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
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-6112
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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 27, 1998 was $265,424,181. See Item 12.
The number of shares of Common Stock outstanding as of February 27, 1998 was
8,975,009. The number of shares of Special Common Stock outstanding as of
February 27, 1998 was 580,512.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for use at its 1998 Annual Meeting
of Shareholders are incorporated by reference into Part III.
<PAGE> -1-
PART I
ITEM 1. Business
The Company is a diversified manufacturer of residential and commercial
building products, operating within four principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating ("HVAC")
Products Group; the Windows, Doors and Siding Group and the Specialty Products
and Distribution 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.)
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.
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, incorporated herein by reference.
Information on foreign and domestic operations is set forth in Note 10, Notes
to Consolidated Financial Statements, Item 8 of Part II of this report,
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), shower doors and bath cabinets. The Group is the
largest supplier in North America 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 original equipment manufacturers (OEMs). 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 14.8% of
the Company's consolidated net sales in 1997.
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
<PAGE> -2-
distribution system of the Group's businesses. Products sold under these brand
names include the Broan Rangemaster and Finesse(TM) rangehood, Solitaire and
Solitaire Ultra Silent fans and fan lights, the Best by Broan(R) European
style luxury rangehoods, the Venmar(R), Flair and vanEE(R) Super Compact line
of indoor air quality systems and the Broan 12" wide 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 net sales. In 1997, approximately 20.2% 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
advanced manufacturing processes, provides the Group with a competitive
advantage.
The Group's primary 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. With respect to range hoods, bath fans, combination units and radio
intercoms, the Company believes that the Group's primary competitor in North
America is NuTone, a subsidiary of Williams plc. The market for bath cabinets
is highly fragmented with no single dominant supplier. Although the Group
believes it competes favorably among suppliers of the Group's products, certain
of these suppliers have greater financial and marketing resources than the
Group.
The Group has seventeen manufacturing plants and employed 2,791 full-time
people as of December 31, 1997, 306 of whom are covered by collective
bargaining agreements which expire in 1999, 2000 and 2001. 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
<PAGE> -3-
Governair(R), Mammoth(R), Temtrol(TM), Aston and Venmar(R) 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), Miller(R) and POWERmiser(R) brand names, and
has recently acquired the use of Frigidaire(R), Tappan(R), and Philco(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.
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, heat pumps and heat recovery equipment. 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 about half of the Group's commercial sales in
1997 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 110 persons as of December 31, 1997. The independent representatives
<PAGE> -4-
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
three largest competitors in the commercial HVAC market are York International
Corporation (which sells under the "Pace" trade name) and it's Miller-Picking
division, McQuay International (a subsidiary of OYL 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 and light
commercial products for site-built homes and light commercial structures.
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 replacements 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. 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 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 the furnace segment of 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
<PAGE> -5-
independently-owned distributors who sell to HVAC contractors. New products for
commercial application through 10 tons have also been recently introduced.
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. To provide greater consumer acceptance
and pull through for its products, the Company has recently licensed from White
Consolidated Industries, Inc. the use of the Frigidaire(R), Tappan(R), and
Philco(R) name brands.
The Company estimates that more than half of the Group's sales of
residential HVAC products in 1997 were attributable to the replacement market,
which tends to be less cyclical than the new construction market.
The Group has nine manufacturing plants and employed 2,288 full-time
people as of December 31, 1997, 212 of whom are covered by a collective
bargaining agreement which expires in 1998. The Company believes that the
Group's relationships with its employees are satisfactory.
Windows, Doors and Siding Group
The Windows, Doors and Siding Group, which was acquired by the Company in
1997, is a manufacturer and distributor of vinyl and wood windows, doors, vinyl
siding, soffit, skirting and shutters for use in the replacement/remodeling and
new construction segments of the building products market. The Company believes
it is among the largest suppliers of vinyl windows serving the replacement
market in the United States. Additionally, the Company believes it is a leading
supplier of wood windows to major home centers and a leading supplier of vinyl
siding in the United States. The Company's sales of windows, since the August
1997, acquisition accounted for approximately 10.1% of the Company's
consolidated net sales in 1997.
Windows and Doors. The Group manufactures and sells a full line of wood, clad,
composition (wood and vinyl) and vinyl windows and patio doors, glass and
polycarbonate skylights, and wooden interior bifold doors under the
Crestline(R) , Vetter(R) , Kenergy(R) and AWC(R) brand names. In addition, the
Group manufactures energy efficient and maintenance free vinyl windows and
patio doors under the Great Lakes(R) Gold, PLY GEM(R) Premium, Uniframe(R) ,
MC+(TM), and Garden Windows(TM) brand names. The products are marketed to both
the home improvement and new construction markets through wholesale and
specialty distributors, large contractors, home centers and lumber yards. The
Company believes that it is the fourth largest producer of wood windows in the
United States.
