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OMB APPROVAL |
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OMB Number:
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3235-0059 |
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Expires:
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February 28, 2006 |
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12.75 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Filed by the Registrant x |
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Filed by a Party other than the Registrant o |
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Check the appropriate box: |
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o Preliminary Proxy Statement |
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o
Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)) |
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x Definitive Proxy Statement |
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o Definitive Additional Materials |
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o
Soliciting Material Pursuant to §240.14a-12 |
(Name of Registrant as Specified In Its Charter)
Lennox International Inc.
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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x No fee required. |
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o Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11. |
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1) Title of each class of securities to which transaction applies: |
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2) Aggregate number of securities to which transaction applies: |
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): |
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4) Proposed maximum aggregate value of transaction: |
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o Fee paid previously with preliminary materials. |
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o Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing. |
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1) Amount Previously Paid: |
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2) Form, Schedule or Registration Statement No.: |
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SEC 1913 (11-01) |
Persons who are to respond to the collection of information
contained in this form are not required to respond unless the form displays a currently valid
OMB control number. |
2140 Lake Park Blvd.
Richardson, Texas 75080
October 27, 2004
Dear Stockholders:
It is my pleasure to invite you to the 2004
Annual Meeting of Stockholders of Lennox International Inc. The
meeting will be held at 9:00 a.m., local time, on Tuesday,
November 16, 2004, at the University of Texas at Dallas
Conference Center, Rutford Avenue and Drive A, Richardson,
Texas 75083.
The accompanying Notice of Annual Meeting of
Stockholders and proxy statement describe the items of business
that will be discussed and voted upon during the meeting. It is
important that you vote your shares whether or not you plan to
attend the meeting. To be sure your vote is counted, we urge you
to carefully review the proxy statement and to vote your
choices. Please sign, date and return the enclosed proxy card
in the accompanying envelope, call the toll-free number or vote
by Internet as soon as possible. If you attend the meeting
and wish to vote in person, the ballot you submit at the meeting
will supersede your proxy.
I look forward to seeing you at the Annual
Meeting of Stockholders. On behalf of the management and
Directors of Lennox International Inc., I want to thank you for
your continued support and confidence for the remainder of 2004.
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Sincerely,
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![-s- John W Norris Jr](d13306dnorrisjw.gif) |
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John W. Norris, Jr.
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Chairman of the Board |
2140 Lake Park Blvd.
Richardson, Texas 75080
October 27, 2004
Notice of Annual Meeting of Stockholders
To be held on November 16, 2004
To Our Stockholders:
Notice is hereby given that the 2004 Annual
Meeting of Stockholders of Lennox International Inc. will be
held on November 16, 2004 at 9:00 a.m., local time, at
the University of Texas at Dallas Conference Center, Rutford
Avenue and Drive A, Richardson, Texas 75083 to:
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Elect five Directors to hold office for a term to
expire at the 2007 Annual Meeting of Stockholders; and
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Transact any other business that may properly
come before the Annual Meeting of Stockholders.
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A proxy statement, form of proxy, annual report
and Form 10-K for the fiscal year ended December 31,
2003 accompany this notice.
The Board of Directors has determined that owners
of record of Lennox International Inc. common stock at the close
of business on October 25, 2004 are entitled to notice of,
and to vote at, the Annual Meeting of Stockholders.
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By Order of the Board of Directors,
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![-s- William F. Stoll, Jr.](d13306dstoll.gif) |
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William F. Stoll, Jr.
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Corporate Secretary |
Your Vote Is Important
To be sure your shares are represented at the
Annual Meeting of Stockholders, please (1) call the
toll-free number (800) 435-6710 and follow the prompts, or
(2) vote by Internet at www.eproxy.com/lii, or
(3) complete, date, sign and return your proxy card in the
enclosed postage-paid envelope as soon as possible. You may vote
in person at the Annual Meeting of Stockholders even if you send
in your proxy card, vote by telephone or vote by
Internet.
TABLE OF CONTENTS
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Appendix AAudit Committee Charter
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A-1 |
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i
PROXY STATEMENT
VOTING PROCEDURES
This proxy statement and the accompanying proxy
card are being mailed to Stockholders of Lennox International
Inc. (LII or the Company) beginning on
or about October 27, 2004 in connection with solicitation
of proxies by the LII Board of Directors for the Annual Meeting
of Stockholders to be held on November 16, 2004 at
9:00 a.m., local time, at the University of Texas at Dallas
Conference Center, Rutford Avenue and Drive A, Richardson,
Texas 75083, and any adjournments thereof.
If you sign and return the accompanying proxy,
vote by telephone, or vote by Internet and your proxy is not
withdrawn or revoked, your shares will be voted in accordance
with your voting instructions. If you sign and return your proxy
but do not give voting instructions, your shares will be voted
as recommended by the Board of Directors.
PROPOSAL
1: ELECTION OF DIRECTORS
The Board of Directors of LII currently consists
of 14 people, with one vacancy. In accordance with the
Bylaws, Directors are divided into three classes, each class
serving a three-year term. At the Annual Meeting of
Stockholders, five Directors will be elected to hold office for
a term expiring at the 2007 Annual Meeting of Stockholders.
Other Directors will continue in office, in accordance with
their previous election, until the expiration of their classes
at the 2005 or 2006 Annual Meeting of Stockholders.
Mr. David Anderson retired from the LII Board of Directors
earlier in 2004. The Board of Directors would like to express
its sincere appreciation to Mr. Anderson for his
31 years of dedication and commitment to LII.
The name of the nominee for Director for the term
expiring at the 2007 Annual Meeting of Stockholders and for each
current Director in the classes continuing in office, their ages
as of the date of the Annual Meeting of Stockholders, the year
each first became a Director, their principal occupations during
at least the past five years, other directorships held by each
as of the date hereof and certain other biographical information
are shown below.
If you do not wish your shares to be voted for
any particular nominee, you may so indicate on the proxy card.
If any of these nominees for Director becomes unavailable, the
persons named in the accompanying proxy may vote for any
alternate designated by the present Board of Directors or the
number of Directors may be reduced.
Nominees for election at this Annual Meeting
of Stockholders for a term expiring at the 2007 Annual Meeting
of Stockholders:
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Janet K.
Cooper, 51, has served as a
Director of the Company since 1999. In 2002, Ms. Cooper was
named Senior Vice President and Treasurer of Qwest
Communications International Inc. Previously, she was Chief
Financial Officer and Senior Vice President of McDATA
Corporation, a global leader in open storage networking
solutions. From 2000 to 2001, she served as Senior Vice
President, Finance of Qwest. From 1998 to 2000, she served in
various senior level finance positions at US West Inc., a
regional Bell operating company, including Vice President,
Finance and Controller and Vice President and Treasurer. From
1978 to 1998, Cooper served in various capacities with the
Quaker Oats Company, including Vice President, Treasurer and Tax
from 1997 to 1998 and Vice President, Treasurer from 1992 to
1997. Ms. Cooper serves on the Board of Directors and chairs the
Audit Committee of The TORO Company, a manufacturer of equipment
for lawn and turf care maintenance.
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C. L. (Jerry)
Henry, 63, was appointed to serve
as a Director of the Company in 2000. Mr. Henry was
formerly Chairman and CEO of Johns Manville Corporation, a
leading manufacturer of insulation and building products. Prior
to his position with Johns Manville, he had served as Executive
Vice President and Chief Financial Officer for
E. I. du Pont de Nemours and Company, a
global science and technology company. Mr. Henry serves as
a Director for Georgia Gulf Corp., a leading manufacturer and
worldwide marketer of several integrated lines of commodity
chemicals and polymers.
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Robert E. Schjerven,
61, was named Chief Executive
Officer of the Company in 2001 and has served as a Director
since that time. Prior to his election as Chief Executive
Officer of the Company, he served as Chief Operating Officer of
the Company in 2000 and as President and Chief Operating Officer
of Lennox Industries Inc., a subsidiary of the Company, from
1995 to 2000. He joined the Company in 1986 as Vice President of
Marketing and Engineering for Heatcraft Inc., a subsidiary of
the Company. From 1988 to 1991, he held the position of Vice
President and General Manager of Heatcraft. From 1991 to 1995,
he served as President and Chief Operating Officer of Armstrong
Air Conditioning Inc., also a subsidiary of the Company.
Mr. Schjerven spent the first 20 years of his career
with The Trane Company, an international manufacturer and
marketer of HVAC systems, and McQuay-Perfex Inc.
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Terry D.
Stinson, 62, has served as a
Director of the Company since 1998. Mr. Stinson currently serves
as Chief Executive Officer of his own consulting practice
engaged in strategic alliances and marketing for the aerospace
industry, and as Chief Executive Officer of Xelus, Inc., a
collaborative enterprise service management solution company.
Until the fall of 2001, Mr. Stinson was Chairman and Chief
Executive Officer of Bell Helicopter Textron Inc., the
worlds leading manufacturer of vertical lift aircraft and
was its President from 1996 to 1998. From 1991 to 1996,
Mr. Stinson served as Group Vice President and Segment
President of Textron Aerospace Systems and Components for
Textron Inc. Prior to that position, he had been the President
of Hamilton Standard Division of United Technologies
Corporation, a defense supply company, since 1986.
Mr. Stinson currently serves on the Board of Directors of
Triumph Group, Inc., a global leader in supplying and
overhauling aerospace and industrial gas turbine systems and
components.
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Richard L. Thompson,
64, has served as a Director of
the Company since 1993. Mr. Thompson was formerly Group
President and member of the Executive Office of Caterpillar
Inc., a manufacturer of construction and mining equipment, a
position he held since 1995. He joined Caterpillar in 1983 as
Vice President, Customer Services. In 1989, he was appointed
President of Solar Turbines Inc., a wholly-owned subsidiary of
Caterpillar and manufacturer of gas turbines. From 1990 to 1995,
he held the role of Vice President of Caterpillar, with
responsibility for its worldwide engine business. Previously, he
had held the positions of Vice President of Marketing and Vice
President and General Manager, Components Operations with RTE
Corporation, a manufacturer of electrical distribution products.
Mr. Thompson serves as a Director for Gardner Denver, Inc., a
manufacturer of air compressors, blowers and petroleum pumps and
for NiSource Inc., a natural gas and electric utility. In
addition, he is a former Director of the National Association of
Manufacturers, the nations largest industrial trade
association; and Proctor Community Hospital in Peoria, Illinois.
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The Board Of Directors Recommends A Vote
For Each Of The Above Nominees.
Directors whose terms continue until the 2005
Annual Meeting of Stockholders:
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Thomas W.
Booth, 47, has served as a
Director of the Company since 1999. Mr. Booth became Vice
President of Corporate Technology for the Company in 2002. In
2000, he was appointed Vice President, Advanced Heat Transfer of
Heatcraft Inc., a subsidiary of the Company. Previously, he was
the Director, Business Development of Heatcraft Inc. from 1997
to 1999. Mr. Booth joined the Company in 1984 and has
served in various capacities including the District Manager for
the Baltimore/Virginia sales branch of Lennox Industries Inc.
from 1994 to 1997. He currently serves on the Board of Directors
of Employers Mutual Casualty Company, a casualty insurance
company.
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James J.
Byrne, 68, has served as a
Director of the Company since 1990. He has been Chairman of
Byrne Technology Partners, Ltd., a firm that provides interim
management at the CEO and senior executive level for high
technology companies, since 1995. Mr. Byrne also serves as
a Director of Healthaxis Inc., a claims processing outsourcing
company for the health care benefits industry, and is a Fellow
and Director of the Legacy Center for Public Policy. In
addition, Mr. Byrne will assist his clients by assuming
executive responsibility with their investments and in that
regard served as Chairman and Chief Executive Officer of
OpenConnect Systems Incorporated, a developer of computer
software products, from 1999 to 2001. Prior to his current role,
he held a number of positions in the technology industry
including President of Harris Adacom Corporation, a network
products and services company, Senior Vice President of United
Technologies Corporations Semiconductor Operation and
President of the North American group of Mohawk Data Sciences, a
manufacturer of distributed computer products. Mr. Byrne
began his career in high technology with General Electric
Company.
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John W. Norris
III, 46, has served as a Director
since 2001. Mr. Norris is the Associate Director of
Philanthropy for the Maine Chapter of The Nature Conservancy.
Prior to his current position, he was Co-Founder and President
of Borealis, Inc., an outdoor products manufacturer, from 1988
to 2000. He served as an economic development Peace Corps
Volunteer in Jamaica, West Indies from 1985 to 1987. Before
joining the Peace Corps, Norris completed a graduate school
internship at Lennox Industries Inc. in Dallas in 1983. He has
been on the Board of Trustees for GlobalQuest, an international
experiential educational organization, since 1999.
Mr. Norris served on the Board of Advisors for Businesses
for the Northern Forest, a 350-member advocacy group working to
protect wildlands, improve forest stewardship, and foster
sustainable economic development, from 1997 through 2001.
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John W. Norris,
Jr., 68, was elected Chairman of
the Board of Directors of the Company in 1991. He has served as
a Director of the Company since 1966. After joining the Company
in 1960, Mr. Norris held a variety of key positions
including Vice President of Marketing, President of Lennox
Industries (Canada) Ltd., a subsidiary of the Company, and
Corporate Senior Vice President. He became President of the
Company in 1977 and was appointed President and Chief Executive
Officer of the Company in 1980 and served through 2001.
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 is a past Chairman of The Nature Conservancy of
Texas board of trustees and also serves as a Director of AmerUs
Group Co., a life insurance and annuity company.
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Directors whose terms continue until the 2006
Annual Meeting of Stockholders:
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Linda G.
