SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-K
(Mark One) ------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number: 1-6112
------------------------
Nortek, Inc.
(exact name of Registrant as specified in its charter)
Delaware 05-0314991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
50 Kennedy Plaza
Providence, Rhode Island 02903-2360
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:(401) 751-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $1.00 par value New York Stock Exchange
Preference Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Special Common Stock, $1.00 par value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 7, 1997 was $220,096,432. See Item 12.
The number of shares of Common Stock outstanding as of February 7, 1997 was
9,141,503. The number of shares of Special Common Stock outstanding as of
February 7, 1997 was 499,824.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for use at its 1997 Annual Meeting
of Shareholders are incorporated by reference into Part III.
PART I
Item 1. Business
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating ("HVAC")
Products Group; and the Plumbing Products Group. Through these product groups,
the Company manufactures and sells, primarily in the United States, Canada and
Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, and the do-it-yourself and professional
remodeling and renovation markets. (As used in this report, the terms
"Company" and "Nortek" refer to Nortek, Inc., together with its subsidiaries,
unless the context indicates otherwise. Such terms as "Company" and "Nortek"
are used for convenience only and are not intended as a precise description of
any of the separate corporations, each of which manages its own affairs.)
As a result of acquisitions primarily in Europe and Canada in 1995 the
Company has considerably expanded its foreign sales and earnings. See Note 9,
Notes to Consolidated Financial Statements, Item 8 of Part II of this report,
incorporated herein by reference for information on foreign and domestic
operations.
The Company's domestic performance is dependent to a significant extent
upon the levels of new residential construction, residential replacement and
remodeling and non-residential construction, which are affected by such factors
as interest rates, inflation, consumer spending habits and unemployment. In
1996 the Company's operations were affected by an increase in housing starts
throughout the United States and Canada. In addition, the actions taken to
reduce production costs and overhead levels and improve the efficiency and
profitability of the Company's operations have enabled it to significantly
increase operating earnings as well as to position the Company for growth. In
the near term, the Company expects to operate in an environment of relatively
stable levels of construction and remodeling activity.
Inflation did not have a material effect on the Company's results of
operations and financial condition until mid-1994, when the Company experienced
significant increases in certain costs and expenses including raw material
costs. These material costs continued to increase in 1995, while in 1996, cost
increases subsided and the Company experienced decreases in certain costs and
expenses including raw materials, as compared to prices in effect in 1995.
Additional information concerning the Company's business is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7, Part II of this report (pages 14 through 23) and
incorporated herein by reference.
Residential Building Products Group
The Residential Building Products Group manufactures and distributes built-
in products primarily for the residential new construction, do-it-
yourself and professional remodeling and renovation markets. The principal
products sold by the Group are kitchen range hoods, bath fans, combination
units (fan, heater and light combinations) and bath cabinets. The Group is the
largest supplier in the United States and Canada of range hoods, bath fans and
combination units, indoor air quality products such as continuous-ventilation
systems and energy-recovery ventilators and one of the leading suppliers in
Western Europe, South America and the Middle East of luxury "Eurostyle" range
hoods. Products are sold under the Broan(R), Nautilus(R), Venmar (R), Flair,
vanEE (R), Rangaire(R) and Best(R) brand names, among others, to distributors
and dealers of electrical and lighting products, kitchen and bath dealers,
retail home centers and OEMs (original equipment manufacturers). Customers for
the Group's products include residential and electrical contractors,
professional remodelers and do-it-yourself homeowners. Other products sold by
this Group include, among others, wireless security products, garage door
openers, built-in home intercoms and entertainment systems, home automation
systems, door chimes, paddle fans, central vacuum systems and fluorescent
lighting fixtures. The Company's sales of kitchen range hoods accounted for
approximately 16.4% of the Company's consolidated net sales in 1996.
A key component of the Group's operating strategy is the introduction of
new products which capitalize on the strong Broan (R), Nautilus(R), Venmar(R),
Flair, vanEE(R), Rangaire(R) and Best(R) brand names and the extensive
distribution system of the Group's businesses. Recent product introductions
under these brand names include the Finesse (TM) contoured style range hood,
Sensaire and Solitare Ultra Silent fans and fan lights, the Flair and vanEE(R)
Super Compact Line of heat recovery cores and the Broan(R) stainless steel
trash compactor. Consumer preferences are important in developing new products
and establishing marketing strategies, and the Company believes that the
Group's ability to develop new and improved product styles and features
provides a significant competitive advantage.
With respect to certain product lines, several private label customers
account for a substantial portion of revenues. In 1996, approximately 24% of
the total sales of the Group were made to private label customers.
Production generally consists of fabrication from coil and sheet steel and
formed metal utilizing stamping, pressing and welding methods, assembly with
components and subassemblies purchased from outside sources (motors, fan
blades, heating elements, wiring harnesses, controlling devices, glass mirrors,
lighting fixtures, lumber, wood and polyethylene components, speakers, grilles
and similar electronic components, and compact disc and tape player mechanisms)
and painting, finishing and packaging.
The Group offers a broad array of products with various features and
styles across a range of price points. The Company believes that the Group's
variety of product offerings helps the Group maintain and improve its market
position for its principal products. At the same time, the Company believes
that the Group's status as a low-cost producer, in large part as a result of
cost reduction initiatives, provides the Group with a competitive advantage.
With respect to range hoods, bath fans, combination units and radio
intercoms, the Company believes that the Group's primary competitor is NuTone,
a subsidiary of Williams Holdings PLC. The market for bath cabinets is highly
fragmented with no single dominant supplier. The Group's other products
compete with many domestic and international suppliers in their various
markets. The Group competes with suppliers of competitive products primarily
on the basis of quality, distribution, delivery and price. Although the Group
believes it competes favorably with respect to each of these factors,
competition among suppliers of the Group's products is intense and certain of
these suppliers have greater financial and marketing resources than the Group.
The Group has 22 manufacturing plants and employed 2,697 full-time people
as of December 31, 1996, 927 of whom are covered by collective bargaining
agreements which expire in 1999, 2000 and 2002. The Company believes that the
Group's relationships with its employees are satisfactory.
Air Conditioning and Heating Products Group
The Air Conditioning and Heating Products Group manufactures and sells
HVAC systems for custom-designed commercial applications and for manufactured
and site-built residential housing. The Group's commercial products consist of
HVAC systems which are custom-designed to meet customer specifications for
commercial offices, manufacturing and educational facilities, hospitals, retail
stores and governmental buildings. Such systems are primarily designed to
operate on building rooftops (including large self-contained walk-in-units) or
on individual floors within a building, and range from 40 to 600 tons of
cooling capacity. The Group markets its commercial products under the
Governair(R), Mammoth(R) and Temtrol(TM) brand names. For manufactured and
site-built residential housing, the Group's products include central air
conditioners, heat pumps, furnaces and a wide range of accessories marketed
under the Intertherm(R), Softheat(R), Miller(R), Elect-Air(R) and Powermiser(R)
brand names. Residential central air conditioning products range from 1.5 to 5
tons of cooling capacity and furnaces range from 45,000 BTU's to 144,000 BTU's
of heating capacity. The Group's residential products also include portable
and permanent electric baseboard heating products.
Commercial Products. The Group's commercial products include packaged rooftop
units and air handlers, custom walk-in mechanical equipment rooms, individual
floor by floor units and heat pumps. The market for commercial HVAC equipment
is segmented between standard and custom-designed equipment. Standard
equipment can be manufactured at a lower cost and therefore offered at
substantially lower initial prices than custom-designed equipment. As a
result, suppliers of standard equipment generally have a larger share of the
overall commercial HVAC market than suppliers of custom-designed equipment,
including the Group. However, because of certain building designs, shapes or
other characteristics, the Company believes there are many applications for
which custom-designed equipment is required or is more cost effective over the
life of the building. Unlike standard equipment, the Group's commercial HVAC
equipment can be designed to match the exact space, capacity and performance
requirements of the customer. The Group sells its commercial products primarily
to contractors, owners and developers of commercial office buildings,
manufacturing and educational facilities, hospitals, retail stores and
governmental buildings. The Group seeks to maintain strong relationships
nationwide with design engineers, owners and developers, and the persons who
are most likely to value the benefits and long-term cost efficiencies of the
Group's custom-designed equipment.
The Company estimates that slightly less than half of the Group's
commercial sales in 1996 were attributable to replacement and retrofit
activity, which typically is less cyclical than new construction activity and
generally commands higher margins. The Group continues to develop product and
marketing programs to increase penetration in the growing replacement and
retrofit market.
For many commercial applications, the ability to provide a custom-designed
system is the principal concern of the customer. The Group's packaged rooftop
and self-contained walk-in equipment rooms maximize a building's rentable floor
space because they are located outside the building. In addition, factors
relating to the manner of construction and timing of installation of commercial
HVAC equipment can often favor custom-designed rather than standard systems.
As compared with site-built and standard HVAC systems, the Group's systems are
factory assembled and then installed, rather than assembled on site, permitting
extensive testing prior to shipment. As a result, the Group's commercial
systems can be installed later in the construction process than site-built
systems, thereby saving the owner or developer construction and labor costs.
The Group's individual floor units offer flexibility in metering and billing, a
substantial advantage if a building is to be occupied in stages or where HVAC
usage varies significantly from floor to floor.
The Group's commercial products are marketed through independently owned
manufacturers' representatives and an in-house sales, marketing and engineering
group of 109 persons as of December 31, 1996. The independent representatives
are typically HVAC engineers, a factor which is significant in marketing the
Group's commercial products because of the design intensive nature of the
market segment in which the Group competes.
The Company believes that the Group is among the largest suppliers of
custom-designed commercial HVAC products in the United States. The Group's
four largest competitors in the commercial HVAC market are Brod & McClung, Inc.
(which sells under the "Pace" tradename), McQuay (a division of Snyder-General
Corporation), Miller-Picking (a division of York International Corporation) and
The Trane Company (a subsidiary of American Standard Inc.). The Group competes
primarily on the basis of engineering support, quality, flexibility in design
and construction and total installed system cost. Although the Company
believes that the Group competes favorably with respect to certain of these
factors, most of the Group's competitors have greater financial and marketing
resources than the Group and enjoy greater brand awareness. However, the
Company believes that the Group's ability to produce equipment that meets the
performance characteristics required by the particular product application
provides it with advantages not enjoyed by certain of these competitors.
Residential Products. The Group is one of the largest suppliers of air
conditioners, heat pumps and furnaces to the manufactured housing market in the
United States. In addition, the Group manufactures and markets HVAC products
for site-built homes, a business it entered in 1987.
The principal factors affecting the market for the Group's residential
HVAC products are the levels of manufactured housing shipments and housing
starts and the demand for replacement and modernization of existing equipment.
The Company anticipates that the replacement market will continue to expand as
a large number of previously installed heating and cooling products become
outdated or reach the end of their useful lives during the 1990s. This growth
may be accelerated by a tendency among consumers to replace older heating and
cooling products with higher efficiency models prior to the end of such
equipment's useful life. The Company estimates that more than half of the
Group's residential site-built sales of HVAC products in 1996 were attributable
to the replacement market, which tends to be less cyclical than the new
construction market. The market for residential cooling products, including
those sold by the Group, is affected by spring and summer temperatures. The
Group does not sell window air conditioners, a segment of the market which is
highly seasonal and especially affected by spring and summer temperatures. The
Company believes that the Group's ability to offer both heating and cooling
products helps offset the effects of seasonality of the Group's sales.
The Group sells its manufactured housing products to builders of
manufactured housing and, through distributors, to manufactured housing
retailers and owners of such housing. The majority of sales to builders of
manufactured housing consist of furnaces designed and engineered to meet or
exceed certain standards mandated by federal agencies, including HUD. These
standards differ in several important respects from the standards for furnaces
used in site-built residential homes. The after market channel of distribution
includes sales of both new and replacement air conditioning units and heat
pumps and replacement furnaces. The Company believes that the Group has one
major competitor in this market, Evcon Industries, a subsidiary of York
International Corporation, which markets its products under the "Evcon/Coleman"
name.
A substantial portion of site-built residential products have been
introduced in the past several years, including a new line of furnaces and a
reengineered line of high efficiency air conditioners and heat pumps.
