OFFERING           SHARES OF COMMON STOCK AND THE

SELLING STOCKHOLDERS ARE OFFERING           SHARES OF COMMON STOCK. THIS IS OUR

INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE

  ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $     AND

                                $     PER SHARE.

 

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

 

            APPLICATION WILL BE MADE TO LIST THE COMMON STOCK ON THE

                NEW YORK STOCK EXCHANGE UNDER THE SYMBOL "LII."

 

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

 

                 INVESTING IN OUR COMMON STOCK INVOLVES RISKS.

                    SEE "RISK FACTORS" BEGINNING ON PAGE 9.

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

 

                           PRICE $            A SHARE

 

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

 

<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           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]

                  [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.

</TABLE>

<PAGE>   5

 

<TABLE>

<S>                                                        <C>

[LENNOX INTERNATIONAL INC. LOGO]

HISTORY AND INNOVATIONS

                  [Graphics depicting timeline of various milestones throughout Lennox's history]

1982                                                       1984

Lennox develops and manufactures the industry's first      Lennox International Inc. is established as the parent

high-efficiency gas furnace.                               company for Lennox Industries Inc. and future

                                                           acquisitions.

[GRAPHIC]

[HEATCRAFT LOGO]

1986                                                       1988

Lennox International expands into the commercial           Lennox International expands into two-step distribution

refrigeration and heat transfer markets with the           of residential heating and cooling equipment with the

establishment of Heatcraft Inc.                            acquisition of Armstrong Air Conditioning Inc.

                                                           [ARMSTRONG AIR CONDITIONING, INC. LOGO]

                                                           Heatcraft implements a 48-hour coil replacement program

                                                           for commercial air conditioning systems.

[GRAPHIC]                                                  [LGL LOGO]

1994                                                       1995

Lennox is the first to manufacture and market a complete   Lennox Global Ltd. (LGL) is established to expand the

combination high-efficiency residential space/water        company's presence in worldwide commercial air

heating system.                                            conditioning, commercial refrigeration and heat transfer

                                                           product markets.

[GRAPHIC]                                                  [GRAPHIC]

Lennox enters the hearth products market with the          Lennox begins factory configure-to-order for commercial

introduction of gas fireplaces.                            air conditioning with the introduction of the L series.

                                                           [GRAPHIC]

                                                           Heatcraft develops Floating Tube and Thermoflex

                                                           technology, significantly reducing leaks in air-cooled

                                                           condensers and unit coolers used for commercial

                                                           refrigeration.

[GRAPHIC]

1996                                                       1997

Heatcraft introduces the Beacon Control System,            LGL enters into joint venture agreements in Europe, Asia

improving the accuracy and reliability of refrigeration    and Latin America.

system information and easing installation.

[GRAPHIC]

1998

Lennox Industries begins to establish a retail

distribution network offering full sales and service

functions.

</TABLE>

<PAGE>   6

 

                               TABLE OF CONTENTS

 

<TABLE>

<CAPTION>

                                                               PAGE

                                                               ----

<S>                                                            <C>

Prospectus Summary..........................................     4

Risk Factors................................................     9

Use of Proceeds.............................................    14

Dividend Policy.............................................    14

Capitalization..............................................    15

Dilution....................................................    16

Selected Financial and Other Data...........................    17

Management's Discussion and Analysis of Financial Condition

  and Results of Operations.................................    18

Business....................................................    29

Management..................................................    45

Principal and Selling Stockholders..........................    59

Certain Relationships and Related Party Transactions........    61

Description of Capital Stock................................    61

Shares Eligible for Future Sale.............................    68

Certain Federal Income Tax Consequences for Non-U.S.

  Holders...................................................    69

Underwriters................................................    71

Legal Matters...............................................    75

Experts.....................................................    75

Where You Can Find More Information.........................    75

Index to Financial Statements...............................   F-1

</TABLE>

 

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

 

     You should rely only on the information contained in this prospectus. We

have not authorized anyone to provide you with information different from that

contained in this prospectus. We are offering to sell, and seeking offers to

buy, shares of common stock only in jurisdictions where offers and sales are

permitted. The information contained in this prospectus is accurate only as of

the date of this prospectus, regardless of the time of delivery of this

prospectus or of any sale of the common stock.

 

     We own or otherwise have rights to trademarks or trade names that we use in

conjunction with the sale of our products. Lennox(R), Armstrong Air(TM),

Bohn(R), Larkin(TM), Heatcraft(R), CompleteHeat(R), Climate Control(TM),

Chandler Refrigeration(R), Advanced Distributor Products(R), Raised Lance(R),

Air-Ease(R), Concord(R), Magic-Pak(R), Superior(TM), Marco(R), Whitfield(R),

Security Chimneys(R), Alcair(TM), Friga-Bohn(TM) and Janka(R), among others, are

trademarks that are owned by us. This prospectus also makes reference to

trademarks of other companies.

 

     Until                   , 1999 (25 days after the date of this prospectus),

all dealers that buy, sell or trade our common stock, whether or not

participating in this offering, may be required to deliver a prospectus. This is

in addition to the dealers' obligation to deliver a prospectus when acting as

underwriters and with respect to their unsold allotments or subscriptions.

 

                                        3

<PAGE>   7

 

                               PROSPECTUS SUMMARY

 

     You should read the following summary together with the more detailed

information and our financial statements and notes appearing elsewhere in this

prospectus.

 

                                     LENNOX

 

     We are a leading global provider of climate control solutions. We design,

manufacture and market a broad range of products for the heating, ventilation,

air conditioning and refrigeration markets, which is sometimes referred to as

"HVACR." Our products are sold under well-established brand names including

"Lennox", "Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. We are one

of the largest manufacturers in North America of heat transfer products, such as

evaporator coils and condenser coils. We have leveraged our expertise in heat

transfer technology, which is critical to the efficient operation of any heating

or cooling system, to become an industry leader known for our product innovation

and the quality and reliability of our products. We have also become a leader in

the growing market for hearth products, which includes pre-fabricated fireplaces

and related products. Historically, we have sold our "Lennox" brand of

residential heating and air conditioning products directly to a network of

installing dealers, which currently numbers approximately 6,000, making us the

largest wholesale distributor of these products in North America. We have

recently initiated a program to acquire dealers in metropolitan areas in the

U.S. and Canada so we can provide heating and air conditioning products and

services directly to consumers.

 

     Our furnaces, heat pumps, air conditioners, pre-fabricated fireplaces and

related products are available in a variety of designs, efficiency levels and

price points that provide an extensive line of comfort systems. A majority of

our sales of residential heating and air conditioning products in the U.S. and

Canada are to the repair and replacement market, which is less cyclical than the

new construction market. We also provide a range of air conditioning products

for commercial market applications such as mid-size office buildings,

restaurants, churches and schools. Our commercial refrigeration products are

used primarily in cold storage applications for food preservation in

supermarkets, convenience stores, restaurants, warehouses and distribution

centers. Our heat transfer products are used by us in our HVACR products and

sold to third parties.

 

     Shown below are our four business segments, the key products and brand

names within each segment and 1998 net sales by segment. The North American

residential segment also includes installation, maintenance and repair services

performed by Lennox-owned dealers.

 

<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,             $1,013.7

                              conditioners, packaged          Air-Ease, Concord, Magic-Pak,

                              heating and cooling systems     Advanced Distributor

                              and related products;           Products, Superior, Marco,

                              pre-fabricated fireplaces,      Whitfield and Security

                              freestanding stoves,            Chimneys

                              fireplace inserts and

                              accessories

Commercial air conditioning   Unitary air conditioning and    Lennox, Alcair and Janka              392.1

                              applied systems

Commercial refrigeration      Chillers, condensing units,     Bohn, Friga-Bohn, Larkin,             237.3

                              unit coolers, fluid coolers,    Climate Control and Chandler

                              air cooled condensers and air   Refrigeration

                              handlers

Heat transfer                 Evaporator and condenser        Heatcraft and Friga-Bohn              178.7

                              coils and equipment and

                              tooling to manufacture coils

                                                                                                 --------

                                                              Total........................      $1,821.8

                                                                                                 ========

</TABLE>

 

                                        4

<PAGE>   8

 

     We market our products using multiple brand names and distribute our

products through multiple distribution channels to penetrate different segments

of the HVACR market. Our "Lennox" brand of residential heating and air

conditioning products is sold directly through installing dealers -- the

"one-step" distribution system -- which has created strong and long-term

relationships with our dealers in North America. Our "Armstrong Air",

"Air-Ease", "Concord" and "Magic-Pak" residential heating and air conditioning

brands are sold to regional distributors that in turn sell the products to

installing contractors -- the "two-step" distribution system typically utilized

in the heating and air conditioning industry. The acquisition of heating and air

conditioning dealers in Canada and the planned acquisition of dealers in the

U.S. allows us to participate in the retail sale and service of heating and air

conditioning products. Our hearth products, commercial air conditioning products

and refrigeration products are also sold under multiple brand names and through

a combination of wholesalers, contractors, original equipment manufacturers,

manufacturers' representatives and national accounts.

 

     From our beginning in 1895 until the mid-1980's, we focused primarily on

the North American residential heating and air conditioning market. In the

1980's, we expanded our product offerings by acquiring several heat transfer and

commercial refrigeration businesses. In the mid-1990's, we increased our

international presence, product offerings and brand portfolio through

acquisitions in Europe, Latin America and the Asia Pacific region. We recently

expanded our product offerings to include hearth products through the

acquisitions of four hearth products companies in the third quarter of 1998 and

in the first quarter of 1999. As a result of these acquisitions, we are one of

the largest manufacturers of hearth products in the U.S. and Canada, offering a

broad line of products through a variety of distribution channels.

 

COMPETITIVE STRENGTHS

 

     We have a combination of strengths that position us to continue to be a

leading provider of climate control solutions, including:

 

     - strong brand recognition and reputation, particularly with the well

       recognized "Lennox" name;

 

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

 

     - leading heat transfer design and manufacturing expertise;

 

     - commitment to product innovation and technological leadership; and

 

     - demonstrated manufacturing efficiency for our products.

 

GROWTH STRATEGY

 

     Our growth strategy is designed to capitalize on our competitive strengths

in order to expand our market share and profitability in the worldwide HVACR

markets. We will continue to pursue internal programs and strategic acquisitions

that broaden our product and service offerings, expand our market opportunities

and enhance our technological expertise. The key elements of this strategy

include:

 

     EXPAND MARKET IN NORTH AMERICA

 

     Our program to acquire heating and air conditioning dealers in the U.S. and

Canada represents a new direction for the heating and air conditioning industry

because, to our knowledge, no other major manufacturer has made a significant

investment in retail distribution. This strategy will enable us to extend our

distribution directly to the consumer, thereby permitting us to participate in

the revenues and margins available at the retail level while strengthening and

protecting our brand equity. We believe that the retail sales and service market

represents a significant growth opportunity because this market is large and

highly fragmented. The retail sales and service market in the U.S. is comprised

of over 30,000 dealers. We started this program in September 1998, and as of

March 31, 1999 we had acquired 37 dealers in Canada for an aggregate purchase

price of approximately $55 million and had signed letters of intent to acquire

nine additional Canadian dealers for an aggregate purchase price of

approximately $9 million. We believe our long history of direct relationships

 

                                        5

<PAGE>   9

 

with our dealers through the one-step distribution system and the resulting

knowledge of local markets will give us advantages in identifying and acquiring

suitable candidates.

 

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

 

     - strengthening our independent dealer network by providing dealers with

       enhanced services and support;

 

     - expanding the network of independent "Lennox" dealers;

 

     - promoting the cross-selling of our "Armstrong Air" brand of products and

       our hearth products to our "Lennox" dealers;

 

     - expanding the geographic market of the "Armstrong Air" brand of products

       from its traditional presence in the Northeast and Central U.S.; and

 

     - pursuing complementary acquisitions that expand our product offerings or

       geographic presence.

 

     EXPLOIT INTERNATIONAL OPPORTUNITIES

 

     Principally as a result of acquisitions in Europe, Latin America and Asia

Pacific, our international sales have grown from $28.5 million in 1996 to $244.5

million in 1998. We will continue to focus on expanding our international

operations through acquisitions and internal growth because we believe that

increasing international demand for HVACR products presents substantial

opportunities, especially in emerging markets and particularly for heat transfer

and refrigeration products.

 

     INCREASE PRESENCE IN HEARTH PRODUCTS MARKET

 

     With our recent acquisitions of hearth products companies, we now

manufacture and sell one of the broadest lines of hearth products in North

America. We believe that we can increase our penetration of this market by

selling in the distribution channels we acquired and through our historical

distribution channels.

 

     CONTINUE PRODUCT INNOVATION

 

     An important part of our growth strategy is to continue to invest in

research and new product development. We have designated certain of our

facilities as "centers for excellence" that are responsible for the research and

development of the core competencies vital to our success. Technological

advances are disseminated from these "centers for excellence" to all of our

operating divisions. This commitment to research and development has resulted in

recent product innovations such as the CompleteHeat, a high efficiency

combination hot water heater and furnace, and the Beacon control system, an

integrated electronic control system for commercial refrigeration applications.

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

 

     We are located at 2100 Lake Park Blvd., Richardson, Texas 75080 and our

telephone number is (972) 497-5000.

 

                                        6

<PAGE>   10

 

                                  THE OFFERING

 

Common stock offered by:

 

  Lennox...................       shares

 

  Selling stockholders.....  ____ shares

 

          Total............       shares

 

Common stock offered in:

 

  U.S. offering............       shares

 

  International offering...  ____ shares

 

          Total............       shares

 

Common stock to be

outstanding after this

  offering.................       shares

 

Use of proceeds............  We will receive approximately $       million in

                             net proceeds from the offering. The net proceeds

                             will be used to repay amounts borrowed under our

                             revolving credit facility and term credit

                             agreement, to fund the purchase of additional

                             dealers and for general corporate purposes. We will

                             not receive any proceeds from the sale of the

                             shares of common stock offered by the selling

                             stockholders.

 

Proposed NYSE symbol.......  LII

 

     All information in this prospectus relating to the number of shares of our

common stock or options has been adjusted to reflect a      -for-one stock split

of our common stock which occurred on             , 1999.

 

     Unless we specifically state otherwise, the information in this prospectus

does not take into account the issuance of up to           shares of common

stock which the underwriters have the option to purchase solely to cover

over-allotments. If the underwriters exercise their over-allotment option in

full,           shares of common stock will be outstanding after the offering.

 

     The number of shares of our common stock to be outstanding immediately

after the offering does not take into account           shares of our common

stock that will be issuable upon the exercise of stock options, substantially

all of which were awarded under our stock option plans. For more information on

our stock option plans, see "Management -- 1998 Incentive Plan."

 

                                        7

<PAGE>   11

 

                        SUMMARY FINANCIAL AND OTHER DATA

 

     The following summary financial and other data for each of the years ended

December 31, 1996, 1997 and 1998 have been derived from our audited financial

statements included elsewhere in this prospectus. Effective September 30, 1997

we increased our ownership of Ets. Brancher S.A., our European joint venture,

from 50% to 70% and, accordingly, changed our accounting method of recognizing

this investment from the equity method to the consolidation method. You should

read "Management's Discussion and Analysis of Financial Condition and Results of

Operations" and our financial statements and the notes thereto included

elsewhere in this prospectus for a further explanation of the financial data

summarized here. The as adjusted amounts give effect to this offering and the

use of the net proceeds as set forth under "Use of Proceeds."

 

<TABLE>

<CAPTION>

                                                                   YEAR ENDED DECEMBER 31,

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

                                                              1996          1997          1998

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

                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                        <C>           <C>           <C>

STATEMENT OF OPERATIONS DATA:

Net sales................................................  $1,364,546    $1,444,442    $1,821,836

Cost of goods sold.......................................     961,696     1,005,913     1,245,623

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

          Gross profit...................................     402,850       438,529       576,213

Selling, general and administrative expenses.............     298,049       326,280       461,143

Other operating expense, net.............................       4,213         7,488         8,467

Product inspection charge(1).............................          --       140,000            --

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

          Income (loss) from operations..................     100,588       (35,239)      106,603

Interest expense, net....................................      13,417         8,515        16,184

Other....................................................        (943)        1,955         1,602

Minority interest........................................          --          (666)         (869)

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

          Income (loss) before income taxes..............      88,114       (45,043)       89,686

Provision (benefit) for income taxes.....................      33,388       (11,493)       37,161

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

          Net income (loss)..............................  $   54,726    $  (33,550)   $   52,525

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

Earnings (loss) per share:

  Basic..................................................

  Diluted................................................

Weighted average shares outstanding:

  Basic..................................................

  Diluted................................................

Dividends per share......................................

OTHER DATA:

EBITDA(2)................................................  $  135,680    $  136,902    $  149,415

Depreciation and amortization............................      34,149        33,430        43,545

Capital expenditures.....................................      31,903        34,581        52,435

Research and development expenses........................      23,235        25,444        33,260

</TABLE>

 

<TABLE>

<CAPTION>

                                                                 DECEMBER 31, 1998

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

                                                                ACTUAL     AS ADJUSTED

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

                                                                   (IN THOUSANDS)

<S>                                                           <C>          <C>

BALANCE SHEET DATA:

Cash and cash equivalents...................................  $   28,389

Working capital.............................................     263,289

Total assets................................................   1,152,952

Total debt..................................................     317,441

Stockholders' equity........................................     376,440

</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 $27.3 million at December 31, 1998 will be adequate to

    cover the remaining costs associated with this inspection program. This

    program ends on June 30, 1999.

 

(2) EBITDA is defined as earnings before interest, taxes and depreciation and

    amortization expense. For 1997, EBITDA excludes the product inspection

    charge. EBITDA is presented here as an alternative measure of our ability to

    generate cash flow and should not be construed as an alternative to

    operating income or to cash flows from operating activities, as determined

    in accordance with generally accepted accounting principles. EBITDA is not

    calculated under generally accepted accounting principles and is not

    comparable to similarly titled measures of other companies.

 

                                        8

<PAGE>   12

 

                                  RISK FACTORS

 

     You should carefully consider the risks described below before making an

investment decision. The risks and uncertainties described below are not the

only ones facing our company. Additional risks and uncertainties not presently

known to us may also impair our business operations.

 

     If any of the following risks actually occur, our business, financial

condition or results of operations could be materially adversely affected. In

such case, the trading price of our common stock could decline, and you may lose

all or part of your investment.

 

     This prospectus also contains forward-looking statements that involve risks

and uncertainties. Our actual results could differ from those anticipated in

these forward-looking statements as a result of certain factors, including the

risks faced by us described below and elsewhere in this prospectus.

 

RISK FACTORS RELATING TO OUR BUSINESS

 

     Our business is subject to the following risks, which include risks

relating to the industry in which we operate.

 

     WE MAY INCUR MATERIAL COSTS AS A RESULT OF WARRANTY AND PRODUCT LIABILITY

CLAIMS

 

     The development, manufacture, sale and use of our products involve a risk

of warranty and product liability claims. In addition, as we increase our

efforts to acquire installing heating and air conditioning dealers in the U.S.

and Canada, we incur the risk of liability claims for the installation and

service of heating and air conditioning products. We maintain product liability

insurance. Our product liability insurance policies have limits, however, that

if exceeded, may result in losses that could have an adverse effect on our

future financial results. In addition, warranty claims are not covered by our

product liability insurance and there may be certain types of product liability

claims that are also not covered by our product liability insurance.

 

     WE ARE SUBJECT TO RISKS IN CONNECTION WITH OUR ACQUISITION STRATEGY

 

     Our plan to make acquisitions part of our growth strategy is subject to

several business risks, including:

 

     - we may have difficulties consummating acquisitions and we may incur

       significant expenses in connection with acquisitions;

 

     - we may have difficulties in assimilating the operations of the acquired

       business into our operations;

 

     - we may lose the acquired customer base or key personnel;

 

     - we face contingent risks with past operations of the acquired business;

 

     - we may not achieve any cost savings or other synergies from our

       acquisitions;

 

     - we may face competition for acquisitions, such as competition from

       consolidators and utility companies for the acquisition of dealers;

 

     - competition for acquisitions could cause the cost of acquiring businesses

       to increase materially; and

 

     - acquisition candidates may not be available on terms and conditions

       acceptable to us.

 

     WE ARE ENTERING NEW BUSINESSES IN WHICH WE HAVE LIMITED EXPERIENCE

 

     With our recently initiated program of acquiring heating and air

conditioning dealers and with our recent acquisitions of hearth products

manufacturers, we have entered into new lines of business. We cannot assure you

that we will be able to successfully manage or operate these new businesses.

 

                                        9

<PAGE>   13

 

     THE CONSOLIDATION OF DISTRIBUTORS AND DEALERS COULD FORCE US TO LOWER OUR

PRICES OR HURT OUR

     BRAND NAMES

 

     There is currently an effort underway in the U.S. by certain companies to

purchase independent distributors and dealers and consolidate them into large

enterprises. These large enterprises may be able to exert pressure on us or our

competitors to reduce prices. Additionally, these new enterprises tend to

emphasize their company name, rather than the brand of the manufacturer, in

their promotional activities, which could lead to dilution of the importance and

value of our brand names. Future price reductions and the brand dilution caused

by such consolidation among HVACR distributors and dealers could have an adverse

effect on our future financial results.