Alvarado, 53, has served as a
Director of the Company since 1987. She is President and Chief
Executive Officer of Alvarado Construction, Inc., a general
contracting firm specializing in commercial, government and
industrial construction and commercial development firm. She
currently serves on the Boards of Directors of Qwest
Communications International Inc, a telecommunications company;
Pepsi Bottling Group, a soft drink and beverage company;
3M Company, a diversified technology company; and Pitney
Bowes Inc., an office equipment and services company.
Ms. Alvarado is also a partner in the Colorado Rockies
Baseball Club.
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Steven R.
Booth, 44, has served as a
Director of the Company since 2002. He became the President of
Polytech Molding Inc., a plastic injection molding company
serving the industrial, health care and automotive markets, in
2001. From 1994 to 2001, Mr. Booth was employed by Process
Science Inc., a designer and manufacturer of equipment and
products using hydrostatic extrusion technology.
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David V.
Brown, 56, has served as a
Director of the Company since 1989. Dr. Brown owns the
Plantation Farm Camp, Inc., a working 500-acre ranch with
livestock that provides learning in a farm setting for children.
He is currently serving on the Strategic Planning Board of the
Western Association of Independent Camps, an educational
organization for training camp directors and owners.
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John E.
Major, 58, has served as a
Director of the Company since 1993. In 2003, Mr. Major
formed MTSG, which provides consulting, management and
governance services and of which he serves as President. In
2003, he stepped down as Chairman and Chief Executive Officer of
Novatel Wireless, Inc., a leading provider of wireless Internet
solutions, having served since 2000. Prior to joining Novatel,
he was Chairman, Chief Executive Officer and President of
Wireless Knowledge. Prior to that, he was Executive Vice
President of QUALCOMM and President of its Wireless
Infrastructure Division. Prior to joining QUALCOMM in 1997,
Mr. Major served as Senior Vice President and Chief
Technical Officer at Motorola, Inc., a manufacturer of
telecommunications equipment, and Senior Vice President and
General Manager for Motorolas Worldwide Systems Group of
the Land Mobile Products Sector. Mr. Major currently serves
on the Boards of Directors of Littelfuse, Inc., a manufacturer
of fuses; Verilink Corporation, a manufacturer of network access
devices; and Broadcom Corporation, a semiconductor manufacturing
company.
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Walden W.
ODell, 59, has served as
Director of the Company since 2003. Mr. ODell serves
as Chairman of the Board, Chief Executive Officer and immediate
past President of Diebold, Incorporated, the leading global
provider of integrated financial self-service delivery systems
and services. Prior to joining Diebold, Mr. ODell
held a series of high-level positions with Emerson, including
President of Emersons Ridge Tool Division while also
serving as Group Vice President of the tool group of Emerson. He
has also served as President of the Liebert Corporation, a
subsidiary of Emerson. Mr. ODell serves on the Boards
of Directors of Federal Signal Corporation, the Columbus
Association of Performing Arts, the Canton Cultural Center for
the Arts and the United Way of Central Stark County, and he is a
member of the Board of Trustees of the Ohio Foundation of
Independent Colleges. He is also a member of The Ohio State
University Advocates, the Board of Trustees and is a lifetime
associate alumni of The Ohio State University.
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John W. Norris, Jr. and David V. Brown are
both grandchildren of D.W. Norris, the founder of LII.
John W. Norris III, Steven R. Booth and
Thomas W. Booth are great grandchildren of
D.W. Norris. John W. Norris, Jr. and
David V. Brown are first cousins. John W.
Norris, Jr. is the father of John W. Norris III.
Steven R. Booth and Thomas W. Booth are brothers.
6
EQUITY COMPENSATION PLANS
INFORMATION
The following table provides information as of
December 31, 2003 regarding shares of LII common stock that
may be issued under the Companys existing equity
compensation plans:
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Number of Securities |
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Weighted-average |
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Number of Securities |
Plan Category |
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to be Issued(a) |
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Exercise Price(b) |
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Remaining(c) |
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Equity compensation plans approved by security
holders
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11,874,855 |
(1) |
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$ |
13.09 |
(2) |
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3,600,580 |
(3) |
Equity compensation plans not approved by
security holders
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Total
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11,874,855 |
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$ |
13.09 |
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3,600,580 |
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(a) |
Number of securities to be issued upon exercise
of outstanding options, warrants and rights.
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(b) |
Weighted-average exercise price of outstanding
options, warrants and rights.
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(c) |
Number of securities remaining available for
future issuance under equity compensation plans, excluding
securities reflected in column (a).
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(1) Includes the following:
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8,698,027 shares of common stock to be
issued upon exercise of outstanding stock options granted under
the 1998 Plan and the Non-employee Directors Compensation
and Deferral Plan;
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Stock appreciation rights based on
1,048,881 shares of common stock granted under the 1998
Plan and the Non-employee Directors Compensation and
Deferral Plan. Upon exercise, the stock appreciation rights will
be settled in cash; and
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2,127,947 shares of common stock to be
issued upon the vesting of restricted stock units outstanding
under the 1998 Plan.
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Excludes 254,355 shares of common stock to
be issued upon exercise of outstanding options originally
granted under the five equity compensation plans adopted by
Service Experts Inc. The options have a weighted average
exercise price of $27.78. The options were assumed by the
Company in connection with the acquisition of Service Experts in
2000. No additional options will be granted under such plans.
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(2) |
Upon vesting, restricted stock units are settled
for shares of common stock on a one-for-one basis. Accordingly,
the restricted stock units have been excluded for purposes of
computing the weighted-average exercise price.
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(3) |
Includes 3,158,637 shares of common stock
available for issuance under the 1998 Plan, 382,441 shares
of common stock reserved for issuance under the Non-employee
Directors Compensation and Deferral Plan and
59,502 shares of common stock reserved for issuance under
the Employee Stock Purchase Plan.
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CORPORATE GOVERNANCE
The Companys Governance Guidelines provide
that a majority of the Directors must be Independent
Directors under the terms of the Companys published
definition of director independence and in accordance with the
listing standards of the New York Stock Exchange. The nominees
for Director are such that immediately after the election of the
nominees to the Board of Directors, a majority of all Directors
holding office will be Independent Directors. The Board has
determined the following Directors are Independent Directors:
Linda G. Alvarado, James J. Byrne, Janet K.
Cooper, C.L. (Jerry) Henry, John E. Major,
Walden W. ODell, Terry D. Stinson and
Richard L. Thompson.
7
The Companys independent Board of Directors
helps ensure good corporate governance and strong internal
controls. The Company believes it is in compliance with all
corporate governance requirements of the New York Stock
Exchange, Securities and Exchange Commission and Sarbanes-Oxley
Act of 2002.
Board of Directors and Board
Committees
The Board of Directors met five times in 2003.
All incumbent Directors attended in excess of 75% of the total
number of meetings of the Board and committees of the Board on
which they served. The Board of Directors does not currently
have a policy with regard to attendance of Board members at the
Annual Meeting of Stockholders. Three Directors attended the
Companys 2003 Annual Meeting of Stockholders.
The standing committees of the Board are as
follows: Audit Committee, Compensation Committee, Board
Governance Committee, Acquisition Committee, Public Policy
Committee, Human Resource Committee and Pension and Risk
Management Committee. The Board has adopted charters for each of
these Committees and the charters are available on the
Companys website at www.lennoxinternational.com.
Audit Committee. The
Audit Committee, currently composed of Ms. Cooper,
Chairperson, Mr. Henry, Mr. Major and
Mr. Stinson, met eight times during 2003. The Audit
Committee assists the Board in fulfilling its oversight
responsibilities to Stockholders, the investment community and
others by reviewing the Companys financial reporting
process, the system of internal control, the audit process, and
the Companys process for monitoring compliance with laws,
regulations and Company policies. The Audit Committee also
selects and engages the independent auditors to audit the books,
records and accounts of the Company, reviews the scope of the
audits, and establishes policy in connection with internal audit
programs of the Company. See Audit Committee Report
below for further information. Each Audit Committee member is an
Independent Director and satisfies the financial literacy and
expertise requirements of the New York Stock Exchange. The Board
of Directors has determined that Ms. Janet K. Cooper, Chair
of the Audit Committee, is an audit committee financial expert
as defined by Item 401(h) of Regulation S-K of the
Securities Exchange Act of 1934, as amended (the Exchange
Act) and is independent within the meaning of
Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Compensation
Committee. The Compensation Committee,
currently composed of Mr. Thompson, Chairperson,
Mr. Byrne, Ms. Cooper and Mr. Major, met four
times during 2003. Each member of the Compensation Committee is
an Independent Director. The Compensation Committee is
responsible for evaluating the performance of LIIs
Chairman of the Board and its Chief Executive Officer, making
recommendations with respect to the salaries of LIIs
Chairman of the Board and its Chief Executive Officer, reviewing
and approving the compensation of executive staff members,
approving the compensation for non-employee Directors and
Committee members, approving stock equity programs for senior
management, approving all employee benefit plan designs and
other matters relating to the compensation of LIIs
Directors, officers and employees.
Board Governance
Committee. The Board Governance
Committee, currently composed of Mr. Stinson, Chairperson,
Ms. Alvarado, Mr. Henry, Mr. ODell and
Mr. Thompson, met four times during 2003. Each member of
the Board Governance Committee is an Independent Director. The
Board Governance Committee assists the Board in the discharge of
its responsibilities relating to (i) identifying
individuals qualified to become Board members, and
(ii) developing and recommending to the Board the Corporate
Governance Guidelines applicable to the Company.
Acquisition
Committee. The Acquisition Committee,
currently composed of Mr. Major, Chairperson,
Mr. Steven Booth, Mr. Thomas Booth, Mr. Brown,
Mr. Henry and Mr. Stinson, met three times during 2003. The
Acquisition Committee is responsible for evaluating potential
acquisitions and making recommendations on proposed acquisitions.
8
Public Policy
Committee. The Public Policy
Committee, currently composed of Mr. Brown, Chairperson,
Ms. Alvarado, Mr. Steven Booth, Mr. Byrne and Mr.
Norris III, met three times during 2003. The Public Policy
Committee is responsible for developing education programs for
new and continuing Directors and overseeing the Companys
position of corporate social responsibility and public issues of
significance which affect investors and other key Company
stakeholders.
Human Resource
Committee. The Human Resource
Committee, currently composed of Mr. Byrne, Chairperson,
Mr. Brown, Ms. Cooper, Mr. Major and Mr.
Thompson, met twice during 2003. The Human Resources Committee
is responsible for succession planning, management development
programs and other human resource matters.
Pension and Risk Management
Committee. The Pension and Risk
Management Committee, currently composed of Mr. Steven
Booth, Chairperson, Ms. Alvarado, Mr. Thomas Booth,
Mr. Norris III and Mr. ODell, met two times
during 2003. The Pension and Risk Management Committee is
responsible for overseeing the administration of LIIs
pension and profit sharing plans, overseeing matters relating to
LIIs insurance coverage, reviewing matters of legal
liability and environmental issues, and other matters relating
to safety and risk management.
Director Nominee Criteria and
Process
The Board of Directors is responsible for
approving candidates for Board membership. The Board has
delegated the screening and recruitment process to the Board
Governance Committee. In this capacity, the Board Governance
Committee develops and periodically reviews the criteria for
Board membership, identifies new Director candidates and makes
recommendations to the Board regarding the appropriate size of
the Board and appointment of members to the Boards
committees. Qualifications required of individuals for
consideration for Board membership will vary according to the
particular areas of expertise being sought as a complement to
the existing Board composition at the time of any vacancy.
However, minimum qualifications include high levels of
leadership experience in business, substantial knowledge of
issues faced by publicly traded companies, experience in
positions demonstrating expertise, including on other boards of
directors, and availability and demonstrated commitment. The
Board Governance Committee usually retains a third-party search
firm to assist in identifying and evaluating potential new
Director candidates.
When a vacancy occurs on the Board, the Board
Governance Committee recommends to the Board a nominee to fill
the vacancy. As provided in the Companys Bylaws, the Board
elects a new Director when a vacancy occurs between Annual
Meetings of Stockholders to fill the vacancy for the duration of
the term. The Board Governance Committee also annually evaluates
and recommends to the Board nominees for election as Directors
at the Companys Annual Meeting of Stockholders.
Stockholder Nominations for
Directors
The Board Governance Committee considers nominees
recommended by Stockholders as candidates for election to the
Board of Directors. A Stockholder wishing to nominate a
candidate for election to the Board at the Annual Meeting of
Stockholders is required to give written notice to the Secretary
of the Company of his or her intention to make a nomination. The
notice of nomination must be received by the Company not less
than 60 days nor more than 90 days prior to the Annual
Meeting of Stockholders, or if the Company gives less than
70 days notice of the Annual Meeting of Stockholders date,
the notice of nomination must be received within 10 days
following the day on which notice of the date of the Annual
Meeting of Stockholders was mailed or such public disclosure was
made to the Stockholders. Pursuant to the Companys Bylaws,
the notice of nomination is required to contain certain
information about both the nominee and the Stockholder making
the nomination, including information sufficient to allow the
Board Governance Committee to determine if the candidate meets
the criteria for Board membership. The Company may require that
the proposed nominee furnish additional information in order to
determine that persons eligibility to serve as a Director.
A nomination that does not comply with the above procedure will
be disregarded.
9
Stockholder Communications To
Directors
Stockholders may send written communications to
the Board by:
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Email to directors@lennoxintl.com
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Mail to
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Board of Directors
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, Texas 75080
Communications addressed to the Board will be
received by the Companys Investor Relations Department and
reviewed by the Corporate Secretarys office. The Corporate
Secretary will:
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Refer substantiated allegations of improper
accounting, internal controls or auditing matters affecting the
Company to the Audit Committee Chairperson;
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Refer substantiated allegations of other improper
conduct affecting the Company to the Chairman of the Board;
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Advise the Board at its regularly scheduled
meetings of significant Stockholder communications; and
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Refer questions concerning the Companys
products, services and human resources issues to the appropriate
department in the Company for a response.
