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The following is an excerpt from a 10-Q SEC Filing, filed by LENNOX INTERNATIONAL INC on 11/13/2000.
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LENNOX INTERNATIONAL INC - 10-Q - 20001113 - NOTES_TO_FINANCIAL_STATEMENT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION:

The accompanying unaudited consolidated balance sheet as of September 30, 2000, and the consolidated statements of income for the three months and nine months ended September 30, 2000 and 1999 and the consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999 should be read in conjunction with Lennox International Inc.'s (the "Company") consolidated financial statements and the accompanying footnotes as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999. In the opinion of management, the accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, results of operations, and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results to be expected for a full year.

The Company's fiscal year ends on December 31 of each year, and the Company's quarters are each comprised of 13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each three month period are denoted by the last day of the respective calendar quarter.

2. REPORTABLE BUSINESS SEGMENTS:

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, the Company discloses business segment data for its reportable business segments, which have been determined using the "management approach." The management approach is based on the way segments are organized within the Company for making operating decisions and assessing performance. Operations for the North American retail segment include primarily the retail sale and service of heating and air conditioning products that have historically been included in the North American residential segment. As a result of the growth in operations of this segment, retail segment results have now been stated separately on a comparative basis. Therefore, the Company's business operations are organized within the following five reportable business segments (in thousands):

                                             For the                   For the
                                      Three Months Ended           Nine Months Ended
                                        September 30,               September 30,
                                     -------------------          -------------------
NET SALES                            2000          1999           2000           1999
---------                            ----          ----           ----           ----
North American residential        $308,370       $328,173      $ 954,040      $  917,257
North American retail              288,817         66,067        772,283         109,788
Commercial air conditioning        136,368        127,922        354,390         337,985
Commercial refrigeration            88,795         94,176        273,975         238,351
Heat transfer (1)                   61,640         60,847        191,421         164,206
Eliminations                       (26,372)        (8,132)       (77,967)        (17,634)
                                  --------       --------     ----------      ----------
                                  $857,618       $669,053     $2,468,142      $1,749,953
                                  ========       ========     ==========      ==========

[FN]
(1) The Heat Transfer segment had intersegment sales of $5,503 and $5,722 for the three months ended September 30, 2000 and 1999, respectively, and $17,901 and $17,696 for the nine months ended September 30, 2000 and 1999, respectively.

                                              For the                        For the
                                         Three Months Ended             Nine Months Ended
                                           September 30,                  September 30,
                                      ---------------------          --------------------
INCOME (LOSS) FROM OPERATIONS         2000             1999          2000           1999
-----------------------------         ----             ----          ----           ----
North American residential         $23,663          $42,824      $  86,631       $105,812
North American retail               11,822            3,698         36,482          6,174
Commercial air conditioning          6,015            5,138          7,695          6,285
Commercial refrigeration             9,216            9,925         24,711         19,095
Heat transfer                        3,525            2,851         12,792         10,308
Corporate and other (1)            (16,283)          (8,075)       (34,223)       (23,802)
Eliminations                        (2,229)          (1,732)        (5,152)        (2,545)
                                   -------          -------      ---------       ---------
                                   $35,729          $54,629       $128,936       $121,327
                                   =======          =======       ========       ========

[FN]
(1) Includes $5,100 for closing operations in Mexico and Argentina.

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                                      As of September 30,     As of December 31,
TOTAL ASSETS                                 2000                   1999
------------                                 ----                   ----
North American residential              $   571,822            $   596,895
North American retail                       775,662                290,978
Commercial air conditioning                 235,449                251,226
Commercial refrigeration                    229,240                252,176
Heat transfer                               154,785                179,615
Corporate and other                         144,221                127,320
Eliminations                                (31,364)               (14,537)
                                        -----------            -----------
                                        $ 2,079,815            $ 1,683,673
                                        ===========            ===========

3. INVENTORIES:

Components of inventories are as follows (in thousands):

                                   As of September 30,     As of December 31,
                                          2000                   1999
                                          ----                   ----
Finished goods                          $243,583               $219,303
Repair parts                              50,776                 36,153
Work in process                           19,997                 20,957
Raw materials                            113,598                117,209
                                        --------               --------
                                         427,954                393,622
  Reduction for last-in, first-out        47,527                 48,198
                                        --------               --------
                                        $380,427               $345,424
                                        ========               ========