 

     OUR DEALER ACQUISITION PROGRAM COULD LEAD TO LOSS OF SALES FROM INDEPENDENT

DEALERS AND DEALERS

     OWNED BY CONSOLIDATORS

 

     With our recently initiated program of acquiring heating and air

conditioning dealers in the U.S. and Canada, we face the risk that dealers owned

by consolidators and independent dealers may discontinue using our heating and

air conditioning products because we are and increasingly will be in competition

with them. We sold approximately $50 million of heating and air conditioning

products to consolidators in 1998, representing 2.7% of our net sales.

 

     OUR PROFITABILITY IS STRONGLY AFFECTED BY THE WEATHER

 

     Demand for our products and for our services is strongly affected by the

weather. Hotter than normal summers generate strong demand for our replacement

air conditioning and refrigeration products and colder than normal winters have

the same effect on our heating products. Conversely, cooler than normal summers

and warmer than normal winters depress our sales. Because a high percentage of

our overhead and operating expenses are relatively fixed throughout the year,

operating earnings and net earnings tend to be lower in quarters with lower

sales.

 

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

BUSINESS

 

     Competition in our various markets could cause us to reduce our prices or

lose market share, or could negatively affect our cash flow, which could have an

adverse effect on our future financial results. Substantially all of the markets

in which we participate are highly competitive. The most significant competitive

factors we face are product reliability, product performance, service and price,

with the relative importance of these factors varying among our product lines.

In addition, with respect to our new distribution channel whereby we will sell

our products directly to consumers, we face competition from independent dealers

and dealers owned by consolidators and utility companies, some of whom may be

able to provide their services at lower rates than we can.

 

     WE MAY BE ADVERSELY AFFECTED BY PROBLEMS IN THE AVAILABILITY OF OR

INCREASES IN THE PRICES OF

     COMPONENTS AND RAW MATERIALS

 

     We are dependent upon components purchased from third parties as well as

raw materials such as copper, aluminum and steel. We enter into contracts each

year for the supply of certain key components at fixed prices. However, if a key

supplier is unable or unwilling to meet our supply requirements, we could

experience supply interruptions or cost increases which could have an adverse

effect on our future financial results. In addition, we regularly pre-purchase a

portion of our raw materials at a fixed price each year to hedge against price

fluctuations, but a large increase in raw materials prices could significantly

increase the cost of our products. Accordingly, increases in raw material costs

or their lack of availability could have an adverse effect on our future

financial results.

 

     OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO ECONOMIC, POLITICAL AND OTHER

RISKS

 

     Our international operations are subject to various economic, political and

other risks that are generally not present in our North American operations. We

sell products in over 70 countries and have business units

 

                                       10

<PAGE>   14

 

located in Europe, Asia Pacific, Latin America and Mexico. Sales of our products

outside of the U.S. and Canada represented approximately 13.4% of our 1998 net

sales. We anticipate that, over time, international sales will continue to grow

as a percentage of our total sales. International risks include:

 

     - instability of foreign economies and governments;

 

     - price and currency exchange controls;

 

     - unfavorable changes in monetary and tax policies and other regulatory

       changes;

 

     - fluctuations in the relative value of currencies;

 

     - expropriation and nationalization of our foreign assets; and

 

     - war and civil unrest.

 

    THE NATURE OF OUR OPERATIONS PRESENTS INHERENT RISKS OF LOSS THAT, IF NOT

    FULLY INSURED AGAINST, COULD ADVERSELY AFFECT OUR FUTURE FINANCIAL RESULTS

 

     Our operations are subject to hazards and risks inherent in operating large

manufacturing facilities, such as fires, natural disasters and explosions, all

of which can result in loss of life or severe damage to our properties and the

suspension of operations. We maintain business interruption and other types of

property insurance as protection against operating hazards. The occurrence of a

significant event not fully covered by insurance could have an adverse effect on

our future financial results.

 

     OUR BUSINESS MAY BE ADVERSELY IMPACTED BY WORK STOPPAGES AND OTHER LABOR

RELATIONS MATTERS

 

     We are subject to a risk of work stoppage and other labor relations matters

because a significant percentage of our workforce is unionized. As of December

31, 1998, approximately 30% of our workforce was unionized. Within the U.S., we

currently have eight manufacturing facilities and five distribution centers,

along with our North American Parts Center in Des Moines, Iowa, with collective

bargaining agreements ranging from three to eight years in length. With respect

to our significant manufacturing facilities, two collective bargaining

agreements expire in April 1999 and one expires in December 1999. Outside of the

U.S., we have 12 significant facilities that are represented by unions. The

agreement for our manufacturing facility in Toronto, Ontario expires in April

1999 and the agreement for our facility in Laval, Quebec expires in December

1999. As we expand our operations, we are subject to increased unionization of

our workforce. The results of future negotiations with these unions, including

the effects of any production interruptions or labor stoppages, could have an

adverse effect on our future financial results. You should read "Business  --

Employees" for a more complete discussion of our collective bargaining

agreements.

 

     WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL REGULATIONS

 

     Our future financial results could be adversely affected by current or

future environmental laws. We are subject to extensive and changing federal,

state and local laws and regulations designed to protect the environment in the

U.S. and in other parts of the world. These laws and regulations could impose

liability for remediation costs or result in civil or criminal penalties in

cases of non-compliance. Compliance with environmental laws increases our costs

of doing business. Because these laws are subject to frequent change, we are

unable to predict the future costs resulting from environmental compliance.

 

     The U.S. and other countries have established programs for limiting the

production, importation and use of certain ozone depleting chemicals, including

refrigerants used by us in most of our air conditioning and refrigeration

products. Some categories of these refrigerants have been banned completely and

others are currently scheduled to be phased out in the U.S. by the year 2030.

The U.S. is under pressure from the international environmental community to

accelerate the current 2030 deadline. In Europe, this phaseout may occur even

sooner. The industry's failure to find suitable replacement refrigerants for

substances that have been or will be banned or the acceleration of any phase out

schedules for these substances by governments could have an adverse effect on

our future financial results. You should read "Business -- Regulation" for a

more complete discussion of environmental regulations which affect our business.

 

                                       11

<PAGE>   15

 

     WE MAY BE ADVERSELY IMPACTED BY THE YEAR 2000 AND OTHER INFORMATION

TECHNOLOGY ISSUES

 

     Year 2000 problems might require us to incur unanticipated expenses that

could have an adverse effect on our future financial results. In 1996, we began

converting all of our major domestic management information systems from

mainframe systems to distributed processing systems. In order to avoid

disruption to our operations, we have conducted the conversion on a phased

basis. We anticipate that our major domestic operations will be supported by

distributed processing by the end of 1999. In addition, we have and will

continue to make investments in our computer systems and applications in an

effort to ensure that they are Year 2000 compliant. However, we may experience

interruptions of operations because of problems in implementing distributed

processing or because of Year 2000 problems within our company. Our suppliers or

customers might experience Year 2000 problems. You should read "Management's

Discussion and Analysis of Financial Condition and Results of Operations -- Year

2000 Compliance" and "Business -- Information Systems" for a more complete

discussion of our systems upgrade and Year 2000 compliance initiative.

 

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

COMPANY

 

     Following the closing of the offering, approximately 110 descendants of or

persons otherwise related to D.W. Norris, one of our original owners, will be

able to collectively control      % of the outstanding shares of our common

stock. Accordingly, if the Norris family were to act together, it would have the

ability to:

 

     - control the vote of most matters submitted to our stockholders, including

       any merger, consolidation or sale of all or substantially all of our

       assets;

 

     - elect the members of our Board of Directors;

 

     - prevent or cause a change in control of our company; and

 

     - decide whether to issue additional common stock or other securities or

       declare dividends.

 

RISK FACTORS RELATING TO SECURITIES MARKETS

 

     There are risks relating to the securities markets that you should consider

in connection with your investment in and ownership of our stock.

 

     ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD

PREVENT OR DELAY A

     CHANGE IN CONTROL OF OUR COMPANY

 

     Our governing documents contain certain provisions that may have the effect

of delaying, deterring or preventing a change in control by making it difficult

to implement certain corporate actions. Examples of these provisions include:

 

     - the Board of Directors is authorized to issue shares of preferred stock

       without stockholder action;

 

     - a vote of more than 80% of the outstanding voting stock is required for

       stockholders to amend certain provisions of the governing documents;

 

     - the Board of Directors is divided into three classes, each serving

       three-year terms;

 

     - members of the Board of Directors may be removed only for cause and only

       upon the affirmative vote of at least 80% of the outstanding voting

       stock; and

 

     - a vote of more than 80% of the outstanding voting stock is required to

       approve certain transactions between us and any person or group that owns

       at least 10% of our voting stock.

 

     In addition, the Delaware General Corporation Law, under which we are

incorporated, contains certain provisions that impose restrictions on business

combinations such as mergers between us and a holder of 15% or more of our

voting stock. You should read the "Description of Capital Stock" section for a

more complete description of these provisions.

 

                                       12

<PAGE>   16

 

     A SUBSTANTIAL NUMBER OF OUR SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC

MARKET AFTER THE

     OFFERING AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE

 

     Sales of a substantial number of shares of our common stock into the public

market after the offering, or the perception that these sales could occur, could

adversely affect our stock price or could impair our ability to obtain capital

through an offering of equity securities. After this offering, we will have

outstanding           shares of common stock assuming no exercise of the

over-allotment option granted to the underwriters of this offering. In addition,

          shares will be issuable upon exercise of options outstanding under our

stock option plan and      shares will be reserved for issuance pursuant to our

stock option plan. All shares of common stock sold in the offering will be

freely tradable without restrictions or registration under the Federal

securities laws unless purchased by an "affiliate" of Lennox, as that term is

defined in Rule 144 under the Securities Act of 1933, as amended. All remaining

shares of common stock held by existing stockholders will be "restricted"

securities, as that term is defined in Rule 144. We, along with our executive

officers and directors, the selling stockholders and certain of our

stockholders, have agreed, subject to certain exceptions, not to sell any common

stock for a period of 180 days from the date of this prospectus without the

prior consent of Morgan Stanley & Co. Incorporated. You should read the "Shares

Eligible For Future Sale" section for a more complete discussion of these

matters.

 

     OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY AFTER THE OFFERING AND YOU

COULD LOSE ALL OR PART OF

     YOUR INVESTMENT AS A RESULT

 

     Prior to the offering, there has been no public market for our common

stock. We do not know how our common stock will trade in the future. The initial

public offering price will be determined through negotiations between the

underwriters and us. You may not be able to resell your shares at or above the

initial public offering price as the price of our common stock may be affected

by a number of factors, including:

 

     - actual or anticipated fluctuations in our operating results;

 

     - changes in expectations as to our future financial performance or changes

       in financial estimates of securities analysts;

 

     - announcements of new products or technological innovations; and

 

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

 

     In addition, the stock market in general has experienced extreme volatility

that often has been unrelated to the operating performance of particular

companies. These broad market and industry fluctuations may adversely affect the

trading price of our common stock, regardless of our actual operating

performance.

 

     You should read the "Underwriters" section for a more complete discussion

of the factors considered in determining the initial public offering price.

 

                                       13

<PAGE>   17

 

                                USE OF PROCEEDS

 

     We estimate that our net proceeds from the sale of our common stock in the

offering, after deducting estimated expenses of $     million and underwriting

discounts and commissions, will be approximately $     million, or approximately

$     million if the underwriters exercise their over-allotment option in full,

at an assumed initial public offering price of $     per share. We will use the

proceeds:

 

     - to repay borrowings under our revolving credit facility and term credit

       agreement;

 

     - to fund some of the cash portion of the purchase of additional dealers

       and for other acquisitions;

 

     - to provide working capital for our expanded operations;

 

     - to fund capital expenditures; and

 

     - for other general corporate purposes.

 

     We have no agreements or commitments with respect to any material

acquisitions. As of March 31, 1999, approximately $115 million was outstanding

under our revolving credit facility at an average interest rate of 5.3% and

approximately $40 million was outstanding under our term credit agreement at an

interest rate of 6.0%. Borrowings under our revolving credit facility and term

credit agreement were used for:

 

     - seasonal working capital needs;

 

     - the acquisitions of the hearth products companies;

 

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

 

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

 

     - expenses incurred in our Pulse inspection program.

 

     For more information about our revolving credit facility and term credit

agreement, see "Management's Discussion and Analysis of Financial Condition and

Results of Operations -- Liquidity and Capital Resources."

 

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

the selling stockholders.

 

                                DIVIDEND POLICY

 

     We paid cash dividends of $     , $     and $     per share on our common

stock during 1996, 1997 and 1998, respectively. We anticipate that we will

continue to pay cash dividends on our common stock, but any future determination

as to the payment or amount of dividends will depend upon our future results of

operations, capital requirements, financial condition and such other factors as

our Board of Directors may consider. In addition, our revolving credit facility,

term credit agreement and certain of our other debt instruments prohibit the

payment of dividends unless we can incur $1.00 of additional indebtedness

pursuant to the terms of such instruments. For more information about our debt

instruments, see "Management's Discussion and Analysis of Financial Condition

and Results of Operations -- Liquidity and Capital Resources."

 

                                       14

<PAGE>   18

 

                                 CAPITALIZATION

 

     The following table sets forth our cash and cash equivalents, short-term

debt and capitalization as of December 31, 1998 and as adjusted to give effect

to the offering and the use of the net proceeds as set forth under "Use of

Proceeds." The outstanding share information excludes           shares of common

stock issuable upon the exercise of outstanding options as of December 31, 1998.

You should read the information presented below in conjunction with our

consolidated financial statements and notes thereto, "Selected Financial and

Other Data," "Management's Discussion and Analysis of Financial Condition and

Results of Operations" and "Management -- 1998 Incentive Plan" included

elsewhere in this prospectus.

 

<TABLE>

<CAPTION>

                                                                DECEMBER 31, 1998

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

                                                               ACTUAL    AS ADJUSTED

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

                                                              (DOLLARS IN THOUSANDS)

<S>                                                           <C>        <C>

Cash and cash equivalents...................................  $ 28,389

                                                              ========

Short-term debt (including current maturities of long-term

  debt).....................................................  $ 74,848

                                                              ========

Long-term debt..............................................  $242,593

Stockholders' equity:

  Preferred stock, $.01 par value, 25,000,000 shares

     authorized, no shares issued or outstanding............        --          --

  Common stock, $.01 par value, 200,000,000 shares

     authorized,        shares issued and outstanding actual

     and        shares as adjusted..........................        11

  Additional paid-in capital................................    33,233

  Retained earnings.........................................   350,851

  Currency translation adjustments..........................    (7,655)

                                                              --------

          Total stockholders' equity........................   376,440

                                                              --------

          Total capitalization..............................  $619,033

                                                              ========

</TABLE>

 

                                       15

<PAGE>   19

 

                                    DILUTION

 

     Our net tangible book value as of December 31, 1998 was approximately

$     million or $     per share of common stock. Net tangible book value per

share represents the amount of our total tangible assets less total liabilities,

divided by the number of shares of common stock issued and outstanding. After

giving effect to the sale of the      shares of common stock offered by us at an

assumed initial public offering price of $     per share and the use of the net

proceeds as set forth under "Use of Proceeds", our pro forma net tangible book

value as of December 31, 1998 would have been $     million, or $     per share.

This represents an immediate increase in net tangible book value of $     per

share to existing stockholders and an immediate dilution of $     per share to

new investors.

 

     The following table illustrates this per share dilution:

 

<TABLE>

<S>                                                           <C>    <C>

Assumed initial public offering price.......................         $

  Net tangible book value before the offering...............  $

  Increase in pro forma net tangible book value attributable

     to new investors.......................................

Pro forma net tangible book value after the offering........

                                                                     ----

Dilution to new investors...................................         $

                                                                     ====

</TABLE>

 

     The following table summarizes, on a pro forma basis as of December 31,

1998, the differences in the total consideration paid and the average price per

share paid by our existing stockholders and by purchasers of the shares of

common stock in the offering:

 

<TABLE>

<CAPTION>

                                                         TOTAL

                               SHARES PURCHASED      CONSIDERATION      AVERAGE

                               -----------------   -----------------   PRICE PER

                               NUMBER    PERCENT   AMOUNT    PERCENT     SHARE

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

<S>                            <C>       <C>       <C>       <C>       <C>

Existing stockholders........                  %   $               %    $

New investors................                  %                   %

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

          Total..............                  %   $               %

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

</TABLE>

 

     The computations in the tables above exclude           shares of common

stock issuable upon exercise of stock options substantially all of which were

awarded under our stock option plans. For more information on our stock option

plans, see "Management -- 1998 Incentive Plan."

 

                                       16

<PAGE>   20

 

                       SELECTED FINANCIAL AND OTHER DATA

 

     The following selected financial and other data for each of the years in

the five-year period ended December 31, 1998 have been derived from our

financial statements which have been audited by Arthur Andersen LLP. Effective

September 30, 1997 we increased our ownership of Ets. Brancher, our European

joint venture, from 50% to 70% and, accordingly, changed our accounting method

of recognizing this investment from the equity method to the consolidation

method. You should read "Management's Discussion and Analysis of Financial

Condition and Results of Operations" and our financial statements and the notes

thereto included elsewhere in this prospectus for a further explanation of the

financial data summarized here.

 

<TABLE>

<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,

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

                                                                1994         1995         1996         1997         1998

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

                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                          <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

Cost of goods sold.........................................     815,511      946,881      961,696    1,005,913    1,245,623

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

        Gross profit.......................................     352,588      360,118      402,850      438,529      576,213

Selling, general and administrative expenses...............     273,421      285,938      298,049      326,280      461,143

Other operating expense, net...............................       7,460        2,555        4,213        7,488        8,467

Product inspection charge(1)...............................          --           --           --      140,000           --

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

        Income (loss) from operations......................      71,707       71,625      100,588      (35,239)     106,603

Interest expense, net......................................      20,830       20,615       13,417        8,515       16,184

Other......................................................         836         (622)        (943)       1,955        1,602

Minority interest..........................................          --           --           --         (666)        (869)

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

        Income (loss) before income taxes..................      50,041       51,632       88,114      (45,043)      89,686

Provision (benefit) for income taxes.......................      19,286       17,480       33,388      (11,493)      37,161

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

        Net income (loss)..................................  $   30,755   $   34,152   $   54,726   $  (33,550)  $   52,525

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

Earnings (loss) per share:

  Basic....................................................

  Diluted..................................................

Weighted average shares outstanding:

  Basic....................................................

  Diluted..................................................

Dividends per share........................................

OTHER DATA:

EBITDA(2)..................................................  $  103,767   $  104,459   $  135,680   $  136,902   $  149,415

Depreciation and amortization..............................      32,896       32,212       34,149       33,430       43,545

Capital expenditures.......................................      36,189       26,675       31,903       34,581       52,435

Research and development expenses..........................      22,773       22,682       23,235       25,444       33,260

</TABLE>

 

<TABLE>

<CAPTION>

                                                                                      DECEMBER 31,

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

                                                                1994         1995         1996         1997         1998

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

                                                                                     (IN THOUSANDS)

<S>                                                          <C>          <C>          <C>          <C>          <C>

BALANCE SHEET DATA:

Cash and cash equivalents..................................  $    2,980   $   73,811   $  151,877   $  147,802   $   28,389

Working capital............................................     252,301      307,502      325,956      335,891      263,289

Total assets...............................................     737,528      768,517      820,653      970,892    1,152,952

Total debt.................................................     243,480      219,346      184,756      198,530      317,441

Stockholders' equity.......................................     286,849      315,313      361,464      325,478      376,440

</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 $27.3 million at December 31, 1998 will be adequate to

    cover the remaining costs associated with this inspection program. This

    program ends on June 30, 1999.

 

(2) EBITDA is defined as earnings before interest, taxes and depreciation and

    amortization expense. For 1997, EBITDA excludes the product inspection

    charge. EBITDA is presented here as an alternative measure of our ability to

    generate cash flow and should not be construed as an alternative to

    operating income or to cash flows from operating activities, as determined

    in accordance with generally accepted accounting principles. EBITDA is not

    calculated under generally accepted accounting principles and is not

    comparable to similarly titled measures of other companies.

 

                                       17

<PAGE>   21

 

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

     We participate in four reportable business segments of the HVACR industry.

The first segment is the North American residential market in which we

manufacture and market a full line of heating, air conditioning and hearth

products for the residential replacement and new construction markets in the

U.S. and Canada. The North American residential segment also includes

installation, maintenance and repair services performed by Lennox-owned dealers.

The second segment is the global commercial air conditioning market in which we

manufacture and sell rooftop products and applied systems for commercial

applications. The third segment is the global commercial refrigeration market

which consists of unit coolers, condensing units and other commercial

refrigeration products. The fourth segment is the heat transfer market in which

we design, manufacture and sell evaporator and condenser coils, copper tubing

and related manufacturing equipment to original equipment manufacturers and

other specialty purchasers on a global basis.

 

     We sell our products to numerous types of customers, including

distributors, installing dealers, homeowners, national accounts and original

equipment manufacturers. The demand for our products is cyclical and influenced

by national and regional economic and demographic factors, such as interest

rates, the availability of financing, regional population and employment trends

and general economic conditions, especially consumer confidence. In addition to

economic cycles, demand for our products is seasonal and dependent on the

weather. Hotter than normal summers generate strong demand for replacement air

conditioning and refrigeration products and colder than normal winters have the

same effect on heating products. Conversely, cooler than normal summers and

warmer than normal winters depress sales of HVACR products.