Residential HVAC products for use in site-built homes are sold through
independently-owned distributors who sell to HVAC contractors.
Competition in the site-built residential HVAC market is intense, and many
suppliers of such equipment have substantially greater financial and marketing
resources than the Group and enjoy greater brand awareness. In these markets,
the Group competes with, among others, Carrier Corporation, Rheem Manufacturing
Company, Lennox Industries, The Trane Company and York International
Corporation. The Group competes in both the manufactured housing and site-
built markets on the basis of breadth and quality of its product line,
distribution, product availability and price. The Company believes that the
Group competes favorably with respect to these factors.
The Group has six manufacturing plants and employed 2,192 full-time people
as of December 31, 1996, 256 of whom are covered under a collective bargaining
agreement which expires in 1998. The Company believes that the Group's
relationships with its employees are satisfactory.
Plumbing Products Group
The Plumbing Products Group manufactures and sells vitreous china bathroom
fixtures (including lavatories, toilet bowls, flush tanks, bidets and urinals),
gelcoat and acrylic bathtubs, shower stalls and whirlpools, brass and die cast
faucets and shower doors, and also markets stainless steel and enameled steel
tubs and sinks. In addition to its standard product offerings, the Group also
sells designer bathroom fixtures, 1.6 gallon water-efficient toilets, pressure
balance tub-shower fittings and a variety of products that are accessible to
physically challenged individuals. Products are sold under the URC(TM) and
Universal-Rundle(R) brand names principally to wholesale plumbing distributors
and retail home centers. End customers of the Group's products are generally
home builders, do-it-yourself or buy-it-yourself homeowners, remodeling
contractors and commercial builders.
The Group sells its products to distributors and home centers primarily
through independently owned manufacturer's representatives supported by 50
sales and marketing personnel employed by the Group as of December 31, 1996.
The Group competes with many suppliers of plumbing and related products,
several of which have greater financial and marketing resources than the Group
and greater brand awareness. The Group's competitors include American Standard
Inc., Eljer Industries, a subsidiary of Zurn Industries, Kohler Company and
Mansfield, a subsidiary of Falcon Building Products, Inc. The Group competes
primarily on the basis of service, quality, price, and breadth of product line
offerings. The Group believes it competes favorably by offering quality
products and customer service at a reasonable price and by developing products
using new technologies.
The Plumbing Products Group has eight manufacturing facilities and
employed 1,355 full-time people as of December 31, 1996, approximately 910 of
whom are covered by collective bargaining agreements which expire in 1997 and
1999. The Company believes that the Group's relationships with its employees
are satisfactory.
GENERAL CONSIDERATIONS
Employees
The Company employed approximately 6,497 persons at December 31, 1996.
Backlog
Backlog expected to be filled during 1997 was approximately $113,638,000
at December 31, 1996 ($116,679,000 at December 31, 1995). Backlog is not
regarded as a significant factor for operations where orders are generally for
prompt delivery. While backlog stated for December 31, 1996 is believed to be
firm, the possibility of cancellations makes it difficult to assess the
firmness of backlog with certainty.
Research and Development
The Company's research and development activities are principally new
product development and represent approximately 1% of net sales.
Patents and Trademarks
The Company holds numerous design and process patents that it considers
important, but no single patent is material to the overall conduct of its
business. It is the Company's policy to obtain and protect patents whenever
such action would be beneficial to the Company. The Company owns several
trademarks that it considers material to the marketing of its products,
including Broan(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R), Best(R),
Governair(R), Mammoth(R), Temtrol(TM), Miller(R), Intertherm(R), Softheat(R),
Powermiser(R), URC(TM) and Universal-Rundle(R). The Company believes that its
rights in these trademarks are adequately protected.
Raw Materials
The Company purchases raw materials and most components used in its
various manufacturing processes. The principal raw materials purchased by the
Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate
mirror glass, silica, lumber, plywood, paints, chemicals, resins and plastics.
The materials, molds and dies, subassemblies and components purchased from
other manufacturers, and other materials and supplies used in manufacturing
processes have generally been available from a variety of sources. Whenever
practical, the Company establishes multiple sources for the purchase of raw
materials and components to achieve competitive pricing, ensure flexibility and
protect against supply disruption. From time to time increases in raw material
costs can affect future supply availability due in part to raw material demands
by other industries.
Working Capital
The carrying of inventories to support distributors and to permit prompt
delivery of finished goods requires substantial working capital. Substantial
working capital is also required to carry receivables. The acquisitions made
by the Company in 1995 have historically financed a substantial portion of
their demands for working capital through various short term financing
arrangements and are expected to do so in the future. See "Liquidity and
Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations, beginning on page 20 of this report,
incorporated herein by reference.
Executive Officers of the Registrant
Name Age Position
- ---- --- --------
Richard L. Bready 52 Chairman, President and
Chief Executive Officer
Almon C. Hall 50 Vice President, Controller
and Chief Accounting Officer
Richard J. Harris 60 Vice President and Treasurer
Siegfried Molnar 56 Senior Vice President -
Group Operations
Kenneth J. Ortman 61 Senior Vice President -
Group Operations
Kevin W. Donnelly 42 Vice President, General Counsel
and Secretary
The executive officers have served in the same or substantially similar
executive positions with the Company for at least the past five years.
Executive Officers are elected annually by the Board of Directors of the
Company and serve until their successors are chosen and qualified. Mr. Bready
has an employment agreement with the Company providing for his employment as
Chief Executive Officer through 1998. The Company's executive officers include
only those officers of the Company who perform policy-making functions for the
Company as a whole and have managerial responsibility for major aspects of the
Company's overall operations. A number of other individuals who serve as
officers of the Company's subsidiaries perform policy-making functions and have
managerial responsibilities for the subsidiary or division by which they are
employed, although not for the Company overall. Certain of these individuals
could, depending on earnings of such unit, be more highly compensated than some
executive officers of the Company.
Item 2. Properties
Set forth below is a brief description of the location and general
character of the principal administrative and manufacturing facilities and
other material real properties of the Company, all of which the Company
considers to be in satisfactory repair. All properties are owned, except for
those indicated by an asterisk, which are leased.
Approximate
Location Description Square Feet
- -------- ----------- -----------
Union, IL Manufacturing/Warehouse/Administrative 180,000
Hartford, WI Manufacturing/Warehouse/Administrative 462,000
Old Forge, PA Warehouse/Administrative 40,000
Bensenville, IL Warehouse/Administrative 69,000*
Mississauga, ONT Manufacturing/Administrative 108,000
Dallas, TX Manufacturing/Administrative 71,000
Carlsbad, CA Administrative 30,000
Hong Kong Manufacturing 20,000*
Waupaca, WI Manufacturing 35,000
Fabriano, Italy Manufacturing/Administrative 97,500*
Cerreto d'Esi, Italy Manufacturing/Administrative 135,000
Montefano, Italy Manufacturing/Administrative 74,000
Cleburne, TX Manufacturing/Administrative 210,000
Drummondville, QUE Manufacturing/Administrative 66,000*
St. Leonard d'Aston, QUE Manufacturing/Administrative 88,000
St. Peters, MO Warehouse/Administrative 250,000*
St. Louis, MO Manufacturing 214,000
Boonville, MO Manufacturing 250,000*
Chaska, MN Manufacturing/Administrative 230,000*
Oklahoma City, OK Manufacturing/Administrative 127,000
Okarche, OK Manufacturing/Administrative 135,000
Los Angeles, CA Manufacturing/Administrative 177,000
New Castle, PA Manufacturing/Administrative 424,000
Hondo, TX Manufacturing/Administrative 460,000
Monroe, GA Manufacturing/Administrative 416,000
Union Point, GA Manufacturing/Administrative 191,000
Ottumwa, IA Manufacturing/Administrative 135,000
Grand Prairie, TX Manufacturing/Warehouse/Administrative 64,800*
Rensselaer, IN Manufacturing/Administrative 125,000
Chicago, IL Manufacturing/Warehouse/Administrative 126,000
Providence, RI Administrative 20,400*
Item 3. Legal Proceedings
The Company and its subsidiaries are subject to numerous federal, state
and local laws and regulations, including environmental laws and regulations
that impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company believes that it is in substantial compliance
with the material laws and regulations applicable to it. The Company and its
subsidiaries or former subsidiaries are involved in current, and may become
involved in future, remedial actions under federal and state environmental laws
and regulations which impose liability on companies to clean up, or contribute
to the cost of cleaning up, sites at which their hazardous wastes or materials
were disposed of or released. Such claims may relate to properties or business
lines acquired by the Company after a release has occurred. In other
instances, the Company may be partially liable under law or contract to other
parties that have acquired businesses or assets from the Company for past
practices relating to hazardous substances management. The Company believes
that all such claims asserted against it, or such obligations incurred by it,
will not have a material adverse effect upon the Company's financial condition
or results of operations. Expenditures in 1995 and 1996 to evaluate and
remediate such sites were not material. However, the Company is presently
unable to estimate accurately its ultimate financial exposure in connection
with identified or yet to be identified remedial actions due among other
reasons to: (i) uncertainties surrounding the nature and application of
environmental regulations, (ii) the Company's lack of information about
additional sites at which it may be listed as a potentially responsible party
("PRP"), (iii) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions and
(iv) the time periods over which remediation may occur. Furthermore, since
liability for site remediation is joint and several, each PRP is potentially
wholly liable for other PRPs that become insolvent or bankrupt. Thus, the
solvency of other PRPs could directly affect the Company's ultimate aggregate
clean-up costs. In certain circumstances, the Company's liability for clean-up
costs may be covered in whole or in part by insurance or indemnification
obligations of third parties.
In addition to the legal matters described above, the Company and its
subsidiaries are parties to various legal proceedings incident to the conduct
of their businesses. None of these proceedings is expected to have a material
adverse effect, either individually or in the aggregate, on the Company's
financial position or results of operations. See Note 8, Notes to Consolidated
Financial Statements, Item 8 of Part II of this report, incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on October 25, 1996, the
following directors were elected by the following votes:
By the holders of Common Stock voting separately as a class.
NAME FOR WITHHELD
---- --- --------
Class I (for a term expiring
at the 1999 Annual Meeting)
J. Peter Lyons 6,991,754 510,293
By the holders of Common Stock and Special Common Stock voting together as
a class.
NAME FOR WITHHELD
---- --- --------
Class I (for a term expiring
at the 1999 Annual Meeting)
William I. Kelly 10,819,681 501,366
Members of the Board of Directors continuing in office after the meeting:
Class II (for a term expiring Richard J. Harris
at the 1997 Annual Meeting)
Class III (for a term expiring Richard L. Bready
at the 1998 Annual Meeting) Philip B. Brooks
The other matter voted upon at the meeting and the vote was as follows:
Shareholder Proposal - Amendment to Strike Section 3.4 of the Company's
By-laws.
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
1,242,974 7,288,310 85,484 2,704,279
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Stockholders of record of Nortek Common and Special Common Stock at
February 7, 1997, numbered 3,423 and 2,682, respectively. There were no
dividends declared on the Common and Special Common Stock in 1995 or 1996. The
high and low sales prices of Nortek's Common Stock traded on the New York Stock
Exchange in each quarter of 1996 and 1995 were:
1996
Quarter High Low
- ------- ---- ---
First 12 1/4 9 3/4
Second 16 1/8 11 5/8
Third 14 1/4 11
Fourth 20 5/8 13 1/2
1995
Quarter High Low
- ------- ---- ---
First 11 7/8 9 3/8
Second 10 3/4 8 1/8
Third 9 1/2 7 3/8
Fourth 12 1/4 7 7/8
See Note 6, Notes to Consolidated Financial Statements.