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Individuals may communicate with non-management
Directors of the Board by sending written communications to the
address listed above to the attention of the Presiding
Non-management Director.
Other Corporate Governance Policies
Code of Conduct and Code of Ethical Conduct.
The Company has adopted a Code of
Conduct that applies to all the Companys Directors,
executive officers and employees. The Code of Conduct is
available on the Companys website at
www.lennoxinternational.com/governance/code.html. Stockholders
may request a free copy of these documents from:
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Lennox International Inc.
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Attention: Investor Relations
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2140 Lake Park Blvd.
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Richardson, Texas 75080
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(972) 497-5000
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The Companys Code of Ethical Conduct for
Senior Financial and Principal Executive Officers (Code of
Ethical Conduct) is also posted on the Companys
website. Amendments to and waivers from the Code of Ethical
Conduct will be disclosed on the Companys website.
Corporate Governance Guidelines Certain
Committee Charters. The Company has
adopted Corporate Governance Guidelines as well as charters for
each of its Audit, Compensation and Board Governance Committees.
These documents are available on the Companys website at
www.lennoxinternational.com/governance/committee.html.
Stockholders may request a free copy of any of these documents
from the address and phone numbers set forth above under
Code of Conduct and Code of Ethical Conduct.
Executive Session
Meetings. The Board has determined
that the Chairpersons of the Board Committees, to the extent
such person is an Independent Director, shall rotate
alphabetically the responsibility to chair the executive session
meetings of non-management Directors. The non-management
Directors meet regularly in executive session without the
presence of management.
10
Committee Authority to Retain Independent
Advisors. Each of the Audit,
Compensation and Board Governance Committees has the authority
to retain independent advisors and consultants, with all fees
and expenses to be paid by the Company.
Whistleblower
Procedures. The Audit Committee has
established procedures for the handling of complaints regarding
accounting, internal accounting controls or auditing matters,
including procedures for confidential and anonymous submission
by the Companys employees of concerns regarding such
matters.
Disclosure
Committee. The Company has established
a Disclosure Committee composed of members of management to
assist the Company in fulfilling its obligations to maintain
disclosure controls and procedures and to coordinate and oversee
the process of preparing the Companys periodic securities
filings.
No Executive Loans.
The Company does not extend loans to executive officers or
Directors and has no such loans outstanding.
AUDIT COMMITTEE REPORT
Audit Committee Charter.
LIIs Audit Committee acts
pursuant to the Audit Committee Charter adopted by the Board of
Directors in April 2000, amended in March 2003 and again amended
in December 2003, a copy of which is attached as
Appendix A. The Audit Committee consists solely of
independent members of the Board of Directors. The role of the
Audit Committee is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing
LIIs financial reporting process, the system of internal
control, the audit process, and LIIs process for
monitoring compliance with laws and regulations and LIIs
policies. In performing its role, the Audit Committee maintains
effective working relationships with the Board of Directors,
management, the internal auditors and the independent
accountants. As set forth in the Charter, it is not the duty of
the Audit Committee to plan or conduct audits or to determine
that LIIs financial statements and disclosures are
complete and accurate and in accordance with generally accepted
accounting principles and applicable rules and regulations of
the Securities and Exchange Commission and the New York Stock
Exchange. The independent accountants are responsible for
auditing LIIs financial statements and expressing an
opinion as to their conformity with generally accepted
accounting principles.
Auditor Independence.
In the performance of its oversight
function, the Audit Committee has reviewed and discussed the
quarterly and audited financial statements, including the
quality of accounting principles, with management and the
independent accountants. The Audit Committee has also discussed
with the independent accountants the matters required to be
discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as currently in effect.
Finally, the Audit Committee has received the written
disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as currently in
effect, and has discussed with the independent accountants, the
independent accountants independence and considered
whether the provision of non-audit services by the independent
accountants to LII is compatible with maintaining the
accountants independence.
Members of the Audit Committee rely, without
independent verification, on the information provided to them
and on the representations made by management and the
independent accountants. Accordingly, the Audit Committees
oversight does not provide an independent basis to determine
that management has maintained appropriate accounting and
financial reporting principles or appropriate internal controls
and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. Furthermore, the
Audit Committees considerations and discussions referred
to above do not assure that the audits of LIIs financial
statements have been carried out in accordance with generally
accepted auditing standards, that the financial statements are
presented in accordance with generally accepted accounting
principles or that LIIs independent accountants are in
fact independent.
11
Audit Committee Recommendation.
Based upon the reports and discussions
described in this report, and subject to the limitations on the
role and responsibilities of the Audit Committee referred to
above and in the Audit Committee Charter, the Audit Committee
recommended to the Board of Directors that the audited financial
statements be included in LIIs Annual Report on
Form 10-K for the year ended December 31, 2003.
Submitted by the Audit Committee of the Board of
Directors:
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Janet K. Cooper (chair)
Terry D. Stinson
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C. L. (Jerry) Henry
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John E. Major
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DIRECTORS COMPENSATION
Directors who are employees of LII do not receive
additional compensation for positions on the Board of Directors.
In 2003, there were two employee Board members:
Messrs. Robert E. Schjerven, Chief Executive Officer;
and Thomas W. Booth, Vice President, Corporate Technology.
The 2003 compensation package for all non-employee Directors,
with the exception of the Chairman, included an annual retainer
of $25,000 in cash and $10,000 in common stock, with an
additional annual retainer of $10,000 in cash for serving as a
committee chair of the Audit, Compensation, or Board Governance
Committees and an additional annual retainer of $6,000 in cash
for serving as a committee chair of the Pension and Risk
Management, Human Resource, Acquisition or Public Policy
Committees. A fee of $1,500 in cash was paid for attending each
meeting day of the Board of Directors and a fee of $1,200 in
cash was paid for attending each Board committee meeting. The
fee paid for participation in a telephonic conference meeting of
the Board or a committee is one-half of the regular meeting fee.
The Chairmans compensation package is twice that of other
Directors: consisting of an annual retainer of $50,000 in cash
and $20,000 in common stock, an additional annual retainer
ranging from $12,000 to $20,000 in cash for serving as a
committee chair and a fee of $3,000 in cash for attending each
meeting day of the Board of Directors or $2,400 for attending
each Board committee meeting. The fee paid for the
Chairmans participation in a telephonic conference meeting
of the Board or a committee is one-half of his regular meeting
fee. Directors may elect to receive the cash portion of their
annual retainer in cash or shares of common stock. Directors may
defer 25% or more of their annual cash retainer in an interest
bearing account under the Non-employee Directors
Compensation and Deferral Plan. All Directors receive
reimbursement for reasonable out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors
or a Board committee.
In addition, each non-employee Director may
periodically, under the 1998 Plan administered by the Board of
Directors, receive stock options to purchase shares of common
stock at an exercise price equal to the fair market value of
such shares on the date of grant. Under the 1998 Plan, the stock
options are non-qualified, and no such options awarded in any
given year shall provide for the purchase of more than 16,500
shares of common stock by each Director. In December 2003, each
non-employee Director, except for the Chairman, was awarded
12,415 stock options. The Chairman was awarded 16,500 stock
options and also received cash in the amount of $46,065 in order
to deliver a total award value that was twice that of the other
Directors, as provided in his compensation package. All options
awarded to Directors in 2003 have a term of seven years and vest
and become exercisable in three equal increments of one-third in
each of the three succeeding Decembers following the grant date.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
Executive Compensation Philosophy and
Policy
Executive compensation is administered by the
Compensation Committee of the Board of Directors, which is
composed of the four independent Board members named below. This
report defines the philosophy and describes the decisions made
by the Compensation Committee during 2003 with respect to the
named executive officers, as defined below under Executive
Compensation. It is the
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Compensation Committees goal to establish
executive compensation programs that deliver total pay linked to
overall business results and, therefore, attract, motivate and
retain highly skilled executives whose performance and
contributions result in increased Stockholder value. To that
end, LII maintains a pay-for-performance compensation philosophy
to pay market-competitive base salaries, while also delivering
variable pay opportunity, which is directly linked to the
achievement of specific Company performance measurements and to
the performance and contribution of the individual. In addition
to the base salary program, LIIs variable pay programs
include both short- and long-term incentive compensation
vehicles.
The Compensation Committee has engaged Hewitt
Associates LLC (Hewitt), a nationally recognized
human resources consulting firm, as its executive compensation
consultant. In order to evaluate the competitiveness of the
executive total compensation program, the Compensation Committee
periodically requests that Hewitt conduct market analyses of the
Companys executive pay programs and practices. The
Compensation Committee emphasizes delivering market-competitive
and flexible total compensation to support the Companys
business objectives. LIIs executive pay is compared to a
group of companies similar to LII, although not necessarily the
same companies included in the peer group in the performance
graph in this proxy statement.
Base Salary
LIIs executive base salary program is
designed to be competitive with the median of the marketplace.
In 2003, the Compensation Committee administered the executive
officers base salaries within an executive broad band
salary range to provide flexibility to reward executive
development, support succession planning and aid in executive
recruiting. LII has engaged Hewitt periodically to conduct a
detailed market analysis of each specific component of the
executive compensation program. During 2001, in preparation for
2002 salary administration, Hewitts market analysis
reflected flat market salaries in an economic downturn, and
consequently, LII froze executive salaries for 2002 at 2001
levels. During 2002, in preparation for 2003 salary
administration, LII asked Hewitt to conduct a market analysis to
determine competitive salary movement for executive positions.
The analysis showed that market salaries had recovered, and that
with the prior years salary freeze, LIIs overall
base salaries for the executive officers were somewhat below
market averages. The Compensation Committee reviewed the base
salary of each executive officer in relationship to
Hewitts market data for the specific position, assessed
the individuals performance relative to previously
established objectives and also made subjective determinations
regarding the individuals contributions before adjusting
base salaries for 2003. After these adjustments, executive
salaries were competitive within the market average and
commensurate with the experience and performance contributions
of the executive officers.
The Compensation Committee also approved mid-2003
base salary adjustments for Mr. Scott J. Boxer and
Mr. Robert J. McDonough as a result of a leadership
reorganization whereby Mr. Boxer assumed the role of
President and Chief Operating Officer of Service Experts Inc.,
and Mr. McDonough assumed the role of President and Chief
Operating Officer of World Wide Heating and Cooling, two of the
Companys major business segments.
Based on Hewitts 2001 market trend analysis
for 2002 salary administration, and because of the general
economic downturn, Mr. Schjervens 2002 salary was
frozen at the 2001 level. In determining
Mr. Schjervens 2003 base salary, the Compensation
Committee reviewed the results of Hewitts market analysis
for the CEO position. The results indicated that market salaries
had recovered, and that with the prior years salary
freeze, Mr. Schjervens base salary was below the
market average. The Compensation Committee reviewed
Mr. Schjervens base salary in relationship to
Hewitts market data, assessed Mr. Schjervens
performance relative to previously established objectives and
also made subjective determinations regarding
Mr. Schjervens contribution before adjusting his base
salary to
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$802,500 for 2003. After this adjustment,
Mr. Schjervens base salary was competitive within the
market average and commensurate with his experience and
performance contributions. Positioning Mr. Schjervens
2003 base salary near the market value reflected the
Compensation Committees support of LIIs philosophy
of paying its executives a market-competitive base salary and
the Compensation Committees assessment of
Mr. Schjervens performance during the prior year. The
Compensation Committee assessed Mr. Schjervens 2002
accomplishments to include:
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Under difficult economic conditions,
Mr. Schjerven successfully focused his executive team on
improving the Companys financial structure, balance sheet
and cash flow.
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Mr. Schjerven led his team to generate
strong cash flow, and reduced total debt by 27% in 2002.
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Debt-to-total capital ratio was strong in 2002,
outperforming the target goals previously established.
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Mr. Schjerven took action to focus on
LIIs core strengths in heating, air conditioning and
refrigeration industries by entering into a heat transfer joint
venture with Outokumpu Oyj of Finland; completing an extensive
rationalization program involving several manufacturing, sales
and distribution facilities in North and South America, Europe
and Asia; and exiting several non-core and underperforming
product lines.
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Short-Term Incentive Compensation
The Compensation Committee administers an
executive short-term incentive opportunity through a program
that requires the achievement of specific Company financial
objectives for those individuals who most directly influence
performance results and thereby supports the following strategic
objectives:
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maintain competitive total executive compensation
opportunity;
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align all executive reward programs with the
success of the Company;
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attract top executive talent to support
organizational growth and expansion;
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ensure equity among internal position values; and
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implement best practices in the area
of executive compensation.
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Final payout results are at the discretion of and
subject to the Compensation Committees review and approval.
In 2003, executive officers and the Chief
Executive Officer participated in two annual variable pay
programs:
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The major business units within LII each had a
broad based variable pay program in which the respective
President managing the business unit participated. Each business
unit President, in conjunction with the Chief Executive Officer,
determined the financial measurements and standards for that
business units program. Based on the performance of the
business unit, the programs generated cash payouts for the named
executive officers ranging from 2.09% to 5.00% of annual base
earnings. Each broad based program was aligned with the
performance metrics in the management short-term incentive
program detailed below.
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Each year, the Chief Executive Officer recommends
and the Compensation Committee evaluates and approves the
design, performance measurements and targets for the management
short-term incentive programs. The performance metrics for the
2003 management short-term incentive program were earnings
before interest and taxes, sales growth, cash flow and working
capital ratio. Threshold, minimum, target and maximum
performance levels were defined, and target bonus award levels
were established for each executive officer. Target incentive
award opportunity for the named executive officers ranged from
70% to 100% of their base salary.