 

     The principal components of cost of goods sold are labor, raw materials,

component costs, factory overhead and estimated costs of warranty expense. The

principal raw materials used in our manufacturing processes are copper, aluminum

and steel. In instances where we are unable to pass on to our customers

increases in the costs of copper and aluminum, we enter into forward contracts

for the purchase of such materials. We have forward commitments for the

substantial majority of our internal needs of aluminum through December 1999 and

copper through December 2000. We attempt to minimize the risk of price

fluctuations in certain key components by entering into contracts, typically at

the beginning of the year, which generally provide for fixed prices for our

needs throughout the year. These hedging strategies enable us to establish

product prices for the entire model year while minimizing the impact of price

increases of components and raw materials on our margins. Warranty expense is

estimated based on historical trends and other factors.

 

     In September 1997, we increased our ownership in Ets. Brancher from 50% to

70%. As a result, we assumed control of the venture and began consolidating the

financial position and operating results of the venture in the fourth quarter of

1997. Previously, we used the equity method of accounting for our investment in

this entity. In the fourth quarter of 1998, we restructured our ownership of our

various European entities to allow for more efficient transfer of funds and to

provide for tax optimization. Although our European operations contributed to

revenue, they had an operating loss in both 1997 and 1998, primarily due to the

performance of the commercial air conditioning business. We have installed a new

management team for our European operations and are bringing our manufacturing

and operating expertise to the European businesses.

 

     We acquired Superior Fireplace Company, Marco Mfg., Inc. and Pyro

Industries, Inc. in the third quarter of 1998 and Security Chimneys

International, Ltd. in the first quarter of 1999 for an aggregate purchase price

of approximately $120 million. These acquisitions give us one of the broadest

lines of hearth products in the industry. These businesses had aggregate

revenues of approximately $150 million in 1998, $68.6 million of which was

reflected in our 1998 net sales.

 

     We recently initiated a program to acquire high quality heating and air

conditioning dealers in metropolitan areas in the U.S. and Canada to market

"Lennox" and other brands of heating and air conditioning products. This

strategy will enable us to extend our distribution directly to the consumer,

thereby

 

                                       18

<PAGE>   22

 

permitting us to participate in the revenues and margins available at the retail

level while strengthening and protecting our brand equity. We believe that the

retail sales and service market represents a significant growth opportunity

because this market is large and highly fragmented. The retail sales and service

market in the U.S. is comprised of over 30,000 dealers. In addition, we believe

that the heating and air conditioning service business is somewhat less seasonal

than the business of manufacturing and selling heating and air conditioning

products. As of March 31, 1999, we had acquired 37 dealers in Canada for an

aggregate purchase price of approximately $55 million and had signed letters of

intent to acquire nine additional Canadian dealers for an aggregate purchase

price of approximately $9 million. As we acquire more heating and air

conditioning dealers, we expect that we will incur additional costs to expand

our infrastructure to effectively manage these businesses.

 

     Our fiscal year ends on December 31 of each year, and our fiscal quarters

are each comprised of 13 weeks. For convenience, throughout this Management's

Discussion and Analysis of Financial Condition and Results of Operations, the 13

week periods comprising each fiscal quarter are denoted by the last day of the

calendar quarter.

 

RESULTS OF OPERATIONS

 

     The following table sets forth, as a percentage of net sales, our statement

of income data for the years ended December 31, 1996, 1997 and 1998.

 

<TABLE>

<CAPTION>

                                                              YEAR ENDED DECEMBER 31,

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

                                                              1996     1997     1998

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

<S>                                                           <C>      <C>      <C>

Net sales...................................................  100.0%   100.0%   100.0%

Cost of goods sold..........................................   70.5     69.6     68.4

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

          Gross profit......................................   29.5     30.4     31.6

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

Selling, general and administrative expenses................   21.8     22.6     25.3

Other operating expense, net................................    0.3      0.5      0.4

Product inspection charge...................................     --      9.7       --

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

          Income (loss) from operations.....................    7.4     (2.4)     5.9

Interest expense, net.......................................    1.0      0.6      0.9

Other.......................................................   (0.1)     0.1      0.1

Minority interest...........................................     --      0.0      0.0

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

          Income (loss) before income taxes.................    6.5     (3.1)     4.9

Provision (benefit) for income taxes........................    2.5     (0.8)     2.0

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

          Net income (loss).................................    4.0%    (2.3)%    2.9%

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

</TABLE>

 

                                       19

<PAGE>   23

 

     The following table sets forth net sales by business segment and geographic

market (dollars in millions):

 

<TABLE>

<CAPTION>

                                                 YEARS ENDED DECEMBER 31,

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

                                        1996               1997               1998

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

                                   AMOUNT      %      AMOUNT      %      AMOUNT      %

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

<S>                               <C>        <C>     <C>        <C>     <C>        <C>

BUSINESS SEGMENT:

North American residential......  $  857.1    62.8%  $  865.1    59.9%  $1,013.7    55.7%

Commercial air conditioning.....     228.9    16.8      278.8    19.3      392.1    21.5

Commercial refrigeration........     135.6     9.9      154.3    10.7      237.3    13.0

Heat transfer...................     142.9    10.5      146.2    10.1      178.7     9.8

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

          Total net sales.......  $1,364.5   100.0%  $1,444.4   100.0%  $1,821.8   100.0%

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

GEOGRAPHIC MARKET:

U.S. and Canada.................  $1,336.0    97.9%  $1,368.1    94.7%  $1,577.3    86.6%

International...................      28.5     2.1       76.3     5.3      244.5    13.4

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

          Total net sales.......  $1,364.5   100.0%  $1,444.4   100.0%  $1,821.8   100.0%

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

</TABLE>

 

     YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

 

     Net sales. Net sales increased $377.4 million, or 26.1%, to $1,821.8

million for the year ended December 31, 1998 from $1,444.4 million for the year

ended December 31, 1997. If the effect of the consolidation of Ets. Brancher is

excluded, net sales would have increased by $226.7 million, or 16.1%, to

$1,630.9 million for 1998 as compared to 1997.

 

     Net sales related to the North American residential segment were $1,013.7

million during 1998, an increase of 17.2% from $865.1 million for 1997. This

increase was primarily due to sales growth of both the "Lennox" and "Armstrong

Air" brands and the inclusion of $68.6 million of sales beginning in the third

quarter of 1998 of the hearth products companies. Hot weather in the spring of

1998 and an expanded dealer and distributor base led to greater sales of the

"Lennox" and "Armstrong Air" brands. Commercial air conditioning revenues

increased $113.3 million, or 40.6%, to $392.1 million for 1998 compared to 1997.

If the effect of the consolidation of Ets. Brancher is excluded, commercial air

conditioning revenues would have increased $46.5 million, or 17.9%, to $306.1

million for 1998 as compared to 1997. This increase was primarily due to

increased rooftop air conditioner business in the U.S. and Canada. Net sales

related to the commercial refrigeration segment were $237.3 million during 1998,

an increase of 53.8% from $154.3 million for 1997. If the effect of the

consolidation of Ets. Brancher is excluded, net sales related to the commercial

refrigeration products segment would have increased $20.2 million, or 14.8%, to

$156.8 million for 1998 as compared to 1997. This increase is primarily due to

hot weather in North America in the spring of 1998 and the acquisition of McQuay

do Brasil in September 1998. Heat transfer revenues increased $32.5 million, or

22.3%, to $178.7 million for 1998 compared to 1997. If the effect of the

consolidation of Ets. Brancher is excluded, heat transfer revenues would have

increased $11.4 million, or 8.0%, to $154.3 million for 1998 as compared to

1997. This increase is primarily due to hot weather in North America in the

spring of 1998.

 

     Gross profit. Gross profit was $576.2 million for the year ended December

31, 1998 as compared to $438.5 million for the year ended December 31, 1997, an

increase of $137.7 million. Gross profit margin increased to 31.6% in 1998 from

30.4% for 1997. The increase of $137.7 million in gross profit was primarily

attributable to increased sales in 1998 as compared to 1997 and the effect of

the consolidation of Ets. Brancher for the full year. Ets. Brancher contributed

$47.7 million and $11.2 million to gross profit in 1998 and 1997, respectively,

and its gross profit margin was 25.0% and 27.9% in 1998 and 1997, respectively.

If the effect of the consolidation of Ets. Brancher is excluded, gross profit

margin would have been 32.4% and 30.4% for 1998 and 1997, respectively. The

improved gross profit margin for 1998 is due to lower material costs, improved

manufacturing processes and increased overhead absorption associated with the

higher volume of sales in North America.

 

     Selling, general and administrative expenses. Selling, general and

administrative expenses were $461.1 million for 1998, an increase of $134.8

million, or 41.3%, from $326.3 million for 1997. Selling, general

 

                                       20

<PAGE>   24

 

and administrative expenses represented 25.3% and 22.6% of total net revenues

for 1998 and 1997, respectively. If the effect of the consolidation of Ets.

Brancher is excluded, selling, general and administrative expenses would have

been $413.9 million for 1998, an increase of $99.8 million, or 31.8%, from

$314.1 million for 1997, representing 25.4% and 22.4% of total net sales for

1998 and 1997, respectively. Approximately $16.7 million of the increase in

selling, general and administrative expenses is composed of three non-recurring

items: $7.1 million associated with the settlement of a lawsuit; approximately

$5.0 million of incremental expense associated with the implementation of the

SAP enterprise business software system; and $4.6 million associated with

increased expenses of a terminated performance share plan. If the effect of

these non-recurring items and the consolidation of Ets. Brancher is excluded,

selling, general and administrative expenses would have been $397.2 million for

1998, an increase of $83.1 million, or 26.5%, from $314.1 million for 1997,

representing 24.4% and 22.4% of total net sales for 1998 and 1997, respectively.

The remaining increase in selling, general and administrative expenses is

primarily due to increased variable costs associated with sales growth in North

America and costs associated with creating infrastructure to manage

international businesses, such as the establishment of a sales office in

Singapore and the business development functions for our global operation.

 

     Other operating expense, net. Other operating expense, net totaled $8.5

million for 1998, an increase of $1.1 million from $7.4 million for 1997. Other

operating expense, net is comprised of (income) loss from joint ventures,

amortization of goodwill and other intangibles and miscellaneous items. The $1.1

million increase is due to increases in amortization of goodwill of $1.7 million

and losses from joint ventures of $1.3 million, partially offset by a decrease

in other intangible and miscellaneous expense of $2.0 million.

 

     Product inspection charge. In the fourth quarter of 1997, we recorded a

non-recurring pre-tax charge of $140.0 million to provide for projected expenses

of the product inspection program related to our Pulse furnace. We have offered

the owners of all Pulse furnaces installed between 1982 and 1990 a subsidized

inspection and a free carbon monoxide detector. The inspection includes a severe

pressure test to determine the serviceability of the heat exchanger. If the heat

exchanger does not pass the test, we will either replace the heat exchanger or

offer a new furnace and subsidize the labor costs for installation. The cost

required for the program depends on the number of furnaces located, the

percentage of those that do not pass the pressure test and the replacement

option chosen by the homeowner. We periodically review the reserve balance and

at this time believe the remaining reserve of $27.3 million at December 31, 1998

will be adequate to cover the remaining costs associated with this inspection

program. This program ends on June 30, 1999.

 

     Income (loss) from operations. Income (loss) from operations was $106.6

million for 1998 compared to $(35.2) million for 1997. Excluding the Ets.

Brancher consolidation, the special charge for the Pulse inspection program and

the three non-recurring selling, general and administrative expense items

mentioned above, income from operations would have been $122.6 million for 1998,

or 7.5% of net sales, as compared to $106.1 million for 1997, or 7.6% of net

sales.

 

     Interest expense, net. Interest expense, net for 1998 increased to $16.2

million from $8.5 million for 1997. Of the $7.7 million increase in interest

expense, $3.6 million was due to the incurrence of $75 million in additional

long-term borrowings in April 1998, $1.3 million was due to the consolidation of

Ets. Brancher for the full year and the remainder was due to less interest

income in 1998.

 

     Other. Other expense was $1.6 million for 1998 and $2.0 million for 1997.

Other expense is primarily comprised of currency exchange gains or losses.

 

     Minority interest. Minority interest in subsidiaries' net loss of $(0.7)

million in 1997 and $(0.9) million in 1998 represents the minority interest in

Ets. Brancher and, for 1998, McQuay do Brasil.

 

     Provision (benefit) for income taxes. The effective tax rates for the 1998

provision and the 1997 benefit were 41.4% and 25.5%, respectively. The effective

tax rates differ from the federal statutory rate of 35% primarily due to state

income taxes and valuation reserves provided for foreign operating losses.

 

     Net income (loss). Net income (loss) was $52.5 million and $(33.6) million

for the year ended December 31, 1998 and 1997, respectively. If the effects of

the consolidation of Ets. Brancher and the non-recurring charge relating to the

Pulse inspection program are excluded, net income would have been

 

                                       21

<PAGE>   25

 

$52.9 million and $55.2 million for 1998 and 1997, representing 3.2% and 3.9% of

net sales for 1998 and 1997, respectively.

 

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

 

     Net sales. Net sales increased $79.9 million, or 5.9%, to $1,444.4 million

for the year ended December 31, 1997 from $1,364.5 million for the year ended

December 31, 1996. If the effect of the consolidation of Ets. Brancher is

excluded, net sales would have increased by $39.7 million, or 2.9%, to $1,404.2

million for 1997 compared to 1996.

 

     Net sales related to the North American residential segment were $865.1

million during 1997, an increase of 0.9% from $857.1 million for 1996. This

increase was principally due to increases in the number of heating and air

conditioning units sold by us, despite the fact that industry shipments were

generally down 5% for 1997. The weather in 1997 was mild with a cool spring and

modest winter over most of the U.S., and inventory levels for both dealers and

distributors were higher than normal at the end of 1996. Commercial air

conditioning revenues increased $49.9 million, or 21.8%, to $278.8 million for

1997 compared to 1996. Of the $49.9 million increase, 61.5% was due to increased

rooftop air conditioner business in North America and the balance was due to the

consolidation of Ets. Brancher in the fourth quarter of 1997. Rooftop air

conditioner business increased in 1997 principally due to focused sales efforts

through commercial districts that we established early in 1997 as well as the

continued roll out of the L Series rooftop product line. Net sales related to

the commercial refrigeration segment were $154.3 million during 1997, an

increase of 13.8% from $135.6 million for 1996. This increase was primarily due

to the consolidation of Ets. Brancher in the fourth quarter of 1997. Heat

transfer revenues increased $3.3 million, or 2.3%, to $146.2 million for 1997

compared to 1996. Ets. Brancher contributed $3.3 million to heat transfer

product sales in 1997.

 

     Gross profit. Gross profit was $438.5 million for the year ended December

31, 1997 as compared to $402.9 million for the year ended December 31, 1996, an

increase of $35.6 million. Gross profit margins were 30.4% and 29.5% for 1997

and 1996, respectively. The increase of $35.6 million in gross profit was

primarily attributable to increased sales in 1997 and the effect of the

consolidation of Ets. Brancher. Ets. Brancher contributed $11.2 million to gross

profit in 1997, and its gross profit margin was 27.9%. If the effect of the

consolidation of Ets. Brancher is excluded, gross profit margin would have

remained the same for 1997.

 

     Selling, general and administrative expenses. Selling, general and

administrative expenses were $326.3 million for 1997, an increase of $28.3

million, or 9.5%, from $298.0 million for 1996. Selling, general and

administrative expenses represented 22.6% and 21.8% of net sales for 1997 and

1996, respectively. Of the $28.3 million increase, $12.2 million was related to

the consolidation of Ets. Brancher. Excluding the effect of the consolidation of

Ets. Brancher, selling, general and administrative expenses would have

represented 22.4% of net sales in 1997. The remaining $16.1 million increase in

selling, general and administrative expenses related to expenses in establishing

specialized commercial sales districts in North America, increased expenses

related to a profit sharing plan and other variable cost increases associated

with increased sales.

 

     Other operating expense, net. Other operating expense, net totaled $7.4

million for 1997, an increase of $3.2 million from $4.2 million for 1996. In

1996, we recognized a non-recurring $4.6 million gain on the sale of a portion

of our interest in Alliance Compressors, a joint venture to manufacture

compressors. After the sale, we owned a 24.5% interest in Alliance Compressors.

 

     Income (loss) from operations. Income (loss) from operations was $(35.2)

million in 1997, a decrease of $135.8 million from $100.6 million in 1996. The

$135.8 million decrease was primarily due to the $140.0 million non-recurring

pre-tax charge relating to the Pulse inspection program. Excluding the special

charge for the Pulse inspection program and the consolidation of Ets. Brancher,

income from operations would have been $106.1 million in 1997, representing 7.6%

of net sales, the same percent as in 1996.

 

     Interest expense, net. Interest expense, net for 1997 decreased to $8.5

million from $13.4 million for 1996. The decrease of $4.9 million in interest

expense was primarily due to higher average cash balances resulting from

improved working capital management. We did not have any short-term borrowings

in 1996 or 1997 and long-term debt remained fairly consistent each year.

 

                                       22

<PAGE>   26

 

     Other. Other expense was $2.0 million for 1997 and $(0.9) million for 1996.

Other expense is primarily comprised of currency exchange gains or losses.

 

     Minority interest. Minority interest in subsidiaries' net loss of $(0.7)

million in 1997 represents the minority interest in Ets. Brancher.

 

     Provision (benefit) for income taxes. The effective tax rates for the 1997

benefit and the 1996 provision were 25.5% and 37.9%, respectively. The effective

tax rates differ from the federal statutory rate of 35% primarily due to state

income taxes and valuation reserves provided for foreign operating losses.

 

     Net income (loss). There was a net loss of $(33.6) million for the year

ended December 31, 1997 compared to net income of $54.7 million for the year

ended December 31, 1996. If the non-recurring charge relating to the Pulse

inspection program and the consolidation of Ets. Brancher are excluded, net

income would have been $55.2 million for 1997, representing 3.9% of net sales,

compared to 4.0% of net sales for 1996.

 

LIQUIDITY AND CAPITAL RESOURCES

 

     We have historically financed our operations and capital requirements from

internally generated funds and, to a lesser extent, borrowings from external

sources. Our capital requirements have related principally to acquisitions, the

expansion of our production capacity and increased working capital needs that

have accompanied sales growth.

 

     We closely monitor controllable working capital, which we define as

inventories plus trade accounts receivables less accounts payable. To measure

the effectiveness of our management of controllable working capital, we

calculate the amount of controllable working capital as a percent of sales on a

rolling twelve month basis. From January 1996 to December 1998, controllable

working capital as a percent of sales has declined from 36.1% to 26.7%. If

controllable working capital management had not improved, we estimate that our

investment in working capital would have been approximately $180 million higher

at December 31, 1998. Controllable working capital has improved primarily

because we have introduced the concepts of "Demand Flow"(R) technology, cellular

manufacturing, just-in-time inventory management and configure-to-order

processes to reduce production cycle lead times in our manufacturing facilities.

Prior to introducing these manufacturing efficiencies, lead times were as long

as 90 days or more and, consequently, substantial buffer stocks were required to

cover anticipated forecast errors. These stocks were often inventoried in one

location when the demand would occur in another location. With lead times as

short as one week, we now require minimal safety stock and rarely have to

redeploy inventory from one location to another.

 

     Net cash provided by operating activities totaled $158.8 million, $58.5

million and $5.0 million for 1996, 1997 and 1998, respectively. The reduction in

cash provided by operating activities is primarily due to the Pulse inspection

program as we spent $26.6 million and $86.1 million on this program in 1997 and

1998, respectively. In addition, we had unusually strong sales of our "Lennox"

brand of North American air conditioning products late in 1997 and accordingly

accounts receivable in December 1997 were higher than normal. Net cash used in

investing activities totaled $37.1 million, $44.6 million and $212.4 million for

1996, 1997 and 1998, respectively. The greater use of cash for investing relates

primarily to increased acquisition activity as we spent $14.3 million and $160.5

million for acquisitions in 1997 and 1998, respectively. Net cash provided by

(used in) financing activities was ($44.0) million, ($17.3) million and $89.5

million for 1996, 1997 and 1998, respectively. In 1998, we issued $75.0 million

principal amount of notes and increased short term borrowings by $36.7 million.

Due to the seasonality of the air conditioning and refrigeration businesses, we

typically use cash in the first six months and generate cash during the latter

half of the year. Our internally generated cash flow, along with borrowings

under our revolving credit facility, have been sufficient to cover our working

capital, capital expenditure and debt service requirements over the last three

years.

 

     In the past, we have used a combination of internally generated funds,

external borrowings and our stock to make acquisitions. We intend to acquire

additional heating and air conditioning dealers in the U.S. and Canada. We plan

to finance these acquisitions with a combination of cash, including a portion of

the net proceeds of this offering, stock and debt. As of March 31, 1999, we had

acquired 37 dealers in Canada for an

 

                                       23

<PAGE>   27

 

aggregate purchase price of approximately $55 million and had signed letters of

intent to acquire nine additional Canadian dealers for an aggregate purchase

price of approximately $9 million.

 

     Our capital expenditures were $31.9 million, $34.6 million and $52.4

million for 1996, 1997 and 1998, respectively. We have budgeted $80 million for

capital expenditures for 1999. These expenditures primarily relate to production

equipment (including tooling), training facilities and information systems. The

majority of these planned capital expenditures are discretionary. We plan to

finance these capital expenditures using cash flow from operations and a portion

of the net proceeds from this offering.