4. LINES OF CREDIT AND FINANCING ARRANGEMENTS:

The Company has bank lines of credit aggregating $688 million, of which $430 million was outstanding at September 30, 2000 with the remaining $258 million available for future borrowings, subject to covenant limitations. Included in the lines of credit are two $300 million domestic facilities governed by revolving credit facility agreements between the Company and syndicates of banks. The facilities contain certain financial covenants and bear interest, at the Company's option, at a rate equal to either (a) the greater of the bank's prime rate or the federal funds rate plus 0.5% or (b) the London Interbank Offered Rate plus a margin equal to 0.5% to 1.25%, depending upon the ratio of total funded debt to EBITDA. The Company pays a commitment fee equal to 0.10% to 0.30% of the unused commitment, depending upon the ratio of total funded debt to EBITDA. The agreements provide restrictions on the Company's ability to incur additional indebtedness, encumber its assets, sell its assets, or pay dividends.

On August 29, 2000, the Company borrowed $25.0 million under a shelf agreement with The Prudential Insurance Company of America. Terms of the borrowing include an interest rate of 7.75%, interest to be paid semi-annually and an ultimate maturity date of August 25, 2005. Terms and conditions of the borrowing are similar to those of the existing revolving credit agreements.

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5. EARNINGS PER SHARE:

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted average number of shares outstanding and the number of equivalent shares assumed outstanding, if dilutive, under the Company's stock-based compensation plans and from convertible securities. Diluted earnings per share are computed as follows (in thousands, except per share amounts):

                                                                   For the             For the
                                                             Three Months Ended   Nine Months Ended
                                                               September 30,        September 30,
                                                             ------------------   -----------------
                                                              2000      1999       2000      1999
                                                              ----      ----       ----      ----
Net income                                                  $12,386   $27,284    $50,403   $57,485
                                                            =======   =======    =======   =======
Weighted average shares outstanding                          56,308    42,164     56,070    37,910
Effect of diluted securities attributable to stock
   options and performance share awards                         487       737        355       878
                                                            -------   -------    -------   -------
Weighted average shares outstanding, as
   adjusted                                                  56,795    42,901     56,425    38,788
                                                            =======   =======    =======   =======
Diluted earnings per share                                  $  0.22   $  0.64    $  0.89   $  1.48
                                                            =======   =======    =======   =======

6. INVESTMENTS IN SUBSIDIARIES:

SERVICE EXPERTS, INC.

On January 21, 2000, the Company acquired Service Experts, Inc., a holding company owning retail outlets for heating and air conditioning products and services. The acquisition took place in the form of a merger wherein 0.67 of a share of the Company's common stock was exchanged for each share of Service Experts, Inc. common stock. The 12.2 million shares so exchanged were valued at approximately $140.5 million. In addition, transaction costs of approximately $4.1 million were paid, and $162.7 million of Service Experts, Inc. debt was assumed and concurrently repaid, resulting in a total purchase price of $307.3 million. The acquisition was accounted for under the purchase method of accounting. Based on current estimates, which may be revised at a later date, approximately $169.0 million was allocated to the fair value of the assets acquired, approximately $105.0 million was allocated to the fair value of liabilities assumed, and $243.3 million was allocated to goodwill, which is being amortized on a straight-line basis over 40 years. The results of Service Experts, Inc. have been fully consolidated with those of the Company since the date of acquisition.

DEALERS

In September of 1998, the Company initiated a program to acquire high quality heating and air conditioning dealers in metropolitan areas of the United States and Canada (the "Dealers"). During the first nine months of 2000, nine Dealers in the United States and two Dealers in Canada were purchased for a total price of approximately $40.6 million. In addition, approximately $21.8 million was paid in the first nine months of 2000 as additional payments on Dealers acquired in 1999. Of this $21.8 million, $6.3 million was in the form of 558,835 shares of the Company's common stock. The purchase of the Dealers in the first nine months of 2000 and the additional payments on Dealers acquired in 1999 were accounted for under the purchase method of accounting. Based on current estimates, which may be revised at a later date, approximately $12.9 million was allocated to the fair value of assets acquired, $8.5 million was allocated to the fair value of liabilities assumed and $57.9 million was allocated to goodwill which is being amortized on a straight-line basis over 40 years. The results of the acquired Dealers have been fully consolidated with those of the Company since the respective dates of acquisition.