Through the Crestline(R) and Vetter(R) brands wood windows are available
with primed or clad exteriors, and offer innovative product features with a
wide selection of options. A complete range of window styles include double
hung, single hung, casement, awning, sliding, garden, angle bay and bow
windows. Specialty and custom windows are available in a wide variety of shapes
and sizes. Patio doors are offered in traditional hinged, French hinged,
<PAGE> -6-
sliding and French sliding designs. The CrestWood(TM) series of premium wood
windows and patio doors combine the performance of an energy efficient,
maintenance-free solid vinyl exterior with the warmth and beauty of a natural
pine, oak, walnut or cherry interior that can be painted or stained. Most of
the products are available with insulated divided light glass, a patented
energy efficient replica of historically correct narrow muntin bar divided
light wood windows and patio doors. VinylCrest(TM) and ProCraft(TM) comprise a
complete line of solid vinyl windows, which are available for replacement and
new construction applications, in a full range of styles. These product
offerings are an important component of the Group's strategy to offer windows
in all price points and market segments. In addition to a broad line of
standard windows and doors, its custom window factory can build nearly any
shape and size window.
The Group manufactures a series of vinyl windows and patio doors for new
construction in both standard and custom sizes. Replacement units are custom
manufactured to customer specifications. These products include single hung,
double hung, bow and bay, casement, garden, sliding and awning windows, as well
as hinged and sliding patio doors in a variety of vinyl colors and interior
woodgrains, several different grille styles and patterns and a wide assortment
of glass options. Product lines feature fusion welded sash and frame corners
which are guaranteed not to separate, leak air or water, or require
maintenance. The Intercept(TM) warm edge glass spacer system is manufactured in
one continuous piece, resulting in a stronger, more energy efficient insulated
glass unit. The Company is the only vinyl window manufacturer to offer Easy-
Clean(TM) glass, which works like Teflon(TM) on cookware, providing an owner
with a window which requires less cleaning. These products incorporate other
innovations which differentiate the product line from other window
manufacturers, including wood grain vinyl interiors available in three
finishes, multi-point locking hardware, and sliding patio doors which utilize a
proprietary tank type roller system. Replacement products are sold through
specialty distributors and directly to large contractors. The new construction
series of vinyl windows and patio doors is currently being sold under private
label programs and to a select number of dealer distributors. This multiple
brand approach has allowed the Group to achieve increased penetration in a
given geographic area, by offering dealer distributors individual brands on an
exclusive basis.
The Group differentiates itself from its competition with a multiple brand
strategy, multi-channels of distribution (with an emphasis on the home center
market), an established distribution network utilizing custom design and
manufacturing capabilities, and a trained field sales and service support
network. Its ability to sell in full truckload and less than truckload
quantities is tailored to the desires of large home center chains which prefer
to purchase windows direct from the manufacturer. The Group's ability to offer
a broad product line that includes primed, clad composition (wood and vinyl)
and vinyl windows and patio doors, along with skylights under a single brand is
also important to the Groups sales and marketing strategy together with the
Company's focus on one of the fastest growing segments in the industry - home
centers and lumberyards.
Siding. The Group is a manufacturer of vinyl siding, soffit, skirting and
accessories, which are available in a variety of woodgrains and colors. Its
products are used in both remodeling and new construction applications,
including manufactured housing. Vinyl siding has captured an increasing share
of the overall market for exterior siding materials due to its ease of
<PAGE> -7-
installation, high performance, durability, low maintenance requirements and
price stability as compared to alternative siding materials (including wood,
aluminum and masonry). These products are marketed under Cedar Lane(R) ,
Varigrain(R) , Duragrain(R) , Timber Oak(R) , and ProLoc(R) brands and the
Georgia Pacific label. The Company believes it is the leading supplier to home
centers and lumberyards, and the fourth largest producer of vinyl siding in the
United States. In addition, the Group is a supplier to the Eastern European
market.
Vinyl siding is sold to either specialty distributors who, in turn, sell
directly to remodeling contractors or builders, or to building materials
wholesale distributors who sell to home centers and lumberyards who, in turn,
sell to remodeling contractors and consumers (two-step distribution). The
Company believes that it is able to compete on favorable terms as a result of
its distribution coverage, quality innovative products, and production
efficiency. Additionally, it is strong in the retail segment of the market,
which continues to grow at a rate faster than the overall market.