 

     At December 31, 1998, we had long-term debt obligations outstanding of

$261.4 million. The total long-term debt consists primarily of six issues of

notes with an aggregate principal amount of $240.6 million, interest rates

ranging from 6.56% to 9.69% and maturities ranging from 2001 to 2008. The notes

contain certain restrictive covenants, including covenants that place certain

limitations on our ability to incur additional indebtedness, encumber our assets

or pay dividends. Our ability to incur debt is limited to 60.0% of our

consolidated capitalization. As of December 31, 1998, our consolidated

indebtedness as a percent of consolidated capitalization was 43.4%. Under the

terms of the notes, we are not allowed to pay dividends unless we could incur

$1.00 of additional indebtedness. In addition, we are required to maintain a

consolidated net worth equal to $261.0 million plus 15% of our consolidated

quarterly net income beginning April 1, 1998. At December 31, 1998, the required

consolidated net worth was $267.8 million and we had a consolidated net worth of

$376.4 million. Our debt service requirements (including principal and interest

payments) for long-term debt are $38.1 million for 1999. As of December 31,

1998, we had approximate minimum commitments on all non-cancelable operating

leases of $22 million and $19 million in 1999 and 2000, respectively.

 

     We have $135 million of borrowings available under our revolving credit

facility. Our revolving credit facility provides for both "standby loans" and

"offered rate loans." Standby loans are made ratably by all lenders under the

revolving credit facility, while offered rate loans are, subject to the terms

and conditions of the credit facility, separately negotiated between us and one

or more members of the lending syndicate. Standby loans bear interest, at our

option, at a rate equal to either (a) the London Interbank Offered Rate plus a

margin equal to 0.150% to 0.405% depending on the ratio of our debt to total

capitalization, or (b) the greater of (1) the Federal Funds Effective Rate plus

0.5%, and (2) the Prime Rate. Offered rate loans bear interest at a fixed rate

agreed to by us and the lender or lenders making such loans. Under the revolving

credit facility, we are obligated to pay certain fees, including (a) a quarterly

facility fee to each lender under the credit facility equal to a percentage,

varying from 0.100% to 0.220% (depending on the ratio of our debt to total

capitalization) of each lender's total commitment, whether used or unused, under

the revolving credit facility and (b) certain administrative fees to the

administrative agent and documentation agent under the revolving credit

facility. The revolving credit facility contains the same restrictive covenants

and maintenance tests as the notes. The revolving credit facility will expire on

July 13, 2001, unless earlier terminated pursuant to its terms and conditions.

 

     In March 1999, we entered into a term credit agreement which provides for

borrowings of up to $115 million. Repayments of borrowings result in a permanent

reduction of the commitment. Loans bear interest, at our option, at a rate equal

to (a) the rate offered by the administrative agent in its London offices plus

1.00% to 1.75%, depending upon the period, or (b) the greater of (1) the Federal

Funds Effective Rate plus 0.5% or (2) the Prime Rate, in each case plus 0% to

0.75%, depending upon the period. Under the term credit agreement, we are

obligated to pay certain fees, including (a) a quarterly commitment fee equal to

0.15% of the unused portion of the commitment and (b) certain administrative

fees to the administrative agent. We are required to use the net proceeds from

any issuance of our securities, including the net proceeds from this offering,

to repay any amounts outstanding under the term credit agreement. The term

credit agreement otherwise expires on December 31, 1999.

 

     We believe that cash flow from operations, as well as the net proceeds from

the offering and available borrowings under our revolving credit facility, will

be sufficient to fund our operations for the foreseeable future.

 

                                       24

<PAGE>   28

 

QUARTERLY RESULTS OF OPERATIONS

 

     The following table presents certain of our quarterly information for the

years ended December 31, 1997 and 1998. Such information is derived from our

unaudited financial statements and, in the opinion of our management, includes

all adjustments, consisting of only normal recurring adjustments, necessary for

a fair presentation of such information. Operating results for any given quarter

are not necessarily indicative of results for any future period and should not

be relied upon as an indicator of future performance. Beginning with the fourth

quarter of 1997, our results of operations reflect the consolidation of Ets.

Brancher.

 

<TABLE>

<CAPTION>

                                                                                QUARTER ENDED

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

                                                                1997                                     1998

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

                                               MAR. 31   JUNE 30   SEPT. 30   DEC. 31   MAR. 31   JUNE 30   SEPT. 30   DEC. 31

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

                                                                                (IN MILLIONS)

<S>                                            <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

Cost of goods sold...........................   211.6     252.0      265.2     277.1     261.8     309.0      359.6     315.2

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

Gross profit.................................    95.5     113.4      116.7     112.9     117.8     147.0      169.6     141.8

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

Selling, general, administrative and other

  expenses...................................    79.1      80.3       81.0      93.3      99.6     116.9      121.7     131.4

Product inspection charge....................      --        --         --     140.0        --        --         --        --

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

Income (loss) from operations................    16.4      33.1       35.7    (120.4)     18.2      30.1       47.9      10.4

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

Net income (loss)............................  $  7.9    $ 17.6     $ 18.5    $(77.6)   $  8.3    $ 17.2     $ 24.5    $  2.5

</TABLE>

 

     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

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

                                               MAR. 31   JUNE 30   SEPT. 30   DEC. 31   MAR. 31   JUNE 30   SEPT. 30   DEC. 31

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

<S>                                            <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%

Cost of goods sold...........................    68.9      69.0      69.4       71.1      69.0      67.8      68.0       69.0

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

Gross profit.................................    31.1      31.0      30.6       28.9      31.0      32.2      32.0       31.0

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

Selling, general and administrative

  expenses...................................    25.8      22.0      21.2       23.9      26.2      25.6      22.9       28.8

Product inspection charge....................      --        --        --       35.9        --        --        --         --

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

Income (loss) from operations................     5.3       9.0       9.4      (30.9)      4.8       6.6       9.1        2.2

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

Net income (loss)............................    2.6%       4.8%      4.8%     (19.9)%     2.2%      3.8%      4.6%        .5%

</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 December 31, 1998, except as follows (in

thousands):

 

<TABLE>

<CAPTION>

                                                                          FAIR VALUE

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

                                                          CARRYING               INTEREST

                                                           AMOUNT     AMOUNT       RATE

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

<S>                                                       <C>         <C>        <C>

9.69% promissory notes..................................  $24,600     $26,601      6.75%

9.53% promissory notes..................................   21,000      21,923      6.75

11.10% promissory notes.................................    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 our current borrowing

rate for similar debt instruments of comparable maturity.

 

                                       25

<PAGE>   29

 

The fair values are estimates as of December 31, 1998, and are not necessarily

indicative of amounts for which we could settle currently or indicative of the

intent or ability of us to dispose of or liquidate such instruments.

 

     Our results of operations can be affected by changes in exchange rates. Net

sales and expenses in currencies other than the U.S. dollar are translated into

U.S. dollars for financial reporting purposes based on the average exchange rate

for the period. During 1996, 1997 and 1998, net sales from outside the U.S. and

Canada represented 2.1%, 5.3% and 13.4%, respectively, of total net sales.

Historically, foreign currency transaction gains (losses) have not had a

material effect on our operations.

 

     We have entered into foreign currency exchange contracts to hedge our

investment in Ets. Brancher. We do not engage in currency speculation. These

contracts do not subject us to risk from exchange rate movements because the

gains or losses on the contracts offset the losses or gains, respectively, on

the assets and liabilities of Ets. Brancher. As of December 31, 1998, we had

entered into foreign currency exchange contracts with a nominal value of 165.5

million French francs (approximately $30.0 million). These contracts require us

to exchange French francs for U.S. dollars at maturity, which is in May 2003, at

rates agreed to at inception of the contracts. If the counterparties to the

exchange contracts do not fulfill their obligations to deliver the contracted

currencies, we could be at risk for any currency related fluctuations.

 

     From time to time we enter into foreign currency exchange contracts to

hedge receivables from our foreign subsidiaries. These contracts do not subject

us to risk from exchange rate movements because the gains or losses on the

contracts offset losses or gains, respectively, on the receivables being hedged.

As of December 31, 1998, we had obligations to deliver the equivalent of $33.2

million of various foreign currencies by March 31, 1999, for which the

counterparties to the contracts will pay fixed contract amounts.

 

INFLATION

 

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

operations.

 

YEAR 2000 COMPLIANCE

 

     The Year 2000 issue concerns the ability of information technology and

non-information technology systems and processes to properly recognize and

process date-sensitive information before, during and after December 31, 1999.

We have a variety of computer software program applications, computer hardware

equipment and other equipment with embedded electronic circuits, including

applications used in our financial business systems, manufacturing processes and

administrative functions, which are collectively referred to as the "Systems".

We expect that our Systems will be ready for the Year 2000 transition.

 

     In order to identify and resolve Year 2000 issues affecting us, we

established a Year 2000 Compliance Program. The Year 2000 Compliance Program is

administered by a Task Force, consisting of members of senior management as well

as personnel from our accounting, internal audit and legal departments, which

has oversight of the information systems managers and other administrative

personnel charged with implementing our Year 2000 Compliance Program. The Task

Force has established a specific compliance team for Lennox Corporate and for

each of our operating locations.

 

     In 1994 we began the replacement of all core business systems for our

domestic subsidiaries. The purpose of this replacement was to upgrade systems

architecture and functionality, improve business integration and implement

process improvements. SAP was selected as the enterprise resource for planning

("ERP") system to replace mission critical software and hardware for Lennox

Industries, Heatcraft (Heat Transfer and Refrigeration Products Divisions) and

the Lennox Corporate operations. Fourth Shift was selected as the ERP system for

the Electrical Products Division of Heatcraft and is also being implemented for

various subsidiaries of Lennox Global. A new version of ROI Manage 2000 was

implemented for Armstrong. As of December 31, 1998, all replacements were

complete except for the Heat Transfer Division of Heatcraft, which is scheduled

to be complete by September 30, 1999, and replacements for certain subsidiaries

of Lennox Global.

 

     SAP, Fourth Shift and ROI Manage 2000 have certified that these systems are

Year 2000 compliant. Hardware, operating systems and databases installed to

support these systems are either compliant or have

 

                                       26

<PAGE>   30

 

Year 2000 vendor supplied updates to be applied in 1999. Other smaller

applications integrated with SAP have been replaced or upgraded with Year 2000

compliant software.

 

     The implementations of SAP, Fourth Shift and ROI Manage 2000 and the

related hardware, operating systems and databases comprise the systems that are

most critical to our operations ("Critical Systems") and address the areas of

our business which would have otherwise been significantly affected by the Year

2000. As of March 15, 1999, we were approximately 85% complete with the

implementation of the Year 2000 Compliance Program for all Critical Systems, and

we expect to be 100% complete by September 30, 1999.

 

     Our Year 2000 Program also addresses compliance in areas in addition to

Critical Systems, including: voice and data networks, desktop computers,

peripherals, EDI, contracted or purchased departmental software, computer

controlled production equipment, test stations, building security, transport and

heating and air conditioning systems, service providers, key customers and

suppliers and Lennox manufactured and purchased products. As of March 15, 1999,

we were more than 50% complete with the implementation of the Year 2000

Compliance Program for all such areas, and we expect to be 100% complete by

September 30, 1999.

 

     We have initiated communications with significant suppliers, customers and

other third parties to identify and assess Year 2000 risks and to develop

solutions that will minimize the impact on us. If third party providers, due to

the Year 2000 issue, fail to provide us with components or materials which are

necessary to manufacture our products, with sufficient electrical power and

other utilities to sustain our manufacturing process, or with adequate and

reliable means of transporting our products to our customers, then any such

failure could have an adverse effect on our future financial results. The amount

of potential liability and lost revenue cannot be estimated. Currently, we are

not aware of any of our significant third party providers or customers that are

not or will not be Year 2000 compliant.

 

     In order to address the potential Year 2000 non-compliance by third parties

affecting our operations, we will continue to survey our key customers and third

party providers requesting that they respond regarding their Year 2000 plans. If

we find a third party whose lack of Year 2000 readiness could have a substantial

impact on our operations, we intend to take corrective action. However, no

assurance can be given that third party suppliers or others on whom we rely will

address such issues successfully.

 

     The implementation of Critical Systems began in 1994 and was not

accelerated as a result of the Year 2000. We do not separately track the costs

of our Year 2000 Compliance Program because the majority of such costs consist

of internal payroll and related benefits of our compliance teams. Year 2000

remediation costs are expensed in the year incurred. We do not expect future

remediation expenditures to be material.

 

     To date, we have no indication that the time to replace or convert any

specific function or system is so great as to threaten our present schedule. If

we complete our remediation plans, then any adverse effects from the Year 2000

problem will result from circumstances outside our control. As we cannot

anticipate such circumstances now, we have not yet developed "most reasonably

likely worst case Year 2000 scenarios."

 

     Although at this time we believe that we are adequately addressing the Year

2000 issues, there can be no assurance that the Year 2000 issues will not have

an adverse effect on our future financial results. In addition, disruptions in

the economy generally resulting from Year 2000 issues could have a materially

adverse effect on us.

 

FORWARD-LOOKING STATEMENTS

 

     "Management's Discussion and Analysis of Financial Condition and Results of

Operations" and other sections of this prospectus contain forward-looking

statements which are subject to various risks and uncertainties. Actual results

could differ materially from those discussed herein. Important factors that

could cause or contribute to such differences include those discussed under

"Risk Factors" as well as those discussed elsewhere in this prospectus.

 

                                       27

<PAGE>   31

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

     In June 1998, the Financial Accounting Standards Board issued Statement of

Financial Accounting Standards No. 133, "Accounting for Derivative Instruments

and Hedging Activities." This statement establishes accounting and reporting

standards for derivative instruments, including certain derivatives embedded in

other contracts (collectively referred to as derivatives) and for hedging

activities. This statement is effective for all fiscal quarters of fiscal years

beginning after June 15, 1999. We do not believe that the adoption of this

pronouncement will have a significant impact on our financial statements.

 

                                       28

<PAGE>   32

 

                                    BUSINESS

 

     We are a leading global provider of climate control solutions. We design,

manufacture and market a broad range of products for the HVACR markets. Our

products are sold under well-established brand names including "Lennox",

"Armstrong Air", "Bohn", "Larkin", "Heatcraft" and others. We are also one of

the largest manufacturers in North America of heat transfer products, such as

evaporator coils and condenser coils. We have leveraged our expertise in heat

transfer technology, which is critical to the efficient operation of any heating

or cooling system, to become an industry leader known for our product innovation

and the quality and reliability of our products. As a result of recent

acquisitions, we have also become a leader in the growing market for hearth

products, which includes pre-fabricated fireplaces and related products.

Historically, we have sold our "Lennox" brand of residential heating and air

conditioning products directly to a network of installing dealers, which

currently numbers approximately 6,000, making us the largest wholesale

distributor of these products in North America. We have recently initiated a

program to acquire dealers in metropolitan areas in the U.S. and Canada so that

we can provide heating and air conditioning products and services directly to

consumers.

 

     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

 

                                       29

<PAGE>   33

 

and air conditioning dealers in Canada and the planned acquisition of dealers in

the U.S. allows us to participate in the retail sale and service of heating and

air conditioning products. Our hearth products, commercial air conditioning

products and refrigeration products are also sold under multiple brand names and

through a combination of wholesalers, contractors, original equipment

manufacturers, manufacturers' representatives and national accounts.

 

     From our beginning in 1895 until the mid-1980's, we focused primarily on

the North American residential heating and air conditioning market. In the

1980's, we expanded our product offerings by acquiring several heat transfer and

commercial refrigeration businesses. In the mid-1990's, we increased our

international presence, product offerings and brand portfolio through

acquisitions in Europe, Latin America and the Asia Pacific region. The most

significant international acquisition was the purchase in 1996 of a 50% interest

in two operating subsidiaries of Ets. Brancher for approximately $22.0 million,

which significantly expanded our geographic presence and provided us with an

entry into the commercial air conditioning and refrigeration markets in Europe.

In 1997, we increased our ownership interest in Ets. Brancher to 70% for an

additional $18.4 million. In September 1998, we acquired a majority interest in

McQuay do Brasil S.A., a Brazilian company which participates in the commercial

refrigeration and heat transfer markets in Brazil and surrounding countries, for

$20.5 million. We recently expanded our product offerings to include hearth

products through the acquisitions of Superior Fireplace Company, Marco Mfg.,

Inc. and Pyro Industries, Inc. in the third quarter of 1998 and Security

Chimneys International, Ltd. in the first quarter of 1999 for an aggregate

purchase price of approximately $120 million. As a result of these acquisitions,

we are one of the largest manufacturers of hearth products in the U.S. and

Canada, offering a broad line of products through a variety of distribution

channels.

 

     We were founded in 1895 in Marshalltown, Iowa when Dave Lennox, who owned a

machine repair business for the railroads, successfully developed and patented a

riveted steel coal-fired furnace which was substantially more durable than the

cast iron furnaces used at the time. By 1904, the manufacture of these furnaces

had grown into a significant business and was diverting the Lennox Machine Shop

from its core business. As a result, in 1904, a group of investors headed by

D.W. Norris bought the furnace business and named it the Lennox Furnace Company.

Over the years, D.W. Norris ensured that ownership of Lennox was distributed to

all generations of his family. Today, Lennox's ownership is broadly distributed

among approximately 110 descendants of or persons otherwise related to D.W.

Norris.

 

INDUSTRY OVERVIEW

 

     NORTH AMERICAN RESIDENTIAL

 

     Residential Heating and Air Conditioning. The residential market in the

U.S. and Canada is divided into two basic categories: furnaces and air

conditioning systems. Air conditioning is further divided into two basic

categories: residential split systems and heat pumps and window and room air

conditioners. We do not participate in the window and room air conditioner

category. Split system air conditioners are comprised of a condensing unit,

normally located outside of the household, and an evaporator unit, which is

typically positioned indoors to use the blower mechanism of a furnace or fan

coil unit in the case of a heat pump.

 

     In recent decades the functions performed by the products of this market

have become increasingly important to modern life. The advent of modern, high

efficiency air conditioning was one of the significant factors contributing to

the growth of large metropolitan areas in parts of the southern U.S. According

to a report published by the U.S. Department of Housing and Urban Development

for 1995, 98% of all new houses constructed in the southern region of the U.S.

and 80% of all new houses in the U.S. included central air conditioning.

According to the U.S. Census Bureau, manufacturers' sales for all residential

air conditioners and warm air furnaces produced in 1997 for the U.S. market were

approximately $5.5 billion, reflecting a compound annual growth rate of

approximately 7.2% from 1993 to 1997. We estimate that manufacturers' sales in

Canada were approximately $200 million in 1997.

 

     Services in the residential market in North America consist of the

installation, replacement, maintenance and repair of heating and air

conditioning systems at existing residences and the installation of heating and

air conditioning systems at newly constructed homes. This market is served by

small, owner-operated businesses

 

                                       30

<PAGE>   34

 

operating in a single geographic area and dealers owned by consolidators,

utility companies and others, some of whom may operate under a uniform trade

name and in multiple geographic locations. The retail sales and service market

in the U.S. is comprised of over 30,000 dealers.

 

     The principal factors affecting market growth in the North American

residential market are new home construction, the weather and economic

conditions, especially consumer confidence. Residential heating and air

conditioning products are sold for both the replacement and new construction

markets. The residential new construction market has historically been a more

price sensitive market because many homebuilders focus on initial price rather

than operating efficiency or ongoing service costs.

 

     Hearth Products. The main components of the hearth products market are

pre-fabricated gas fireplaces and inserts, pre-fabricated wood burning

fireplaces and inserts, pellet stoves, gas logs, and accessories and

miscellaneous items. We participate in all major aspects of the hearth products

market. According to the Hearth Products Association, an industry trade group,

there were 2.3 million unit sales in 1998, including all gas and wood burning

appliances, and this market is expected to grow at 7.5% per year through 2000.

The addition of a fireplace is considered one of the best return on investment

decisions that a homeowner can make. Hearth products are distributed and sold

through many channels, ranging from contractors to specialty retailers.

 

     COMMERCIAL AIR CONDITIONING

 

     The global commercial air conditioning market is divided into two basic

categories: unitary air conditioners and applied systems. We primarily

participate in the unitary air conditioning market in North America and in both

the unitary and applied systems markets in Europe. Unitary products consist of

modular split systems and packaged products with up to 30 tons of cooling

capacity. One ton of cooling capacity is equivalent to 12,000 BTUs and is

generally adequate to air condition approximately 500 square feet of space.

Packaged units are self-contained heating and cooling or cooling only units that

typically fit on top of a low rise commercial building such as a shopping center

or a restaurant. Applied systems are typically larger engineered systems, which

are designed to operate in multi-story buildings and include air cooled and

water cooled chillers, air handling units and equipment to monitor and control

the entire system.

 

     According to the Air-Conditioning & Refrigeration Institute, an industry

trade group, global manufacturers' sales for all commercial air conditioning

systems produced in 1994 (the latest available data) were approximately $14

billion. The principal factors affecting growth in this market are new

construction, economic conditions and environmental regulation of refrigerants.

Unlike residential heating and air conditioning systems, some commercial air

conditioning systems use refrigerants that have been banned or that are

currently being phased out, especially in Europe. We expect that such regulation

will lead to increased growth in this market.