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Executive officers who are also Presidents of a
business unit had 70% of the target based on their business unit
results and 30% based on aggregate LII results. 50% of the
target payment could be achieved with the threshold performance
and up to 150% of the target payment could be achieved with the
maximum performance. Additionally, for performance above the
maximum level, each business unit selected one of the above
named performance metrics to function as a multiplier of 1.0 to
1.5 of the incentive payment as determined by the other metrics,
resulting in a potential payment of up to 225% of the target
payment. The Compensation Committee determined that, due to an
executive reorganization in mid-2003, named executive officers
whose position changed and resulted in being measured in two
different business units short-term incentive programs in
2003 were paid the higher of two calculations: (1) as if
they were in their original program for the entire year; or
(2) a prorated calculation accounting for the time in each
position. Final 2003 incentive payouts in this program for the
named executive officers ranged between 127% and 215% of target
payments, based on performance and as determined by the
Compensation Committee.
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Mr. Schjerven participated in the two annual
variable pay programs listed above. Prior to the beginning of
2003, the Compensation Committee of the Board of Directors
determined his performance goals and their expectations for
2003. The Compensation Committees assessment of
Mr. Schjervens 2003 performance results included the
following:
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In mid-2003, Mr. Schjerven executed a
strategic restructuring of the businesses into three core
segments: Worldwide Heating and Cooling, Worldwide
Refrigeration, and Service Experts, and significantly improved
the leadership structure of the businesses by repositioning
three key, skilled and experienced executives to lead the
segments.
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Mr. Schjerven continued to successfully
focus his executive team on improving the organizations
financial structure, balance sheet and cash flow.
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Mr. Schjerven led his team to generate free
cash flow of $115 million and reduced debt over the past
three years by $328 million.
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Under Mr. Schjervens leadership in
2003, operating income grew 44% to $156 million; income,
before the cumulative effect of an accounting change, increased
97% to $84 million, a record for LII; and diluted earnings
per share, before the cumulative effect of an accounting change,
rose from $0.73 to $1.40.
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Mr. Schjervens focus on innovation
resulted in approximately one-third of 2003s revenue in
the manufacturing businesses being generated from products
launched in the past three yearsseveral with important
industry leadership claims.
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A negative development was the discovery of
deficiencies in internal controls within Service Experts
Canadian operations, which resulted in downward adjustments of
$7 million to previously reported cumulative earnings for
the years 1999-2003.
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After taking these factors into account, the
Compensation Committee awarded Mr. Schjerven short-term
incentive awards of $1,156,042.
Long-Term Incentive Compensation
The long-term incentive awards granted to the
named executive officers in December reflected a change in
LIIs program from past years. In the past, LIIs
standard executive long-term incentive compensation program was
comprised of two vehicles: stock options and performance share
program awards. For 2003, LII modified the long-term incentive
program to meet several objectives, including compliance with
changing regulations, obtaining favorable reactions from
Stockholders under increasing scrutiny in the public
environment, and delivering a best-practice and competitive
compensation
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package. The 2003 executive long-term incentive
compensation program includes three vehicles. Two vehicles are
performance-based: performance shares and stock appreciation
rights. The third vehicle addresses retention of key executives
to support leadership continuity: restricted stock awards. The
purpose of these vehicles is to foster and enhance the long-term
success of the Company for the benefit of its Stockholders by
offering the incentive of long-term rewards to those executives
who have proprietary interest in the growth and performance of
the Company and who have principal responsibility for long-term
profitability of LII.
Performance Share
AwardsTaking into account
internal affordability and market-competitive practices outlined
in Hewitts market study, the Compensation Committee
reviews and determines LIIs Performance Share Program
(PSP) award levels for executive officers annually.
PSP awards are made in December for a performance period
beginning the following January 1. The performance period
for the PSP consists of three consecutive fiscal years
commencing each January 1. Minimum, target and maximum
performance standard levels, with a corresponding payout
opportunity ranging from 50% to 200% of target are established,
the achievement of which earns a lesser or greater multiplier of
a contingent award granted at the beginning of the three-year
performance period. Each named executive officer, with the
exceptions of Mr. Schjerven and Mr. Edwards, who announced
his upcoming retirement and therefore was ineligible for a 2003
PSP award, received 14,835 contingent shares. For PSP
awards made in 2003, the financial measure is return on invested
capital, as an average over the three-year period, with the
lowest year weighted at 20% and the remaining two years each
weighted at 40%. Contingent awards are expressed in shares of
the Companys common stock. At the end of any performance
period the earned share awards are calculated by applying the
performance standards for such period to the contingent share
award. If, at the end of the performance period, at least the
minimum performance level has been attained, the earned share
awards vest and are distributed in the form of LII common stock.
To the extent the earned award payout level attained is less
than 100%, the difference between 100% and the earned award, if
any, is forfeited. Current stock holdings of the executives were
not considered when determining the size of the 2003 contingent
awards.
Stock Appreciation Rights
(SARs)Taking into
account internal affordability and the market-competitive
practices outlined in Hewitts market study, the
Compensation Committee reviews and determines LIIs SARs
award levels for executive officers. The Compensation Committee
grants SARs awards annually in December of each year. Each named
executive officer, with the exceptions of Mr. Schjerven and
Mr. Edwards, who announced his upcoming retirement and
therefore was ineligible for a 2003 SARs award, received
34,070 SARs. SARs vest ratably over three years. Upon the
exercise of vested SARs, the increase (if any) between the fair
market value of LII common stock on the date the right is
exercised over the fair market value on the date of grant, is
paid in LII common stock. SARs granted in 2003 expire seven
years from the date of grant.
Restricted Stock
AwardsIn order to facilitate
LIIs ability to attract and retain key executives, as well
as to ensure continuity in executing long-term business
objectives, LIIs 2003 executive long-term incentive
compensation program includes restricted stock awards. Taking
into account internal affordability and the market-competitive
practices outlined in Hewitts market study, the
Compensation Committee reviews and determines LIIs
restricted stock award levels for executive officers annually,
in December. Each of the named executive officers, with the
exceptions of Mr. Schjerven and Mr. Edwards, who
announced his upcoming retirement and therefore was ineligible
for a 2003 restricted stock award, received 14,328 shares
of restricted stock. The restricted stock awards vest three
years following the grant date, and the participant must remain
employed by the Company to receive the shares.
Upon an executive reorganization in mid-2003, the
Compensation Committee granted Mr. Boxer and
Mr. McDonough each a special restricted stock award of
30,000 shares. The award vests after a four-year retention
period, and Mr. Boxer and Mr. McDonough must remain
employed by the Company to receive the shares.
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Performance Share
AwardsTaking into account
internal affordability and market-competitive practices outlined
in Hewitts market study, the Compensation Committee
reviews and determines LIIs PSP award levels for the CEO
annually. PSP awards are made in December for a performance
period beginning the following January 1. The performance
period for the PSP consists of three consecutive fiscal years
commencing each January 1. Minimum, target and maximum
performance standard levels, with a corresponding payout
opportunity ranging from 50% to 200% of target, are established;
the achievement of which earns a lesser or greater multiplier of
a contingent award granted at the beginning of the three-year
performance period. Mr. Schjerven received 53,951
contingent shares. For PSP awards made in 2003, the financial
measure is return on invested capital, as an average over the
three-year period, with the lowest year weighted at 20% and the
remaining two years each weighted at 40%. Contingent awards are
expressed in shares of the Companys common stock. At the
end of any performance period the earned share awards are
calculated by applying the performance standards for such period
to the contingent share award. If, at the end of the performance
period, at least the minimum performance level has been
attained, the earned share awards vest and are distributed in
the form of LII common stock. To the extent the earned award
payout level attained is less than 100%, the difference between
100% and the earned award, if any, is forfeited. Current stock
holdings of the executives were not considered when determining
the size of the 2003 contingent awards.
Stock Appreciation Rights
(SARs)Taking into
account internal affordability and the market-competitive
practices outlined in Hewitts market study, the
Compensation Committee reviews and determines LIIs SARs
award levels for the CEO. The Compensation Committee grants SARs
awards annually in December of each year. Mr. Schjerven
received 123,902 SARs. SARs vest ratably over three years.
Upon the exercise of vested SARs, the increase (if any) between
the fair market value of LII common stock on the date the right
is exercised over the fair market value on the date of grant, is
paid in LII common stock. SARs granted in 2003 expire seven
years from the date of grant.
Restricted Stock
AwardsIn order to facilitate
LIIs ability to attract and retain key executives, as well
as to ensure continuity in executing long-term business
objectives, LIIs 2003 executive long-term incentive
compensation program includes restricted stock awards. Taking
into account internal affordability and the market-competitive
practices outlined in Hewitts market study, the
Compensation Committee reviews and determines LIIs
restricted stock award levels for the CEO annually, in December.
Mr. Schjerven received 52,105 shares of restricted stock.
The restricted stock awards vest three years following the grant
date, and the participant must remain employed by the Company to
receive the shares.
Policy for Compliance with
Section 162(m)
Section 162(m) of the Internal Revenue Code
of 1986, as amended (the Code), limits a
companys ability to deduct compensation paid in excess of
$1 million to the Chief Executive Officer and the other four
highest paid executives, unless the compensation meets certain
Stockholder-approved performance requirements. It is the
Companys intent to make awards that qualify as deductible
compensation under section 162(m) of the Code whenever possible.
However, where granting awards is consistent with the strategic
business goals of the Company, the Compensation Committee
reserves the right to make awards that are non-deductible.
The following individuals who served on the
Compensation Committee of the Board of Directors during 2003
submit this report on LIIs executive compensation programs:
|
|
|
Richard L. Thompson (chair)
|
|
Janet K. Cooper
|
James J. Byrne
|
|
John E. Major
|
17
EXECUTIVE COMPENSATION
The following table sets forth information on
compensation earned in 2003, 2002 and 2001 by LIIs Chief
Executive Officer and its four other most highly compensated
executive officers, such individuals sometimes being referred to
in this proxy statement as the named executive
officers.
Summary Compensation Table
|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
Payouts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
Annual Compensation |
|
Restricted |
|
Underlying |
|
|
|
|
|
|
|
|
|
|
Stock |
|
Options/SARs |
|
LTIP |
|
All Other |
Named Executive Officer |
|
Year |
|
Salary |
|
Bonus(1) |
|
Awards(2) |
|
Granted |
|
Payouts(3) |
|
Compensation(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Schjerven
|
|
|
2003 |
|
|
$ |
802,500 |
|
|
$ |
1,156,043 |
|
|
$ |
1,777,499 |
|
|
|
123,902 |
|
|
$ |
205,265 |
|
|
$ |
232,703 |
|
|
Chief Executive Officer
|
|
|
2002 |
|
|
|
750,000 |
|
|
|
1,725,000 |
|
|
|
2,094,618 |
|
|
|
440,950 |
|
|
|
104,569 |
|
|
|
148,784 |
|
|
|
|
2001 |
|
|
|
750,000 |
|
|
|
900,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
78,137 |
|
|
|
68,888 |
|
|
Harry J. Ashenhurst, Ph.D.
|
|
|
2003 |
|
|
|
399,324 |
|
|
|
470,007 |
|
|
|
488,772 |
|
|
|
34,070 |
|
|
|
108,358 |
|
|
|
85,581 |
|
|
Executive Vice President
|
|
|
2002 |
|
|
|
368,376 |
|
|
|
557,169 |
|
|
|
1,079,635 |
|
|
|
88,410 |
|
|
|
64,350 |
|
|
|
56,881 |
|
|
and Chief Administrative
|
|
|
2001 |
|
|
|
368,376 |
|
|
|
287,333 |
|
|
|
0 |
|
|
|
0 |
|
|
|
58,603 |
|
|
|
32,817 |
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott J. Boxer
|
|
|
2003 |
|
|
|
381,688 |
|
|
|
567,928 |
|
|
|
883,572 |
|
|
|
34,070 |
|
|
|
88,199 |
|
|
|
126,887 |
|
|
President/ COO
|
|
|
2002 |
|
|
|
320,256 |
|
|
|
457,934 |
|
|
|
1,079,635 |
|
|
|
88,410 |
|
|
|
48,263 |
|
|
|
54,578 |
|
|
Service Experts Inc. |
|
|
2001 |
|
|
|
320,256 |
|
|
|
249,800 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
29,222 |
|
|
Robert J. McDonough
|
|
|
2003 |
|
|
|
367,866 |
|
|
|
339,952 |
|
|
|
883,572 |
|
|
|
34,070 |
|
|
|
75,599 |
|
|
|
78,574 |
|
|
President/ COO
|
|
|
2002 |
|
|
|
320,004 |
|
|
|
484,470 |
|
|
|
1,079,635 |
|
|
|
88,410 |
|
|
|
36,192 |
|
|
|
46,071 |
|
|
World Wide
|
|
|
2001 |
|
|
|
300,004 |
|
|
|
152,102 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
41,005 |
|
|
Heating & Cooling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl E. Edwards Jr.(5)
|
|
|
2003 |
|
|
|
335,112 |
|
|
|
394,429 |
|
|
|
0 |
|
|
|
0 |
|
|
|
108,358 |
|
|
|
76,609 |
|
|
Executive Vice President
|
|
|
2002 |
|
|
|
320,988 |
|
|
|
485,494 |
|
|
|
1,079,635 |
|
|
|
88,410 |
|
|
|
64,350 |
|
|
|
52,281 |
|
|
and Chief Legal Officer
|
|
|
2001 |
|
|
|
320,988 |
|
|
|
250,371 |
|
|
|
0 |
|
|
|
0 |
|
|
|
58,603 |
|
|
|
30,811 |
|
|
|
(1) |
Includes annual incentive payments for the
respective year from annual variable pay plans and other bonuses.
|
|
(2) |
Represents PSP awards and restricted stock awards
of the following number of shares of LII common stock granted
pursuant to the 1998 Plan multiplied by the average of the high
and low price of LII common stock on the New York Stock
Exchange (the Fair Market Value) on the grant
date(s). PSP awards in December 2003 at a Fair Market Value of
$16.76 per share are as follows: Mr. Schjerven
53,951 shares; Dr. Ashenhurst 14,835 shares;
Mr. Boxer 14,835 shares and Mr. McDonough
14,835 shares. For the December 2003 PSP grant, shares
granted will vest in December 2006 providing specific
performance targets are met. If, at the end of the performance
period, at least the minimum performance level has been
attained, the earned PSP award will be vested and will be
distributed. To the extent the earned award payout level
attained is less than 100%, the difference between 100% and the
earned award distributed, if any, shall be forfeited. Restricted
stock awards in December 2003 at a Fair Market Value of $16.76
per share are as follows: Mr. Schjerven 52,105 shares;
Dr. Ashenhurst 14,328 shares; Mr. Boxer
14,328 shares; and Mr. McDonough 14,328 shares.