Item 6. Consolidated Selected Financial Data
Nortek, Inc. and Subsidiaries
For the Five Years Ended December 31, 1996
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands Except Per Share Amounts)
Consolidated Summary of
Operations:
Net sales $969,798 $776,210 $737,160 $744,113 $799,979
Operating earnings 60,052 41,084 50,017 30,346 20,436
Loss on businesses sold --- --- (1,750) (20,300) (14,500)
Earnings (loss) from
continuing operations 22,000 15,000 17,200 (12,600) (21,000)
Loss from discontinued
operations --- --- --- --- (3,300)
Extraordinary gain (loss)
from debt retirements --- --- 200 (6,100) 100
Cumulative effect of
accounting changes --- --- 400 (2,100) ---
Net earnings (loss) 22,000 15,000 17,800 (20,800) (24,200)
Financial Position:
Unrestricted cash, invest-
ments and marketable
securities $ 92,093 $103,313 $105,080 $ 82,498 $ 73,748
Working capital 143,474 160,753 173,459 117,926 132,587
Total assets 609,116 625,479 519,217 509,209 515,373
Total debt--
Current 36,564 42,050 4,629 37,539 6,810
Long-term 243,961 240,396 219,951 178,210 201,863
Current ratio 1.7:1 1.7:1 2.1:1 1.6:1 1.9:1
Debt to equity ratio 2.4:1 2.2:1 1.9:1 2.1:1 1.6:1
Depreciation and amorti-
zation 23,726 18,977 17,960 20,726 23,644
Capital expenditures 22,184 17,321 19,424 10,809 8,804
Stockholders' investment 118,795 131,291 117,790 104,007 126,906
Common and special common
shares outstanding 9,873 12,074 12,550 12,542 12,526
Per Share:
Earnings (loss) from continuing
operations--
Primary $2.07 $1.19 $1.35 $(1.00) $(1.67)
Fully diluted 2.05 1.19 1.34 (1.00) (1.67)
Net earnings (loss)--
Primary 2.07 1.19 1.40 (1.66) (1.92)
Fully diluted 2.05 1.19 1.39 (1.66) (1.92)
Stockholders' investment 12.03 10.87 9.39 8.29 10.13
See Notes 2, 9 to 11 and Note 13 of the Notes to Consolidated Financial
Statements, and Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, below, regarding the effect on operating
results of acquisitions, businesses sold and other matters. There have not
been any cash dividends declared or paid on the Company's Common or Special
Common Stock during the past five years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating Products
Group; and the Plumbing Products Group. Through these product groups, the
Company manufactures and sells, primarily in the United States, Canada and
Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, and the do-it-yourself and professional
remodeling and renovation markets.
During the fourth quarter of 1995, the Company acquired three businesses, which
are included in the Residential Building Products Group, and accounted for
these acquisitions under the purchase method of accounting. Accordingly, the
results of such acquisitions are included in the Company's consolidated results
since the date of acquisition. (See Liquidity and Capital Resources and Notes
1 and 2 of the Notes to Consolidated Financial Statements included elsewhere
herein.)
Results of Operations
The following tables set forth, for the three years ended December 31, 1996,
(a) certain consolidated operating results, (b) the percentage change of such
results as compared to the prior year, (c) the percentage which such results
bears to net sales and (d) the change of such percentages as compared to the
prior year:
Percentage
Change
--------------
Year Ended December 31, 1995 1994
----------------------- to to
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
(Amounts in Millions)
Net sales $969.8 $776.2 $737.2 24.9% 5.3%
Cost of products sold 709.9 574.9 520.4 (23.5) (10.5)
Selling, general and admini-
strative expense 199.8 160.2 166.8 (24.7) 4.0
Operating earnings 60.1 41.1 50.0 46.2 (17.8)
Interest expense (30.1) (24.9) (26.2) (20.9) 5.0
Interest income 5.3 6.1 5.3 (13.1) 15.1
Net gain on investment and
marketable securities .7 2.0 --- (65.0) ---
Loss on business sold --- --- (1.7) --- 100.0
Earnings before provision
for income taxes 36.0 24.3 27.4 48.1 (11.3)
Provision for income taxes 14.0 9.3 10.2 (50.5) 8.8
Earnings before extra-
ordinary gain 22.0 15.0 17.2 46.7 (12.8)
Extraordinary gain from
debt retirements --- --- .2 --- (100.0)
Cumulative effect of an accounting
change --- --- .4 --- (100.0)
Net earnings 22.0 15.0 17.8 46.7 (15.7)
Percentage
Percentage of Net Sales Change
-------------
Year Ended December 31, 1995 1994
----------------------- to to
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% ---% ---%
Cost of products sold 73.2 74.1 70.6 .9 (3.5)
Selling, general and admini-
strative expense 20.6 20.6 22.6 --- 2.0
Operating earnings 6.2 5.3 6.8 .9 (1.5)
Interest expense (3.1) (3.2) (3.6) .1 .4
Interest income .6 .8 .7 (.2) .1
Net gain on investment and
marketable securities --- .2 --- (.2) .2
Loss on business sold --- --- (.2) --- .2
Earnings before provision
for income taxes 3.7 3.1 3.7 .6 (.6)
Provision for income taxes 1.4 1.2 1.4 (.2) .2
Earnings before extra-
ordinary gain 2.3 1.9 2.3 .4 (.4)
Extraordinary gain
from debt retirements --- --- --- --- ---
Cumulative effect of an accounting
change --- --- .1 --- (.1)
Net earnings 2.3 1.9 2.4 .4 (.5)
The following table presents the net sales for the Company's principal product
groups for the three years ended December 31, 1996, and the percentage change
of such results as compared to the prior year:
Percentage
Change
------
Year Ended December 31, 1995 1994
----------------------- to to
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
Net Sales: (Amounts in Millions)
Residential Building
Products $418.6 $281.2 $265.2 48.9% 6.0%
Air Conditioning and
Heating Products 411.9 363.4 338.0 13.4 7.5
Plumbing Products 139.3 131.6 134.0 5.9 (1.8)
----- ----- ----- ---- ----
Total $969.8 $776.2 $737.2 24.9% 5.3%
===== ===== ===== ==== ====
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
Net sales increased approximately $193,600,000, or approximately 24.9%, as
compared to 1995. The Residential Building Products Group net sales increased
principally as a result of fourth quarter 1995 acquisitions, which contributed
approximately $140,400,000 in 1996 as compared to approximately $24,600,000 in
1995. Shipments of new and replacement air conditioning and heating ("HVAC")
products to manufactured housing customers and increased sales levels of
commercial and industrial HVAC products were the primary reasons for increased
sales in the Air Conditioning and Heating Products Group. Modest sales price
increases in certain product lines of the Residential Building Products Group,
were also a factor, and were partially offset by lower sales prices of certain
products in the Plumbing Products Group and certain residential HVAC products
in the Air Conditioning and Heating Products Group.
Cost of products sold as a percentage of net sales decreased from approximately
74.1% in 1995 to approximately 73.2% in 1996. The decrease in the percentage
principally resulted from a reduction in cost in 1996 of certain raw materials
and components compared to 1995 and decreased overhead costs as a percentage of
sales in the Residential Building Products and Air Conditioning and Heating
Products Groups due to increased volume and improved efficiency. These
decreases were partially offset by the 1995 acquisitions, which have a higher
level of cost of sales to net sales than the overall group of businesses owned
prior to the acquisitions, the effect of the development and introduction of
new products and the effect of an extended shut-down period in the third
quarter in Europe and by increased direct labor costs in the Plumbing Products
Group. Had all year-end inventory values been stated on a FIFO basis, year-end
inventory would have been approximately $8,482,000 higher in 1996,
approximately $10,550,000 higher in 1995 and approximately $6,710,000 higher in
1994. Overall, changes in cost of products sold as a percentage of net sales
for one period as compared to another period may reflect the effect of a number
of factors, including among others changes in the relative mix of products
sold, the effect of changes in sales prices, the unit cost of products sold and
changes in productivity levels.
Selling, general and administrative expense as a percentage of net sales was
approximately 20.6% in 1995 and 1996. The fourth quarter 1995 acquisitions,
which have a lower level of selling, general and administrative expense to net
sales than the overall group of businesses owned prior to the acquisitions, and
increased sales levels without a proportionate increase in expense in the
Company's Plumbing Products Group in 1996 contributed to a decrease in the
percentage which was offset by the effect of limited sales activity during an
extended shutdown period in the third quarter by the Company's European
subsidiaries without a proportionate reduction in expense and higher net
unallocated expense.
Segment earnings were approximately $73,900,000 for 1996, as compared to
approximately $48,700,000 for 1995. Segment earnings are operating earnings
before corporate and other expenses that are not directly attributable to the
Company's product groups. Fourth quarter 1995 acquisitions, included in the
Residential Building Products Group, contributed approximately $8,400,000 to
segment earnings in 1996 as compared to $1,050,000 in 1995.
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
(Continued)
Segment earnings have been reduced by depreciation and amortization expense of
approximately $22,200,000 and approximately $17,600,000 for 1996 and 1995,
respectively. Acquisitions accounted for approximately $5,100,000 of the
depreciation and amortization expense in 1996 as compared to $750,000 in 1995.
The overall increase in segment earnings was due principally to increased sales
volume in each of the Company's operating groups, particularly increased sales
volume of residential and commercial HVAC products and residential building
products, the effect of increased sales from the fourth quarter 1995
acquisitions, and a reduction in the price paid for certain materials in each
of the Company's operating groups and was affected by the factors noted above.
Foreign segment earnings, consisting primarily of the results of operations of
the Company's Canadian and European subsidiaries, which manufacture built-in
ventilating products, increased to approximately 11.4% of segment earnings in
1996 from approximately 6.1% of such earnings in 1995. The increase in 1996 was
primarily attributable to an approximate 184.2% increase in foreign segment
earnings in 1996, as compared to a 43.2% increase in domestic earnings. The
increase in 1996 was primarily attributable to earnings of the Company's 1995
Canadian and European acquisitions. Sales and earnings derived from the
international market are subject to the risks of currency fluctuations.
Operating earnings in 1996 increased approximately $19,000,000, or
approximately 46.2%, as compared to 1995, primarily due to the factors
previously discussed.
Interest expense in 1996 increased approximately $5,200,000, or approximately
20.9%, as compared to 1995, primarily as a result of higher borrowings
resulting from the 1995 acquisitions including existing short-term working
capital borrowings of the acquired subsidiaries.
Interest income in 1996 decreased approximately $800,000, or approximately
13.1%, as compared to 1995, principally due to lower average invested balances
of short-term investments and marketable securities, principally resulting from
the 1995 acquisitions and from purchases of the Company's capital stock,
partially offset by increased cash from operating results.
The provision for income taxes was approximately $14,000,000 for 1996, as
compared to approximately $9,300,000 for 1995. The provision for income taxes
has been reduced by approximately $481,000 in 1996 and approximately $1,100,000
in 1995, respectively, reflecting the reversal of tax valuation reserves no
longer required, of which approximately $263,000 in 1996 and $670,000 in 1995
are as a result of the gain on the sale of certain investments and marketable
securities. The income tax rates principally differed from the United States
Federal statutory rate of 35%, as a result of state income tax provisions,
nondeductible amortization expense (for tax purposes), the changes in tax
valuation reserves, the effect of foreign income tax on foreign source income,
and in 1996 from the effect of product development tax credits from foreign
operations. (See Note 4 of the Notes to the Consolidated Financial Statements
included elsewhere herein.)
Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994
Net sales increased approximately $39,000,000, or approximately 5.3%, as
compared to 1994, principally as a result of increased shipments of new and
replacement HVAC products to manufactured housing customers, increased sales
levels of commercial and industrial HVAC products by the Air Conditioning and
Heating Products Group and acquisitions which contributed approximately
$24,600,000 to net sales in 1995. These increases were partially offset by
lower sales volume and prices of vitreous china products in the Plumbing
Products Group.
Cost of products sold as a percentage of net sales increased from approximately
70.6% in 1994 to approximately 74.1% in 1995, primarily as a result of higher
material costs in each of the Company's operating groups. Had all year end
inventory values been stated on a FIFO basis, year end inventory would have
been approximately $10,550,000 higher in 1995, approximately $6,710,000 higher
in 1994, and approximately $4,982,000 higher in 1993. Increased direct labor
and overhead costs in the Air Conditioning and Heating Products Group also
contributed to the increased percentage. To a lesser extent, decreased sales
levels without a proportionate decrease in overhead costs in Plumbing Products
were also a factor. The increase in the percentage was partially offset by
lower direct labor and overhead costs in the Residential Building Products
Group.