The Group also manufactures a line of injection molded siding components for
the remodeling and new construction markets. Siding components include blocks,
which allow for the flush mounting of items like light fixtures to the exterior
of a home, and gable vents that provide attic ventilation. The products are
sold to home centers, lumberyards and wholesale distributors of building
materials. It is the only manufacturer of siding components to offer a color
selection to match or compliment the colors offered by most major manufacturers
of vinyl siding. The group has also recently introduced a line of fixed and
variable dimension shutters.
The Group operates ten manufacturing plants in the United States and employed
3,436 full-time people as of December 31, 1997, 1,578 of whom are covered by
collective bargaining agreements which expire in 1998 and 1999. The Company
believes that the Group's relationships with its employees are satisfactory.
Specialty Products and Distribution Group
The Specialty Products and Distribution Group, which was acquired by the
Company in 1997, manufactures and distributes pressure treated wood products,
specialty lumber and decorative home products. The Group offers a full range of
preservative and fire retardant treated lumber and plywood products which are
marketed to home centers, cooperative buying groups, lumberyards and
independent wholesale distributors for use generally in residential decking,
roofing, siding and landscaping as well as various commercial construction
applications. The Group's products include fire retardant treated wood products
which are used nationwide for commercial and noncombustible construction. These
products, PYRO-GUARD(R) and EXTERIOR FIRE-X(R) are the United States market's
major brands. They are available from Company plants east of the Rockies and
from licensees west of the Rockies. Other treated wood products include
CCA/KDAT preservative treated wood for commercial and residential construction
that is kiln dried after treatment, COP-8(R) food-safe preservative treated
wood and PLYWALL preservative treated wood highway noise barriers.
The Group manufactures and distributes specialty lumber and related building
products for a variety of uses including roofing, decking, siding, landscaping
and interior paneling. The Group also distributes decorative products for the
home including prefinished wood paneling, solid wood planking, imported
ceramic, marble and porcelain tile and melamine coated panels. Finished and
<PAGE> -8-
unfinished wood and melamine shelving as well as other products are sold to
home centers and lumberyards. The Group has become a strategic, value-added
supplier of a wide range of products for the national home center chains.
While the specialty wood products industry is very competitive, the Company
believes it is able to compete effectively by providing superior customer
service and quality, and wherever possible, proprietary products. The companies
within the Group focus on high margin, niche markets within the broader defined
wood products industry which tends to be commodity driven. Its products are
sold through home center retailers and wholesalers of building materials. The
Company believes that growth of this segment of its business will result from
continued expansion of its share of the home center market.
The Group also distributes a broad range of high end specialty wood and wood
related products, including hardwood plywood, melamine and other laminated
board products, hardwood lumber, high pressure laminates (HPL), solid surface
materials and cabinet hardware and is a leading importer of specialty wood
panels from all over the world, including Russian plywood sold under its brand
name Baltic Birch(R) . Customers of these products are industrial woodworkers,
including cabinet manufacturers, architectural millworkers, and manufacturers
of store fixtures, furniture and signs and exhibits. Products are sold through
an extensive network of Company operated warehouse facilities, and in addition,
public warehouses from time to time located in various major port cities. Sales
are generated by a well trained and experienced sales force. These distribution
operations are differentiated from those of competitors, which primarily
include local independent distributors, by superior customer service,
geographic coverage and breadth of product line. As a result, the Group has
become a preferred distributor of many products, selling them on an exclusive
or limited exclusive basis. The Company believes that future growth will be
from the introduction of new products and expansion of its market territories.
In addition, the Group is a west coast manufacturer and distributor of
furniture components, laminates and board products to furniture manufacturers
and other original equipment manufacturers, building materials retailers and
wholesalers. In addition to distribution of wood products, its strengths are
laminating, drawer parts, cut to size components and other value added services
on a just-in-time basis. As a large manufacturer and distributor of high
quality, cost efficient products for the furniture, ready-to-assemble, cabinet
and building industries, the Company specializes in providing custom
laminations to industrial customers that meet almost any specification.
The Specialty Products and Distribution Group operates eight production
facilities and twelve distribution centers in the United States and employed
707 full-time people as of December 31, 1997, 163 of whom are covered by
collective bargaining agreements which expire in 1998 and 1999. The Company
believes that the Group's relationships with the employees are satisfactory.
RECENT DEVELOPMENTS
Acquisition
On August 26, 1997, the Company acquired Ply Gem Industries, Inc.(PlyGem)
(See Note 2 of the Notes to Consolidated Financial Statements included
elsewhere herein).