For the December 2003 restricted stock grant, all shares granted
will vest and be distributed in December 2006, providing
continued employment with LII. Mr. Boxer and
Mr. McDonough received 30,000 restricted stock awards in
July 2003 upon a major management reorganization. PSP awards in
December 2002 at a Fair Market Value of $13.375 per share are as
follows: Mr. Schjerven 70,800 shares;
Dr. Ashenhurst 28,000 shares; Mr. Boxer
28,000 shares; Mr. McDonough 28,000 shares; and
Mr. Edwards 28,000 shares. All December 2002
|
18
|
|
|
PSP shares will vest in December 2005 providing
performance targets are met. There were no stock awards in 2001
due to an insufficient number of shares remaining in the 1998
Plan; therefore, upon Stockholder approval of additional shares
at the 2002 Annual Meeting of Stockholders, the delayed 2001
award was made in May 2002, with the normal grant schedule
resuming in December 2002. PSP awards in May 2002 at a Fair
Market Value of $16.21 per share are as follows:
Mr. Schjerven 70,800 shares; Dr. Ashenhurst
28,000 shares; Mr. Boxer 28,000 shares;
Mr. McDonough 28,000 shares; and Mr. Edwards
28,000 shares. All May 2002 PSP shares will vest in December
2004 providing performance targets are met. For the 2002 and
2001 PSP grants, shares that do not vest in any performance
period due to failure to achieve performance targets will vest
10 years from the grant date. A special restricted stock
award in July 2002 at a Fair Market Value of $16.21 per share
are as follows: Dr. Ashenhurst 15,500 shares;
Mr. Boxer 15,500 shares; Mr. McDonough
15,500 shares; and Mr. Edwards 15,500 shares. For
the July 2002 restricted stock grant, all shares granted will
vest and be distributed in July 2005, providing continued
employment with LII.
|
|
(3) |
2003 amounts represent the value of earned awards
in the form of LII common stock for the PSP for the 2000-2002
performance period, paid in April 2003. 2002 amounts represent
the value of earned awards in the form of LII common stock for
the PSP for the 1999-2001 performance period, paid in 2002. 2001
amounts represent the value of earned awards in the form of LII
common stock for the PSP for the 1999-2000 performance period,
paid in 2001. As discussed in footnote 3 to our financial
statements contained in our Annual Report on Form 10-K for
the year ended December 31, 2003, LII has identified
downward adjustments of $1.0 million and $4.6 million
relating, respectively, to 2001 and years prior to 2001.
Inclusion of the relevant adjustment in the 2001 period would
have deferred the vesting and receipt (but not the amount) of
the PSP grant for the 2000-2002 performance period until 2009,
providing the recipient remains in LIIs employ. Inclusion
of the relevant adjustments in the pre-2001 period would have
reduced the amount received by the named executive officers by
$17,000 in the aggregate. Vesting and receipt of this amount
would have been deferred until 2007, provided the recipient
remains in LIIs employ. Because Mr. Edwards retired
from the company in 2004, his total award for the 2000-2002
performance period and approximately $5,000 of his award for the
1999-2000 performance period would have been forfeited.
|
|
(4) |
Composed of contributions by LII to its profit
sharing retirement plan and profit sharing restoration plan and
the dollar value of term life insurance premiums paid by LII.
Contributions to the plans were as follows: In 2003:
Mr. Schjerven $217,387; Dr. Ashenhurst
$79,630; Mr. Boxer $69,382, in addition to $46,552 as
payment for installation of LII equipment under executive
equipment program; Mr. McDonough $67,866;
Mr. Edwards $68,263. In 2002:
Mr. Schjerven $133,494; Dr. Ashenhurst
$50,953; Mr. Boxer $43,642; Mr. McDonough
$38,001; Mr. Edwards $43,951. In 2001:
Mr. Schjerven $54,154; Dr. Ashenhurst
$27,060; Mr. Boxer $19,502; Mr. McDonough
$29,197; Mr. Edwards $23,082.
|
|
(5) |
Mr. Edwards announced his upcoming
retirement and, therefore, became ineligible for 2003 long-term
incentive awards.
|
19
The following table provides information
concerning stock options granted to the named executive officers
in 2003.
Option/ SAR Grants in Last Fiscal
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Number of |
|
Total |
|
|
|
|
|
|
Securities |
|
Options/SARs |
|
|
|
|
|
|
Underlying |
|
Granted to |
|
|
|
Grant Date |
|
|
Grant |
|
Options/SARs |
|
Employees in |
|
Exercise or |
|
Expiration |
|
Present |
Name |
|
Date |
|
Granted |
|
Fiscal Year |
|
Base Price(1) |
|
Date |
|
Value(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Schjerven
|
|
|
12/11/03 |
|
|
|
123,902 |
|
|
|
11.81 |
|
|
$ |
16.76 |
|
|
|
12/11/10 |
|
|
$ |
784,300 |
|
Harry J. Ashenhurst, Ph.D.
|
|
|
12/11/03 |
|
|
|
34,070 |
|
|
|
3.25 |
|
|
|
16.76 |
|
|
|
12/11/10 |
|
|
|
215,663 |
|
Scott J. Boxer
|
|
|
12/11/03 |
|
|
|
34,070 |
|
|
|
3.25 |
|
|
|
16.76 |
|
|
|
12/11/10 |
|
|
|
215,663 |
|
Robert J. McDonough
|
|
|
12/11/03 |
|
|
|
34,070 |
|
|
|
3.25 |
|
|
|
16.76 |
|
|
|
12/11/10 |
|
|
|
215,663 |
|
Carl E. Edwards, Jr.(3)
|
|
|
12/11/03 |
|
|
|
0 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
(1) |
Equals the Fair Market Value of the LII common
stock on the date of grant.
|
|
(2) |
The grant date present values shown in the table
were determined using the Black-Scholes option valuation model
using the following assumptions: stock price volatility of 50.0%
which represents an average volatility among general industry
companies; expected option life of 7.0 years; dividend
yield of 2.24%; risk free interest rate of 3.75%; modified
derived value of $6.33, which includes the following additional
assumptions: discounts for the probability of termination for
death, disability, retirement and voluntary/involuntary
terminations.
|
|
(3) |
Mr. Edwards announced his upcoming
retirement and, therefore, became ineligible for 2003 long-term
incentive awards.
|
The following table provides the options
exercised during 2003 for each of the named executive officers
and the number of options and the value of unexercised options
held by each named executive officer as of December 31,
2003.
Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
Value of Unexercised |
|
|
|
|
|
|
Underlying Unexercised |
|
In-the-Money |
|
|
|
|
|
|
Options/SARs at |
|
Options/SARs at |
|
|
Shares |
|
|
|
December 31, 2003 |
|
December 31, 2003(1) |
|
|
Acquired |
|
Value |
|
|
|
|
Name |
|
on Exercise |
|
Realized |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Schjerven
|
|
|
0 |
|
|
$ |
0 |
|
|
|
666,545 |
|
|
|
347,876 |
|
|
$ |
3,580,974 |
|
|
$ |
625,821 |
|
Harry J. Ashenhurst, Ph.D.
|
|
|
0 |
|
|
|
0 |
|
|
|
252,823 |
|
|
|
78,976 |
|
|
|
1,111,743 |
|
|
|
127,229 |
|
Scott J. Boxer
|
|
|
0 |
|
|
|
0 |
|
|
|
206,691 |
|
|
|
78,976 |
|
|
|
899,807 |
|
|
|
127,229 |
|
Robert J. McDonough
|
|
|
0 |
|
|
|
0 |
|
|
|
209,890 |
|
|
|
78,976 |
|
|
|
1,066,996 |
|
|
|
127,229 |
|
Carl E. Edwards, Jr.
|
|
|
150,000 |
|
|
|
882,491 |
|
|
|
102,823 |
|
|
|
44,906 |
|
|
|
261,878 |
|
|
|
120,755 |
|
|
|
(1) |
Calculated on the basis of the Fair Market Value
of the underlying securities as of December 31, 2003,
$16.95 per share, minus the exercise price for
in-the-money options.
|
The following table provides information
concerning PSP awards and restricted stock awards made in 2003
to the named executive officers under the 1998 Plan. The named
executive officers were awarded a number of PSP shares of LII
common stock in December 2003 subject to achievement of
performance targets based on the return on invested capital for
a three-year period. For PSP grants made in 2002, information
about the portion of the PSP award that becomes vested
regardless of whether the performance goals are met is presented
in the notes to the Summary Compensation Table
above. Presented below is the maximum number of PSP shares of
LII common stock that may be payable to each of the named
executive officers that is subject to achievement of the
performance goals. The actual
20
number of shares awarded depends on the level of
achievement of the performance objectives. Additionally, the
named executive officers were awarded a restricted stock grant
in December 2003 whereby all shares vest in December 2006
providing continued employment.
Long-Term Incentive PlansAwards in Last
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares, Units |
|
Performance or Other Period |
Name |
|
Date of Grant |
|
or Other Rights |
|
Until Maturation or Payout |
|
|
|
|
|
|
|
Robert E. Schjerven
|
|
|
12/11/03 |
|
|
|
107,902 |
|
|
|
3 years |
|
Robert E. Schjerven
|
|
|
12/11/03 |
|
|
|
52,105 |
|
|
|
3 years |
|
Harry J. Ashenhurst, Ph.D.
|
|
|
12/11/03 |
|
|
|
29,670 |
|
|
|
3 years |
|
Harry J. Ashenhurst, Ph.D.
|
|
|
12/11/03 |
|
|
|
14,328 |
|
|
|
3 years |
|
Scott J. Boxer
|
|
|
12/11/03 |
|
|
|
29,670 |
|
|
|
3 years |
|
Scott J. Boxer
|
|
|
12/11/03 |
|
|
|
14,328 |
|
|
|
3 years |
|
Robert J. McDonough
|
|
|
12/11/03 |
|
|
|
29,670 |
|
|
|
3 years |
|
Robert J. McDonough
|
|
|
12/11/03 |
|
|
|
14,328 |
|
|
|
3 years |
|
Carl E. Edwards, Jr.(1)
|
|
|
12/11/03 |
|
|
|
0 |
|
|
|
N/A |
|
Carl E. Edwards, Jr.(1)
|
|
|
12/11/03 |
|
|
|
0 |
|
|
|
N/A |
|
|
|
(1) |
Mr. Edwards announced his upcoming
retirement and, therefore, became ineligible for 2003 long-term
incentive awards.
|
Retirement Plans
The named executive officers participate in four
LII-sponsored retirement plans: the pension plan for salaried
employees, the profit sharing retirement plan, the profit
sharing restoration plan and the supplemental retirement plan.
The profit sharing restoration plan and the supplemental
retirement plan are non-qualified plans under the
Code. LII pays the full cost of each of 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 for the highest five consecutive
years of compensation. The benefit is currently based on 1.00%
of final average pay, plus 0.60% of final average pay above
Social Security covered compensation, multiplied by the number
of years of credited service, not to exceed 30 years.
Employees become vested in the pension plan for salaried
employees after five years of service and may commence unreduced
benefits at age 65. Once the specified age and service
requirements are met, benefits may commence earlier on an
actuarially reduced basis. At time of retirement, a participant
may choose one of five optional forms of payment.
The profit sharing retirement plan is a
defined contribution plan under the Code. Profit
sharing contributions, as determined by the Board of Directors,
are credited annually to participants accounts based on
total pay. Participants are fully vested after six years of
service. The assets of the plan are employer-directed.
Distributions may occur at separation of employment and can be
paid directly to the participant.
The profit sharing restoration plan permits
accruals that otherwise could not occur because of Internal
Revenue Service limitations on compensation.
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, permits early
retirement on somewhat more favorable terms than the pension
plan and provides for an additional optional form of payment.
21
The estimates of annual retirement benefits shown
in the following table are the targets established by the
supplemental retirement plan. All benefits are computed as a
straight-life annuity and are not subject to deduction for
Social Security.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Service |
|
|
|
2003 Final Average Earnings(1) |
|
5 |
|
10 |
|
15 |
|
20 |
|
25 |
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 250,000
|
|
$ |
34,780 |
|
|
$ |
69,560 |
|
|
$ |
104,340 |
|
|
$ |
104,340 |
|
|
$ |
104,340 |
|
|
$ |
104,340 |
|
425,000
|
|
|
62,780 |
|
|
|
125,560 |
|
|
|
188,340 |
|
|
|
188,340 |
|
|
|
188,340 |
|
|
|
188,340 |
|
600,000
|
|
|
90,780 |
|
|
|
181,560 |
|
|
|
272,340 |
|
|
|
272,340 |
|
|
|
272,340 |
|
|
|
272,340 |
|
775,000
|
|
|
118,780 |
|
|
|
237,560 |
|
|
|
356,340 |
|
|
|
356,340 |
|
|
|
356,340 |
|
|
|
356,340 |
|
950,000
|
|
|
146,780 |
|
|
|
293,560 |
|
|
|
440,340 |
|
|
|
440,340 |
|
|
|
440,340 |
|
|
|
440,340 |
|
1,125,000
|
|
|
174,780 |
|
|
|
349,560 |
|
|
|
524,340 |
|
|
|
524,340 |
|
|
|
524,340 |
|
|
|
524,340 |
|
1,300,000
|
|
|
202,780 |
|
|
|
405,560 |
|
|
|
608,340 |
|
|
|
608,340 |
|
|
|
608,340 |
|
|
|
608,340 |
|
1,475,000
|
|
|
230,780 |
|
|
|
461,560 |
|
|
|
692,340 |
|
|
|
692,340 |
|
|
|
692,340 |
|
|
|
692,340 |
|
|
|
(1) |
Final Average Earnings are the average of the
highest five consecutive years of includible earnings.