Selling, general and administrative expense as a percentage of net sales
decreased from approximately 22.6% in 1994 to approximately 20.6% in 1995,
principally due to lower expense on increased HVAC product net sales, primarily
to residential and manufactured housing customers and lower non-segment expense
both as a result of the Company's cost containment measures. To a lesser
extent, decreased expenses in the Plumbing Products Group was also a factor.
The decrease in the percentage was partially offset by the effect of
approximately $3,200,000 of income in 1994 from the settlement of insurance
claims and disputes.
Segment earnings were approximately $48,700,000 for 1995, as compared to
approximately $61,300,000 for 1994, as a result of the effect of the factors
discussed below. Acquisitions in 1995, included in the Residential Building
Products Group, contributed approximately $1,050,000 to segment earnings in
1995. Segment earnings have been reduced by depreciation and amortization
expense of approximately $17,600,000 and $15,700,000 for 1995 and 1994,
respectively. Acquisitions contributed approximately $750,000 of the increase
in depreciation and amortization expense in 1995. The overall decline in
segment earnings was due principally to increased material costs in each of the
Company's operating groups, partially offset by higher earnings from increased
sales volume of HVAC products, without a proportionate increase in expense, and
lower selling, general and administrative expense (as a percentage of net
sales) in the Air Conditioning and Heating Products and Plumbing Products
Groups. Approximately $1,600,000 of the decline in segment earnings resulted
from the effect of income in the second quarter of 1994 from the settlement of
insurance claims and disputes.
Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994
(Continued)
Foreign segment earnings in 1995, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries, which
manufacture built-in ventilating products, decreased to approximately 6.1% of
segment earnings in 1995 from approximately 6.2% of such earnings in 1994.
This decrease was primarily due to a decline in earnings in Canada due to the
continued weakness in residential construction, partially offset by
acquisitions and the effect of an approximate 21% decline in domestic segment
earnings in 1995.
Operating earnings in 1995 decreased approximately $8,900,000, or approximately
17.8%, as compared to 1994, primarily as a result of the factors discussed
above, including the effect of lower non-segment expense, net and approximately
$3,200,000 (including $1,600,000 relating to the Company's operating segments)
of income in the second quarter of 1994 from the settlement of insurance claims
and disputes.
Interest expense decreased approximately $1,300,000, or approximately 5.0% in
1995, as compared to 1994. In February 1994, the Company sold in a public
offering $218,500,000 of its 9 7/8% Notes and used a portion of the proceeds to
redeem, on March 24, 1994, approximately $153,000,000 of certain of the
Company's outstanding indebtedness. Interest expense (net of interest income)
for 1994 was approximately $1,300,000 greater than it would have been had the
debt redemption occurred on the same day as the financing. The effect of the
redemption of certain other outstanding indebtedness in 1994 was also a factor.
The decrease in interest expense was partially offset by increased interest
expense as a result of acquisitions.
Interest income increased approximately $800,000, or approximately 15.1% in
1995, as compared to 1994, principally due to higher yields earned on short-
term investments and marketable securities, partially offset by lower average
invested balances of short-term investments and marketable securities.
In the third quarter of 1995, the Company sold its investment in the preferred
stock of a business previously sold, which resulted in a pre-tax gain of
$2,200,000. (See Note 2 of the Notes to Consolidated Financial Statements
included elsewhere herein.)
The provision for income taxes was approximately $9,300,000 in 1995, as
compared to approximately $10,200,000 in 1994. The provision for income taxes
as a percentage of pre-tax earnings was approximately 38.3% in 1995 and 37.2%
in 1994. The provision for income taxes in 1995 has been reduced by
approximately $1,100,000, reflecting the reversal of tax valuation reserves no
longer required, of which $670,000 is as a result of the sale of certain
investments and marketable securities. The provision for income taxes in 1994
has been reduced by approximately $1,600,000, principally reflecting the
reversal of tax valuation reserves as a result of the realization of
certain tax assets. The income tax rates also differ from the United States
federal statutory rate of 35% as a result of state income tax provisions,
nondeductible amortization expense (for tax purposes) and the effect of
foreign income tax on foreign source income. (See Note 4 of the Notes to
Consolidated Financial Statements included elsewhere herein.)
Liquidity and Capital Resources
The Company's primary sources of liquidity in 1996 and 1995 have been funds
provided by subsidiary operations and unrestricted short-term investments and
marketable securities. Unrestricted cash, investments and marketable
securities were approximately $92,093,000 at December 31, 1996 as compared to
$103,313,000 at December 31, 1995.
The Company's investment in marketable securities at December 31, 1996
consisted primarily of investments in United States Treasury Notes and bank
issued money market instruments and at December 31, 1996, approximately
$5,681,000 of the Company's investments and marketable securities were pledged
as collateral for insurance and other requirements and were classified as
restricted in current assets in the Company's accompanying consolidated balance
sheet.
During 1995 and 1996, the Company's Board of Directors authorized a number of
programs to purchase shares of the Company's Common and Special Common Stock,
subject to market conditions and cash availability. The programs included the
purchase of 1,189,809 shares of its common stock, or approximately 10.6% of its
outstanding shares on April 26, 1996 for approximately $20,200,000 from three
of its directors, who also resigned from the Company's Board of Directors, and
the most recent program which was announced on October 28, 1996, to purchase up
to 500,000 shares of the Company's Common and Special Common Stock in open-
market or negotiated transactions subject to market conditions and cash
availability. From November 16, 1995 to February 7, 1997, the Company purchased
approximately 2,757,000 shares of its Common and Special Common Stock for
approximately $42,849,000 and accounted for such share purchases as Treasury
Stock. (See below and Note 6 of the Notes to the Consolidated Financial
Statements included elsewhere herein.)
At February 7, 1997, approximately $683,607 was available for the payment of
cash dividends or stock payments under the terms of the Company's indenture
governing the 9 7/8% Notes.
The Company's working capital decreased from approximately $160,753,000 to
approximately $143,474,000 between December 31, 1995 and December 31, 1996
while its current ratio was 1.7:1 at both dates, principally as a result of
purchases of the Company's common stock described above and the factors
described below. Working capital included approximately $103,313,000 at
December 31, 1995 and approximately $92,093,000 at December 31, 1996 of
unrestricted cash, investments and marketable securities.
Liquidity and Capital Resources (Continued)
Accounts receivable increased approximately $4,159,000, or approximately 3.5%,
between December 31, 1995 and December 31, 1996, while net sales increased
approximately 18.0% in the fourth quarter of 1996 as compared to the fourth
quarter of 1995. The rate of change in accounts receivable in certain periods
may be different than the rate of change in sales in such periods principally
due to the timing of net sales. Significant increases or decreases in net
sales near the end of any period generally result in changes in the amount of
accounts receivable on the date of the balance sheet at the end of such period,
as was the situation on December 31, 1996 as compared to December 31, 1995.
The Company has not experienced any significant changes in credit terms,
collection efforts, credit utilization or delinquency in accounts receivable in
1995 or 1996.
Inventories decreased approximately $12,394,000 or approximately 11.3%, between
December 31, 1995 and December 31, 1996 and reflect, in part, the positive
effect of changes in inventory control systems and other initiatives
implemented during the past several years to reduce inventories in certain of
the Company's businesses.
Accounts payable increased approximately $1,898,000 or approximately 2.6%
between December 31, 1995 and December 31, 1996.
Unrestricted cash and cash equivalents increased approximately $3,831,000 from
December 31, 1995 to December 31, 1996, principally as a result of the
following:
Condensed
Consolidated
Cash Flows
----------
Operating Activities--
Cash flow from operations, net $43,176,000
Increase in accounts receivable, net (3,626,000)
Decrease in inventories 12,196,000
Decrease in prepaids and other current assets 4,620,000
Increase in trade accounts payable 2,090,000
Decrease in accrued expenses and taxes (8,840,000)
Investing Activities--
Purchase of marketable securities (66,901,000)
Proceeds from the sale of marketable securities 82,435,000
Capital expenditures (21,683,000)
Financing Activities--
Increase in borrowings 9,609,000
Payment of borrowings (13,701,000)
Purchase of Nortek Common and Special
Common Stock (34,822,000)
Other, net (722,000)
----------
$ 3,831,000
==========
The Company's debt-to-equity ratio increased from approximately 2.2:1 at
December 31, 1995 to 2.4:1 at December 31, 1996, primarily as a result of the
effect of the purchase of the Company's Common and Special Common Stock (see
Note 6 of the Notes to the Consolidated Financial Statements) partially offset
by a slight net decrease in borrowings, and by net earnings for 1996.
(See the Company's Consolidated Statement of Stockholders' Investment
included elsewhere herein.)
On April 1, 1996, the Company extended and amended its shareholder rights plan
to March 31, 2006. Under the amended plan, each right previously issued under
the plan in effect to date, or subsequently issued under the amended and
restated plan, entitles shareholders to buy 1/100 of a share of a new series of
preferred stock of Nortek at an exercise price of $72 per share, subject to
adjustments for stock dividends, splits and similar events. (See Note 6 of the
Notes to the Consolidated Financial Statements included elsewhere herein.)
The Company believes that its growth will be generated largely by internal
growth in each of its product groups, augmented by strategic acquisitions. The
Company regularly evaluates potential acquisitions which would increase or
expand the market penetration of, or otherwise complement, its current product
lines.
Inflation, Trends and General Considerations
The Company's performance is dependent to a significant extent upon the levels
of new residential construction, residential replacement and remodeling and non
residential construction, all of which are affected by such factors as interest
rates, inflation and unemployment. In recent periods, the Company's product
groups have operated in an environment of increasing levels of construction and
remodeling activity, including new housing starts which increased approximately
20% between 1990 and 1994, declined approximately 8.5% in 1995, and increased
approximately 8.8% in 1996. New residential construction housing starts,
however, remain below the levels experienced in the mid-l980s. The Company's
operations have been affected by past difficult economic conditions in the
northeastern United States, California and Canada. However, the actions taken
to reduce production costs and overhead levels and improve the efficiency and
profitability of the Company's operations have enabled it to significantly
increase operating earnings, as well as to position the Company for growth. In
the near term, the Company expects to operate in an environment of relatively
stable levels of construction and remodeling activity. However, increases in
interest rates could have a negative impact on the level of housing
construction and remodeling activity.
Inflation did not have a material effect on the Company's results of operations
and financial condition until mid-1994, when the Company experienced increases
in certain costs and expenses including raw material costs. In 1995, material
costs as a percentage of net sales increased by approximately 3.0%, as compared
to 1994. In 1996, cost increases subsided and the Company experienced
decreases in certain costs and expenses, including raw materials, as compared
to prices in effect in 1995.
Forward Looking Statements
When used in this discussion, the words "believes," "anticipates," and
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
over which the Company has no control, which could cause actual results to
differ materially from those projected. These risks and uncertainties include
increases in raw material costs (including, among others, steel, copper,
packaging material, plastics, resins and aluminum) and purchased component
costs, the level of domestic and foreign construction and remodeling activity
affecting residential and commercial markets, interest rates, inflation,
consumer spending levels, operating in international economies, the rate of
sales growth, price and product competition, new product introduction, material
shortages and product liability claims. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date thereof or
to reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company, in
this report, as well as the Company's periodic reports on Forms 10-Q and 8-K
filed with the Securities and Exchange Commission.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) included elsewhere herein.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
See Election of Directors in the definitive Proxy Statement for the Company's
1997 Annual Meeting of Stockholders, incorporated herein by reference. See
also Part I, Item 1, Business-General Considerations-Executive Officers of the
Registrant.
Item 11. Executive Compensation
See Executive Compensation in the definitive Proxy Statement for the Company's
1997 Annual Meeting of Stockholders, incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See Security Ownership of Certain Beneficial Owners and Management in the
definitive Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See Election of Directors in the definitive Proxy Statement for the Company's
1997 Annual Meeting of Stockholders, incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The following documents are filed as part of this report:
1. Financial Statements: Page No.
Consolidated Statement of
Operations for the three
years ended December 31,
1996 27
Consolidated Balance Sheet
as of December 31, 1996
and 1995 28
Consolidated Statement of
Cash Flows for the three
years ended December 31,
1996 30
Consolidated Statement of
Stockholders' Investment
for the three years ended
December 31, 1996 31
Notes to Consolidated
Financial Statements 33
Report of Independent
Public Accountants 52
2. Financial Statement Schedules:
Schedule II Valuation
and Qualifying Accounts 53
3. The exhibits are listed in the Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K
The following report on Form 8-K was filed by the Registrant during the
last quarter of the period covered by this report:
October 25, 1996, Item 5, Other Events.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on February 18, 1997.
