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EXHIBIT 10.10
June 23, 1998
Xx. Xxxx-Xxxxxxx Xxxxxxxx
Ets. Xxxxxxxx X.X.
00, xxx x'Xxxxxx-Xxxxxxxx
00000 Xxxx, Xxxxxx
Re: Letter of Intent
Dear Xxxx-Xxxxxxx:
This Letter of Intent will confirm the intentions of Lennox Global Ltd., a
Delaware corporation ("Global"), and you, to further amend the existing
agreements between various parties described below regarding the joint venture
for the manufacturing, marketing and sale of heating, ventilating, air
conditioning and refrigeration equipment ("HVAC") in Europe (the "Business"). On
13 May 1996, Global, Ets. Brancher S.A., its subsidiary Xxxxx X.X. and you
entered into an agreement to form a joint venture to engage in the Business in
Europe and other areas (the "Venture Agreement"). The Venture Agreement included
provisions for Global to purchase a part of the shares of the companies involved
in the Business which were owned, directly or indirectly, by you. The Venture
Agreement was subsequently amended on 13 and 24 May 1996 and amended and
completely restated on 20 October 1997 (all agreements relating to the Venture
as amended and existing at the time of this Letter of Intent are collectively
referred to as the "Prior Agreements"). This Letter of Intent is to describe the
principles by which the parties will further amend the Prior Agreements to allow
for the most efficient operational, fiscal and tax structure for the Business
while preserving the rights of the parties under the Prior Agreements ("Proposed
Restructure"). Upon acceptance by you, this Letter of Intent shall represent the
binding agreement of you and Global, and will allow the Proposed Restructure of
the Business to proceed while the final detailed terms of the necessary
amendments to the Prior Agreements are prepared and agreed to by the parties.
The Prior Agreements
The Prior Agreements provided for: (i) the transfer of all companies and assets
necessary for the operation of the Business to Ets. Brancher S.A. (the "Venture
Holding Company"); (ii) the purchase by Global of approximately Seventy Percent
(70%) of the outstanding shares of Ets. Brancher S.A. (the "Shares") and (iii)
the eventual purchase by Global of all of the remaining Shares from you under
agreed upon terms and conditions. The future purchases of Shares were to be
based on a price calculated based on the book
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value and net income of the Venture Holding Company using the formula described
on EXHIBIT "A". The Prior Agreements also described any other applicable terms
and the timing of the purchases by Global.
Proposed Restructure
On such dates and under such terms as the parties may agree, the Business will
be restructured according to the following principles:
1. Creation of a European Holding Company. To allow for certain fiscal and tax
benefits, a holding company or holding companies will be created for the
Business in those countries where the Business operates which providing the best
fiscal and tax arrangements while not adversely effecting the operations of the
Business. Certain of the companies of the Business will be transferred to this
Company (the "European Holding Company"). It is agreed that operating companies
of the Business will remain as subsidiaries of Ets. Brancher S.A. for so long as
Xxxx-Xxxxxxx Brancher owns more than Twenty-Five Percent (25%) of Ets. Brancher.
Global or its affiliated companies will own One Hundred Percent (100%) of the
European Holding Company. The parties agree to prepare and execute any necessary
documents to transfer title to the companies of the Business as required.
2. Creation of Country Holding Companies. The parties further agree, where
appropriate, to create holding companies in each country where more than one
company of the Business exists regardless of the type of business of those
companies where there are fiscal, tax, operational or other justifications for
such structure.
3. Merger of the Operating Companies in France. The parties have agreed to
undertake the merger of the operational companies of the Business, HCF Xxxxxx
X.X., Xxxxx Xxxx S.A. and SCI Geraval, in France to accomplish certain
operational objectives.
Proposed Amendments
The parties agree to amend the Prior Agreements according to the following:
1. General Principles. The parties have agreed to amend the Prior Agreements to
achieve the following: (i) allow for the restructuring of the companies of the
Business as described above even though it may result in a different proportion
of ownership among the parties of the individual companies of the Business from
the present; (ii) preserve intact your ownership of Ets. Brancher in accordance
with the Prior Agreements; (iii) amend the formula for the future purchase of
your Shares so as to base it on the book value and income of those companies
which are a part of the Business as of 31 December 1997(as represented in the
financial statements of the Business attached hereto as EXHIBIT "B") regardless
of whether such companies are owned in the future by Ets Brancher S.A. or the
European Holding Company at the time of such purchase; (iv) allow for the free
introduction and removal of capital in the European or Country Holding Companies
by
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Global with an appropriate adjustment to the formula to allow for the adjustment
of your proportion of ownership in the companies of the Business to reflect the
change in capital; and (v) take no action which would diminish the value of the
Shares or the rights of either party under the Prior Agreements.