 

     COMMERCIAL REFRIGERATION

 

     The global refrigeration market is a highly diversified market, including

everything from household refrigerators and walk-in coolers to large, ammonia

based flash freezing plants and process cooling equipment. We define our served

market as the design and manufacture of equipment used in cold storage,

primarily for the preservation of perishable goods. Our served market includes

condensing units, unit coolers, air cooled condensers, non-supermarket racks and

packaged systems. According to the U.S. Census Bureau, our served market in the

U.S. accounted for approximately $510.9 million in revenues in 1997, reflecting

a compound annual growth rate of approximately 5.3% from 1993 to 1997.

 

     The principal factors affecting growth in the commercial refrigeration

market are:

 

     - new commercial construction activity, including construction of

       supermarkets, restaurants, convenience stores and distribution centers;

 

     - replacement and retrofit activity in commercial buildings such as

       efficiency improvements and store design changes; and

 

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     - emergency replacement activity such as replacement of weather related

       product/component breakdowns and product maintenance.

 

     HEAT TRANSFER

 

     The heat transfer surface or coil is a fundamental technology employed in

the heating and cooling cycles for HVACR products. The global heat transfer

surface market is comprised not only of the traditional HVACR applications such

as furnaces, air conditioners and unit coolers, but also numerous other

applications such as ice machines, refrigerated trucks, certain farm equipment

and off-road vehicles, recreational vehicles, computer room air conditioners and

process cooling equipment used with sophisticated laser cutting machines. We

produce heat transfer surfaces not only for traditional HVACR applications, but

also for many of these other applications. Many HVACR manufacturers produce

standard coils for their own use and generally do not sell coils to third

parties. Coils are also designed and produced by independent coil manufacturers

and sold to original equipment manufacturers for use in their products. Coils

are typically designed, developed and sold by engineers who work with customers

to produce a coil that will meet the customer's precise specifications. Factors

affecting a coil purchaser's decision are quality, delivery time, engineering

and design capability, and price.

 

     Since heat transfer products are a fundamental part of HVACR products, the

heat transfer market is driven by the same economic factors that affect the

HVACR markets generally. Because of the fragmented nature of this market and the

fact that coils are often produced internally by HVACR manufacturers, it is

difficult to gauge the size of the worldwide served heat transfer market.

According to the U.S. Census Bureau, the served market in the U.S. (i.e., third

party sales) accounted for approximately $528.1 million in revenues in 1997,

reflecting a compound annual growth rate of approximately 6.2% from 1993 to

1997.

 

COMPETITIVE STRENGTHS

 

     We have a combination of strengths that position us to continue to be a

leading provider of climate control solutions including:

 

     STRONG BRAND RECOGNITION AND REPUTATION

 

     We believe that our well known brand names and reputation for quality

products and services position us to compete successfully in our existing

markets and to continue to expand internationally. Our studies indicate that our

"Lennox" brand is the most widely recognized brand name in the North American

residential heating and air conditioning markets. Furthermore, in a recent

survey of home builders, the "Lennox" brand received the highest overall rating

in terms of product quality for furnaces and unitary air conditioners. We market

our other HVACR and hearth products under the well known brand names of

"Armstrong Air", "Bohn", "Larkin" and "Superior", among others.

 

     BREADTH OF DISTRIBUTION

 

     We market and distribute our products using multiple brand names through

multiple distribution channels to penetrate different segments of the HVACR

market. We sell our heating and air conditioning products through independent

and Lennox-owned installing dealers, as well as through regional distributors.

Our hearth products, commercial air conditioning and refrigeration products are

also sold under multiple brand names and through a combination of wholesalers,

installing contractors, manufacturers' representatives, original equipment

manufacturers, national accounts and specialty retailers. We believe that sales

growth is driven, in part, by the level of exposure to our customers and our

distribution strategy is designed to maximize this exposure.

 

     PROVEN HEAT TRANSFER EXPERTISE

 

     Heat transfer surfaces, which include evaporator and condenser coils, are

critical to the operation of most HVACR products. For a given application, a

variety of factors must be evaluated, such as the size of the HVACR unit and

desired energy efficiency, while considering such additional elements as

manufacturing

 

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ease. Since our acquisition of the Heatcraft business in 1986, we have devoted

significant resources to the development of heat transfer surfaces. We use

computer-aided design and other advanced software to improve the efficiency of

designs and simulate and evaluate the movement of refrigerants even before a

prototype is built. Since we also produce coils for sale to third parties, we

are able to spread our research and development costs over third party purchases

of heat transfer products as well as sales of our own HVACR products. We have

recently agreed to acquire Livernois Engineering Holding Company, which will

provide us with access to additional heat transfer technology. Livernois

produces heat transfer manufacturing equipment for the HVACR and automotive

industries.

 

     COMMITMENT TO PRODUCT INNOVATION AND TECHNOLOGICAL LEADERSHIP

 

     Throughout our history, we have dedicated substantial resources to research

and development and product innovation. We pioneered the introduction of the

forced air furnace in 1935, which resulted in new approaches to home design for

more efficient heating. Other examples of our product innovation include:

 

     - the multi-zone rooftop air conditioner in 1965;

 

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

       1973;

 

     - the high efficiency gas furnace in 1982;

 

     - the first commercially available high efficiency combination hot water

       heater and furnace in 1994; and

 

     - "Floating Tube" and "Thermoflex" technologies, which significantly reduce

       leaks in air cooled condensers and unit coolers, in 1995.

 

     We have invested approximately $125 million over the last five years on

research and development activities, and we intend to continue to invest in

these activities to create innovative and technologically superior products.

 

     DEMONSTRATED MANUFACTURING EFFICIENCY

 

     Over the last several years, we have introduced concepts of "Demand

Flow"(R) technology, cellular manufacturing, just-in-time inventory management

and configure-to-order processes to reduce production cycle lead times to a week

or as little as 48 hours in many of our manufacturing facilities, compared to

lead times of 90 days or more before the introduction of such concepts. The

increases in manufacturing efficiency have led to improvements in inventory

turnover. Without these improvements, along with improvements in accounts

receivable and accounts payable management, we estimate that our investment in

working capital would have been approximately $180 million higher at December

31, 1998.

 

GROWTH STRATEGY

 

     Our growth strategy is designed to capitalize on our competitive strengths

in order to expand our market share and profitability in the worldwide HVACR

markets. We will continue to pursue internal programs and strategic acquisitions

that broaden our product and service offerings, expand our market opportunities

and enhance our technological expertise. The key elements of this strategy

include:

 

     EXPAND MARKET IN NORTH AMERICA

 

     Our program to acquire heating and air conditioning dealers in the U.S. and

Canada represents a new direction for the heating and air conditioning industry

because, to our knowledge, no other major manufacturer has made a significant

investment in retail distribution. This strategy will enable us to extend our

distribution directly to the consumer, thereby permitting us to participate in

the revenues and margins available at the retail level while strengthening and

protecting our brand equity. We believe that the retail sales and service market

represents a significant growth opportunity because this market is large and

highly fragmented. The retail sales and service market in the U.S. is comprised

of over 30,000 dealers. We started this program in September 1998, and as of

March 31, 1999 we had acquired 37 dealers in Canada for an aggregate purchase

 

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price of approximately $55 million and had signed letters of intent to acquire

nine additional Canadian dealers for an aggregate purchase price of

approximately $9 million. We intend to start acquiring dealers in the U.S. by

initially focusing on our existing "Lennox" dealers and will try to achieve a

balance between residential new construction, residential replacement and light

commercial activities. We believe our long history of direct relationships with

our dealers through the one-step distribution system and the resulting knowledge

of local markets will give us advantages in identifying and acquiring suitable

candidates. We have assembled an experienced management team to administer the

dealer operations, and we have developed a portfolio of training programs,

management procedures and goods and services that we believe will enhance the

quality, effectiveness and profitability of dealer operations.

 

     In addition to our acquisition program, we have initiated a program to

strengthen our independent dealer network by providing all dealers with a broad

array of services and support. Participants in a newly-created Associate Dealer

Program will receive certain retirement and other benefits in exchange for

agreeing that a certain percentage of their purchases will be of our products

and for granting us a right of first refusal to acquire their businesses. All

independent dealers, including participants in the Associate Dealer Program,

will be provided with access to Lennox-sponsored volume purchasing programs with

third parties for goods and services used in their businesses.

 

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

 

     - selectively expanding our "Lennox" independent dealer network;

 

     - promoting the cross-selling of our "Armstrong Air" and other residential

       heating and air conditioning brands to our existing network of "Lennox"

       dealers as a second line;

 

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

       base;

 

     - expanding the geographic market for the "Armstrong Air" brand of

       residential heating and air conditioning products from its traditional

       presence in the Northeast and Central U.S. to the southern and western

       portions of the U.S.;

 

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

 

     - pursuing complementary acquisitions that expand our product offerings or

       geographic presence.

 

     EXPLOIT INTERNATIONAL OPPORTUNITIES

 

     Worldwide demand for residential and commercial heating, air conditioning,

refrigeration and heat transfer products is increasing. We believe that the

increasing international demand for these products presents substantial

opportunities, especially in emerging markets and particularly for heat transfer

and refrigeration products. An example is the increasing use of refrigeration

products to preserve perishables including food products in underdeveloped

countries. Refrigeration products generally have the same design and

applications globally. To take advantage of international opportunities, we have

made substantial investments in manufacturing facilities in Europe, Latin

America and Asia Pacific through acquisitions, including a 70% interest in Ets.

Brancher. Our international sales have grown from $28.5 million in 1996 to

$244.5 million in 1998. We will continue to focus on expanding our international

operations through acquisitions and internal growth to take advantage of

international growth opportunities. We are also investing additional resources

in our international operations with the goal of achieving manufacturing and

distribution efficiencies comparable to that of our North American operations.

 

     INCREASE PRESENCE IN HEARTH PRODUCTS MARKET

 

     With our recent acquisitions of hearth products companies, we now

manufacture and sell one of the broadest lines of hearth products in North

America. We offer multiple brands of hearth products at a range of price points.

We believe that this broad product line will allow us to compete successfully in

the hearth products market since many distributors prefer to concentrate their

product purchases with a limited number of suppliers. We believe that we can

increase our penetration of this market by selling in the distribution

 

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channels we acquired and through our historical distribution channels. Many of

our heating and air conditioning dealers have begun to expand their product

offerings to include hearth products.

 

     CONTINUE PRODUCT INNOVATION

 

     An important part of our growth strategy is to continue to invest in

research and new product development. We have designated certain of our

facilities as "centers for excellence" that are responsible for the research and

development of core competencies vital to our success, such as combustion

technology, vapor compression, heat transfer and low temperature refrigeration.

Technological advances are disseminated from these "centers for excellence" to

all of our operating divisions. Historically, our commitment to research and

development has resulted in product innovations such as the first high

efficiency gas furnace. More recently, we were the first to manufacture and

market a complete combination high efficiency water heater and furnace, the

CompleteHeat, and also developed an integrated electronic refrigeration control

system, the Beacon control system.

 

PRODUCTS

 

     NORTH AMERICAN RESIDENTIAL PRODUCTS AND SERVICES

 

     Heating and Air Conditioning Products. We manufacture and market a broad

range of furnaces, heat pumps, air conditioners, packaged heating and cooling

systems and related products. These products are available in a variety of

product designs and efficiency levels at a range of price points intended to

provide a complete line of home comfort systems for both the residential

replacement and new construction markets. We market these products through

multiple brand names. In addition, we manufacture zoning controls, thermostats

and a complete line of replacement parts. We believe that by maintaining a broad

product line with multiple brand names, we can address different market segments

and penetrate multiple distribution channels.

 

     Our Advanced Distributor Products division builds evaporator coils, unit

heaters and air handlers under the "ADP" brand as well as the "Lennox" and

"Armstrong Air" brands. This division supplies us with components for our

heating and air conditioning products and produces evaporator coils to be used

in conjunction with competitors' heating and air conditioning products and as an

alternative to such competitors' brand name components. We started this business

in 1993 and have been able to achieve an approximate 20% share of this market

for evaporator coils through the application of our technological and

manufacturing skills.

 

     Hearth Products. We believe we are the only North American HVACR

manufacturer that also designs, manufactures and markets residential hearth

products. Our hearth products include prefabricated gas and wood burning

fireplaces, free standing pellet and gas stoves, fireplace inserts, gas logs and

accessories. Many of the fireplaces are built with a blower or fan option and

are efficient heat sources as well as attractive amenities to the home. Prior to

the hearth products acquisitions, we offered a limited selection of hearth

products in Canada and, to a lesser extent, in the U.S. We substantially

expanded our offering of hearth products and distribution outlets with these

acquisitions. We currently market our hearth products under the "Lennox",

"Superior", "Marco", "Whitfield", and "Security Chimneys" brand names. We

believe that our strong relationship with our dealers and our brand names will

assist in selling into this market.

 

     Retail Service. With our recently initiated program of acquiring dealers in

the U.S. and Canada, we have begun to provide installation, maintenance, repair

and replacement services for heating and air conditioning systems directly to

both residential and light commercial customers. Installation services include

the installation of heating and air conditioning systems in new construction and

the replacement of existing systems. Other services include preventative

maintenance, emergency repairs and the replacement of parts associated with

heating and air conditioning systems. We also sell a wide range of mechanical

and electrical equipment, parts and supplies in connection with these services.

 

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     COMMERCIAL AIR CONDITIONING

 

     We manufacture and sell commercial air conditioning equipment in North

America, Europe, Asia Pacific and South America.

 

     North America. In the North American commercial markets, our air

conditioning equipment is used in applications such as low rise office

buildings, restaurants, retail and supermarket centers, churches and schools.

Our product offerings for these applications include rooftop units which range

from two to 30 tons of cooling capacity and split system/air handler

combinations which range from two to 20 tons. In North America, we sell unitary

equipment as opposed to larger applied systems. Our newest rooftop unit, the L

Series, was introduced in 1995 and has been well received by the national

accounts market where it is sold to restaurants, mass merchandisers and other

retail outlets. We believe that this product's success is attributable to its

efficiency, design flexibility, low life cycle cost, ease of service and

advanced control technology.

 

     International. We compete in the commercial air conditioning market in

Europe through our ownership of 70% of Ets. Brancher and Ets. Brancher's

operating subsidiaries, HCF S.A. and Friga-Bohn S.A. We have agreed to buy the

remaining 30% interest in Ets. Brancher on March 31, 2000 for approximately $17

million. HCF manufactures and sells unitary products which range from two to 30

tons and applied systems which range up to 500 tons. HCF's products consist of

chillers, air handlers, fan coils and large rooftop units and serve medium

high-rise buildings, institutional applications and other field engineered

applications. HCF manufactures its air conditioning products in several

locations throughout Europe, including sites in the United Kingdom, France,

Holland and Spain, and markets such products through various distribution

channels in the foregoing countries and Italy, Germany, Belgium and the Czech

Republic.

 

     We have been active in Australia for several years, primarily in the

distribution of our residential and light commercial heating and air

conditioning products manufactured in North America. In 1997, we acquired the

assets of Alcair Industries, an Australian manufacturer of commercial heating

and air conditioning products (packaged and split systems) ranging in size from

two to 60 tons. This acquisition provided us with a manufacturing presence,

doubled our revenues in Australia and added marketing, distribution and

management strength to our operations in Australia.

 

     Through our 50% owned Fairco joint venture in Argentina, we manufacture

split system heating and air conditioning products and a limited range of L

Series commercial air conditioning products for sale in Argentina, Chile and the

surrounding Mercosur trading zone, which includes Brazil, Argentina, Bolivia,

Paraguay and Uruguay.

 

     COMMERCIAL REFRIGERATION

 

     North America. We are one of the leading manufacturers of commercial

refrigeration products in North America. Our refrigeration products include

chillers, condensing units, unit coolers, fluid coolers, air cooled condensers

and air handlers. Our refrigeration products are sold for cold storage

applications to preserve food and other perishables. These products are used by

supermarkets, convenience stores, restaurants, warehouses and distribution

centers. As part of our sale of commercial refrigeration products, we routinely

provide application engineering for consulting engineers, contractors and

others. Some of our larger commercial refrigeration projects have included the

sale of custom designed systems for the Georgia Dome, Camden Yards, Ohio

University, the Boston Museum of Fine Arts and Ericsson Stadium.

 

     International. Friga-Bohn manufactures and markets refrigeration products

through manufacturing facilities and joint ventures located in France, Italy and

Spain. Friga-Bohn's refrigeration products include small chillers, unit coolers,

air cooled condensers, fluid coolers and refrigeration racks. These products are

sold to distributors, installing contractors and original equipment

manufacturers.

 

     We also own 50% of a joint venture in Mexico that produces unit coolers and

condensing units of the same design and quality as those manufactured by us in

the U.S. Since this venture produces a smaller range of products, the product

line is complemented with imports from the U.S. which are sold through the joint

venture's distribution network. Sales are made in Mexico to wholesalers,

installing contractors and original

 

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equipment manufacturers. As production volumes increase, there exists the

potential to export some of the high labor content products from the joint

venture into North America and Latin America.

 

     In the third quarter of 1998, we acquired a 79% interest in McQuay do

Brasil S.A., a Brazilian company that manufactures condensing units and unit

coolers. We believe this acquisition gives us the leading market share for

commercial refrigeration products in Brazil.

 

     In the fourth quarter of 1998, we acquired the assets of Lovelock Luke Pty.

Limited, a distributor of refrigeration and related equipment in Australia and

New Zealand. This acquisition gives us an established commercial refrigeration

business in Australia and New Zealand.

 

     HEAT TRANSFER

 

     We are one of the largest manufacturers of heat transfer coils in the U.S.,

Europe, Mexico and Brazil. These products are used primarily by original

equipment manufacturers of residential and commercial air conditioning products,

transportation air conditioning and refrigeration systems, and commercial

refrigeration products. A portion of our original equipment manufacturer coils

are produced for use in our residential and commercial HVACR products. We also

produce private label replacement coils for use in other manufacturers' HVACR

equipment. We believe that the engineering expertise of our sales force provides

us with an advantage in designing and applying these products for our customers.

Advanced computer software enables us to predict with a high degree of accuracy

the performance of complete air conditioning and refrigeration systems.

 

     In addition to supplying the original equipment manufacturer market, we

also produce replacement coils for large commercial air conditioning, heating

and industrial processing systems. Many of these coils are specially designed

for particular systems and in the event of a failure may need to be replaced

quickly. We are the industry leader in this market and have designed our

manufacturing processes and systems in North America so that we can deliver

custom coils within 48 hours of receipt of an order. This premium service

enables us to receive superior prices and generate attractive margins.

 

     We also design and manufacture the equipment and tooling necessary to

produce coils. We use such equipment and tooling in our manufacturing facilities

and sell it to third parties. Typically, there is a long lead time between the

initial order and receipt for this type of equipment and tooling from third

parties. Since we have the ability to quickly produce the equipment and tooling

necessary to manufacture heat transfer products and systems, we can accelerate

the international growth of our heat transfer products segment. For example, we

were able to design, manufacture and deliver the equipment necessary to produce

evaporator and condenser coils for our joint venture in Mexico in what we

estimate was half the time than would otherwise have been required to obtain the

equipment from third parties. Upon completion of our acquisition of Livernois,

we will also supply heat transfer manufacturing equipment to the automotive

industry.

 

     In addition to manufacturing heat transfer products in the North American

market, we produce coils for the European market through a joint venture in the

Czech Republic. Our joint venture in Mexico produces evaporator and condenser

coils for use in that country and for export to the Caribbean and the U.S. Our

Brazilian joint venture manufactures heat transfer coils that are sold to both

HVACR manufacturers and automotive original equipment manufacturers in Brazil.

 

MARKETING AND DISTRIBUTION

 

     We manage numerous distribution channels for our products in order to

better penetrate the HVACR market. Generally, our products are sold through a

combination of distributors, independent and company-owned dealers, wholesalers,

manufacturers' representatives, original equipment manufacturers and national

accounts. We have also established separate distribution networks in each

country in which we conduct operations. We deploy dedicated sales forces across

all our business segments and brands in a manner designed to maximize the

ability of each sales force to service its particular distribution channel. To

maximize enterprise-wide effectiveness, we have active cross-functional and

cross-organizational teams working on issues such as pricing and coordinated

approaches to product design and national account customers with

 

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interests cutting across business segments. We have approximately 1,600 persons

employed in sales and marketing positions and spent $50.2 million on

advertising, promotions and related marketing activities in 1998.

 

     One example of the competitive strength of our marketing and distribution

strategy is in the North American residential heating and air conditioning

market, in which we use three distinctly different distribution

approaches -- the one-step distribution system, the two-step distribution system

and sales made directly to consumers through Lennox-owned dealers. We market and

distribute our "Lennox" brand of heating and air conditioning products directly

to approximately 6,000 dealers that install these products.

 

     We distribute our "Armstrong Air", "Air-Ease", "Concord" and "Magic-Pak"

brands of residential heating and air conditioning products through the

traditional two-step distribution process whereby we sell our products to

distributors who, in turn, sell the products to a local installing dealer.

Accordingly, by using multiple brands and distribution channels, we are able to

better penetrate the North American residential heating and air conditioning

market. In addition, we have begun to acquire or establish distributors in key

strategic areas when a satisfactory relationship with an independent distributor

is not available.

 

     We have initiated a program to acquire high quality dealers in metropolitan

areas in the U.S. and Canada so we can provide heating and air conditioning

products and services directly to consumers. We intend to start acquiring

dealers in the U.S. by initially focusing on our existing "Lennox" dealers who

are part of our one-step distribution system.