NORTEK, INC.
By: /s/Richard L. Bready
-----------------------------
Richard L. Bready
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, as of February 18, 1997.
/s/Richard L. Bready /s/J.Peter Lyons
- --------------------------------- -------------------------------
Richard L. Bready, Chairman J. Peter Lyons, Director
of the Board and President
(principal executive officer)
/s/Richard J. Harris /s/William I. Kelly
- ---------------------------------- -------------------------------
Richard J. Harris, Vice President William I. Kelly, Director
and Treasurer (principal financial
officer) and Director
/s/Almon C. Hall /s/Phillip L. Cohen
- --------------------------------- -------------------------------
Almon C. Hall, Vice President Phillip L. Cohen, Director
and Controller (principal
accounting officer)
Nortek, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(In Thousands Except Per Share Amounts)
Net Sales $969,798 $776,210 $737,160
------- ------- -------
Costs and Expenses:
Cost of products sold 709,875 574,929 520,328
Selling, general and administrative
expense 199,871 160,197 166,815
------- ------- -------
909,746 735,126 687,143
------- ------- -------
Operating earnings 60,052 41,084 50,017
Interest expense (30,113) (24,918) (26,162)
Interest income 5,311 6,134 5,295
Net gain on investment and
marketable securities 750 2,000 ---
Loss on business sold --- --- (1,750)
------- ------- -------
Earnings before provision
for income taxes 36,000 24,300 27,400
Provision for income taxes 14,000 9,300 10,200
------- ------- -------
Earnings before extraordinary
gain 22,000 15,000 17,200
Extraordinary gain from debt
retirements --- --- 200
------- ------- -------
Earnings before the cumulative
effect of an accounting change 22,000 15,000 17,400
Cumulative effect of an accounting change --- --- 400
------- ------- -------
Net Earnings $ 22,000 $ 15,000 $ 17,800
======= ======= =======
Net Earnings Per Share:
Earnings before extraordinary gain
Primary $ 2.07 $ 1.19 $ 1.35
Fully diluted $ 2.05 $ 1.19 $ 1.34
Extraordinary gain
Primary --- --- .02
Fully diluted --- --- .02
Cumulative effect of an accounting change
Primary --- --- .03
---- ---- ----
Fully diluted --- --- .03
---- ---- ----
Net Earnings
Primary $ 2.07 $ 1.19 $ 1.40
==== ==== ====
Fully diluted $ 2.05 $ 1.19 $ 1.39
==== ==== ====
Weighted Average Number of Shares:
Primary 10,641 12,569 12,707
====== ====== ======
Fully diluted 10,722 12,620 13,144
====== ====== ======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
------------------
Assets 1996 1995
---- ----
(Amounts in Thousands)
Current Assets:
Unrestricted
Cash and cash equivalents $ 41,042 $ 37,211
Marketable securities available for sale 51,051 66,102
Restricted
Investments and marketable
securities at cost, which approximates
market 5,681 9,411
Accounts receivable, less allowances
of $4,356,000 and $4,546,000 122,176 118,017
Inventories
Raw materials 36,765 42,601
Work in process 12,717 14,319
Finished goods 48,176 53,132
------- -------
97,658 110,052
------- -------
Prepaid expenses and other current assets 14,940 16,927
Prepaid income taxes 20,000 19,100
------- -------
Total current assets 352,548 376,820
------- -------
Property and Equipment, at Cost:
Land 7,046 6,508
Buildings and improvements 72,954 69,125
Machinery and equipment 174,064 157,884
------- -------
254,064 233,517
Less accumulated depreciation 112,645 97,255
------- -------
Total property and equipment, net 141,419 136,262
------- -------
Other Assets:
Goodwill, less accumulated amortization
of $26,948,000 and $23,978,000 91,578 91,347
Deferred debt expense 6,647 7,574
Other 16,924 13,476
------- -------
115,149 112,397
------- -------
$609,116 $625,479
======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
(Continued)
December 31,
------------------
1996 1995
---- ----
(Amounts in Thousands)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term
obligations $ 25,334 $ 30,226
Current maturities of long-term debt 11,230 11,824
Accounts payable 74,945 73,047
Accrued expenses and taxes, net 97,565 100,970
------- -------
Total current liabilities 209,074 216,067
------- -------
Other Liabilities:
Deferred income taxes 22,588 27,780
Other 14,698 9,945
------- -------
37,286 37,725
------- -------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 243,961 240,396
------- -------
Commitments and Contingencies (Note 8)
Stockholders' Investment:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 15,965,585 and
15,883,427 shares issued 15,966 15,883
Special common stock, $1 par value;
authorized 5,000,000 shares; 784,169 and
774,366 shares issued 784 774
Additional paid-in capital 135,028 134,690
Retained earnings 37,766 15,766
Cumulative translation, pension
and other adjustments (3,212) (2,742)
Less --treasury common stock at cost,
6,599,645 and 4,306,706 shares (65,805) (31,351)
--treasury special common stock
at cost, 276,910 and 276,784
shares (1,732) (1,729)
------- -------
Total stockholders' investment 118,795 131,291
------- -------
$609,116 $625,479
======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended
December 31,
------------------------
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Cash Flows from operating activities:
Net earnings $22,000 $15,000 $17,800
------ ------ ------
Adjustments to reconcile net earnings
to cash:
Depreciation and amortization 23,726 18,977 17,960
Net gain on investments and
marketable securities (750) (2,000) ---
Extraordinary gain from debt
retirements --- --- (250)
Loss on business sold --- --- 1,750
Cumulative effect of an accounting change --- --- (400)
Deferred federal income tax (benefit) provision
before extraordinary items (1,800) 1,300 300
Deferred federal income tax provision on
discontinued operations --- --- 2,200
Deferred federal income tax provision
on extraordinary items --- --- 1,350
Changes in certain assets and liabilities,
net of effects from acquisitions and
dispositions:
Accounts receivable, net (3,626) 4,496 (5,501)
Prepaids and other current assets 4,620 (289) (4,361)
Inventories 12,196 5,820 (12,593)
Accounts payable 2,090 (5,614) 6,364
Accrued expenses and taxes (8,840) (4,894) 4,242
Long-term assets, liabilities and other, net (312) 1,051 (2,682)
------ ------ ------
Total adjustments to net earnings 27,304 18,847 8,379
------ ------ ------
Net cash provided by operating activities 49,304 33,847 26,179
------ ------ ------
Cash Flows from investing activities:
Capital expenditures (21,683) (16,091) (19,424)
Net cash paid for businesses acquired --- (27,543) ---
Proceeds from the sale of property and
equipment 1,325 1,831 114
Purchase of investments and marketable
securities (66,901) (104,762) (110,231)
Proceeds from the sale of investments
and marketable securities 82,435 112,173 62,929
Net cash proceeds relating to businesses
sold or discontinued --- 1,129 12,465
Change in restricted investments and
marketable securities --- (331) (2,475)
Other, net (2,214) (1,499) 51
------- ------- -------
Net cash used in investing activities (7,038) (35,093) (56,571)
------- ------- -------
Cash Flows from financing activities:
Sale of Notes, net --- --- 209,195
Purchase of debentures and notes payable --- --- (191,582)
Increase in borrowings 9,609 10,763 ---
Payment of borrowings (13,701) (1,656) (8,962)
Purchase of Nortek Common and Special Common
Stock (34,822) (4,664) ---
Other, net 479 (822) (29)
------- ------- -------
Net cash (used in) provided by financing
activities (38,435) 3,621 8,622
------- ------- -------
Net increase (decrease) in unrestricted
cash and cash equivalents 3,831 2,375 (21,770)
Unrestricted cash and cash equivalents
at the beginning of the year 37,211 34,836 56,606
------- ------- -------
Unrestricted cash and cash equivalents
at the end of the year $ 41,042 $ 37,211 $ 34,836
======= ======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Investment
For the Three Years Ended December 31, 1996
-------------------------------------------------------
Cumulative
Translation,
Addi- Retained Pension
Special tional Earnings and Other
Common Common Paid-in (Accumulat- Adjust- Treasury
Stock Stock Capital ed Deficit) ments Stock
----- ----- ------- ----------- ----- -----
(Amounts in Thousands)
Balance, December 31,
1993 $15,759 $849 $134,627 $(17,034) $(2,143) $(28,051)
47,478 shares of
special common stock
converted into 47,478
shares of common stock 47 (47) --- --- --- ---
7,794 shares of common
stock issued upon
exercise of stock options 8 --- --- --- --- ---
Translation adjustment --- --- --- --- (780) ---
Pension adjustment --- --- --- --- 134 ---
Cumulative effect of an
accounting change --- --- --- --- (400) ---
Unrealized decline in
marketable securities --- --- --- --- (2,979) ---
Net earnings --- --- --- 17,800 --- ---
------ --- ------- ------ ------ -------
Balance, December 31,
1994 $15,814 $802 $134,627 $ 766 $(6,168) $(28,051)
27,731 shares of
special common stock
converted into 27,731
shares of common stock 28 (28) --- --- --- ---
41,450 shares of common
stock issued upon
exercise of stock
options 41 --- 63 --- --- ---
511,671 shares of
treasury stock
acquired --- --- --- --- --- (5,029)
Translation adjustment --- --- --- --- 701 ---
Pension adjustment --- --- --- --- (244) ---
Unrealized appreciation
in marketable
securities --- --- --- --- 2,969 ---
Net earnings --- --- --- 15,000 --- ---
------ --- ------- ------ ------ -------
Balance, December 31,
1995 $15,883 $774 $134,690 $15,766 $(2,742) $(33,080)
27,697 shares of
special common stock
converted into 27,697
shares of common stock 28 (28) --- --- --- ---
54,461 shares of common
stock and 37,500 shares
of special common stock
issued upon exercise of
stock options 55 38 338 --- --- ---
2,293,065 shares of
treasury stock acquired --- --- --- --- --- (34,457)
Translation adjustment --- --- --- --- 138 ---
Pension adjustment --- --- --- --- (127) ---
Unrealized decline in
marketable securities --- --- --- --- (481) ---
Net earnings --- --- --- 22,000 --- ---
------ --- ------- ------ ------ ------
Balance, December 31,
1996 $15,966 $784 $135,028 $37,766 $(3,212) $(67,537)
====== === ======= ====== ====== =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating Products
Group; and the Plumbing Products Group. Through these product groups, the
Company manufactures and sells, primarily in the United States, Canada and
Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, and the do-it-yourself and professional
remodeling and renovation markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Nortek, Inc. and
all of its significant wholly-owned subsidiaries (the "Company" or "Nortek")
after elimination of intercompany accounts and transactions. Certain amounts
in the prior years' financial statements have been reclassified to conform to
the presentation at December 31, 1996.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles involves estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of income and expense during the reporting periods. Operating results
in the future could vary from the amounts derived from such estimates and
assumptions.
Cash, Investments and Marketable Securities
Cash equivalents consist of short-term highly liquid investments with original
maturities of three months or less which are readily convertible into cash.
The Company has classified as restricted (in current assets in the accompanying
consolidated balance sheet) certain investments and marketable securities that
are not fully available for use in its operations. At December 31, 1996,
approximately $5,681,000 of investments and marketable securities has been
pledged as collateral for insurance and other requirements.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents--
The carrying amount approximates fair value because of the short maturity
of those instruments.
Marketable Securities--
The fair value of marketable securities is based on quoted market prices.
At December 31, 1996, the fair value of marketable securities approximated
the amount on the Company's consolidated balance sheet.
Long-Term Debt--
At December 31, 1996, the fair value of long-term indebtedness
approximated the amount, before original issue discount, on the Company's
consolidated balance sheet. (See Note 5.)
Inventories
Inventories in the accompanying consolidated balance sheet are valued at the
lower of cost or market. At December 31, 1996 and 1995, approximately
$61,641,000 and $69,967,000 of total inventories, respectively, were valued on
the last-in, first-out method (LIFO). Under the first-in, first-out method
(FIFO) of accounting, such inventories would have been approximately $8,482,000
and $10,550,000 greater at December 31, 1996 and 1995, respectively. All other
inventories were valued under the FIFO method.