2. Specific Provisions. The specific amendments will address the following:
a. The price paid by Global for the Shares is to be calculated based on
the net book value ("Net Book Value") and net income or loss ("Net Income") of
the European Holding Company as calculated according to its books and records
maintained based on the applicable generally accepted accounting principles at
the time of the sale of the Shares.
b. The price to be paid will be adjusted to reflect the impact of any
capital in flow or out flow which is disproportionate to the ownership
percentage of the parties. This adjustment will be based on two ratios of
ownership. The first ratio is percentage of ownership which you own of Ets.
Brancher S.A. at any given time ("Brancher Ownership Percentage" or "BOP"). The
second is the effective ownership percentage ("EOP") of the European Holding
Company which is based on any capital in-flow to or out-flow from the European
Holding Company to or from the parties in a proportion different the ownership
percentage of the parties. The EOP will initially be the BOP. Thereafter, the
EOP will be adjusted when capital adjustments are made disproportionate to the
existing EOP. In the event of a disproportionate capital in-flow or out-flow to
or from the European Holding Company the EOP will be re-calculated based on the
following:
(i). Determine the Net Book Value of the European Holding
Company immediately prior to any disproportionate capital in-flow or out-flow.
(ii) Each party will be assigned a part of this net book value
equal to the party's then applicable EOP.
(iii) Each party's allocation of capital will be adjusted
based on this change of capital.
(iv) The new EOP for each party will equal the ratio of that
party's capital (allocation of capital adjusted for the change) to the total
capital of the European Holding Company after the adjustment.
For example: At the effective date of the Letter of Intent, Global's EOP is 70%
and yours ("JJB") is 30%.
Assume Global makes 20 French Francs ("FF") capital contribution and JJB makes
no capital contribution to the European Holding Company on 1/1/99.
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On 1/1/99, prior to the capital contributions the Net Book Value of the European
Holding Company is 100 FF and the respective capital allocations are:
Global = 70% of 100 or 70 FF JJB = 30% of 100 or 30 FF
20 FF of capital is contributed by Global resulting in the following changes to
the respective capital allocations:
Global = 90 FF JJB = 30 FF Total = 120 FF
The resulting Effective Ownership Percentage after the capital contribution will
be:
Global = 90/120 = 75% JJB = 30/120 = 25%
c. In the event of a future purchase, the price for the Shares will be
calculated using the existing formula based on the Net Book Value and Net Income
of the European Holding Company as defined above. If the EOP is different than
the actual ownership of JJB, the price for the Shares will be further adjusted
as follows:
The aggregate Price for the Shares being purchased will be multiplied by an
adjustment factor equal to the EOP times the ratio of the Shares being sold to
the total number of Shares you own. The EOP will be then reduced by the actual
percentage of Ets. Brancher which has been sold times this same adjustment
factor and the your BOP will be reduced by the percentage sold.
EXAMPLE ONE:
Assume Global has made the 20 FF capital contribution described above and JJB
wishes to sell all of his shares. In addition assume that the formula produces a
company value or CV of 200 FF using the European Holding Company financial data.
The price paid for the shares will be:
Price = CV*(EOP for JJB)
Price = 200 FF * (25%) = 50 FF
EXAMPLE TWO:
Assume Global has made the 20 FF capital contribution described above and JJB
wishes to sell an additional 5% of Ets Brancher S.A. and retain 25% BOP interest
in Ets. Brancher S. A. In addition assume that the formula produces a company
value or CV of 200 FF using the European Holding Company financial data.
The price paid by Global for the additional 5% of for Ets. Brancher S.A. will
be:
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Price = CV *( # Shares sold by JJB)/(total # Shares owned by JJB) * (EOP for
JJB)
Price = 200 FF * (5%/30%) * (25%) = 200 FF * 0.1667 * 0.25 = 200 FF * 0.04167
Price = 8.3335 FF
d. The parties further agree to modify the existing agreements in such
a way so as to provide for the planned conversion to the European-currency
without altering the basic intent of the parties with respect to such
agreements.
Conditions to Closing
The parties have further agreed to the following to complete this transaction:
1. Definitive Agreement. The negotiation and execution of an
appropriate Amendment to the existing agreements with terms and conditions
satisfactory to each party.
2. Corporate Approvals. The Boards of Directors of Global and its
parent company shall have approved the execution and delivery of this Letter of
Intent and the Amendments to Prior Agreement.
Please indicate your acceptance and approval of the foregoing by signing below
and returning a copy of this letter to Global.
Very truly yours,
LENNOX GLOBAL LTD.