 

     Through the years, the "Lennox" brand has become synonymous with the "Dave

Lennox" image, which is utilized in national television and print advertising as

well as in numerous locally produced dealer ads, open houses and trade events,

and is easily the best recognized advertising icon in the heating and air

conditioning industry. We spent an aggregate of $40.1 million in advertising,

promotions and related marketing activities in 1998 on the "Lennox" brand alone.

 

MANUFACTURING

 

     We operate 15 manufacturing facilities in the U.S. and Canada and 19

outside the U.S. and Canada. These plants range from small manufacturing

facilities to large 1,000,000 square foot facilities in Grenada, Mississippi and

Marshalltown, Iowa. In our facilities most impacted by seasonal demand, we

manufacture both heating and air conditioning products to smooth seasonal

production demands and maintain a relatively stable labor force. We are

generally able to hire temporary employees to meet changes in demand.

 

     Over the last several years, we have introduced concepts of "Demand

Flow"(R) technology, cellular manufacturing, just-in-time inventory management

and configure-to-order processes to reduce production cycle lead times to a week

or as little as 48 hours in many of our manufacturing facilities, compared to

lead times of 90 days or more before the introduction of such concepts. These

processes enable us to deliver to our customers the product with the exact

specifications and features they desire in a very short lead time while reducing

inventory, inventory obsolescence and working capital. If these improvements had

not occurred, along with improvements in accounts receivable and accounts

payable management, we estimate that our investment in working capital would

have been approximately $180 million higher at December 31, 1998. These

improvements in manufacturing efficiency have also allowed us to produce more

output with a smaller workforce and less factory space, and accordingly to

consolidate our manufacturing facilities.

 

     Some of the recently acquired manufacturing facilities have not yet reached

the levels of efficiency that have been achieved at our plants which we have

owned for a longer time. However, we intend to bring our manufacturing and

operating expertise to these plants.

 

PURCHASING

 

     We rely on various suppliers to furnish the raw materials and components

used in the manufacture of our products. To maximize our buying power in the

marketplace, we utilize a "purchasing council" that consolidates purchases of

our entire domestic requirements of particular items across all business

segments. The purchasing council generally concentrates its purchases for a

given material or component with one or two

 

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suppliers, although we believe that there are alternative suppliers for all of

our key raw material and component needs. Compressors, motors and controls

constitute our most significant component purchases, while steel, copper and

aluminum account for the bulk of our raw material purchases. Although most of

the compressors used by us are purchased directly from major compressor

manufacturers, we own a 24.5% interest in a joint venture to manufacture

compressors in the one and one-half to seven horsepower range. We expect that

this joint venture, which began limited production in April 1998, will be

capable of providing us with a substantial portion of our compressor

requirements in the residential air conditioning market after achieving full

production levels, which is expected in 2001.

 

     We attempt to minimize the risk of price fluctuations in certain key

components by entering into contracts, typically at the beginning of the year,

which generally provide for fixed prices for our needs throughout the year. In

instances where we are unable to pass on to our customers increases in the costs

of copper and aluminum, we enter into forward contracts for the purchase of such

materials. We have forward commitments for the substantial majority of our

internal needs of aluminum through December 1999 and copper through December

2000.

 

INFORMATION SYSTEMS

 

     Our North American operations are supported by enterprise business systems

which support all core business processes. Enterprise business systems are

designed to enhance the continuity of operations, ensure appropriate controls,

and support timely and efficient decision making. Our largest operating

divisions began installing the SAP enterprise business software system in 1996.

We have substantially completed the implementation of SAP software and full

implementation by all divisions converting to SAP is expected to be completed by

the end of 1999. The SAP software system is designed to facilitate the flow of

information and business processes across all business functions such as sales,

manufacturing, distribution and financial accounting.

 

TECHNOLOGY AND RESEARCH AND DEVELOPMENT

 

     We support an extensive research and development program focusing on the

development of new products and improvements to our existing product lines. We

spent an aggregate of $23.2 million, $25.4 million and $31.8 million on research

and development during 1996, 1997 and 1998, respectively. As of December 31,

1998, we employed approximately 480 persons dedicated to research and

development activities. We have a number of research and development facilities

located around the world, including a limited number of "centers for excellence"

that are responsible for the research and development of particular core

competencies vital to our business, such as combustion technology, vapor

compression, heat transfer and low temperature refrigeration.

 

     We use advanced, commercially available computer-aided design,

computer-aided manufacturing, computational fluid dynamics and other

sophisticated software not only to streamline the design and manufacturing

processes, but also to give us the ability to run complex computer simulations

on a product design before a working prototype is created. We operate a full

line of metalworking equipment and advanced laboratories certified by applicable

industry associations.

 

PATENTS AND PROPRIETARY RIGHTS

 

     We hold numerous patents that relate to the design and use of our products.

We consider these patents important, but no single patent is material to the

overall conduct of our business. Our policy is to obtain and protect patents

whenever such action would be beneficial to us. We own several trademarks that

we consider important in the marketing of our products, including Lennox(R),

Heatcraft(R), CompleteHeat(R), Raised Lance(R), Larkin(TM), Climate Control(TM),

Chandler Refrigeration(R), Bohn(R), Advanced Distributor Products(R), Armstrong

Air(TM), Air-Ease(R), Concord(R), Magic-Pak(R), Superior(TM), Marco(R),

Whitfield(R), Security Chimneys(R), Janka(R), Alcair(TM) and Friga-Bohn(TM). We

believe our rights in these trademarks are adequately protected.

 

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COMPETITION

 

     Substantially all of the markets in which we participate are highly

competitive. The most significant competitive factors facing us are product

reliability, product performance, service and price, with the relative

importance of these factors varying among our product lines. In addition, as we

acquire more heating and air conditioning dealers, we will face increasing

competition from independent dealers and dealers owned by consolidators and

utility companies. Certain competitors may have greater financial and marketing

resources than we have. Listed below are some of the companies that we view as

our main manufacturing competitors in each segment we serve, with relevant brand

names, when different than the company name, shown in parentheses.

 

     - North American residential -- United Technologies Corporation (Carrier);

       Goodman Manufacturing Company (Janitrol, Amana); American Standard

       Companies Inc. (Trane); York International Corporation; Hearth

       Technologies Inc. (Heatilator); and CFM Majestic, Inc. (Majestic).

 

     - Commercial air conditioning -- United Technologies Corporation (Carrier);

       American Standard Companies Inc. (Trane); York International Corporation;

       Daikin Industries, Ltd.; and McQuay International.

 

     - Commercial refrigeration -- United Technologies Corporation (Ardco

       Group); Tecumseh Products Co.; Copeland Corporation; and Hussmann

       International Inc. (Krack).

 

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

 

EMPLOYEES

 

     As of December 31, 1998, we employed approximately 11,700 employees,

approximately 3,400 of which were represented by unions. The number of hourly

workers we employ during the course of the year may vary in order to match our

labor needs during periods of fluctuating demand. We believe that our

relationships with our employees are generally good.

 

     Within the U.S., we have eight manufacturing facilities and five

distribution centers, along with our North American Parts Center in Des Moines,

Iowa, with collective bargaining agreements ranging from three to eight years in

length. The five distribution centers are covered by a single contract that

expires in 2001. With respect to our significant manufacturing facilities, two

collective bargaining agreements expire in April 1999 -- Bellevue, Ohio and

Union City, Tennessee -- and one expires in December 1999 -- Lynwood,

California. Three collective bargaining agreements expire in

2000 -- Marshalltown, Iowa, Burlington, Washington and Atlanta, Georgia -- and

one expires in 2002 -- Danville, Illinois. Outside of the U.S., we have 12

significant facilities that are represented by unions. The four agreements for

HCF in France have no fixed expiration date. The agreements at our facilities in

Toronto, Ontario and Laval, Quebec expire in April 1999 and December 1999,

respectively, and the agreement at our facility in Burgos, Spain expires in

2000. We believe that our relationships with the unions representing our

employees are generally good, and do not anticipate any material adverse

consequences resulting from negotiations to renew these agreements.

 

                                       40

<PAGE>   44

 

PROPERTIES

 

     The following chart lists our major domestic and international

manufacturing, distribution and office facilities and whether such facilities

are owned or leased:

 

                              DOMESTIC FACILITIES

 

<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

                     294,690 square feet

Lynwood, CA          Marco Mfg. Inc. headquarters and         Gas and wood burning fireplaces            Leased

                     factory; 200,000 square feet

</TABLE>

 

                            INTERNATIONAL FACILITIES

 

<TABLE>

<CAPTION>

     LOCATION           DESCRIPTION AND APPROXIMATE SIZE                PRINCIPAL PRODUCTS             OWNED/LEASED

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

<S>                  <C>                                      <C>                                      <C>

Genas, France        Friga-Bohn headquarters and 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.

 

                                       41

<PAGE>   45

 

     In addition to the properties described above and excluding dealer

facilities, we lease over 60 facilities in the U.S. for use as sales offices and

district warehouses and a limited number of additional facilities worldwide for

use as sales and service offices and regional warehouses. We believe that our

properties are in good condition and adequate for our requirements. We also

believe that our principal plants are generally adequate to meet our production

needs.

 

REGULATION

 

     Our operations are subject to evolving and often increasingly stringent

federal, state, local and international laws and regulations concerning the

environment. Environmental laws that affect or could affect our domestic

operations include, among others, the Clean Air Act, the Clean Water Act, the

Resource Conservation and Recovery Act, the Comprehensive Environmental

Response, Compensation, and Liability Act, the Occupational Safety and Health

Act, the National Environmental Policy Act, the Toxic Substances Control Act,

any regulations promulgated under these acts and various other Federal, state

and local laws and regulations governing environmental matters. We believe we

are in substantial compliance with such existing environmental laws and

regulations. Our non-U.S. operations are also subject to various environmental

statutes and regulations. Generally, these statutes and regulations impose

operational requirements that are similar to those imposed in the U.S. We

believe we are in substantial compliance with applicable non-U.S. environmental

statutes and regulations.

 

     Refrigerants. In the past decade, there has been increasing regulatory and

political pressure to phase out the use of certain ozone depleting substances,

including hydrochlorofluorocarbons, which are sometimes referred to as "HCFCs".

This development is of particular importance to us and our competitors because

of the common usage of HCFCs as refrigerants for air conditioning and

refrigeration equipment. As discussed below, we do not believe that

implementation of the phase out schedule for HCFCs contained in the current

regulations will have a material adverse effect on our financial position or

results of operations. We do believe, however, that there will likely be

continued pressure by the international environmental community for the U.S. and

other countries to accelerate the phase out schedule. We have been an active

participant in the ongoing international dialogue on these issues and believe

that we are well positioned to react to any changes in the regulatory landscape.

 

     In September 1987, the U.S. became a signatory to an international

agreement titled the Montreal Protocol on Substances that Deplete the Ozone

Layer. The Montreal Protocol requires its signatories to phase out HCFCs on an

orderly basis. All countries in the developed world have become signatories to

the Montreal Protocol. The manner in which these countries implement the

Montreal Protocol and regulate HCFCs differs widely.

 

     The 1990 U.S. Clean Air Act amendments implement the Montreal Protocol by

establishing a program to limit the production, importation and use of certain

ozone depleting substances, including HCFCs currently used as refrigerants by us

and our competitors. Under the Act and implementing regulations, all HCFCs must

be phased out between 2010 and 2030. We believe that these regulations as

currently in effect will not have a material adverse effect on our operations.

It is not expected that the planned phase out of HCFCs will have a significant

impact on the sales of products utilizing these refrigerants prior to the end of

the decade. Nonetheless, as the supply of virgin and recycled HCFCs falls, it

will be necessary to address the need to substitute permitted substances for

HCFCs. Further, the U.S. is under pressure from the international environmental

community to accelerate the current 2030 deadline for phase out of HCFCs. An

accelerated phase out schedule could adversely affect our future financial

results and the industry generally.

 

     We, in conjunction with major chemical manufacturers, are continually in

the process of reviewing and addressing the potential impact of refrigerant

regulations on our products. We believe that the combination of products that

presently utilize HCFCs, and products in the field which can be retrofitted to

alternate refrigerants, provide a complete line of commercial and industrial

products. Therefore, we do not foresee any material adverse impact on our

business or competitive position as a result of the Montreal Protocol, the 1990

Clean Air Act amendments or their implementing regulations. However, we believe

that the implementation

 

                                       42

<PAGE>   46

 

of severe restrictions on the production, importation or use of refrigerants we

employ in larger quantities or acceleration of the current phase out schedule

could have such an impact on us and our competitors.

 

     We are subject to appliance efficiency regulations promulgated under the

National Appliance Energy Conservation Act of 1987, as amended, and various

state regulations concerning the energy efficiency of our products. We have

developed and are developing products which comply with National Appliance

Energy Conservation Act regulations, and do not believe that such regulations

will have a material adverse effect on our business. The U.S. Department of

Energy began in 1998 its review of national standards for comfort products

covered under National Appliance Energy Conservation Act. It is anticipated that

the National Appliance Energy Conservation Act regulations requiring

manufacturers to phase in new higher efficiency products will not take effect

prior to 2006. We believe we are well positioned to comply with any new

standards that may be promulgated by the Department of Energy and do not foresee

any adverse material impact from a National Appliance Energy Conservation Act

standard change.

 

     Remediation Activity. In addition to affecting our ongoing operations,

applicable environmental laws can impose obligations to remediate hazardous

substances at our properties, at properties formerly owned or operated by us and

at facilities to which we sent or send waste for treatment or disposal. We are

currently involved in remediation activities at our facility in Grenada,

Mississippi and at a formerly owned site in Ft. Worth, Texas. In addition,

former hazardous waste management units at two of our facilities, Danville,

Illinois and Wilmington, North Carolina, are currently in the process of being

closed under the Resource Conservation and Recovery Act. The Resource

Conservation and Recovery Act closure process can result in the need to conduct

soil and/or groundwater remediation to address any on-site releases. The Grenada

facility is subject to an administrative order issued by the Mississippi

Department of Environmental Quality pursuant to which we will conduct

groundwater remediation. We have established a $1.8 million reserve to cover

costs of remediation at the Grenada facility and possible costs associated with

the Resource Conservation and Recovery Act closure at the Danville facility. We

also have installed and are operating a groundwater treatment system at our

previously owned facility in Ft. Worth, Texas. We have established a reserve

having a balance of approximately $200,000 to cover the projected $50,000 annual

operating costs for ongoing treatment at the Ft. Worth site. Resource

Conservation and Recovery Act closure activities at the Wilmington facility

include an ongoing groundwater remediation project. This project is being

conducted and funded by a prior owner of the facility, pursuant to an

indemnification obligation under the contract pursuant to which we acquired the

facility. We have no reason to believe that the prior owner will not continue to

conduct and pay for the required remediation at the Wilmington facility.

However, if the prior owner refused to meet its contractual obligations, we

could be required to complete the remediation. In addition, we have from time to

time received notices that we are a potentially responsible party along with

other potentially responsible parties in Superfund proceedings for cleanup of

hazardous substances at certain sites to which the potentially responsible

parties are alleged to have sent waste. At present, our only active Superfund

involvements are at the Granville Solvents Superfund Site located in Ohio and at

the Envirochem Third Site in Illinois. Since 1994, we have spent an average of

$49,000 per year for costs related to the Granville Solvents site and expect to

incur similar costs with respect to the site over the next few years. Total

estimated exposure costs at the Envirochem Third Site are approximately $30,000.

Based on the facts presently known, we do not believe that environmental cleanup

costs associated with either Superfund site will have a material adverse effect

on our financial position or results of operations.

 

     Dealer operations. The heating and air conditioning dealers acquired in the

U.S. and Canada will be subject to various federal, state and local laws and

regulations, including, among others:

 

     - permitting and licensing requirements applicable to service technicians

       in their respective trades;

 

     - building, heating, ventilation, air conditioning, plumbing and electrical

       codes and zoning ordinances;

 

     - laws and regulations relating to consumer protection, including laws and

       regulations governing service contracts for residential services; and

 

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

       environment.

 

                                       43

<PAGE>   47

 

     A large number of state and local regulations governing the residential and

commercial maintenance services trades require various permits and licenses to

be held by individuals. In some cases, a required permit or license held by a

single individual may be sufficient to authorize specified activities for all of

our service technicians who work in the geographic area covered by the permit or

license.

 

LEGAL PROCEEDINGS

 

     We are involved in various claims and lawsuits incidental to our business.

In the opinion of our management, these claims and suits in the aggregate will

not have a material adverse effect on our business, financial condition or

results of operations.

 

                                       44

<PAGE>   48

 

                                   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.......................  40    President and Chief Operating Officer, Armstrong

                                                  Air Conditioning Inc.

Harry J. Ashenhurst.......................  50    Executive Vice President, Human Resources

Scott J. Boxer............................  48    Executive Vice President, Lennox Global Ltd. and

                                                    President, European Operations

Carl E. Edwards, Jr. .....................  57    Executive Vice President, General Counsel and

                                                  Secretary

W. Lane Pennington........................  43    Executive Vice President, Lennox Global Ltd. and

                                                    President, Asia Pacific Operations

Clyde W. Wyant............................  60    Executive Vice President, Chief Financial Officer

                                                  and Treasurer

John J. Hubbuch...........................  56    Vice President, Controller and Chief Accounting

                                                  Officer

Linda G. Alvarado.........................  47    Director

David H. Anderson.........................  58    Director

Richard W. Booth..........................  67    Director

David V. Brown............................  51    Director

James J. Byrne............................  63    Director

Thomas B. Howard, Jr. ....................  70    Director

John E. Major.............................  53    Director

Donald E. Miller..........................  68    Director

Loraine B. Millman........................  52    Director

Robert W. Norris..........................  61    Director

Terry D. Stinson..........................  57    Director

Lynn B. Storey............................  58    Director

Richard L. Thompson.......................  59    Director

</TABLE>

 

     The following biographies describe the business experience of our executive

officers and directors.

 

     John W. Norris, Jr. was elected Chairman of the Board of Directors of

Lennox in 1991. He has served as a Director of Lennox since 1966. After joining

Lennox in 1960, Mr. Norris held a variety of key positions including Vice

President of Marketing, President of Lennox Industries (Canada) Ltd., and

Corporate Senior Vice President. He became President of Lennox in 1977 and was

appointed President and Chief Executive Officer of Lennox in 1980. Mr. Norris is

on the Board of Directors of the Air-Conditioning & Refrigeration Institute of

which he was Chairman in 1986. He is also an active Board member of the Gas

Appliance Manufacturers Association, where he was Chairman from 1980 to 1981. He

also serves as a Director of AmerUs Life Holdings, Inc. and Metroplex Regional

Advisory Board of Chase Bank of Texas, NA.

 

     H. E. French is the President and Chief Operating Officer of Heatcraft Inc.

Mr. French joined Lennox in 1989 as Vice President and General Manager of the

Refrigeration Products division for Heatcraft Inc. In 1995 he was named

President and Chief Operating Officer of Armstrong Air Conditioning Inc. Mr.

French was appointed to his current role in 1997. Prior to joining Lennox, Mr.

French spent 11 years in management with Wickes/Larkin, Inc.

 

     Robert E. Schjerven was named President and Chief Operating Officer of

Lennox Industries Inc. in 1995. In 1986, he joined Lennox as Vice President of

Marketing and Engineering for Heatcraft Inc. From 1988 to 1991 he held the

position of Vice President and General Manager of that subsidiary. From 1991 to

1995 he

 

                                       45

<PAGE>   49

 

served as President and Chief Operating Officer of Armstrong Air Conditioning

Inc. Mr. Schjerven spent the first 20 years of his career with the Trane Company

and McQuay-Perfex Inc.

 

     Michael G. Schwartz became the President and Chief Operating Officer of

Armstrong Air Conditioning Inc. in 1997. He joined Heatcraft in 1990 when Lennox

acquired Bohn Heat Transfer Inc. and served as Director of Sales and Marketing,

Original Equipment Manufacturer Products. Prior to his current appointment, he

served as Vice President of Commercial Products for Heatcraft Inc. where his

responsibilities included the development of Heatcraft's position in the A-Coil

market. Mr. Schwartz began his career with Bohn Heat Transfer Inc. in 1981.

 

     Harry J. Ashenhurst was appointed Executive Vice President, Human Resources

and Administration in 1994. He joined Lennox in 1989 as Vice President of Human

Resources. Dr. Ashenhurst was named Executive Vice President, Human Resources

for Lennox in 1990 and in 1994 moved to his current position and assumed

responsibility for the Public Relations and Communications and Aviation

departments. Prior to joining Lennox, he worked as an independent management

consultant with the consulting firm of Roher, Hibler and Replogle. While at

Roher, Hibler and Replogle, Dr. Ashenhurst was assigned to work as a corporate

psychologist for Lennox.

 

     Scott J. Boxer joined Lennox in 1998 as Executive Vice President, Lennox

Global Ltd. and President, European Operations. Prior to joining Lennox, Mr.

Boxer spent 26 years with York International Corporation in various roles, most

recently as President, Unitary Products Group Worldwide, where he reported

directly to the Chairman of that company and was responsible for directing that

company's residential and light commercial heating and air conditioning

operations worldwide.