Sales Recognition
The Company recognizes sales upon the shipment of its products net of
applicable provisions for discounts and allowances. The Company also provides
for its estimate of warranty and bad debts at the time of shipment as selling,
general and administrative expense.
Foreign Currency Translation
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency. The
Company translates the assets and liabilities of its foreign subsidiaries at
the exchange rates in effect at year-end. Net sales and expenses are
translated using average exchange rates in effect during the year. Gains and
losses from foreign currency translation are credited or charged to cumulative
translation adjustment included in stockholders' investment in the accompanying
consolidated balance sheet. Transaction gains or losses are recorded in
selling, general and administrative expense and have not been material.
Depreciation and Amortization
Depreciation and amortization of property and equipment are provided on a
straight-line basis over the estimated useful lives, which are generally as
follows:
Buildings and improvements 10-35 years
Machinery and equipment, including leases 3-15 years
Leasehold improvements term of lease
Expenditures for maintenance and repairs are expensed when incurred.
Expenditures for renewals and betterments are capitalized. When assets are
sold, or otherwise disposed of, the cost and accumulated depreciation are
eliminated and the resulting gain or loss is recognized.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Goodwill
The Company has classified as goodwill the cost in excess of fair value of the
net assets (including tax attributes) of companies acquired in purchase
transactions. Goodwill is being amortized on a straight-line method over 40
years. Amortization charged to operations amounted to $2,970,000, $2,519,000
and $2,407,000 for 1996, 1995 and 1994, respectively. At each balance sheet
date, the Company evaluates the realizability of goodwill based on expectations
of non-discounted cash flows and operating income for each subsidiary having a
material goodwill balance. Based on its most recent analysis, the Company
believes that no material impairment of goodwill exists at December 31, 1996.
Recent Accounting Pronouncements
On January 1, 1996, the Company adopted the accounting requirements of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles that are to be disposed, be reported at the lower of
the carrying amount or fair value less cost to sell. The application of SFAS
No. 121 did not have a significant impact on the Company's results of
operations or financial condition.
On January 1, 1996, the Company adopted the accounting requirements of SFAS No.
123, "Stock-Based Compensation." SFAS No. 123 requires that employee stock-
based compensation be either recorded or disclosed at its fair value. The
Company will continue to account for stock-based compensation under Accounting
Principles Board ("APB") No. 25 and will not adopt the new accounting
provisions for stock-based compensation under SFAS No. 123, but will include
the additional required disclosures. (See Note 6.)
Net Earnings Per Share
Net earnings per share amounts have been computed using the weighted average
number of common and common equivalent shares outstanding during each year.
Special Common Stock is treated as the equivalent of Common Stock in
determining earnings per share results.
2. Acquisitions and Businesses Sold
Acquisitions are accounted for as purchases and, accordingly, have been
included in the Company's consolidated results of operations since the
acquisition date. Purchase price allocations are subject to refinement until
all pertinent information regarding the acquisitions is obtained.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
In the fourth quarter of 1995, several of the Company's wholly owned
subsidiaries completed the acquisition of the assets, subject to certain
liabilities, of Rangaire Company ("Rangaire"), all the capital stock of Best
S.p.A. and related entities ("Best") and all the capital stock of Venmar
Ventilation inc. ("Venmar"). The aggregate purchase price for these
acquisitions was approximately $36,500,000, consisting of cash of approximately
$33,400,000 and future payments of approximately $3,100,000. The selling
shareholders of certain of these acquisitions are entitled to additional
purchase price payments of up to approximately $2,000,000, depending on
subsequent operating results of such acquisitions.
On March 31, 1994, the Company sold all the capital stock of one of its
businesses for approximately $18,800,000 in cash and $6,000,000 in preferred
stock of the purchaser. In the third quarter of 1995, the Company sold its
investment in the preferred stock, which resulted in a pre-tax gain of
approximately $2,200,000 ($.17 per share, net of tax), and is included in net
gain on investment and marketable securities in the Company's accompanying
consolidated statement of operations.
In January 1995, the Company paid approximately $1,750,000 ($.14 per share, net
of tax) as a final purchase price adjustment related to one of its businesses
sold and recorded a charge to earnings in the fourth quarter of 1994.
The approximate unaudited pro forma net sales, operating earnings, earnings
before extraordinary gain, and fully diluted earnings per share of the Company
for the year ended December 31, 1995, as adjusted for the pro forma effect of
acquisitions discussed above, assuming that these transactions occurred on
January 1, 1995 was approximately $886,210,000, $47,355,000, $15,100,000, and
$1.20, respectively.
In computing the pro forma earnings before extraordinary gain, earnings have
been reduced by net interest income on the aggregate cash portion of the
purchase price of such acquisitions at the historical rates earned by the
Company and by interest expense on indebtedness incurred in connection with the
acquisitions, net of the tax effect. Earnings before extraordinary gain have
also been reduced by amortization of goodwill and reflect net adjustments to
depreciation expense, as a result of an increase to estimated fair market value
of property and equipment.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The pro forma information presented does not purport to be indicative of the
results which would have been reported if these transactions had occurred on
January 1, 1995, or which may be reported in the future.
3. Cash Flows
Interest paid was $30,581,000, $23,228,000 and $22,119,000 in 1996, 1995 and
1994, respectively.
The following table summarizes the activity of businesses acquired in purchase
transactions included in the accompanying consolidated statement of cash flows
for the year ended December 31, 1995:
1995
----
(Amounts in Thousands)
Fair value of assets acquired $129,652
Liabilities assumed or created (96,224)
-------
Cash paid for acquisitions 33,428
Less cash acquired (5,885)
-------
Net cash paid for acquisitions $ 27,543
=======
The following table summarizes the activity of businesses sold or discontinued
included in the accompanying consolidated statement of cash flows:
Year Ended December 31,
-----------------------
1995 1994
---- ----
(Amounts in Thousands)
Fair value of assets sold --- $39,439
Liabilities assumed by the purchaser --- (16,143)
Notes receivable and other non-cash proceeds
received as part of the proceeds --- (6,000)
Cash proceeds from the sale of preferred
stock 2,874 ---
Cash payments relating to businesses
sold or discontinued, net (1,745) (4,831)
------ ------
Net cash proceeds relating to
businesses sold or discontinued $ 1,129 $12,465
====== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Significant non-cash financing and investing activities excluded from the
accompanying consolidated statement of cash flows include capitalized lease
additions of approximately $500,000 in 1996 and a decline of approximately
$481,000, an increase of approximately $2,969,000 and a decline of
approximately $2,979,000 in the fair market value of marketable securities
available for sale for 1996, 1995 and 1994, respectively.
4. Income Taxes
The following is a summary of the components of earnings before provision for
income taxes and extraordinary gain:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Domestic $32,500 $21,600 $23,100
Foreign 3,500 2,700 4,300
------ ------ ------
$36,000 $24,300 $27,400
====== ====== ======
The following is a summary of the provision (benefit) for income taxes before
extraordinary gain included in the accompanying consolidated statement of
operations:
Year Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Federal income taxes--
Current $12,950 $5,700 $ 7,125
Deferred (1,800) 1,300 300
------ ----- ------
11,150 7,000 7,425
Foreign 1,300 1,300 1,500
State 1,550 1,000 1,275
------ ----- ------
$14,000 $9,300 $10,200
====== ===== ======
Income tax payments, net of refunds, were approximately $18,611,000, $3,739,000
and $10,895,000 in 1996, 1995 and 1994, respectively.
The following reconciles the federal statutory income tax rate to the effective
tax rate for earnings before extraordinary gain of approximately 38.9%, 38.3%
and 37.2% in 1996, 1995 and 1994, respectively.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Income tax provision before
extraordinary gain at the
Federal statutory rate $12,600 $8,505 $ 9,590
Net change from statutory
rate:
Change in valuation reserve, net (481) (1,100) (1,625)
State taxes, net of federal tax effect 1,008 650 829
Amortization not deductible for
tax purposes 1,040 868 737
Business sold --- --- 613
Product development tax credit from
foreign operations (478) --- ---
Tax effect on foreign income 56 79 164
Other, net 255 298 (108)
------ ----- ------
$14,000 $9,300 $10,200
====== ===== ======
The tax effect of temporary differences which gave rise to significant portions
of deferred income tax assets and liabilities as of December 31, 1996 and
December 31, 1995 are as follows:
December 31,
---------------
1996 1995
---- ----
(Amounts in Thousands)
Prepaid (Deferred) Income Tax Assets
Arising From:
Accounts receivable $ 1,246 $ 1,425
Inventory (610) (577)
Insurance reserves 2,972 6,036
Other reserves, liabilities and
assets, net 16,392 12,216
------ ------
$20,000 $19,100
====== ======
Deferred (Prepaid) Income Tax Liabilities
Arising From:
Property and equipment, net $15,400 $15,233
Prepaid pension assets (593) 1,323
Insurance reserves (10) (273)
Other reserves, liabilities and
assets, net 5,787 8,797
Capital loss carryforward (6,462) (7,260)
Other tax assets (1,772) (1,658)
Valuation allowances 10,238 11,618
------ ------
$22,588 $27,780
====== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
At December 31, 1996, the Company has U.S. Federal capital loss carryforwards
of approximately $18,500,000, of which approximately $16,600,000 expires in the
year 1997. The Company has provided a valuation allowance equal to the tax
effect of capital loss carryforwards and certain other tax assets, since
realization of these tax assets cannot be reasonably assured.
5. Notes, Mortgage Notes and Obligations Payable
Short-term obligations at December 31, 1996 and 1995 consist of the following:
December 31,
------------
1996 1995
---- ----
(Amounts in Thousands)
Secured revolving lines of credit of
a Canadian subsidiary $ 2,472 $ 4,173
Secured lines of credit and bank advances
of the Company's European subsidiaries 22,118 21,972
Other secured revolving lines of credit
of one of the Company's U. S. subsidiaries 742 3,830
Other obligations 2 251
------ ------
$25,334 $30,226
====== ======
These short-term obligations principally relate to subsidiaries acquired in
1995 and at December 31, 1996 are secured by approximately $56,900,000 of
accounts receivable and inventory. These borrowings have an average weighted
interest rate of approximately 10.925%.
Notes, mortgage notes and obligations payable in the accompanying consolidated
balance sheet at December 31, 1996 and 1995 consist of the following:
December 31,
------------
1996 1995
---- ----
(Amounts in Thousands)
Mortgage notes payable, net of $316,000
of unamortized discount in 1996 $ 20,878 $ 17,055
Other, net of $548,000 and $750,000 of
unamortized discount 17,209 18,185
9 7/8% Senior Subordinated Notes
due 2004 ("9 7/8% Notes"), net of
unamortized original issue discount
of $1,396,000 and $1,520,000 217,104 216,980
------- -------
255,191 252,220
Less amounts included in current
liabilities 11,230 11,824
------- -------
$243,961 $240,396
======= =======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The indenture governing the 9 7/8% Notes restricts, among other things, the
payment of cash dividends, repurchase of the Company's capital stock and the
making of certain other restricted payments, the incurrence of additional
indebtedness, the making of certain investments, mergers, consolidations and
sale of assets (all as defined in the indenture). Upon certain asset sales (as
defined in the indenture), the Company will be required to offer to purchase,
at 100% principal amount plus accrued interest to the date of purchase, 9 7/8%
Notes in a principal amount equal to any net cash proceeds (as defined in the
indenture) that are not invested in properties and assets used primarily in the
same or related business to those owned and operated by the Company at the
issue date of the 9 7/8% Notes or at the date of such asset sale and such net
cash proceeds were not applied to permanently reduce Senior Indebtedness (as
defined in the indenture). The 9 7/8% Notes are redeemable at the option of
the Company, in whole or in part, at any time and from time to time, at
104.214% on March 1, 1999, declining to 100% on March 1, 2002 and thereafter.
At February 7, 1997, approximately $683,607 was available for the payment of
cash dividends or stock payments under the terms of the Company's Indenture
governing the 9 7/8% Notes. (See Note 6.)