By: /s/ Xxxxxx X. Xxxxxxx
Xxxxxx X. Xxxxxxx
President and Chief Operating Officer
ACCEPTED AND APPROVED:
Xxxx-Xxxxxxx Brancher
Signature: /s/ Xxxx-Xxxxxxx Brancher
Date: July 7, 1998
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EXHIBIT "A"
SECTION 3.3. PHASED ACQUISITION OF REMAINING OWNERSHIP OF ETS.
BRANCHER.
At the times specified below for a change in the Lennox percentage
ownership in Ets. Brancher, Lennox will purchase the amount of additional
Company Stock of Ets. Brancher prescribed below using the Company Stock Price
defined below.
A. STOCK PRICE. The stock price for any specified purchase
shall be calculated by dividing the Ets. Brancher yearly Company Value for the
applicable year by the number of shares of Ets. Brancher Company Stock issued
and outstanding at time of the calculation (the "Stock Price").
(i) Yearly Ets. Brancher Company Value. The yearly
Ets. Brancher Company value (Ets. Brancher Company Value or "CV") shall
be calculated using its consolidated Net Book Value as defined below at
the close of each business year ("Yearly Book Value" or "YBV"). The
Yearly Book Value will be the consolidated Net Book Value of Ets.
Brancher as of 30 September 1997 after taking into account all
restructuring steps and as adjusted for any consolidated profits or
losses accumulated through the business year just ended. The Ets.
Brancher Company Value is computed as follows:
CV = [YBV + 9*{(Y-2+2 * Y-1+3 * Y-0)/6}]/2
Where:
YBV = its Yearly Book Value for the business year
just ended.
Y-2 = its consolidated Net Income or loss for the
business year two years before the year just ended.
Y-1 = its consolidated Net Income or loss for the
business year one year before the year just ended.
Y-0 = its consolidated Net Income or loss for the
business year just ended.
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CV = the Company Value will never be less than its
Yearly Book Value for any business year.
(ii) The Effect of Goodwill on Ets. Brancher Company
Value. In the event assets or companies are acquired by Ets. Brancher
for a cost greater than their net book value, the amortization of
goodwill will be over a period of not less than thirty (30) years or in
the event changes in generally accepted accounting practices, the
goodwill will be accounted for so as not to materially damage the CV of
Ets. Brancher.
B. SALE OF ETS. BRANCHER COMPANY STOCK. The further sale of
Ets. Brancher Company Stock shall take place using the stock price (as defined
above) within thirty (30) days after adequate audited financial data is
available in the year of purchase to calculate the Ets. Brancher Company Value,
Lennox will pay to Brancher an amount equal to the Ets. Brancher Company Stock
Price defined above times the number of additional shares necessary for Lennox
to achieve the Lennox Percentage of Ownership applicable at that time. In
exchange for this payment, Brancher agrees to transfer to Lennox sufficient
shares of the Ets. Brancher Company Stock to represent the Additional Percentage
of Ownership (as defined below) being acquired by Lennox for that specified
year.
C. ADDITIONAL PERCENTAGE OF OWNERSHIP AND SCHEDULE. In the
event that Brancher has not sold and Lennox has not purchased at least 74% of
Ets. Brancher by the end of calendar year 2005, Lennox will acquire sufficient
additional ownership of the Ets. Brancher to allow the percentage then owned by
Lennox to equal 74%. Further, in the event that Brancher has not sold and Lennox
has not purchased all the remaining ownership of Ets. Brancher by the end of
calendar year 2006, Lennox will acquire all the remaining ownership of the Ets.
Brancher. These purchases may be accelerated as described below.
D. ACCELERATION OF PURCHASE. The Lennox purchases described
above may be accelerated in any of the following circumstances:
(i) Death of Xxxx-Xxxxxxx Brancher. In the event of the death
of Xxxx-Xxxxxxx Brancher, Lennox will purchase and Brancher shall sell
all of the remaining Additional Percentage of Ownership of Ets.
Brancher for a purchase price equal to the greater of (1) the number of
shares representing the remaining Additional
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Percentage of Ownership times the applicable Ets. Brancher Company
Stock Price or (2) the minimum company value described in Section
3.3.A(ii). Xxxx-Xxxxxxx Brancher agrees to comply with any reasonable
request of Lennox to take any action which, under French Law, will
increase the enforceability of the agreement to sell Ets. Brancher
Company Stock as described in this Section 3.3.D(i). The purchase will
be completed within three (3) months of the notice to Lennox of the
date of the death of Xxxx-Xxxxxxx Brancher.