Compensation for these purposes includes salary and bonuses, and
excludes extraordinary compensation such as benefits from the
1998 Plan or its predecessor plans. Bonus numbers used in these
calculations, as per the 1998 Plan requirements, are the bonuses
actually paid in those years. In the Summary Compensation
Table, the 2003 bonus reported is the bonus earned in
2003, but not actually paid until 2004.
|
As of December 31, 2003, the final average
earnings and the eligible years of credited service for each of
the named executive officers was as follows: Mr. Schjerven
$1,319,35417.8 years; Dr. Ashenhurst
$660,05315.0 years; Mr. Boxer
$524,8225.6 years; Mr. McDonough
$508,0668.7 years; Mr. Edwards
$568,76112.0 years.
Employment Agreements
LII has entered into employment agreements with
the named executive officers, which are substantially identical
except for the name of the named executive officer who is a
party to the agreement and the date of the agreement. These
employment agreements establish the basis of compensation and
assignments, and contain post-employment covenants covering
confidential information, the diverting of employees, vendors
and contractors and the solicitation of customers. These
agreements also establish binding arbitration as the mechanism
for resolving disputes and provide benefits and income in the
event employment terminates under specified circumstances. On
January 1 of each year, 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 LII terminates a named executive officer prior
to the expiration of the term of the agreement or if LII does
not renew the agreement for any reason other than for cause, the
employee will be entitled to receive monthly payments of the
greater of the employees base salary for the remainder of
the agreements term or three months of the employees
base salary in addition to any other compensation or benefits
applicable to an employee at the employees level.
If LII terminates a named executive officer other
than for cause, including LIIs non-renewal of the
agreement, and the employee agrees to execute a written general
release of any and all possible claims against LII existing at
the time of termination, LII will provide the employee with an
enhanced severance package. This package includes payment of the
employees base monthly salary for a period of
24 months following the date of termination, a lump sum in
the amount which totals any short-term bonus payments actually
paid to the employee over the 24 month period prior to the
date of termination, a lump sum payment of a sum equal to 10% of
the employees annual base salary in effect at the time of
termination in lieu of perquisites lost, and forgiveness of
COBRA premiums due for group health insurance coverage for up to
18 months following termination while the employee remains
unemployed. If the employee remains unemployed at the end of
18 months, the equivalent of the COBRA premium
22
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
employees election, a lump-sum payment of 10% of the
employees annual base salary will be made to the employee
in lieu of those services. Additionally, the employees
beneficiary will receive a lump-sum death benefit equivalent to
six months of the employees base salary should the
employee die while entitled to enhanced severance payments.
Change of Control Employment
Agreements
LII has entered into change of control employment
agreements with the named executive officers, which are
substantially identical except for the name of the named
executive officer who is a party to the agreement and the date
of the agreement. The change of control agreements provide for
certain additional benefits under specified circumstances if a
named executive officers employment is terminated
following a change of control transaction involving LII. The
change of control agreements are intended to provide protections
to the named executive officers that are not afforded by their
existing employment agreements, but not to duplicate these
benefits. The term of the change of control agreements is
generally two years from the date of a change of control or two
years from the date of a potential change of control, as
discussed below. If the named executive officer remains employed
at the conclusion of such term, the officers existing
employment agreement will continue to remain in effect. 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) the Board of Directors determines that a change
of control is not likely or (b) the named executive
officer, upon proper notice to LII, elects to terminate the term
of the officers change of control agreement as of any
anniversary of the potential change of control.
A change of control generally
includes the occurrence of any of the following:
|
|
|
(a) any person,
other than specified exempt persons which includes LII and its
subsidiaries and employee benefit plans, becoming a beneficial
owner of 35% or more of the shares of LII voting securities;
|
|
|
(b) a change in the
identity of a majority of the Board of Directors, unless
approved by a majority of the incumbent members of the Board of
Directors;
|
|
|
(c) approval by the
Stockholders of a reorganization, merger or consolidation in
which:
|
|
|
|
(1) existing
Stockholders would own 65% or less of the voting securities of
the surviving entity;
|
|
|
(2) any person,
other than specified exempt persons, would own 35% or more of
the voting securities of the surviving entity;
|
|
|
(3) less than a
majority of the board of the surviving entity would consist of
the then incumbent members of the Board of Directors; or
|
|
|
|
(d) approval by the
Stockholders of a liquidation or dissolution of LII, unless such
liquidation or dissolution involves a sale to a company of which
following such transaction:
|
|
|
|
(1) more than 65% of
the voting securities of such company would be owned by existing
Stockholders;
|
|
|
(2) no person, other
than specified exempt persons, would own 35% or more of the
voting securities 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 the Board of Directors.
|
23
A potential change of control
generally includes any of the following:
|
|
|
(a) commencement of
a tender or exchange offer for voting stock that, if
consummated, would result in a change of control;
|
|
|
(b) LII entering
into an agreement which, if consummated, would constitute a
change of control;
|
|
|
(c) commencement of
a contested election contest subject to proxy rules; or
|
|
|
(d) occurrence of
any other event that the Board of Directors determines could
result in a change of control.
|
During the term of the change of control
agreement, a named executive officers position, authority,
duties and responsibilities may not be diminished, and all forms
of compensation, including salary, bonus, regular salaried
employee plan benefits, stock options, restricted stock and
other awards, must continue on a basis no less favorable than at
the beginning of the term of the change of control agreement
and, in the case of specified benefits, must continue on a basis
no less favorable in the aggregate than the most favorable
application of such benefits to any of LIIs employees.
If a named executive officer terminates
employment during the term of the change of control agreement
for good reason or for any reason during a window period (the
90-day period commencing 366 days after any change of
control), LII will pay such officer:
|
|
|
|
|
his or her then unpaid current salary and a pro
rata portion of the highest bonus earned during the preceding
three years, as well as previously deferred compensation and
accrued vacation time;
|
|
|
|
a lump-sum cash payment equal to the sum of three
times the officers annual base salary and three times the
highest annual bonus paid or awarded to the officer during the
preceding three fiscal years;
|
|
|
|
a lump-sum cash payment equal to the sum of three
times the officers annual base salary and three times the
highest annual bonus paid or awarded during the preceding three
fiscal years, to reflect the equity component of the
officers compensation;
|
|
|
|
a lump-sum cash payment equal to the sum of 15%
of the officers annual base salary, in lieu of
outplacement services, and three times 15% of the annual base
salary that would have been paid or awarded to the officer
during the fiscal year that includes the date of termination,
for the perquisites component of the officers compensation;
|
|
|
|
for purposes of LIIs supplemental
retirement plan and LIIs profit sharing restoration plan,
three additional years added to each of the service and age
criteria; and
|
|
|
|
continued coverage under LIIs employee
welfare benefits plans for up to four and one-half years after
termination.
|
In addition, all options, restricted stock and
other compensatory awards held by the named executive officer
will immediately vest and become exercisable, and the term of
these awards will be extended for up to three years following
termination of employment. The named executive 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 a contest concerning a change of
control agreement, unless the officers claim is found by a
court to be frivolous, LII has no right of offset, the officer
is not required to mitigate damages and LII agrees to pay any
legal fees incurred by the officer in connection with such
contest.
LII also agrees to pay all amounts owing to the
officer during any period of dispute, subject only to the
officers agreement to repay any amounts to which it is
determined the officer was not entitled. The
24
change of control agreements provide for a tax
gross-up in the event that specified excise taxes are applicable
to payments made by LII under a change of control agreement or
otherwise. The change of control agreements require the officer
to maintain the confidentiality of LIIs information and,
for a period of 24 months following termination of
employment, to avoid any attempts to induce LIIs employees
to terminate their employment with LII.
Indemnification Agreements
LII has entered into indemnification agreements
with its Directors and a number of its executive officers. Each
of these indemnification agreements is substantially identical
except for the name of the Director or executive officer who is
a party to the agreement and the date of the agreement. Under
the terms of the indemnification agreements, LII has generally
agreed to indemnify, and advance expenses to, each indemnitee to
the fullest extent permitted by applicable law on the date of
the agreements and to such greater extent as applicable law may
at a future time permit. In addition, the indemnification
agreements contain specific provisions pursuant to which LII has
agreed to indemnify each indemnitee:
|
|
|
|
|
if such person is, by reason of his or her status
as a Director, nominee for Director, officer, agent or fiduciary
of LII or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise with which such
person was serving at LIIs 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 LII;
|
|
|
|
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 LII 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 LII 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;
|
|
|
|
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, LII has agreed to pay all reasonable
expenses incurred by or on behalf of an indemnitee in connection
with any proceeding, whether brought by or in the right of LII
or otherwise, in advance of any determination with respect to
entitlement to indemnification and within 15 days after the
receipt by LII 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 LII 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
LII against such expenses.
The indemnification agreements also include
provisions that specify the procedures and presumptions which
are to be employed to determine whether an indemnitee is
entitled to indemnification. In some cases, the nature of the
procedures specified in the indemnification agreements varies
depending on whether LII has undergone a change of control.
25
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
John W. Norris, Jr., LIIs
Chairman of the Board, Stephen R. Booth, Thomas W.
Booth, David V. Brown and John W. Norris III, each a
Director of LII, as well as other LII Stockholders who may be
immediate family members of the foregoing persons, are,
individually or through trust arrangements, members of AOC Land
Investment, L.L.C. AOC Land Investment, L.L.C. owns 70% of AOC
Development II, L.L.C., which owns substantially all of One Lake
Park, L.L.C. LII is leasing part of an office building owned by
One Lake Park, L.L.C. for use as the LII corporate headquarters.
The lease, initiated in 1999, has a term of 25 years and
the lease payments for 2003 totaled approximately
$2.9 million. LII also leased a portion of Lennox Center, a
retail complex owned by AOC Development, L.L.C., for use as
offices. The Lennox Center lease had a term of three years,
which terminated in March 2003. The lease payments for 2003
totaled approximately $20,430. AOC Land Investment, L.L.C. also
owns 70% of AOC Development, L.L.C. LII believes that the terms
of its leases with One Lake Park, L.L.C. and AOC Development,
L.L.C. are comparable to terms that could be obtained from
unaffiliated third parties.
These transactions were not the result of
arms-length negotiations. Accordingly, certain of the terms of
these transactions may be more or less favorable to LII than
might have been obtained from unaffiliated third parties. LII
does not intend to enter into any future transactions in which
its Directors, executive officers or principal Stockholders and
their affiliates have a material interest unless such
transactions are approved by a majority of the disinterested
members of its Board of Directors and are on terms that are no
less favorable to it than those that it could obtain from
unaffiliated third parties.
Compensation Committee Interlocks and Insider
Participation
During the fiscal year 2003, the Compensation
Committee was composed of Richard L. Thompson, Janet K. Cooper,
James J. Byrne and John E. Major. No member of the Compensation
Committee was an officer or employee of LII or any of its
subsidiaries. None of the LII executive officers served on the
board of directors or on the compensation committee of any other
entity, for which any officers of such other entity served
either on our Board or on our Compensation Committee. For
information on insider participation, see Certain
Relationships and Related Party Transactions.