Mortgage notes payable of approximately $20,879,000 outstanding at December 31,
1996 include various mortgage notes and other related indebtedness payable in
installments through 2006 and bearing interest at rates ranging from 6.25% to
11.5% and is collateralized by property and equipment with an aggregate net
book value of approximately $42,900,000 at December 31, 1996.
Other obligations of approximately $17,209,000 outstanding at December 31, 1996
include borrowings relating to equipment purchases and other borrowings bearing
interest at rates primarily ranging between 5.6% to 14% and maturing at various
dates through 2002. Approximately $12,599,000 of such indebtedness is
collateralized by property and equipment with an aggregate net book value of
approximately $29,072,000 at December 31, 1996.
The following is a summary of maturities of all of the Company's debt
obligations, excluding unamortized debt discount, due after December 31, 1997:
(Amounts in Thousands)
1998 $ 7,277
1999 5,056
2000 4,789
2001 3,245
Thereafter 225,854
-------
$246,221
=======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Amortization of discount and deferred costs, net of amortization of discount on
marketable securities in 1996, was approximately $1,200,000, $1,100,000 and
$1,400,000 in 1996, 1995 and 1994, respectively.
6. Common Stock, Special Common Stock and Stock Options
Each share of Special Common Stock has 10 votes on all matters submitted to a
stockholder vote, except that the holders of Common Stock, voting separately as
a class, have the right to elect 25% of the directors to be elected at a
meeting, with the remaining 75% being elected by the combined vote of both
classes. Shares of Special Common Stock are generally non-transferable, but
are freely convertible on a share-for-share basis into shares of Common Stock.
On April 1, 1996, the Company extended and amended its shareholder rights plan
to March 31, 2006. Under the amended plan, each right previously issued under
the plan in effect to date, or subsequently issued under the amended and
restated plan, entitles shareholders to buy 1/100 of a share of a new series of
preference stock of Nortek at an exercise price of $72 per share, subject to
adjustments for stock dividends, splits and similar events.
The rights, that are not currently exercisable, are attached to each share of
Common Stock and may be redeemed by the Directors at $.01 per share at any
time. After a shareholder acquires beneficial ownership of 17% or more of the
Company's Common Stock and Special Common Stock, the rights will trade
separately and become exercisable entitling a rights holder to acquire
additional shares of the Company's Common Stock having a market value equal to
twice the amount of the exercise price of the right. In addition, after a
person or group ("Acquiring Company") commences a tender offer or announces an
intention to acquire 30% or more of the Company's Common Stock and Special
Common Stock, the rights will trade separately and, under certain
circumstances, will permit each rights holder to acquire common stock of the
Acquiring Company, having a market value equal to twice the amount of the
exercise price of the right.
At December 31, 1996, a total of 1,428,869 shares of Common Stock was reserved
as follows:
Stock option plans 644,700
Conversion of Special Common Stock 784,169
---------
1,428,869
=========
At December 31, 1996, 281,000 shares of Special Common Stock were reserved for
stock option plans.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The Company has several stock option plans which provide for the granting of
options to certain officers, employees and non-employee directors of the
Company. Options granted under the plans vest over periods ranging up to five
years and expire ten years from the date of grant. At December 31, 1996,
15,900 additional options are available for grant under these plans. Options
for 27,500 and 200,100 shares of Common and Special Common Stock became
exercisable during 1996 and 1995, respectively.
The following summarizes the Common and Special Common Stock option
transactions for the three years ended December 31, 1996:
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
--------- --------- -----
Options outstanding at
December 31, 1993 503,900 $2.25-$15.69 $ 6.89
Exercised (9,800) 2.875 2.88
------- ----------- -----
Options outstanding at
December 31, 1994 494,100 $2.25-$15.69 $ 6.97
Exercised (42,600) 2.25-2.875 2.81
------- ----------- -----
Options outstanding at
December 31, 1995 451,500 $2.25-$15.69 $ 7.36
Granted 275,000 14.75 14.75
Exercised (95,200) 2.25-7.9375 5.07
Canceled (2,500) 8.75 8.75
------- ------------ -----
Options outstanding at
December 31, 1996 628,800 $2.875-$15.69 $10.93
======= ============ =====
51,800 of the 628,800 options outstanding at December 31, 1996 have an exercise
price of $2.875, with a weighted average contractual life of 2.8 years. All of
these options are exercisable. 296,000 options have exercise prices between
$6.125 and $9.38 with a weighted average exercise price of $8.69 and a weighted
average remaining contractual life of 6.5 years. All of these options are
exercisable. The remaining 281,000 options, 6,000 of which are exercisable,
have exercise prices between $14.75 and $15.69, with a weighted average
exercise price of $14.77 and a remaining contractual life of 9.8 years.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The Company accounts for stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized since options are granted with
exercise prices equal to the fair market value of the Common Stock at the date
of grant. Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's unaudited pro forma net earnings and fully diluted
earnings per share for the year ended December 31, 1996 would have been
approximately $21,634,000 and $2.02, respectively. The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following assumptions used for grants in 1996:
risk-free interest rate of 7%; expected life of 5 years; expected volatility of
33%; dividend yield of 0%.
During 1995 and 1996, the Company's Board of Directors authorized a number of
programs to purchase shares of the Company's Common and Special Common Stock,
subject to market conditions and cash availability. The programs included the
purchase of 1,189,809 shares of its common stock, or approximately 10.6% of its
outstanding shares on April 26, 1996 for approximately $20,200,000 from three
of its directors who also resigned from the Company's Board of Directors, and
the most recent program which was announced on October 28, 1996, to purchase up
to 500,000 shares of the Company's Common and Special Common Stock in open-
market or negotiated transactions subject to market conditions and cash
availability. From November 16, 1995 to December 31, 1996, the Company
purchased 2,476,719 shares of its Common and Special Common Stock for
approximately $36,319,000 and accounted for such share purchases as Treasury
Stock. Had these shares been purchased as of January 1, 1995, unaudited pro
forma net earnings and fully diluted net earnings per share would have been:
Year Year
Ended Ended
Dec. 31, Dec. 31,
1996 1995
---- ----
(Amounts in Thousands
except per share amounts)
Net Earnings $21,600 $13,800
====== ======
Fully diluted net
earnings per
share $ 2.14 $ 1.37
====== ======
As of February 7, 1997, the Company purchased during the first quarter,
approximately 280,700 shares of its Common and Special Common Stock for
approximately $6,530,000 in cash, in negotiated and open market transactions.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7. Pension, Retirement and Profit Sharing Plans
The Company and its subsidiaries have various pension, retirement and profit
sharing plans requiring contributions to qualified trusts and union
administered funds. Pension and profit sharing expense charged to operations
aggregated approximately $4,420,000 in 1996, $1,377,000 in 1995 and $2,883,000
in 1994. The Company's policy is to fund currently the actuarially determined
annual contribution. In the fourth quarter of 1995, benefits related to the
Company's existing defined benefit plans were frozen. On January 1, 1996, the
Company adopted a supplemental retirement plan for certain officers. The
actuarial present value of the unfunded accumulated benefit obligation and the
pension costs of this plan have been included in the tables below.
The Company's net expense for its defined benefit plans for 1996, 1995 and 1994
consists of the following components:
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Service costs $ 453 $1,273 $1,647
Interest cost 2,543 2,364 2,261
Actual net income on plan assets (4,345) (3,204) (2,155)
Net amortization and deferred items 2,341 790 10
Net gain from freezing plan benefits --- (581) ---
----- ----- -----
Total expense $ 992 $ 642 $1,763
===== ===== =====
The following sets forth the funded status of the Company's defined benefit
plans and amounts recognized in the Company's consolidated balance sheet at
December 31, 1996 and 1995:
Plan Assets
Exceeding
Benefit Obligations
-------------------
1996 1995
---- ----
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits and
accumulated benefit
obligation $23,945 $22,259
------ ------
Plan assets at fair value at September 30 28,040 25,673
Plan assets in excess of the accumulated
benefit obligation 4,095 3,414
Unrecognized net gain (452) ---
------ ------
$ 3,643 $ 3,414
====== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Benefit Obligations
Exceeding Plan Assets
---------------------
1996 1995
---- ----
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits $ 9,707 $5,069
Non-vested benefits 520 ---
------ -----
Accumulated benefit obligation 10,227 5,069
Effect of projected future compensation levels 2,439 ---
------ -----
Projected benefit obligation 12,666 5,069
------ -----
Plan assets at fair value at September 30 4,813 4,407
Projected obligation in excess of plan assets (7,853) (662)
Unrecognized net loss 1,043 916
Unrecognized prior service costs 6,335 ---
Additional minimum liability (4,939) (916)
------ -----
$(5,414) $ (662)
====== =====
Plan assets include commingled funds, marketable securities, insurance
contracts and cash and short-term investments. The weighted average discount
rate and rate of increase in future compensation levels used in determining the
actuarial present value of benefit obligations were 7 1/2 percent and 5
percent, respectively, in 1996 and 1995 and 8 percent and 5 1/2 percent,
respectively, in 1994. The expected long-term rate of return on assets was 8
1/2 percent in 1996, 1995 and 1994.
Recognition of a minimum pension liability and an intangible asset for certain
plans resulted in a reduction in the Company's stockholders' investment of
approximately $1,043,000, $916,000 and $672,000 in 1996, 1995 and 1994,
respectively.
8. Commitments and Contingencies
The Company provides accruals for all direct and indirect costs associated with
the estimated resolution of contingencies at the earliest date at which the
incurrence of a liability is deemed probable and the amount of such liability
can be reasonably estimated.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
At December 31, 1996, the Company and its subsidiaries are obligated under
lease agreements for the rental of certain real estate and machinery and
equipment used in its operations. Minimum annual rental expense aggregates
approximately $26,761,000 at December 31, 1996. The obligations are payable as
follows:
1997 $ 4,916,000
1998 4,173,000
1999 3,104,000
2000 1,953,000
2001 1,319,000
Thereafter 11,296,000
Certain of these lease agreements provide for increased payments based on
changes in the consumer price index. Rental expense charged to operations in
the accompanying consolidated statement of operations was approximately
$6,725,000, $6,900,000, and $7,000,000, for the years ended December 31, 1996,
1995 and 1994, respectively. Under certain of these lease agreements, the
Company and its subsidiaries are also obligated to pay insurance and taxes.
The Company is subject to other contingencies, including legal proceedings and
claims arising out of its businesses that cover a wide range of matters,
including, among others, environmental matters, contract and employment claims,
product liability, warranty and modification, adjustment or replacement of
component parts of units sold, which may include product recalls. The Company
has used various substances in its products and manufacturing operations which
have been or may be deemed to be hazardous or dangerous, and the extent of its
potential liability, if any, under environmental, product liability and
workers' compensation statutes, rules, regulations and case law is unclear.
Further, due to the lack of adequate information and the potential impact of
present regulations and any future regulations, there are certain circumstances
in which no range of potential exposure may be reasonably estimated.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company
believes that the aggregate amount of such liabilities, if any, in excess of
amounts provided, will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
9. Operating and Geographic Segment Information and Concentration of Credit
Risk
The Company operates in one industry segment, Residential and Commercial
Building Products. No single customer accounts for 10% or more of consolidated
net sales. Prior to 1995, more than 90% of net sales and identifiable assets
were related to the Company's domestic operations. As a result of acquisitions
in 1995, the following information by geographic area is presented for 1996 and
1995:
For the year ended December 31, 1996:
Net Pre-Tax Identifiable
Sales Earnings Assets
----- -------- ------------
(Amounts in Thousands)
Geographic areas:
Domestic operations $834,789 $65,538 $334,927
European operations 82,363 3,520 73,285
Other foreign operations 67,503 4,886 64,609
Eliminations (14,857) --- (5,663)
------- ------ -------
969,798 73,944 467,158
Unallocated --- (13,892) 141,958
Interest expense --- (30,113) ---
Interest income --- 5,311 ---
Net gain on investment and
marketable securities --- 750 ---
------- ------ -------
Consolidated Totals $969,798 $36,000 $609,116
======= ====== =======
For the year ended December 31, 1995:
Net Pre-Tax Identifiable
Sales Earnings Assets
----- -------- ------------
(Amounts in Thousands)
Geographic areas:
Domestic operations $733,264 $45,742 $341,555
European operations 13,298 769 71,180
Other foreign operations 42,432 2,189 68,056
Eliminations (12,784) --- (8,258)
------- ------ -------
776,210 48,700 472,533
Unallocated --- (7,616) 152,946
Interest expense --- (24,918) ---
Interest income --- 6,134 ---
Net gain on investment and
marketable securities --- 2,000 ---
------- ------ -------
Consolidated Totals $776,210 $24,300 $625,479
======= ====== =======
Unallocated assets consist primarily of cash, investments and marketable
securities and U. S. Federal prepaid income taxes.