 

     Carl E. Edwards, Jr. joined Lennox in February 1992 as Vice President and

General Counsel. He became the Secretary of Lennox in April 1992 and was also

named Executive Vice President and General Counsel in December 1992. Prior to

joining Lennox, he was Vice President, General Counsel and Secretary for Elcor

Corporation. He also serves as a Director of Kentucky Electric Steel Inc.

 

     W. Lane Pennington was appointed to his current position of Executive Vice

President, Lennox Global Ltd. and President, Asia Pacific Operations in 1998. He

joined Lennox in 1997 as Vice President, Asia Pacific Operations. From 1988

until 1997, Mr. Pennington was with Hilti International Corp., where he most

recently served as President, Hilti Asia Limited, based in Hong Kong.

 

     Clyde W. Wyant joined Lennox in 1990 and was appointed Executive Vice

President, Chief Financial Officer and Treasurer, the position he still holds.

Prior to joining Lennox, he served as Executive Vice President, Chief Financial

Officer and Director of Purolator Products Co. (formerly Facet Enterprises,

Inc.), from 1985 to 1990. In 1965, Mr. Wyant began his career with Helmerich &

Payne Inc., where he last served as Vice President, Finance.

 

     John J. Hubbuch was named Vice President, Controller and Chief Accounting

Officer of Lennox in 1998. Mr. Hubbuch joined Lennox in 1986 as the Division

Controller for Heatcraft Inc. In 1989 he became Heatcraft's Group Controller.

From 1982 to 1986, Mr. Hubbuch was the Division Controller for McQuay-Perfex

Inc./SynderGeneral. In 1992 he became Corporate Controller of Lennox.

 

     Linda G. Alvarado has served as a Director of Lennox since 1987. She is

President of Alvarado Construction, Inc. a general contracting firm specializing

in commercial, government and industrial construction and environmental

remediation projects. She currently serves on the Board of Directors of Cyprus

Amax Minerals Company, US West Communications, Inc., Englehard Corporation and

Pitney Bowes Inc., and is part owner of the Colorado Rockies Baseball Club.

 

     David H. Anderson has served as a Director of Lennox since 1973. Mr.

Anderson currently serves as the Co-Executive Director of the Santa Barbara

Museum of Natural History. He formerly had a private law practice specializing

in land use and environmental law. Mr. Anderson also serves as legal counsel for

a local land conservation organization in Santa Barbara County. He currently

serves on the Boards of the California Nature Conservancy, the Land Trust for

Santa Barbara County and the Santa Barbara Foundation.

 

                                       46

<PAGE>   50

 

     Richard W. Booth has served as a Director of Lennox since 1966. Mr. Booth

retired from Lennox in 1992 as Executive Vice President, Administration and

Secretary, a position he had held since 1983. Mr. Booth held a variety of key

positions after joining Lennox in 1954. He serves on the Board of Directors of

Employers Mutual Casualty Company and is a member of the Board of Trustees of

Grinnell College.

 

     David V. Brown has served as a Director of Lennox since 1989. Dr. Brown

owns the Plantation Farm Camp, a working 500-acre ranch with livestock that

provides learning in a farm setting for children. He is currently serving on the

Strategic Planning Board of the Western Association of Independent Camps.

 

     James J. Byrne has served as a Director of Lennox since 1990. He has been a

managing partner of Byrne Technology Partners, Ltd. since January 1996. Prior to

his current role, he held a number of positions in the technology industry

including President of Harris Adacom Corporation, Senior Vice President of

United Technologies Corporation's Semiconductor Operation and President of North

American group of Mohawk Data Sciences. Mr. Byrne began his career with General

Electric. Mr. Byrne is a Director of STB Systems Inc. and ICARUS International,

Inc.

 

     Thomas B. Howard, Jr. has served as a Director of Lennox since 1980. From

1989 to 1992, Mr. Howard served as Chairman and Chief Executive Officer of

Beazer U.S.A. and as a Director of Beazer PLC (U.K.). From 1969 to 1989, Mr.

Howard served Gifford-Hill & Company Inc. in various capacities most recently as

its Chief Executive Officer. After Gifford-Hill was acquired by Beazer PLC

(U.K.), Mr. Howard assumed the position of Chairman and Chief Executive Officer,

a position he held until he retired in 1992. He is a member of the Board of

Directors of Beazer Homes USA.

 

     John E. Major has served as a Director of Lennox since 1993. Mr. Major has

been the Chairman, Chief Executive Officer and President of Wireless Knowledge,

a QUALCOMM Incorporated and Microsoft joint venture, since November 1998.

Previously he was Executive Vice President of QUALCOMM and President of its

Wireless Infrastructure Division, and was responsible for managing and guiding

the market potential for CDMA infrastructure products. Prior to joining QUALCOMM

in 1997, Mr. Major served most recently as Senior Vice President and Staff Chief

Technical Officer at Motorola, Inc. and Senior Vice President and General

Manager for Motorola's Worldwide Systems Group of the Land Mobile Products

Sector. Mr. Major currently serves on the Board of Directors of Littlefuse, Inc.

and Verilink Corporation.

 

     Donald E. Miller has served as a Director of Lennox since 1987. Mr. Miller

spent his 35 year career with The Gates Corporation. He retired as Vice Chairman

of that company in 1996. From 1987 until 1994 he held the position of President

and Chief Operating Officer of The Gates Corporation. Mr. Miller serves on the

Board of Directors of Sentry Insurance Corporation, OEA, Inc. and Chateau

Communities Inc., and is the President of the Board of Colorado School of Mines

Foundation.

 

     Loraine B. Millman has served as a Director of Lennox since 1994. She is a

social worker who is currently the Director of Treatment Services at Central

Nassau Guidance and Counseling Services, Inc., a mental health clinic in

Hicksville, New York where she has worked since 1983. Prior to that she worked

in the field of education.

 

     Robert W. Norris has served as a Director of Lennox since 1967. Mr. Norris

is recently retired from teaching. Mr. Norris joined Lennox in 1966 as manager

of Lennox-Europe and in 1968 he became Assistant Works Manager in Columbus,

Ohio, a position he held until 1972. From 1972 to 1979 he held various positions

including assistant superintendent of Chapel Hills Public Schools, consultant

with the International Management training for Educational Change in Oslo,

Norway, and owner and manager of Provent AB. He serves as a Trustee of both

Sunbridge College and WAMC Public Radio Station.

 

     Terry D. Stinson has served as a Director of Lennox since 1998. Mr. Stinson

has been the Chairman and Chief Executive Officer of Bell Helicopter Textron

Inc. since 1998 and was its President from 1996 to 1998. From 1991 to 1996, Mr.

Stinson served as Group Vice President and Segment President of Textron

Aerospace Systems and Components for Textron Inc. Prior to that position, he had

been the President of Hamilton Standard Division of United Technologies

Corporation since 1986.

 

                                       47

<PAGE>   51

 

     Lynn B. Storey has served as a Director of Lennox since 1981. Ms. Storey is

a community volunteer and fundraiser. At present she is co-chair for Community

Leadership for Planned Parenthood for Monterey County. She served on the Board

of Directors of Planned Parenthood Monterey/Mar Monte from 1990 to 1997. She

also served on the Community Services District of Fallen Leaf Lake in California

administering the development and financing of public lands. She is a past

president of the Junior League of Monterey County and the Monterey County

Medical Auxiliary and served on the Board of the National Council on Alcoholism

for Monterey County.

 

     Richard L. Thompson has served as a Director of Lennox since 1993. In 1995,

Mr. Thompson was named to his present position of Group President and member of

the Executive Office of Caterpillar Inc. He joined Caterpillar in 1983 as Vice

President, Customer Services. In 1990, he was appointed President of Solar

Turbines Inc., a wholly owned subsidiary of Caterpillar. From 1990 to 1995, he

held the role of Vice President of Caterpillar, with responsibility for its

worldwide engine business. Previously, he had held the positions of Vice

President of Marketing and Vice President and General Manager, Components

Operations with RTE Corporation.

 

     John W. Norris, Jr., Richard W. Booth, Robert W. Norris, David H. Anderson,

David V. Brown, Loraine B. Millman, Lynn B. Storey are all grandchildren of D.W.

Norris. John W. Norris, Jr. and Robert W. Norris are siblings, as are Lynn B.

Storey, Loraine B. Millman and David V. Brown. Both groups of siblings, as well

as Richard W. Booth and David H. Anderson, are first cousins.

 

INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES

 

     Our Board of Directors is divided into three classes of directors, with

each class elected to a three-year term every third year and holding office

until their successors are elected and qualified. The class whose term of office

will expire at our 1999 Annual Meeting of Stockholders consists of David H.

Anderson, James J. Byrne, Donald E. Miller, John W. Norris, Jr. and Lynn B.

Storey. The class whose term of office will expire at our 2000 Annual Meeting of

Stockholders consists of Linda G. Alvarado, Richard W. Booth, David V. Brown,

Thomas B. Howard, Jr. and John E. Major. The class whose term of office will

expire at our 2001 Annual Meeting of Stockholders consists of Robert W. Norris,

Loraine B. Millman, Terry D. Stinson and Richard L. Thompson.

 

     Our Board of Directors has established an Audit Committee, Acquisition

Committee, Board Operations Committee, Human Resource Committee, Compensation

Committee and a Pension and Risk Management Committee. The Audit Committee is

responsible for meeting with management and our independent accountants to

determine the adequacy of internal controls and other financial reporting

matters. The following directors currently serve on the Audit Committee: John E.

Major (Chair), Linda G. Alvarado, Donald E. Miller, Loraine B. Millman and Terry

D. Stinson.

 

     The Acquisition Committee is responsible for evaluating potential

acquisitions and making recommendations with respect to proposed acquisitions.

The following directors currently serve on the Acquisition Committee: Donald E.

Miller (Chair), David H. Anderson, Thomas B. Howard, Jr., Robert W. Norris,

Terry D. Stinson and Richard L. Thompson.

 

     The Board Operations Committee is responsible for making recommendations

with respect to the election of directors and officers, the number of directors,

and other matters pertaining to the operations of our Board of Directors. The

following directors currently serve on the Board Operations Committee: Richard

W. Booth (Chair), James J. Byrne, John E. Major, Robert W. Norris and Lynn B.

Storey.

 

     The Human Resource Committee is responsible for succession planning,

management development programs and other human resource matters. The following

directors currently serve on the Human Resource Committee: James J. Byrne

(Chair), Linda G. Alvarado, David V. Brown, Thomas B. Howard, Jr., John E. Major

and Richard L. Thompson.

 

     The Compensation Committee is responsible for evaluating the performance of

our Chief Executive Officer, making recommendations with respect to the salary

of our Chief Executive Officer, approving the compensation of executive staff

members, approving the compensation for non-employee directors and

 

                                       48

<PAGE>   52

 

committee members, approving incentive stock options for senior management,

approving all employee benefit plan designs and other matters relating to the

compensation of our directors, officers and employees. The following directors

currently serve on the Compensation Committee: Richard L. Thompson (Chair),

Linda G. Alvarado, James J. Byrne and Thomas B. Howard, Jr.

 

     The Pension and Risk Management Committee is responsible for overseeing the

administration of our pension and profit sharing plans, overseeing matters

relating to our insurance coverage, reviewing matters of legal liability and

environmental issues, and other matters relating to risk management. The

following directors currently serve on the Pension and Risk Management

Committee: David H. Anderson (Chair), Richard W. Booth, David V. Brown, Donald

E. Miller, Loraine B. Millman and Lynn B. Storey.

 

COMPENSATION OF DIRECTORS

 

     In 1999, non-employee directors will receive an annual retainer of $21,000

in cash and $5,000 in common stock for board of directors and committee service,

an annual retainer of $4,000 in cash for serving as a committee chair and a fee

of $1,000, or $500 in the event of a telephonic meeting, in cash for attending

each meeting day of the Board of Directors or any committee thereof. Board

members may elect to receive the cash portion of their annual retainer in cash

or shares of common stock. All directors receive reimbursement for reasonable

out-of-pocket expenses incurred in connection with attendance at meetings of the

Board of Directors or any committee thereof. In addition, each non-employee

director may receive, pursuant to our 1998 Incentive Plan, options to purchase

shares of common stock at an exercise price equal to the fair market value of

such shares at the date of grant.

 

EXECUTIVE COMPENSATION

 

     The following table sets forth information on compensation earned in 1998

by our Chief Executive Officer and our four other most highly compensated

executive officers, such individuals sometimes being referred to as the "Named

Executive Officers". In the third quarter of 1998, we terminated the Lennox

International Inc. Performance Share Plan in connection with the adoption of the

1998 Incentive Plan of Lennox International Inc. We terminated the Performance

Share Plan to reduce potential earnings volatility associated with the

application of variable price accounting rules to the provisions of the plan.

The amounts in the LTIP Payouts column in the Summary Compensation Table below

consists of the value of common stock issued to the Named Executive Officers in

connection with the termination of the Performance Share Plan and in full

settlement of our obligations under that plan. Performance awards are now

granted under our 1998 Incentive Plan.

 

                           SUMMARY COMPENSATION TABLE

 

<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                  $2,043,909      $146,600

Robert L. Jenkins(5).....   361,200      370,158      288,206                     859,815        91,425

Robert E. Schjerven......   335,400      323,562      739,038                     750,994        86,656

H.E. French..............   309,852      328,902      502,320                     595,940        80,389

Clyde W. Wyant...........   291,300      348,639      516,762                     718,883        67,645

</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, $     per

    share: Mr. Norris --        ; Mr. Jenkins --        ; Mr.

    Schjerven --        ; Mr. French --        ; and Mr. Wyant --        . Such

    shares represent all of such individual's holdings

 

                                       49

<PAGE>   53

 

    of restricted common stock at December 31, 1998. For the Named Executive

    Officers,      shares will vest at December 31, 1999,        shares will

    vest at December 31, 2000 and the remainder will vest at December 31, 2001,

    in each case if performance targets are met. Shares which do not vest in any

    performance period due to failure to achieve such goals will vest in 2006,

    2007 and 2008, respectively. Information with respect to performance share

    awards made pursuant to the 1998 Incentive Plan in December 1998 which do

    not vest unless certain performance goals are met is set forth in the table

    titled "Long-Term Incentive Plans -- Awards in Last Fiscal Year."

 

(3) Represents awards of shares of common stock multiplied by the stock price on

    the award date, $     per share, in connection with the termination of the

    Performance Share Plan.

 

(4) Composed of contributions by Lennox to the Lennox International Inc. Profit

    Sharing Retirement Plan and to the Lennox International Inc. Profit Sharing

    Restoration Plan and the dollar value of term life insurance premiums paid

    by us for the benefit of the Named Executive Officers. Contributions to the

    plans for the Named Executive Officers were as follows: Mr.

    Norris -- $139,730; Mr. Jenkins -- $86,223; Mr. Schjerven -- $81,369; Mr.

    French -- $73,833; and Mr. Wyant -- $62,619.

 

(5) On December 31, 1998, Mr. Jenkins retired from his position as the Assistant

    to the Chairman of the Board -- Business Development.

 

     We maintain a pay-for-performance compensation philosophy to pay

market-competitive base salaries, while also delivering variable pay which is

directly linked to the achievement of performance measurements and to the

performance and contribution of the individual.

 

     Executive compensation is composed of three primary components: base

salary, variable pay (annual incentives and long-term incentives) and benefits

and perquisites. In order to evaluate the competitiveness of our total

compensation programs, we have periodically engaged Hewitt Associates LLC, a

Human Resources consulting firm, to conduct market analyses of the compensation

programs for executive level jobs within our organization. In doing so, we

emphasize delivering competitive total compensation opportunities, while

maintaining the flexibility to design individual compensation components to

support critical business objectives.

 

     The following table provides information concerning stock options granted

to the Named Executive Officers in 1998.

 

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

 

<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....                        16.7%                       December 11, 2008       $755,325

Robert L. Jenkins.....                          --                               --                     --

Robert E. Schjerven...                         5.6                        December 11, 2008        251,775

H. E. French..........                         4.1                        December 11, 2008        184,635

Clyde W. Wyant........                         4.1                        December 11, 2008        184,635

</TABLE>

 

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

 

(1) The grant date present values shown in the table were determined pursuant to

    the Black-Scholes option valuation model using the following assumptions:

    stock price volatility of 35.4% which represents an average volatility among

    general industry companies; expected option life of 10.0 years; dividend

    yield of 1.66%; risk free interest rate of 4.53%; Hewitt Associates Modified

    Derived Value: $       which includes the following additional assumptions:

    discounts for the probability of termination for death, disability,

    retirement and voluntary/involuntary terminations.

 

                                       50

<PAGE>   54

 

     The following table sets forth for each of the Named Executive Officers the

options exercised during 1998 and the number of options and the value of

unexercised options held by the Named Executive Officers as of December 31,

1998.

 

   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION

                                     VALUES

 

<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.........                        --                                 $1,872,771          0

Robert L. Jenkins..........                $  812,648       --             --                 --         --

Robert E. Schjerven........                 1,042,300       --                                --          0

H. E. French...............                 1,363,807       --                                --          0

Clyde W. Wyant.............                   360,121                                  1,106,297          0

</TABLE>

 

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

 

(1) Calculated on the basis of the fair market value of the underlying

    securities as of December 31, 1998, $     per share, minus the exercise

    price of "in-the-money" options

 

     The following table provides certain information concerning performance

share awards made under the 1998 Incentive Plan to the Named Executive Officers

in 1998. The Named Executive Officers are awarded a number of shares of common

stock subject to achievement of certain performance targets based on the average

return on equity for a three year period. Information with respect to the

portion of the award that becomes vested regardless of whether the performance

goals are met is set forth under the Restricted Stock Awards column in the table

titled "Summary Compensation Table." Set forth below is the maximum number of

shares of common stock that may be payable to each of the Named Executive

Officers that is subject to achievement of the performance goals. The actual

number of shares awarded depends on the level of achievement of the performance

objectives.

 

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

 

<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......................                                       3 years

Robert L. Jenkins.......................                                       3 years

Robert E. Schjerven.....................                                       3 years

H. E. French............................                                       3 years

Clyde W. Wyant..........................                                       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 Lennox

International Inc. 1994 Stock Option and Restricted Stock Plan. Any outstanding

awards under the 1994 Stock Option and Restricted Stock Plan will remain

outstanding. The objectives of the 1998 Incentive Plan are to attract and retain

employees, to attract and retain qualified directors and to stimulate the active

interest of such persons in our development and financial success. Awards

provide participants with a proprietary interest in our growth and performance.

The description set forth below represents a summary of the principal terms and

conditions of the 1998 Incentive Plan.

 

     Awards to our employees or independent contractors under the 1998 Incentive

Plan may be made in the form of grants of stock options, stock appreciation

rights, restricted or non-restricted stock or units denominated in stock, cash

awards, performance awards or any combination of the foregoing. Awards to non-

employee directors under the 1998 Incentive Plan will be in the form of grants

of stock options.

 

                                       51

<PAGE>   55

 

     The 1998 Incentive Plan provides for awards to be made in respect of a

maximum of      shares of our common stock, of which      shares will be

available for awards to our employees and the remainder of which will be

available for awards to non-employee directors. No participant under the 1998

Incentive Plan may be granted in any 12-month period awards consisting of stock

options or stock appreciation rights for more than      shares of common stock,

stock awards for more than           shares of common stock or cash awards in

excess of $       . Shares of common stock which are the subject of awards that

are forfeited or terminated or expire unexercised will again immediately become

available for awards under the 1998 Incentive Plan.

 

     Insofar as the 1998 Incentive Plan relates to employee awards, our

Compensation Committee will have the exclusive authority to administer the 1998

Incentive Plan and to take all actions which are specifically contemplated by

the plan or are necessary or appropriate in connection with the administration

thereof. The Compensation Committee may, in its discretion:

 

     - provide for the extension of the exercisability of an award;

 

     - accelerate the vesting or exercisability of an award to our employees;

 

     - eliminate or make less restrictive any restrictions contained in an award

       to our employees;

 

     - waive any restriction or other provision of the 1998 Incentive Plan or in

       any award to our employees; or

 

     - otherwise amend or modify an award to our employees in any manner that is

       either not adverse to the employee holding the award or consented to by

       such employee.

 

     EMPLOYEE AWARDS

 

     The Compensation Committee will determine the type or types of awards made

under the 1998 Incentive Plan and will designate the employees who are to be

recipients of such awards. Each award may be embodied in an agreement, which

will contain such terms, conditions and limitations as are determined by the

Compensation Committee. Awards to our employees may be granted singly, in

combination or in tandem. Awards to our employees may also be made in

combination or in tandem with, in replacement of, or as alternatives to, grants

or rights under the 1998 Incentive Plan or any other employee plan or program of

Lennox, including any acquired entity. All or part of an award to our employees

may be subject to conditions established by the Compensation Committee, which

may include continuous service with Lennox, achievement of specific business

objectives, increases in specified indices, attainment of specified growth rates

and other comparable measurements of performance.

 

     The types of awards to our employees that may be made under the 1998

Incentive Plan are as follows:

 

     Options: Options are rights to purchase a specified number of shares of

common stock at a specified price. An option granted pursuant to the 1998

Incentive Plan may consist of either an incentive stock option that complies

with the requirements of Section 422 of the Internal Revenue Code of 1986, or a

non-qualified stock option that does not comply with such requirements.

Incentive stock options must have an exercise price per share that is not less

than the fair market value of the common stock on the date of grant. To the

extent that the aggregate fair market value, measured at the time of grant, of

common stock subject to incentive stock options that first become exercisable by

an employee in any one calendar year exceeds $100,000, such options shall be

treated as non-qualified stock options and not as incentive stock options.