On March 9, 1998, the Company through a wholly-owned subsidiary, entered
into an agreement (the "Agreement") to purchase NuTone, Inc., a wholly-owned
subsidiary of Williams plc, for approximately $242,500,000 in cash, subject to
adjustment. The acquisition is subject to the requirements of the Hart-Scott-
<PAGE> -9-
Rodino Antitrust Improvements Act. In connection with its review of the
acquisition under the Act, the Federal Trade Commission ("FTC") has issued a
"second request" for certain additional information. The Agreement provides
that completion of the acquisition is to take place within 45 days of clearance
by the FTC. The FTC has taken no position with respect to the transaction and
there can be no assurance that the transaction, as proposed, will be
consummated. If the acquisition is not consummated, the Company expects that it
would incur an approximately $3,000,000 ($0.31 per diluted share) net after
tax charge to its earnings as a result of fees, expenses and other
acquisition related costs. In order to consummate the acquisition, the Company
will need to raise additional funds through debt and equity financings.
Following the acquisition the Company anticipates that it will enter into a
bank facility in order to meet its working capital needs.
NuTone is a leading U.S. manufacturer and supplier of built-in home
products for use in residential construction and remodeling. Based in
Cincinnati, Ohio, it sells primarily to the North American market and has
operations in Canada through its wholly-owned subsidiary NuTone Canada, Inc.
NuTone's product range includes exhaust fans, range hoods, door chimes,
intercoms, central vacuum cleaners and bathroom cabinets and accessories.
In the year ended December 31, 1997, NuTone had sales of approximately
$199,000,000 and EBITDA of approximately $30,200,000. The consideration of
$242,500,000 is based on the acquired business being debt free at closing, with
an agreed level of net assets. The consideration will be subject to adjustment
dependent on the actual level of net assets at closing (See note 13 of the
Notes to Consolidated Financial Statements included elsewhere herein).
Discontinued Operations
In the fourth quarter of 1997 the Company adopted a plan to discontinue
its Plumbing Products Group, a manufacturer of vitreous china bathroom
fixtures, gelcoat and acrylic bathtubs, shower stalls, whirlpools, and brass
and die cast faucets. (See Note 9 of the Notes to Consolidated Financial
Statements included elsewhere herein).
GENERAL CONSIDERATIONS
Employees
The Company employed approximately 9,262 persons at December 31, 1997.
Backlog
Backlog expected to be filled during 1998 was approximately $127,137,000
at December 31, 1997 ($107,907,000 at December 31, 1996). Backlog is not
regarded as a significant factor for operations where orders are generally for
prompt delivery. While backlog stated for December 31, 1997 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.
<PAGE> -10-
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),
Crestline(R), Vetter(R), AWC(R), Kenergy(R), CrestWood(TM), VinylCrest(TM),
ProCraft(TM), Cedar Lane(R), Varigrain(R), Duragrain(R), Timber Oak(R),
ProLoc(R), Great Lakes(R) Gold, PLY GEM(R) Premium, Uniframe(R), MC+(TM),
Intercept(TM), Easy-Clean(TM), PYRO-GUARD(R), EXTERIOR FIRE-X(R), CCA/KDAT, COP-
8(R), PLYWALL, Baltic Birch(R), Governair(R), Mammoth(R), Temtrol(TM),
Miller(R), Intertherm(R) and POWERmiser(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, PVC, polypropylene, glass, vinyl extrusions, particle board,
fiberboard, lumber, plywood, various chemicals, paints, resins, and plastics.
The materials, molds and dyes, 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 customers and to permit prompt
delivery of finished goods requires substantial working capital.
Substantial working capital is also required to carry receivables. The
demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States and in Canada where inclement weather
during the winter months usually reduces the level of building and remodeling
activity in both the home improvement and new construction markets. The Ply Gem
businesses, acquired in August 1997, have in the past been more seasonal in
nature than the Company's subsidiaries owned prior to the acquisition. As a
result, the demand for working capital of the Company's subsidiaries is greater
from late in the first quarter until early in the fourth quarter. See
"Liquidity and Capital Resources" in Management's Discussion and Analysis of
Financial Condition and Results of Operations, incorporated herein by
reference.
<PAGE> -11-
Executive Officers of the Registrant
Name Age Position
Richard L. Bready 53 Chairman, President and
Chief Executive Officer
Almon C. Hall 51 Vice President, Controller
and Chief Accounting Officer
Richard J. Harris 61 Vice President and Treasurer
Kenneth J. Ortman 62 Senior Vice President - Group
Operations
Kevin W. Donnelly 43 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 2002, which term is extended at the end of each
year for an additional year until either party gives notice it will not be
further extended. 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.