26
OWNERSHIP OF LII COMMON STOCK
The following table contains information
regarding the beneficial ownership of LII common stock as of
September 3, 2004 by the following individuals:
|
|
|
|
|
each person known by LII to own more than 5% of
the outstanding shares of LII common stock;
|
|
|
|
each of LIIs Directors;
|
|
|
|
each named executive officer of LII; and
|
|
|
|
all executive officers and Directors of LII as a
group.
|
All persons listed have an address in care of
LIIs principal executive offices which are located at
2140 Lake Park Boulevard, Richardson, Texas 75080.
The information contained in this table reflects
beneficial ownership as defined in Rule 13d-3
of the Securities Exchange Act of 1934. In computing the number
of shares beneficially owned by a person and the percentage
ownership of that person, shares of LII common stock subject to
options held by that person that were exercisable on
September 3, 2004 or would be exercisable within
60 days following September 3, 2004 are considered
outstanding. However, such shares are not considered outstanding
for the purpose of computing the percentage ownership of any
other person. To our knowledge and unless otherwise indicated,
each Stockholder has sole voting and investment power over the
shares listed as beneficially owned by such Stockholder, subject
to community property laws where applicable. Percentage of
ownership is based on 60,164,165 shares of common stock
outstanding as of September 3, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned |
|
|
|
Beneficial Owner |
|
Number |
|
Percentage |
|
|
|
|
|
John W. Norris, Jr.(1)(2)
|
|
|
4,706,117 |
|
|
|
7.73 |
|
Robert E. Schjerven(2)
|
|
|
1,297,499 |
|
|
|
2.13 |
|
Linda G. Alvarado(2)(3)
|
|
|
176,431 |
|
|
|
* |
|
Harry J. Ashenhurst, Ph.D.(2)
|
|
|
501,318 |
|
|
|
* |
|
Steven R. Booth(2)(4)
|
|
|
2,885,202 |
|
|
|
4.79 |
|
Thomas W. Booth(2)(5)
|
|
|
2,953,644 |
|
|
|
4.91 |
|
Scott J. Boxer(2)
|
|
|
464,624 |
|
|
|
* |
|
David V. Brown(2)
|
|
|
1,466,233 |
|
|
|
2.43 |
|
James J. Byrne(2)
|
|
|
137,154 |
|
|
|
* |
|
Janet K. Cooper(2)
|
|
|
54,443 |
|
|
|
* |
|
Carl E. Edwards, Jr.(2)
|
|
|
369,495 |
|
|
|
* |
|
C. L. (Jerry) Henry(2)
|
|
|
37,236 |
|
|
|
* |
|
John E. Major(2)
|
|
|
194,931 |
|
|
|
* |
|
Robert J. McDonough(2)
|
|
|
391,458 |
|
|
|
* |
|
John W. Norris III(2)(6)
|
|
|
2,985,738 |
|
|
|
4.96 |
|
Walden W. ODell
|
|
|
781 |
|
|
|
* |
|
Terry D. Stinson(2)
|
|
|
58,746 |
|
|
|
* |
|
Richard L. Thompson(2)
|
|
|
157,952 |
|
|
|
* |
|
All executive officers and Directors as a group
(23 persons)(2)
|
|
|
14,735,612 |
|
|
|
23.23 |
|
David H. Anderson(2)
|
|
|
3,290,784 |
|
|
|
5.46 |
|
Barclays Global Investors NA/ CA/(7)
|
|
|
4,483,377 |
|
|
|
7.45 |
|
27
|
|
* |
Less than 1%
|
|
(1) |
Includes: (a) 321,750 shares held by the
Robert W. Norris Trust A, 321,750 shares held by the John
W. Norris, Jr. Trust A., and 663,135 shares held by
the Megan E. Norris Trust A., each of which
Mr. Norris is a co-trustee; and (b) 2,658,661 shares
held by the Norris Family Limited Partnership, of which
Mr. Norris is General Partner.
|
|
(2) |
Includes the following shares subject to options:
Mr. Norris, Jr. 740,821; Mr. Schjerven
666,545; Ms. Alvarado 167,065;
Dr. Ashenhurst 252,823; Mr. S. Booth
11,727; Mr. T. Booth 38,205; Mr. Boxer
206,691; Mr. Brown 167,065; Mr. Byrne
67,784; Ms. Cooper 40,015; Mr. Edwards
102,821; Mr. Henry 26,858; Mr. Major
167,065; Mr. McDonough 209,890; Mr. Norris
III 11,727; Mr. Stinson 40,015;
Mr. Thompson 82,915; all executive officers and
Directors as a group 3,275,542; and
Mr. Anderson 152,065.
|
|
(3) |
Includes 8,174 shares held by Cimarron
Holdings, LLC.
|
|
(4) |
Includes (a) 1,995,206 shares held by trusts
for the benefit of Mr. Richard W. Booth, 642,741 shares
held by the Steven R. Booth Trust, and 136,502 shares held by
The Booth Family Charitable Lead Annuity Trust, each of which
Mr. S. Booth is a co-trustee, and (b) 83,446 shares
held by Mr. S. Booths children.
|
|
(5) |
Includes: (a) 1,995,206 shares held by
trusts for the benefit of Mr. Richard W. Booth,
40,062 shares held by the Thomas W. Booth Trust, and
136,502 shares held by The Booth Family Charitable Lead Annuity
Trust, each of which Mr. T. Booth is a co-trustee, and
(b) 76,051 shares held by Mr. T. Booths children.
|
|
(6) |
Includes (a) 4,987 shares held by the
W.H. Norris Trust, 4,987 shares held by the
B.W. Norris Trust, and 4,063 shares held by the L.C. Norris
Trust, each of which Mr. Norris is a trustee;
(b) 2,658,661 shares held by the Norris Family Limited
Partnership, of which Mr. Norris is a 1% beneficiary; and
(c) 31,768 shares held by Mr. Norris minor
children.
|
|
(7) |
Includes: (a) 3,583,666 shares held by
Barclays Global Investors, NA; and (b) 899,711 shares held
by Barclays Global Fund Advisors.
|
28
COMPARISON OF TOTAL STOCKHOLDER
RETURN
The following graph compares the cumulative total
returns of LII, the Standard & Poors Small-Cap
600 Index and a peer group of U.S. industrial manufacturing and
service companies in the heating, ventilation, air conditioning
and refrigeration businesses from July 29, 1999, the date
of the LII initial public offering, through December 31,
2003. The chart assumes that $100 was invested on July 29,
1999, with dividends reinvested. Peer group returns are weighted
by market capitalization. The peer group includes AAON, Inc.,
American Standard Companies Inc., Comfort Systems USA, Inc.,
Maytag Corporation, Watsco, Inc., Whirlpool Corporation, and
York International Corporation. Modine Corporation, a company
engaged in the heat transfer business, was removed from the peer
group in 2003, as LII has only a minority interest in its joint
venture in the heat transfer business which was formed with
Outokumpu Oyj of Finland in 2002.
Comparison of 5 Year Cumulative Total
Return
Assumes Initial Investment of $100
December 2003
29
INDEPENDENT AUDITORS
The Audit Committee of the Board of Directors has
selected KPMG LLP (KPMG) to continue as LIIs
independent auditors for the fiscal year ending
December 31, 2004. A representative of KPMG will be present
at the Annual Meeting of Stockholders and will have the
opportunity to make a statement if he or she desires to do so
and is expected to be available to respond to appropriate
questions.
The fees for professional services rendered for
the audit of LIIs annual financial statements for each of
the fiscal years ended December 31, 2003 and
December 31, 2002, and the reviews of the financial
statements included in LIIs Quarterly Reports on
Form 10-Q or services that are normally provided by KPMG in
connection with statutory or regulatory filings or engagement
for each of those fiscal years, were $1,318,000 and $880,000,
respectively. These amounts also included fees associated with
comfort letters and consents related to debt and equity
offerings. In addition, LIIs former auditors, Arthur
Andersen LLP, billed LII an aggregate of $8,000 for professional
services rendered for the review of financial statements
included in the LII Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002.
Aggregate fees billed or expected to be billed by
KPMG for assurance and related services reasonably related to
the performance of the audit or review of LIIs financial
statements for each of the fiscal years ended December 31,
2003 and December 31, 2002, and not included in the audit
fees listed above were $151,000 and $54,000, respectively. These
services are comprised primarily of accounting consultations and
other audit or attestation services not required by statute or
regulation.
Aggregate fees billed or expected to be billed by
KPMG for tax compliance, tax advice and tax planning for each of
the fiscal years ended December 31, 2003 and
December 31, 2002, were $682,000 and $171,000,
respectively. These fees related to reviews of tax returns, tax
consulting and tax planning.
The fees for services rendered to LII by KPMG,
other than those services covered in the sections captioned
Audit Fees, Audit-Related Fees and
Tax Fees, for each of the fiscal years ended
December 31, 2003 and December 31, 2002, were $0 and
$36,000, respectively. These services were comprised primarily
of miscellaneous technical assistance provided to LII.
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Audit Committee Approval of Audit and
Non-Audit Services |
Prior to 2003, each type of non-audit service
proposed to be provided by the Companys independent
auditors, KPMG, was approved on an individual basis by the Audit
Committee in advance of the rendering of such non-audit
services. The Audit Committee, in 2003, developed an
Administrative Policy and Procedure for Audit Committee Approval
of Non-Audit Services Provided by the External Auditor, which
sets forth certain pre-approved non-audit work that may be
performed by KPMG. Specifically, the Audit Committee has
pre-approved the use of KPMG for detailed, specific types of
services within the following categories of non-audit services:
tax advisory and tax return services, accounting consultation
regarding accounting standards and internal audit consultation
services. In each case, the Audit Committee has also set a
specific annual limit on the amount of such services which the
Company would obtain from KPMG, and has required management to
report the specific engagements to the Audit Committee. All
other non-audit services other than the pre-approved services
set forth above and any services that exceed the annual limits
set forth in the policy must be pre-approved in writing by the
Audit Committee. The Chairperson of the Audit Committee is
authorized by the Audit Committee to pre-approve additional KPMG
audit and non-audit services between Audit Committee
30
meetings, provided the additional services do not
affect KPMGs independence under applicable Securities and
Exchange Commission rules and any such pre-approval is reported
to the Audit Committee at its next meeting.
ADDITIONAL INFORMATION
A quorum of LII Stockholders is necessary to have
a valid meeting of Stockholders. A majority of the shares of LII
common stock issued and outstanding and entitled to vote on the
record date must be represented in person or by proxy at the
Annual Meeting of Stockholders in order for a quorum to be
established. Abstentions and broker non-votes count
as present for establishing a quorum. Shares held by LII in its
treasury or by any majority-owned subsidiary or LII do not count
toward a quorum. A broker non-vote occurs on an item when a
broker is not permitted to vote on that item without instruction
from the beneficial owner of the shares and no instruction is
given. We expect, in the event that a quorum is not present at
the Annual Meeting of Stockholders, the meeting will be
adjourned or postponed to solicit additional proxies.
Only Stockholders of record at the close of
business on October 25, 2004 are entitled to notice of and
to vote at the meeting. There were 60,247,201 shares of
common stock of LII outstanding at the close of business on that
date, all of which will be entitled to vote. Holders of shares
of common stock are entitled to one vote per share held of
record in their names on the record date on all matters.
Stockholders do not have cumulative voting rights. The election
of each Director requires a plurality of the votes cast. Votes
withheld will be deemed not to have been cast. Abstentions and
broker non-votes have no effect on determinations of plurality,
except to the extent that they affect the total votes received
by any particular candidate or proposal.
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Shares Held in Street Name |
Under the applicable rules of the New York Stock
Exchange, brokers who hold shares in street name
(i.e., in the name of a broker, bank or other record
holder) for customers who are the beneficial owners of those
shares may be prohibited from giving a proxy to vote those
customers shares with respect to the proposals to be voted
on at the Annual Meeting of Stockholders in the absence of
specific instructions from the customer. LII Stockholders whose
shares are held in street name must either direct the record
holder of their shares as to how to vote their shares or obtain
a proxy from the record holder to vote at the Annual Meeting of
Stockholders.
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Telephone and Internet Voting |
Shares Directly Registered in the Name of the
Stockholder. Stockholders with shares
registered directly with Mellon Investor Services may vote by
telephone by calling Mellon Investor Services at
(800) 435-6710 or by Internet at www.eproxy.com/lii.
Shares Registered in the Name of a Brokerage
Firm or Bank. A number of brokerage
firms and banks offer telephone and Internet voting options.
These programs differ from the program provided by Mellon
Investor Services for shares registered in the name of the
Stockholder. Check the information forwarded by your bank,
broker or other holder of record to see which options are
available to you.
LII Stockholders of record may revoke their
proxies at any time prior to the time their proxies are voted at
the Annual Meeting of Stockholders. Proxies may be revoked by
written notice, including by facsimile, to the Secretary of LII,
by a later-dated proxy signed and returned by mail or by
attending
31
LIIs Annual Meeting of Stockholders and
voting in person. Attendance at the Annual Meeting of
Stockholders will not in and of itself constitute a revocation
of a proxy. Any written notice of a revocation of a proxy must
be sent so as to be delivered before the taking of the vote at
the Annual Meeting of Stockholders to:
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Lennox International Inc.
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2140 Lake Park Blvd.
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Richardson, TX 75080
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Facsimile: (972) 497-6660
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Attention: William F. Stoll, Jr.
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Other Business; Adjournments
We are not aware of any other business to be
acted upon at the Annual Meeting of Stockholders. If, however,
other matters are properly brought before the meeting, or any
adjourned meeting, your proxies will have discretion to act on
those matters or to adjourn the meeting, according to their best
judgment. Adjournment of the Annual Meeting of Stockholders may
be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made at any time by
Stockholders representing a majority of the votes present in
person or by proxy at the adjourned meeting, whether or not a
quorum exists, without further notice other than by an
announcement made at the meeting.
Proxy Solicitation
The cost of solicitation of proxies will be paid
by LII. In addition to solicitation by mail, the Directors,
officers and employees of LII may also solicit proxies from
Stockholders by telephone, facsimile, electronic mail or in
person. We will also make arrangements with brokerage houses and
other custodians, nominees and fiduciaries to send the proxy
materials to beneficial owners. Upon request, we will reimburse
those brokerage houses and custodians for their reasonable
expenses in so doing.
Stockholder Proposals
If you wish to submit a proposal for possible
inclusion in our 2005 proxy material, we must receive your
notice, in accordance with rules of the Securities and Exchange
Commission, on or before December 31, 2004. If you wish to
submit a proposal at the 2005 Annual Meeting of Stockholders
(but not seek inclusion of the proposal in our proxy material),
we must receive your notice, in accordance with the LII Bylaws,
not less than 60 nor more than 90 days in advance of such
meeting.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act
of 1934 requires LIIs Directors and executive officers and
persons who beneficially own more than 10% of LII common stock
to file with the Securities and Exchange Commission and the New
York Stock Exchange initial reports of ownership and reports of
changes in their ownership of LII common stock. Directors,
executive officers and greater than 10% beneficial owners are
required by the Securities and Exchange Commission regulations
to furnish LII with copies of these reports. Based solely upon a
review of such reports and related information furnished to LII,
LII believes that, during the 2003 fiscal year, all LII
Directors, executive officers and greater than 10% beneficial
owners were in compliance with the section 16(a) filing
requirements, other than
32
Thomas W. Booth, who inadvertently filed one
Form 4 Statement of Change in Beneficial Ownership,
reporting three transactions, on December 17, 2003, two
days late.