Non-qualified stock options must have an exercise price per share that is not

less than, but may exceed, the fair market value of the common stock on the date

of grant. In either case, the exercise price must be paid in full at the time an

option is exercised in cash or, if the employee so elects, by means of tendering

common stock or surrendering another award.

 

     Stock Appreciation Rights: Stock appreciation rights are rights to receive

a payment, in cash or common stock, equal to the excess of the fair market value

or other specified valuation of a specified number of shares of common stock on

the date the rights are exercised over a specified strike price. A stock

appreciation right may be granted in tandem under the 1998 Incentive Plan to the

holder of an option with respect to all or a portion of the shares of common

stock subject to such option or may be granted separately. The terms, conditions

and limitations applicable to any stock appreciation rights, including the term

of any stock

 

                                       52

<PAGE>   56

 

appreciation rights and the date or dates upon which they become exercisable,

will be determined by our Compensation Committee.

 

     Stock Awards: Stock awards consist of grants of restricted common stock or

non-restricted common stock or units denominated in common stock. The terms,

conditions and limitations applicable to any stock awards will be determined by

our Compensation Committee. The Compensation Committee may remove any

restrictions on stock awards, at its discretion. Without limiting the foregoing,

rights to dividends or dividend equivalents may be extended to and made part of

any stock award in the discretion of the Compensation Committee.

 

     Cash Awards: Cash awards consist of grants denominated in cash. The terms,

conditions and limitations applicable to any cash awards will be determined by

our Compensation Committee.

 

     Performance Awards: Performance awards consist of grants made to an

employee subject to the attainment of one or more performance goals. A

performance award will be paid, vested or otherwise deliverable solely upon the

attainment of one or more pre-established, objective performance goals

established by our Compensation Committee prior to the earlier of (a) 90 days

after the commencement of the period of service to which the performance goals

relate and (b) the elapse of 25% of the period of service, and in any event

while the outcome is substantially uncertain. A performance goal may be based

upon one or more business criteria that apply to the employee, one or more

business units of Lennox or Lennox as a whole. The terms, conditions and

limitations applicable to any performance awards will be determined by our

Compensation Committee.

 

     DIRECTOR AWARDS

 

     Our Board of Directors will administer the 1998 Incentive Plan as it

relates to awards to non-employee directors. The board will have the right to

determine on an annual basis, or at any other time in its sole discretion, to

award options which are non-qualified stock options to non-employee directors.

Such options awarded shall provide that no more than      shares of common stock

be purchased in any year. All options awarded to directors shall have a term of

10 years and shall vest and become exercisable in increments of one-third on

each of the three succeeding anniversaries after the date of grant. Unvested

options awarded to directors shall be forfeited if a director resigns without

the consent of the majority of our Board of Directors.

 

     OTHER PROVISIONS

 

     Our Board of Directors may amend, modify, suspend or terminate the 1998

Incentive Plan for the purpose of addressing any changes in legal requirements

or for any other purpose permitted by law, except that:

 

     - no amendment that would impair the rights of any employee or non-employee

       director with respect to any award may be made without the consent of

       such employee or non-employee Director; and

 

     - no amendment requiring stockholder approval pursuant to any applicable

       legal requirements will be effective until such approval has been

       obtained.

 

     In the event of any subdivision or consolidation of outstanding shares of

our common stock, declaration of a stock dividend payable in shares of our

common stock or other stock split, the 1998 Incentive Plan provides for the

Board of Directors to make appropriate adjustments to:

 

     - the number of shares of common stock reserved under the 1998 Incentive

       Plan;

 

     - the number of shares of common stock covered by outstanding awards in the

       form of common stock or units denominated in common stock;

 

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

 

     - the appropriate fair market value and other price determinations for

       awards in order to reflect such transactions; and

 

                                       53

<PAGE>   57

 

     - the limitations set forth in the 1998 Incentive Plan regarding the number

       of awards which may be made to any employee in a given year.

 

     Furthermore, in the event of any other recapitalization or capital

reorganization of Lennox, any consolidation or merger of Lennox with another

corporation or entity, the adoption by Lennox of any plan of exchange affecting

the common stock or any distribution to holders of common stock or securities or

property, other than normal cash dividends or stock dividends, our Board of

Directors will make appropriate adjustments to the amounts or other items

referred to above to give effect to such transactions, but only to the extent

necessary to maintain the proportionate interest of the holders of the awards

and to preserve, without exceeding, the value thereof.

 

RETIREMENT PLANS

 

     The Named Executive Officers participate in four Lennox-sponsored

retirement plans. The plans are as follows: the Lennox International Inc.

Pension Plan for Salaried Employees, the Lennox International Inc. Profit

Sharing Retirement Plan, the Lennox International Inc. Supplemental Retirement

Plan, and the Lennox International Inc. Profit Sharing Restoration Plan. The

Supplemental Retirement Plan and the Profit Sharing Restoration Plan are

non-qualified plans. We pay the full cost of all these plans.

 

     The Pension Plan for Salaried Employees is a floor offset plan. A target

benefit is calculated using credited service and final average pay during the

five highest consecutive years. The benefit is currently based on 1.00% of final

average pay, plus .60% of final average pay above Social Security covered

compensation, times the number of years of credited service, not to exceed 30

years. Employees vest after five years of service and may commence unreduced

benefits at age 65. If certain age and service requirements are met, benefits

may commence earlier on an actuarially reduced basis. At time of retirement, a

participant may choose one of five optional forms of payment. The Supplemental

Retirement Plan permits income above Internal Revenue Service limitations to be

considered in determining final average pay, doubles the rate of benefit

accrual, limits credited service to 15 years and permits early retirement on

somewhat more favorable terms than the Pension Plan.

 

     The Profit Sharing Retirement Plan is a defined contribution plan. Profit

sharing contributions, as determined by the Board of Directors, are credited

annually to participants' accounts based on pay. Participants are fully vested

after 6 years. The assets of the plan are employer directed. Distributions may

occur at separation of employment and can be paid directly to the participant.

The Restoration Plan permits accruals that otherwise could not occur because of

Internal Revenue Service limitations on compensation.

 

     The estimates of annual retirement benefits shown in the following table

are the targets established by the Supplemental Retirement Plan.

 

<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.

 

                                       54

<PAGE>   58

 

     As of December 31, 1998, the final average pay and the eligible years of

credited service for each of the Named Executive Officers was as follows: Mr.

Norris, $855,001 -- 38.25 years; Mr. Jenkins, $483,948 -- 14.00 years; Mr.

Wyant, $402,391 -- 8.30 years; Mr. Schjerven, $411,416 -- 12.80 years; Mr.

French, $340,666 -- 9.80 years.

 

EMPLOYMENT AGREEMENTS

 

     We have entered into an employment agreement with each of the Named

Executive Officers who are currently employees of Lennox. These employment

agreements establish a specified duration or term of employment; the basis of

compensation and assignments; and post-employment covenants covering

confidential information, the diverting of employees, vendors and contractors

and the solicitation of customers. These agreements also establish binding

arbitration as the mechanism for resolving disputes and provide certain benefits

and income in the event employment terminates under specified circumstances.

 

     The agreements commence on the date they are signed by both parties and

remain in effect until December 31 of that year and thereafter for a series of

one-year terms. On January 1 of each year after the end of the first term and

for each year thereafter, the agreements automatically renew for an additional

year, unless either party notifies the other, in writing, at least 30 days prior

to such date, of a decision not to renew the agreement.

 

     If we terminate the employee prior to the expiration of the term of the

agreement or if we do not renew the agreement for any reason other than for

cause (as defined in the agreement), the employee will be entitled to receive

monthly payments of the greater of the employee's base salary for the remainder

of the agreement's term or three months of the employee's base salary in

addition to any other compensation or benefits applicable to an employee at the

employee's level.

 

     If we terminate the employee other than for cause, including our

non-renewal of the agreement, and the employee agrees to execute a written

general release of any and all possible claims against us existing at the time

of termination, we will provide the employee with an enhanced severance package.

That package includes payment of the employee's base monthly salary for a period

of twenty-four months following the date of termination, a lump sum payment of

$12,000 in lieu of perquisites lost, and forgiveness of COBRA premiums due for

group health insurance coverage for up to eighteen months while the employee

remains unemployed. If the employee remains unemployed at the end of eighteen

months, the equivalent of the COBRA premium will be paid to the employee on a

month to month basis for up to six additional months while the employee remains

unemployed. Outplacement services are provided or, at the employee's election, a

lump-sum payment of 10% of the employee's annual base salary will be made to the

employee in lieu of those services. Additionally, the employee's beneficiary

will receive a lump-sum death benefit equivalent to six months of the employee's

base salary should the employee die while entitled to enhanced severance

payments.

 

CHANGE OF CONTROL EMPLOYMENT AGREEMENTS

 

     We have entered into a change of control employment agreement with each of

the Named Executive Officers who are currently employees of Lennox. The change

of control agreements provide for certain benefits under specified circumstances

if the officer's employment is terminated following a change of control

transaction involving Lennox. The change of control agreements are intended to

provide protections to the officers that are not afforded by their existing

employment agreements, but not to duplicate benefits provided thereunder. The

term of the change of control agreements is generally two years from the date of

a Potential Change of Control, as discussed below, or a Change of Control. If

the officer remains employed at the conclusion of such term, the officer's

existing employment agreement will continue to apply. The employment rights of

the Named Executive Officers under the change of control agreements would be

triggered by either a Change of Control or a Potential Change of Control.

Following a Potential Change of Control, the term of the change of control

agreement may terminate but the Change of Control Agreement will remain in force

and a new term of the agreement will apply to any future Change of Control or

Potential Change of Control, if either (a) our Board of Directors determines

that a Change of Control is not likely or (b) the Named Executive

 

                                       55

<PAGE>   59

 

Officer, upon proper notice to us, elects to terminate his term of the change of

control agreement as of any anniversary of the Potential Change of Control.

 

     A "Change of Control" generally includes the occurrence on or after the

date of the offering of any of the following:

 

          (a) any person, other than certain exempt persons, including Lennox

     and its subsidiaries and employee benefit plans, becoming a beneficial

     owner of 35% or more of the shares of common stock or voting stock of

     Lennox then outstanding, including as a result of the offering;

 

          (b) a change in the identity of a majority of the persons serving as

     members of our Board of Directors, unless such change was approved by a

     majority of the incumbent members of our Board of Directors;

 

          (c) the approval by the stockholders of a reorganization, merger or

     consolidation in which:

 

             (1) existing stockholders would not own more than 65% of the common

        stock and voting stock of the resulting company;

 

             (2) a person, other than certain exempt persons, would own 35% or

        more of the common stock or voting stock of the resulting company; or

 

             (3) less than a majority of the board of the resulting company

        would consist of the then incumbent members of our Board of Directors;

        or

 

          (d) the approval by the stockholders of a liquidation or dissolution

     of Lennox, unless such liquidation or dissolution is part of a plan of

     liquidation or dissolution involving a sale to a company of which following

     such transaction:

 

             (1) more than 65% of the common stock and voting stock would be

        owned by existing stockholders;

 

             (2) no person (other than certain exempt persons) would own 35% or

        more of the common stock or voting stock of such company; and

 

             (3) at least a majority of the board of directors of such company

        would consist of the then incumbent members of our Board of Directors.

 

     A "Potential Change in Control" generally includes any of the following:

 

     - the commencement of a tender or exchange offer for voting stock that, if

       consummated, would result in a Change of Control;

 

     - Lennox entering into an agreement which, if consummated, would constitute

       a Change of Control;

 

     - the commencement of a contested election contest subject to certain proxy

       rules; or

 

     - the occurrence of any other event that our Board of Directors determines

       could result in a Change of Control.

 

     During the term of the change of control agreement, an officer's position,

authority, duties and responsibilities may not be diminished, and all forms of

compensation, including salary, bonus, regular salaried employee plan benefits,

stock options, restricted stock and other awards, must continue on a basis no

less favorable than at the beginning of the term of the change of control

agreement and, in the case of certain benefits, must continue on a basis no less

favorable in the aggregate than the most favorable application of such benefits

to any of our employees.

 

                                       56

<PAGE>   60

 

     If an officer terminates employment during the term of the change of

control agreement for good reason, as defined in the change of control

agreements, and we fail to honor the terms of the change of control agreement,

we will pay the officer:

 

     - his then unpaid current salary and a pro rata portion of the highest

       bonus earned during the three preceding years, as well as previously

       deferred compensation and accrued vacation time;

 

     - a lump-sum benefit equal to the sum of three times the officer's annual

       base salary and three times the annual bonus (as both such terms are

       defined in the change of control agreements) he would have earned in the

       year of termination;

 

     - for purposes of our Supplemental Retirement Plan and our Profit Sharing

       Restoration Plan, three additional years added to both his service and

       age criteria; and

 

     - continued coverage under our employee welfare benefits plans for up to

       four and one-half years.

 

In addition, all options, restricted stock and other compensatory awards held by

the officer will immediately vest and become exercisable, and the term thereof

will be extended for up to one year following termination of employment. The

officer may also elect to cash out equity-based compensatory awards at the

highest price per share paid by specified persons during the term of the change

of control agreement or the six-month period prior to the beginning of the term

of the change of control agreement.

 

     In the event of any contest concerning a change of control agreement in

which the officer is successful, in whole or in part, on the merits, (a) we have

no right of offset, (b) the officer is not required to mitigate damages, and (c)

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

contest. We also agree to pay all amounts owing to the officer during any period

of dispute, subject only to the officer's agreement to repay any amounts to

which he is determined not to be entitled. The change of control agreements

provide for a tax gross-up in the event that certain excise taxes are applicable

to payments made by us under a change of control agreement or otherwise. The

change of control agreements require the officer to maintain the confidentiality

of our information, and, for a period of 24 months following his termination of

employment, to avoid any attempts to induce our employees to terminate their

employment with us.

 

INDEMNIFICATION AGREEMENTS

 

     We have entered into indemnification agreements with our directors and

certain of our executive officers. Under the terms of the indemnification

agreements, we have generally agreed to indemnify, and advance expenses to, each

indemnitee to the fullest extent permitted by applicable law on the date of the

agreements and to such greater extent as applicable law may thereafter permit.

In addition, the indemnification agreements contain specific provisions pursuant

to which we have agreed to indemnify each indemnitee:

 

     - if such person is, by reason of his or her status as a director, nominee

       for director, officer, agent or fiduciary of ours or of any other

       corporation, partnership, joint venture, trust, employee benefit plan or

       other enterprise with which such person was serving at our request, any

       such status being referred to as a "Corporate Status," made or threatened

       to be made a party to any threatened, pending or completed action, suit,

       arbitration, alternative dispute resolution mechanism, investigation or

       other proceeding, other than a proceeding by or in the right of Lennox;

 

     - if such person is, by reason of his or her Corporate Status, made or

       threatened to be made a party to any proceeding brought by or in the

       right of Lennox to procure a judgment in its favor, except that no

       indemnification shall be made in respect of any claim, issue or matter in

       such proceeding as to which such indemnitee shall have been adjudged to

       be liable to Lennox if applicable law prohibits such indemnification,

       unless and only to the extent that a court shall otherwise determine;

 

     - against expenses actually and reasonably incurred by such person or on

       his or her behalf in connection with any proceeding to which such

       indemnitee was or is a party by reason of his or her Corporate Status and

       in which such indemnitee is successful, on the merits or otherwise;

 

                                       57

<PAGE>   61

 

     - against expenses actually and reasonably incurred by such person or on

       his or her behalf in connection with a proceeding to the extent that such

       indemnitee is, by reason of his or her Corporate Status, a witness or

       otherwise participates in any proceeding at a time when such person is

       not a party in the proceeding; and

 

     - against expenses actually and reasonably incurred by such person in

       certain judicial adjudications of or awards in arbitration to enforce his

       or her rights under the indemnification agreements.

 

     In addition, under the terms of the indemnification agreements, we have

agreed to pay all reasonable expenses incurred by or on behalf of an indemnitee

in connection with any proceeding, whether brought by or in the right of Lennox

or otherwise, in advance of any determination with respect to entitlement to

indemnification and within 15 days after the receipt by us of a written request

from such indemnitee for such payment. In the indemnification agreements, each

indemnitee has agreed that he or she will reimburse and repay us for any

expenses so advanced to the extent that it shall ultimately be determined that

he or she is not entitled to be indemnified by us against such expenses.

 

     The indemnification agreements also include provisions that specify the

procedures and presumptions which are to be employed to determine whether an

indemnitee is entitled to indemnification thereunder. In some cases, the nature

of the procedures specified in the indemnification agreements varies depending

on whether we have undergone a change in control, as such term is defined in the

indemnification agreements.

 

                                       58

<PAGE>   62

 

                       PRINCIPAL AND SELLING STOCKHOLDERS

 

     The following table sets forth certain information regarding the beneficial

ownership of our common stock as of December 31, 1998 and as adjusted to reflect

the offering by the following individuals:

 

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

       common stock;

 

     - each of our directors;

 

     - each Named Executive Officer;

 

     - all executive officers and directors as a group; and

 

     - each selling stockholder.

 

All persons listed have an address in care of our principal executive offices

and have sole voting and investment power with respect to their shares unless

otherwise indicated.

 

     The information contained in this table with respect to beneficial

ownership reflects "beneficial ownership" as defined in Rule 13d-3 of the

Securities Exchange Act of 1934, as amended. In computing the number of shares

beneficially owned by a person and the percentage ownership of that person,

shares of common stock subject to options held by that person that were

exercisable on December 31, 1998 or became exercisable within 60 days following

December 31, 1998 are deemed outstanding. However, such shares are not deemed

outstanding for the purpose of computing the percentage ownership of any other

person. To our knowledge and unless otherwise indicated, each stockholder has

sole voting and investment power with respect to the shares listed as

beneficially owned by such stockholder, subject to community property laws where

applicable. Percentage of ownership is based on      shares of common stock

outstanding as of December 31, 1998 and      shares of common stock outstanding

after the completion of the offering assuming no exercise of the underwriters'

over-allotment option. As of December 31, 1998, we had approximately

beneficial holders of our common stock.

 

<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).............                11.2%

H. E. French.......................                *

Robert E. Schjerven................                *

Robert L. Jenkins..................                *

Clyde W. Wyant(2)..................                *

Linda G. Alvarado(3)...............                *

David H. Anderson(4)...............                12.4

Richard W. Booth(5)................                14.5

David V. Brown(6)..................                 3.7

James J. Byrne(7)..................                *

Thomas B. Howard, Jr.(8)...........                *

John E. Major(9)...................                *

Donald E. Miller(10)...............                *

Loraine B. Millman(11).............                 3.1

Robert W. Norris(12)...............                 7.0

Terry D. Stinson...................                  --

Lynn B. Storey(13).................                 3.6

Richard L. Thompson(14)............                *

All executive officers and

  directors as a group (23

  persons)(15).....................                56.7

A.O.C. Corporation(16).............                 7.6

Thomas W. Booth(17)................                 7.8

</TABLE>

 

                                       59

<PAGE>   63

 

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

 

  *  Less than 1%

 

 (1) Includes:

     (a)    shares held by the Robert W. Norris Trust A of which John W. Norris,

        Jr. is a co-trustee;

     (b)    shares held by the John W. Norris, Jr. Trust A of which John W.

        Norris, Jr. is a co-trustee;

     (c)    shares held by the Megan E. Norris Trust A of which John W. Norris,

        Jr. is a co-trustee;

     (d)    shares of the Robert W. Norris Irrevocable Descendants' Trust of

        which John W. Norris, Jr. is the trustee; and

     (e)    shares subject to options.

 

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

 

 (3) Includes:

     (a)    shares held by Cimarron Holdings L.L.C. of which Linda G. Alvarado

        is the managing member; and

     (b)    shares subject to options.

 

 (4) Includes:

     (a)    shares held by the Leo E. Anderson Trust of which David H. Anderson

        is the trustee;

     (b)    shares held by the Kristin H. Anderson Trust of which David H.

        Anderson is a co-trustee;

     (c)    shares held by the David H. Anderson Trust of which David H.

        Anderson is the trustee;

     (d)    shares held by the Betty Oakes Trust of which David H. Anderson is

        the trustee;

     (e)    shares held by David H. Anderson's child; and

     (f)    shares subject to options.

 

 (5) Includes:

     (a)    shares held by the 1996 Anderson GST Exempt Trust of which Richard

        W. Booth is the trustee;

     (b)    shares held by a trust for the benefit of Richard W. Booth of which

        Richard W. Booth is a co-trustee;

     (c)    shares held by a trust for the benefit of Anne Zink of which Richard

        W. Booth is a co-trustee; and

     (d)    shares subject to options.

 

(6) Includes:

     (a)    shares held by David V. Brown's children; and

     (b)    shares subject to options.

 

 (7) Includes     shares subject to options.

 

 (8) Includes:

     (a)    shares held by the Howard Family Trust of which Thomas B. Howard,

        Jr. is a co-trustee; and

     (b)    shares subject to options.

 

 (9) Includes     shares subject to options.

 

(10) Includes:

     (a)    shares held by the Donald E. Miller Trust of which Donald E. Miller

        is a co-trustee; and

     (b)    shares subject to options.

 

(11) Includes     shares subject to options.

 

(12) Includes:

     (a)    shares held by the Robert W. Norris Trust A of which Robert W.

        Norris is a co-trustee;