The Company operates internationally and is exposed to market risks from
changes in foreign exchange rates. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and trade receivables. The Company places its
temporary cash investments with high credit quality financial institutions and
limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across many different geographical regions. At December 31,
1996, the Company had no significant concentrations of credit risk.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
10. Net Gain or Loss on Marketable Securities
On January 1, 1994, the Company adopted the accounting requirements of SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities," and
recorded as income the accumulated unrealized marketable security reserve
recorded at December 31, 1993 of approximately $400,000 ($.03 per share) as the
cumulative effect of an accounting change. Under the new accounting method,
the Company records unrealized gains or losses on such investment securities as
adjustments to stockholders' investment. Previously, such gains or losses were
recorded in the Company's consolidated statement of operations.
At December 31, 1996 and 1995, the reduction in the Company's stockholders'
investment under the new accounting method for gross unrealized losses was
approximately $891,000 and $410,000, respectively. At December 31, 1996, there
were no gross unrealized gains on the Company's marketable securities.
The Company's marketable securities at December 31, 1996 consist primarily of
U. S. Government Treasury Notes and bank issued money market instruments due as
follows:
Fair
Principal Amortized Market
Amount Cost Value
------ ---- -----
(Amounts in Thousands)
U. S. Government Notes:
Due in 1-5 years $11,000 $11,207 $10,806
Due in 5-10 years 4,000 4,123 3,880
------ ------ ------
15,000 15,330 14,686
Bank issued Money Market Instruments:
Due within 1 year 35,900 36,612 36,365
------ ------ ------
$50,900 $51,942 $51,051
====== ====== ======
11. Selling, General and Administrative Expense
In the second quarter of 1994, the Company recorded net pre-tax income of
approximately $3,200,000 ($.14 per share, net of tax) resulting from the
settlement of certain insurance claims and disputes.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
12. Accrued Expenses and Taxes, Net
Accrued expenses and taxes, net, consist of the following at December 31, 1996
and 1995:
December 31,
-------------
1996 1995
---- ----
(Amounts in Thousands)
Insurance $12,084 $ 22,496
Payroll, management incentive and
accrued employee benefits 25,939 17,463
Interest 7,749 8,077
Accrued product warranty expense 8,134 6,850
Other, net 43,659 46,084
------ -------
$97,565 $100,970
====== =======
13. Summarized Quarterly Financial Data (Unaudited)
The following summarizes unaudited quarterly financial data for the years ended
December 31, 1996 and December 31, 1995:
For the Quarters Ended
----------------------
March 30 June 29 Sept. 28 Dec. 31
-------- ------- -------- -------
(In Thousands Except Per Share Amounts)
1996
Net sales $220,985 $260,235 $248,227 $240,351
Gross profit 55,398 68,612 66,419 69,494
Net earnings 2,400 5,800 6,500 7,300
Net earnings per share:
Primary .20 .55 .64 .72
Fully diluted .20 .55 .64 .72
For the Quarters Ended
----------------------
April 1 July 1 Sept. 30 Dec. 31
------- ------ -------- -------
(In Thousands Except Per Share Amounts)
1995
Net sales $184,809 $194,206 $193,567 $203,628
Gross profit 49,369 49,505 49,676 52,731
Net earnings 2,500 3,200 5,200 4,100
Net earnings per share:
Primary .20 .25 .41 .33
Fully diluted .20 .25 .41 .33
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
See Notes 2 and 11 regarding certain other quarterly transactions included in
the operating results in the above table.
Increased net sales in 1996 as compared to 1995 reflect the effect of
businesses acquired in the fourth quarter of 1995. Operating results in the
third quarter of 1996 were adversely affected by an extended shutdown period
and other factors by the Company's European subsidiaries. Net sales and gross
profit margins increased in the fourth quarter of 1996 from the fourth quarter
of 1995. Overall, these increases are due in part to the effect of continued
strong shipments (on a seasonal basis) in several of the Company's businesses,
especially ventilation and HVAC products and the positive effect of the
relative mix of products sold and changes in productivity levels. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 2).
Report of Independent Public Accountants
To Nortek, Inc.:
We have audited the accompanying consolidated balance sheets of Nortek, Inc. (a
Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this Form 10-
K as of December 31, 1996 and 1995, and the related statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nortek, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14(a)(2) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 12, 1997
SCHEDULE II
NORTEK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED
AT TO COSTS CHARGED DEDUCTIONS BALANCE
BEGINNING ACQUI- AND TO OTHER FROM AT END
CLASSIFICATION OF YEAR SITIONS EXPENSES ACCOUNTS RESERVES OF YEAR
- -------------- ------- ------- -------- -------- -------- -------
(Amounts in Thousands)
For the year ended
December 31, 1994:
Allowances for doubtful
accounts and sales
allowances $4,198 $ --- $ 762 $ 147(b) $(1,077)(a) $4,030
===== ===== ===== ===== ====== =====
For the year ended
December 31, 1995:
Allowances for doubtful
accounts and sales
allowances $4,030 $ 719 $1,069 $ 389(b) $(1,661)(a) $4,546
===== ===== ===== ===== ====== =====
For the year ended
December 31, 1996:
Allowances for doubtful
accounts and sales
allowances $4,546 $ --- $1,701 $ 119 $(2,010) $4,356
===== ===== ===== ===== ====== =====
(a) Amounts written off, net of recoveries.
(b) Other
EXHIBIT INDEX
-------------
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Exhibits marked with a double asterisk identify each
management contract or compensatory plan or arrangement.
3.1 Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 2
to Form 8-K filed April 23, 1987, File No. 1-6112).
3.2 Amendment to Restated Certificate of Incorporation of Nortek,
Inc. effective May 10, 1989 (Exhibit 3.2 to Form 10-K filed March 30,
1990, File No. 1-6112).
3.3 By-laws of Nortek, Inc. (as amended through September 19, 1996)
(Exhibit 3.3 to Form 10-Q filed November 5, 1996, File No. 1-6112).
4.1 Second Amended and Restated Rights Agreement dated as of April
1, 1996 between the Company and State Street Bank and Trust Company,
as Rights Agent (Exhibit 1 to Form 8-K filed April 2, 1996, File No.
1-6112).
4.2 Indenture dated as of February 14, 1994 between the Company and
State Street Bank and Trust Company, as Trustee, relating to the 9
7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K
filed March 25, 1994, File No. 1-6112).
**10.1 Employment Agreement between Richard L. Bready and the
Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed
March 31, 1986, File No. 1-6112).
**10.2 Amendment dated as of March 3, 1988 to Employment Agreement
between Richard L. Bready and the Company dated as of January 1, 1984
(Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112).
**10.3 Second Amendment dated as of November 1, 1990 to Employment
Agreement between Richard L. Bready and the Company dated as of
January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File
No. 1-6112).
**10.4 Deferred Compensation Agreement dated March 7, 1983 between
Richard L. Bready and the Company (Exhibit 10.4 to Registration
Statement No. 33-69778 filed February 9, 1994).
**10.5 Deferred Compensation Agreement dated March 7, 1983 between
Almon C. Hall and the Company (Exhibit 10.5 to Registration Statement
No. 33-69778 filed February 9, 1994).
**10.6 Deferred Compensation Agreement dated March 7, 1983 between
Richard J. Harris and the Company (Exhibit 10.6 to Registration
Statement No. 33-69778 filed February 9, 1994).
**10.7 1984 Stock Option Plan, as amended through May 27, 1987
(Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15,
1988).
**10.8 Change in Control Severance Benefit Plan for Key Employees
adopted February 10, 1986, and form of agreement with employees
(Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112).
**10.9 1987 Stock Option Plan (Exhibit 28.3 to Registration
Statement No. 33-22527 filed June 15, 1988).
**10.10 Form of Indemnification Agreement between the Company and
its directors and certain officers (Appendix C to Proxy Statement
dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File
No. 1-6112).
*11.1 Calculation of Shares Used in Determining Earnings Per
Share.
*21.1 List of subsidiaries.
*23.1 Consent of Independent Public Accountants
*27.1 Financial Data Schedule.
EXHIBIT 11.1
NORTEK, INC. AND SUBSIDIARIES
CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE
1996 1995 1994
---- ---- ----
Calculation of the number of shares to
be used in computing earnings per share:
Weighted average common and special
common shares issued during the
period 16,666,825 16,625,166 16,609,828
Less average common and special common
shares held in the Treasury (6,181,480) (4,180,560) (4,066,611)
---------- ---------- ----------
Weighted average number of common and
special common shares outstanding
during the period 10,485,345 12,444,606 12,543,217
Dilutive effect of stock options
considered common stock equivalents 155,513 124,686 163,894
---------- ---------- ----------
Weighted average number of common and
common equivalent shares outstanding
during the period 10,640,858 12,569,292 12,707,111
========== ========== ==========
Calculation of the number of shares to
be used in computing fully diluted
earnings per share:
Weighted average number of common and
special common shares outstanding
during the period 10,485,345 12,444,606 12,543,217
Dilutive effect of stock options
considered common stock equivalents
computed under the treasury stock
method using the greater of the
price at the end of the period or
the average price during the
period 236,813 175,153 206,305
Dilutive effect of assuming conversion
of the Company's 7-1/2% convertible
debentures --- --- 394,792
---------- ---------- ----------
10,722,158 12,619,759 13,144,314
========== ========== ==========
Exhibit 21.1
LIST OF SUBSIDIARIES
--------------------
Set forth below is a list of all subsidiaries of the Company as of
December 31, 1996 the assets and operations of which are included in the
Consolidated Financial Statements of Nortek, Inc., except subsidiaries that,
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary:
STATE OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Broan Limited Ontario
Venmar Ventilation inc. Quebec
Conservation Energy Systems, Inc. Quebec
Broan Mfg. Co., Inc. Wisconsin
Aubrey Manufacturing, Inc. Delaware
Monarch Metal Products Corporation Illinois
Jensen Industries, Inc. Delaware
Linear Corporation California
Linear H.K. Manufacturing Limited Hong Kong
We Monitor America Incorporated Colorado
Moore-O-Matic, Inc. Wisconsin
M & S Systems, Inc. Delaware
Nordyne Inc. Delaware
Commercial Environmental Systems
Group, Inc. Delaware
Mammoth, Inc. Delaware
Governair Corporation Oklahoma
Temtrol, Inc. Oklahoma
Nortek (UK) Limited United Kingdom
Best S.p.A. Italy
Best Deutschland GmbH Germany
Elektromec S.p.A. Italy
Rangaire, Inc. Delaware
Universal-Rundle Corporation Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nortek, Inc.:
As independent public accountants, we hereby consent to the
incorporation of our report dated February 12, 1997, included in this Form 10-
K, into the Company's previously filed Registration Statements on Form S-8
(File Nos. 33-22527 and 33-47897).
/s/Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 41,042
<SECURITIES> 56,732
<RECEIVABLES> 126,532
<ALLOWANCES> 4,356
<INVENTORY> 97,658
<CURRENT-ASSETS> 352,548
<PP&E> 254,064
<DEPRECIATION> 112,645
<TOTAL-ASSETS> 609,116
<CURRENT-LIABILITIES> 209,074
<BONDS> 243,961
0
0
<COMMON> 16,750
<OTHER-SE> 102,045
<TOTAL-LIABILITY-AND-EQUITY> 609,116
<SALES> 969,798
<TOTAL-REVENUES> 969,798
<CGS> 709,875
<TOTAL-COSTS> 709,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,113
<INCOME-PRETAX> 36,000
<INCOME-TAX> 14,000
<INCOME-CONTINUING> 22,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 22,000
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