(ii) Option of Brancher. In addition, Brancher shall have the
right but not the obligation, at any time, to require Lennox to
purchase all or any portion of the remaining shares in Ets. Brancher at
a purchase price per share equal to Stock Price. The accelerated
purchase will be completed within ninety (90) days of the date of the
exercise of this option in writing by Brancher.
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EXHIBIT "B"
FINANCIAL STATEMENTS
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1. ETS BRANCHER US GAAP UNAUDITED BALANCE SHEET AS AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1997 AND PROFIT AND LOSS STATEMENT AS OF DECEMBER 31, 1997 (3
MONTHS)
SEPTEMBER 30, DECEMBER 31,
1997 1997
# ASSETS UNAUDITED UNAUDITED
--- ------ ------------- ------------
1 Cash and cash equivalents 18.216 10.483
2 Trade accounts & notes receivables - Gross 330.887 295.248
3 Less - reserve for doubtful accounts (33.072) (29.757)
4 Net trade accounts & notes receivables 297.815 265.491
5 Inventories 196.366 186.661
6 Loans to affiliate 1.173 592
7 Current deferred taxes 12.239 10.827
8 Other current assets 30.496 20.877
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9 TOTAL CURRENT ASSETS 556.305 494.931
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10 Investments in subsidiaries and affiliates 1.312 1.057
11 Less allowances for decrease in value (214) (238)
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12 NET INVESTMENTS IN AFFILIATES 1.098 819
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13 Property plant and equipment 416.644 425.566
14 Accumulated depreciation (230.452) (236.825)
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15 NET PROPERTY PLANT AND EQUIPMENT 186.192 188.741
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16 Goodwill (West) 0 2.121
17 Amortizable long term assets 12.954 13.131
18 Other non current assets 1.362 2.133
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19 TOTAL NON CURRENT ASSETS 201.606 206.945
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20 TOTAL ASSETS 757.911 701.876
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Such statement is based on the work of Ets Brancher chartered accountant and
includes some restatements we considered necessary as described in Section 2 and
3.
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SEPTEMBER 30, DECEMBER 31,
1997 1997
# LIABILITIES AND EQUITY UNAUDITED UNAUDITED
-- ---------------------- --------- ---------
21 Short-term loans from banks 55.670 41.392
22 Current long term debt to banks 5.532 8.874
23 Account payables - Non affiliates 178.196 146.001
24 Account payables - Affiliates 93 0
25 Current warranty liability 6.685 7.167
26 Accrued expenses 126.803 96.554
27 Current income taxes payable 2.598 8.413
28 Other 1.976 2.764
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29 TOTAL CURRENT LIABILITIES 377.553 311.165
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30 Long term loans from banks 41.033 62.096
31 Long term loans from affiliates 59 0
32 Non current warranty liability 3.157 3.102
33 Non current deferred taxes 8.797 6.987
34 Other non current liabilities 56.953 62.926
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35 TOTAL LONG TERM LIABILITIES 109.999 135.111
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36 TOTAL LIABILITIES 487.552 446.276
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37 NET ASSETS AND LIABILITIES 270.359 255.600
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38 Retained earnings 270.359 270.753
39 Exchange variances (1.076)
40 Net Income (loss) (14.077)
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41 TOTAL NET EQUITY 270.359 255.600
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42 TOTAL LIABILITIES AND EQUITY 757.911 701.876
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Such statement is based on the work of Ets Brancher chartered accountant and
includes some restatements we considered necessary as described in Section 2 and
3.
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DECEMBER 31, 1997
3 MONTHS
-----------------
Gross sales trade 241.007
Less cash discounts (871)
NET SALES TRADE 240.136
COST OF SALES (146.606)
VARIABLE MARGIN 93.530
Outbound freight (3.537)
Commissions (3.854)
Replacements and allowances (5.410)
Bad debt expenses (693)
Other variable costs 194
SUB TOTAL VARIABLE OPERATING EXPENSES (13.300)
CONTRIBUTION MARGIN 80.230
Manufacturing overhead (22.347)
Distribution and selling (31.341)
Administration expenses (26.629)
Research and development (5.687)
SUB TOTAL PERIOD EXPENSES (86.004)
OPERATING INCOME (LOSS) (5.774)
Amortization of intangibles (206)
Goodwill amortization (38)
Currency exchange (12)
Miscellaneous (4.107)
EARNINGS BEFORE INTEREST AND TAXES (10.137)
Interest income/expenses (1.170)
INCOME (LOSS) BEFORE TAX (11.307)
Income tax (3.333)
NET INCOME (LOSS) (14.640)
Minority interest (563)
NET INCOME (LOSS) OF THE GROUP (14.077)
Such statement is based on the work of Ets Brancher chartered accountant and
includes some restatements we considered necessary as described in Section 2 and
3.