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By Order of the Board of Directors
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![-s- William F. Stoll, Jr.](d13306dstoll.gif) |
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William F. Stoll, Jr.
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Corporate Secretary |
Richardson, Texas
October 27, 2004
33
APPENDIX A
LENNOX INTERNATIONAL INC.
AUDIT COMMITTEE
CHARTER
Purpose
The purpose of the Audit Committee is to assist
the Board of Directors in fulfilling its oversight
responsibilities by reviewing the Companys financial
reporting process, the system of internal control, the audit
process, and the Companys process for monitoring
compliance with laws and regulations and the Companys
policies. In performing its role, the Audit Committee will
maintain effective working relationships with the Board of
Directors, management, the internal auditors and the independent
accountants.
The Audit Committee shall prepare the report
required by the rules of the Securities and Exchange Commission
(the Commission) to be included in the
Companys annual proxy statement.
Organization
The Audit Committee shall be comprised of no less
than three Directors. The members of the Audit Committee shall
meet the independence and experience requirements of the New
York Stock Exchange, section 10A of the Securities Exchange Act
of 1934 (the Exchange Act), as amended by the
Sarbanes-Oxley Act of 2002, and the rules and regulations of the
Commission. All members of the Audit Committee shall be
financially literate and at least one member of the Audit
Committee shall be a financial expert as defined by the
Commission. Audit Committee members shall not simultaneously
serve on the audit committees of more than two other public
companies.
The Board shall appoint the members of the Audit
Committee annually, considering the recommendation of the
Governance Committee. The members of the Audit Committee shall
serve until their successors are appointed and qualify. The
Board of Directors will appoint one Audit Committee member to
serve as the Committee Chairman. The Board shall have the power
at any time to change the membership of the Audit Committee and
to fill vacancies in it, subject to such new member(s)
satisfying the independence, experience and financial expertise
requirements referred to above. The Audit Committee shall meet
when called by the Chairman, but at least four times per year.
The Audit Committee may request any officer or employee of the
Company or the Companys outside counsel or independent
accountant to attend a meeting of the Committee or to meet with
any members of, or consultants to, the Committee.
Duties and Responsibilities
To fulfill its duties and responsibilities, the
Audit Committee shall:
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Assist the Board of Directors in satisfying its
responsibilities to the shareholders with respect to matters
relating to the Companys accounting, financial reporting,
audit, legal compliance and internal control practices.
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Report Committee actions to the Board of
Directors with such recommendations as the Committee may deem
appropriate.
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Attendance by nonmembers at the meetings of the
Committee shall be at the sole discretion of the Committee and
the Committee may invite at any time such directors, officers,
employees of the Company or other parties as it determines to be
beneficial to the discharge of its functions and
responsibilities.
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Meet at least annually with the senior internal
auditing executive, management and the independent accountants
in separate executive sessions to discuss any matters that the
Committee or they believe should be discussed privately with the
Audit Committee.
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Perform the functions assigned to the Committee
by the Companys charter or Bylaws, or the Board of
Directors.
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Review and reassess the adequacy of this Charter
annually and recommend any proposed changes to the Board of
Directors for approval.
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Review at least annually the Audit
Committees own performance.
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Review with the Companys independent
accountant, the Companys internal control procedures,
financial and accounting personnel and the adequacy and
effectiveness of the accounting and financial controls of the
Company, and elicit any recommendations for the improvement of
such internal control procedures or particular areas where new
or more detailed controls or procedures are desirable or
necessary.
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Financial Reporting Process |
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Review with management and the independent
accountants any significant accounting and reporting issues made
in connection with the preparation of the Companys
financial statements, including any significant changes in the
Companys selection or application of accounting
principles, any major issues as to the adequacy of the
Companys internal controls and any special steps adopted
in light of material control deficiencies.
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Inquire of management, the independent
accountants and the senior internal auditing executive about the
Companys significant risks and exposures, and the steps
management has taken to monitor and control such exposures,
including the Companys risk assessment and risk management
policies.
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Review and discuss with management and the
independent accountant the Companys annual audited
financial statements, including disclosures made in
managements discussion and analysis, related footnotes and
the independent accountants report, and resolve any
questions with management, and if required, the independent
accountants.
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Review annual and/or quarterly filings with the
SEC and other published documents containing the Companys
financial statements, and determine whether the information
contained in these documents is consistent with that known to
the committee members.
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Ensure review of the Companys interim
financial information, including disclosures made in
managements discussion and analysis, by the Companys
independent accountants in accordance with applicable generally
accepted auditing standards prior to the inclusion of such
information in the Companys Form 10-Q.
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Discuss with the independent accountant the
matters required to be discussed by Statement on Auditing
Standards No. 61 relating to the conduct of the audit,
including any difficulties encountered in the course of the
audit work, any restrictions on the scope of activities or
access to requested information, and any significant
disagreement with management.
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Discuss with management the Companys
earnings press releases, as well as financial information and
earnings guidance provided to analysts and rating agencies.
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Discuss with management and the independent
accountant the effect of regulatory and accounting initiatives
as well as off-balance sheet structures on the Companys
financial statements.
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A-2
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Review disclosures made to the Audit Committee by
the Companys CEO and CFO during their certification
process for the Form 10-K and Form 10-Q about any
significant deficiencies in the design or operation of internal
controls or material weaknesses therein, and any fraud involving
management or other employees who have a significant role in the
Companys internal controls.
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Review of Process for Company Compliance with
Laws, Regulations and Policies |
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Review with the Companys counsel any
contingent liabilities and/or legal matters that could have a
significant impact on the Companys financial statements or
the Companys compliance policies.
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Review the Companys process for determining
risks and exposures from asserted and unasserted litigation and
claims.
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Review the Companys program for monitoring
compliance with policies and review any recurring events of
non-compliance of a material nature.
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Discuss with management and the independent
accountant any correspondence with regulators or governmental
agencies and any published reports, which raise material issues
regarding the Companys financial statements or accounting
policies.
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Establish procedures for the receipt, retention
and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters,
and the confidential anonymous submission by employees of
concerns regarding questionable accounting or auditing matters.
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Obtain from the independent accountant assurance
that section 10A(b) of the Exchange Act has not been implicated.
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Review the appointment and replacement of the
senior internal auditing executive.
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Evaluate and approve the process for establishing
the annual internal audit plan and review such plan to determine
that the plan is sufficiently linked to the Companys
overall business objectives and associated risks.
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Review with the senior internal auditing
executive and management the following:
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The Internal Audit Department Charter.
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The Department structure, budget, staffing level
and qualifications.
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3. |
A summary of activities and significant findings
during the year.
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4. |
Any changes required in the scope of the audit
plan.
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Review the overall effectiveness of the internal
audit function and review a summary of the significant reports
to management prepared by the internal auditing department and
managements responses.
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Ensure that the independent accountants are
ultimately accountable to the Audit Committee and that the Audit
Committee has the sole authority to appoint or replace the
independent accountants (subject, if applicable, to shareholder
ratification), approve the compensation of the independent
accountants for performing the annual audit, and pre-approve all
non-audit engagements with the independent accountants, and
direct the dismissal of the independent accountants when
circumstances warrant action.
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A-3
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Review the scope and approach of the annual audit
with the independent accountants, including their process for
identifying and responding to key audit and internal control
risks.
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Review and evaluate the lead partner of the
independent accountants team.
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Obtain and review a report from the independent
accountants at least annually regarding (a) the independent
accountants internal quality-control procedures,
(b) any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any
inquiry or investigation by governmental or professional
authorities within the preceding five years respecting one or
more independent audits carried out by the firm, (c) any
steps taken to deal with any such issues, and (d) all
relationships between the independent accountants and the
Company. Evaluate the qualifications, performance and
independence of the independent accountants, including
considering whether the accountants quality controls are
adequate and the provision of permitted non-audit services is
compatible with maintaining the accountants independence,
and taking into account the opinions of management and internal
auditors. The Audit Committee shall present its conclusions with
respect to the independent accountants to the Board.
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Ensure the rotation as required by law of the
lead (or coordinating) audit partner having primary
responsibility for the audit, as well as the audit partner
responsible for reviewing the audit.
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Recommend to the Board policies for the
Companys hiring of employees or former employees of the
independent accountants who participated in any capacity in the
audit of the Company.
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Discuss with the national office of the
independent accountants issues on which they were consulted by
the Companys audit team and matters of audit quality and
consistency.
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Reporting Responsibilities
To satisfy its reporting responsibilities, the
Audit Committee shall:
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Affirm annually, in writing, to the New York
Stock Exchange that the Audit Committee has:
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1. |
Met and will continue to meet, the membership
requirements.
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2. |
Adopted a written charter.
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3. |
Annually reviewed and reassessed the adequacy of
the charter.
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Disclose in the Companys proxy statement
that:
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All Audit Committee members are independent.
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2. |
The Audit Committee is governed by a written
charter, and include a copy of the charter at least once every
three years.
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Include in the Companys proxy statement a
report from the Audit Committee that states that it has:
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Reviewed and discussed the Companys audited
financial statements with management and the independent
accountant.
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2. |
Discussed the quarterly financial statements,
including the quality of accounting principles, with the
independent accountants.
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3. |
Received the required written independence
disclosures from the independent accountants.
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4. |
Recommended to the Board of Directors that the
audited financial statements be included in the Companys
Annual Report on Form 10-K.
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A-4
Special Authorities
The Audit Committee shall also have the power to
conduct or authorize investigations into any matters within the
Committees scope of responsibility. The Committee shall
have unrestricted access to members of management, independent
accountants and all information relevant to its
responsibilities. The Committee shall be empowered to retain
independent counsel, accountants or others as they deem
appropriate from time to time.
Limitation of Audit Committees
Role
While the Audit Committee has the
responsibilities and powers set forth in this Charter, it is not
the duty of the Audit Committee to plan or conduct audits or to
determine that the Companys financial statements and
disclosures are complete and accurate and are in accordance with
generally accepted accounting principles and applicable rules
and regulations. These are the responsibilities of management
and the independent accountants.
A-5
THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR IF NO DIRECTION IS INDICATED, WILL BE VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
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Please |
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Mark Here |
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for Address |
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Change or o |
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Comments |
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SEE REVERSE SIDE |
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Election of the following nominees as directors for a term expiring in 2007. |
01. Janet K. Cooper, 02. C.L. (Jerry) Henry, 03. Robert E. Schjerven,
04. Terry D. Stinson, 05. Richard L. Thompson
INSTRUCTIONS: To withhold authority to
vote for any individual nominee mark the
Exceptions box and write that nominees
name in the space provided below.
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FOR
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WITHHOLD AUTHORITY |
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all nominees
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to vote for all |
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listed
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nominees listed
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EXCEPTIONS |
o
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At the discretion of such Proxies on
any other matter that may properly come
before the meeting or any adjournment
thereof. |
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Consenting to receive all future annual
meeting materials and shareholder
communications electronically is simple and
fast! Enroll today at
www.melloninvestor.com/ISD for secure online
access to your proxy materials, statements,
tax documents and other important shareholder
correspondence.
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I (WE) PLAN TO ATTEND THE
ANNUAL MEETING OF o |
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STOCKHOLDERS ON NOVEMBER 16, 2004. |
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Dated: |
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, 2004 |
Signature |
Signature |
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Please sign exactly as your name
appears hereon. Executors,
administrators, guardians, and
others signing in a fiduciary
capacity should indicate such
capacity when signing. If shares
are held jointly, each holder
should sign. If a corporation,
please sign in full corporate name
by duly authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
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/\ FOLD AND DETACH HERE /\
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
Internet and telephone voting is available through 11:59 PM
Eastern Time the day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
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Internet
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Telephone
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Mail |
http://www.eproxy.com/lii
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1-800-435-6710
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Mark, sign and date |
Use the Internet to vote your proxy.
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Use any touch-tone telephone to
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your proxy card |
Have your proxy card in
hand when you access the web site.
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OR
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vote your proxy. Have your
proxy card in hand when you call.
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OR
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and return it in the
enclosed postage-paid envelope. |
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If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.
You can view the Annual Report and Proxy Statement
on the internet at www.lennoxinternational.com
<http://www.lennoxinternational.com>
and select SEC Filings from the Financials menu.
LENNOX INTERNATIONAL
INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
NOVEMBER 16, 2004
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The signatory of this Proxy, by execution on the reverse side of this Proxy,
hereby appoints and constitutes John W. Norris, Jr. and William F. Stoll, Jr.,
and each of them, with full power of substitution, with the powers the
signatory of this Proxy would possess if personally present, to vote all shares
of Lennox Common Stock entitled to be voted by the signatory at the Annual
Meeting of Stockholders to be held at 9:00 a.m., local time, on November 16,
2004, or at any reconvened meeting after any adjournment or postponement
thereof, on the matters forth on the reverse side in accordance with any
directions given by the signatory and, in their discretion, on all other
matters that may properly come before the Annual Meeting or any reconvened
meeting after any adjournment or postponement thereof.
IMPORTANT PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED ON THE
REVERSE SIDE. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1.
Address Change/Comments (Mark the corresponding box on the reverse side)
/\ FOLD AND DETACH HERE /\
You can now access your Lennox International Inc. account online.
Access your Lennox International Inc. stockholder account online via Investor ServiceDirect® (ISD).
Mellon Investor Services LLC, Transfer Agent for Lennox International Inc., now makes it easy and convenient
to get current
information on your stockholder account.
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View account status
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View payment history for dividends |
View certificate history
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Make address changes |
View book-entry information
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Obtain a duplicate 1099 tax form |
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Establish/change your PIN |
Visit us on the web at http://www.melloninvestor.com
For Technical Assistance Call 1-877-978-7778 between 9am-7pm
Monday-Friday Eastern Time