As of September 30, 2000, the Company had commitments to acquire two additional Dealers for approximately $8.0 million.

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The following table presents the pro forma results as if the above companies had been acquired on January 1, 1999 (in thousands, except per share data):

                                      For the                    For the
                                 Three Months Ended         Nine Months Ended
                                    September 30              September 30,
                                 ------------------       --------------------
                                   2000       1999        2000           1999
                                   ----       ----        ----           ----
Net sales                       $859,008   $846,117    $2,516,773     $2,226,415
Net income                        12,481     29,859        51,661         70,122
Basic earnings per share            0.22       0.54          0.92           1.38
Diluted earnings per share          0.22       0.54          0.92           1.36

7. TREASURY STOCK:

On November 1, 1999, the Company's Board of Directors authorized the purchase of up to 5,000,000 shares of the issued and outstanding common stock. As of September 30, 2000, 2,729,300 of such shares had been purchased at a total cost of $27.8 million. On March 6, 2000, the Company entered into forward purchase contracts to purchase 1,557,100 shares of its common stock. On May 5, 2000, the Company entered into forward purchase contracts to purchase an additional 858,000 shares of its common stock. In accordance with the terms of these contracts, settlement is permitted on either a net cash settlement, net share settlement, or a physical settlement basis. Therefore, the shares so contracted remain issued and outstanding until such time as the contracts are settled. The Company settled the first of the forward contracts to acquire shares of its common stock. On July 7, 2000, 1,557,100 shares were purchased for a net cash settlement of $15.4 million. The Company expects to settle the remaining contracts in the fourth quarter of 2000. (See SUBSEQUENT EVENTS for further information.)

8. RECENT ACCOUNTING PRONOUNCEMENTS:

In September 2000, the Emerging Issues Task Force issued EITF00-10 which requires disclosure of shipping and handling costs that are not included in costs of goods sold. These costs, for the Company, are included in the Consolidated Statements of Income under OPERATING EXPENSES as part of selling, general and administrative expense. Following are the amounts for shipping and handling (in thousands):

        For the                       For the
   Three Months Ended            Nine Months Ended
     September 30,                  September 30,
  -------------------            -----------------
  2000           1999            2000       1999
  ----           ----            ----       ----
$32,240        $29,505         $93,783     $85,614

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts (collectively referred to as derivatives) and for hedging activities. This statement, for the Company, is effective beginning with the first quarter of 2001. Management does not believe that the adoption of this pronouncement will have a significant impact on the Company's financial statements.

9. COMPREHENSIVE INCOME:

Comprehensive income is computed as follows (in thousands):

                                             For the               For the
                                        Three Months Ended    Nine Months Ended
                                          September 30,          September 30,
                                        ---------------        ---------------
                                       2000       1999        2000       1999
                                       ----       ----        ----       ----
Net income                          $ 12,386     $27,284    $ 50,403  $ 57,485
Cumulative foreign currency
  translation adjustments            (12,741)      2,949     (29,222)   (3,487)
                                     --------    --------    --------  --------

Total comprehensive income (loss)   $   (355)    $30,233    $ 21,181   $53,998
                                     =========    =======    ========   =======

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10. OTHER EVENTS:

On July 27, 2000, the Board of Directors of the Company declared a dividend of one right ("Right") for each outstanding share of its common stock to stockholders of record at the close of business on August 7, 2000. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a "Fractional Share") of Series A Junior Participating Preferred Stock, par value $.01 per share, at a purchase price of $75.00 per Fractional Share, subject to adjustment.

11. SUBSEQUENT EVENTS:

The Company settled the last of the forward contracts to acquire shares of its common stock. On October 6, 2000, 858,000 shares were purchased for a net cash settlement of $9.8 million.

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BROKERAGE PARTNERS