Location Description Approximate
Square Feet
Union, IL Manufacturing/Warehouse/Administrative 197,000
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*
<PAGE> -12-
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,QU Manufacturing/Administrative 88,000
St. Peters, MO Warehouse/Administrative 250,000*
St. Louis, MO Manufacturing 214,000
Boonsville, 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
Chicago, IL Manufacturing/Warehouse/Administrative 126,000
Lynwood, CA Manufacturing/Warehouse/Administrative 256,000*
Toledo, OH Manufacturing/Warehouse/Administrative 291,500
Concord, MA Administrative 9,300*
Kearney, MO Manufacturing/Administrative 145,000
Martinsburg, WV Manufacturing 162,000
Jasper, TN Manufacturing 110,000
Gloucester City, NJ Manufacturing 210,000*
Mosinee, WI Manufacturing/Warehouse/Administrative 850,000*
Stevens Point, WI Manufacturing 107,000
Huntington, WV Manufacturing/Warehouse 286,000*
Albuquerque, NM Manufacturing/Wholesale Lumberyards 31 Acres
Montrose, CO Manufacturing/Wholesale Lumberyards 19 Acres
Pine Bluff, AR Manufacturing 35 Acres
Thomson, GA Manufacturing 29 Acres
Milford, VA Manufacturing 45 Acres
Detroit, MI Manufacturing 10 Acres
Providence, RI Administrative 23,900*
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 is
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
<PAGE> -13-
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
1996 and 1997 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 to 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
Not applicable.
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 27, 1998, numbered 3,096 and 2,434, respectively. There were no
dividends declared on the Common and Special Common in 1997 or 1996. The high
and low sales prices of Nortek's Common Stock traded on the New York Stock
Exchange in each quarter of 1997 and 1996 were:
1997
Quarter High Low
- ------- ---- ---
First 27 1/2 19 1/2
Second 25 17 3/4
Third 27 1/4 23 3/16
Fourth 26 15/16 21 13/16
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
See Note 6, Notes to Consolidated Financial Statements.
<PAGE> -14-
Item 6. Consolidated Selected Financial Data
Nortek, Inc. and Subsidiaries
For the Five Years Ended December 31, 1997
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands Except Ratios and Per Share Amounts)
Consolidated Summary of
Operations:
Net sales $1,134,129 $841,557 $656,800 $615,952 $627,489
Operating earnings 82,981 60,951 42,973 44,393 31,674
Loss on businesses sold --- --- --- (1,750) (20,300)
Earnings (loss) from
Continuing Operations 26,400 23,700 17,500 15,400 (10,200)
Earnings (loss) from
Discontinued Operations (5,200) (1,700) (2,500) 1,800 (4,000)
Extraordinary gain (loss)
from debt retirements --- --- --- 200 (6,100)
Cumulative effect of
accounting changes --- --- --- 400 (500)
Net earnings (loss) 21,200 22,000 15,000 17,800 (20,800)
Financial Position:
Unrestricted cash, invest-
ments and marketable
securities $161,830 $ 92,093 $103,313 $105,080 $ 82,498
Working capital 341,821 163,133 180,218 194,330 133,824
Total assets 1,304,546 590,233 604,950 494,573 486,069
Total debt--
Current 17,739 36,486 41,948 4,452 37,249
Long-term 835,840 243,769 240,125 219,241 177,348
Current ratio 2.3:1 1.9:1 1.9:1 2.4:1 1.7:1
Debt to equity ratio 6.7:1 2.4:1 2.1:1 1.9:1 2.1:1
Depreciation and amortization
including non-cash interest28,407 20,995 16,225 15,539 18,012
Capital expenditures 22,464 19,798 15,665 14,375 8,718
Stockholders' investment 128,088 118,795 131,291 117,790 104,007
Common and special common
shares outstanding 9,500 9,873 12,074 12,550 12,542
Per Share:
Earnings (loss) from
Continuing Operations
Basic $2.75 $2.26 $1.41 $1.23 $(.81)
Diluted 2.68 2.23 1.39 1.21 (.81)
Net earnings (loss)
Basic 2.21 2.10 1.21 1.42 (1.66)
Diluted 2.15 2.07 1.19 1.39 (1.66)
Stockholders' investment 13.48 12.03 10.87 9.39 8.29
See Notes 2, 9 to 11 and 14 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, discontinued operations, 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.
<PAGE> -15-
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 four principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating ("HVAC")
Products Group; the Windows, Doors and Siding Group; and the Specialty Products
and Distribution 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.
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").
On August 26, 1997, the Company acquired Ply Gem, which is accounted for under
the purchase method of accounting. Accordingly, the results of Ply Gem are
included in the Company's consolidated results since that date. (See Liquidity
and Capital Resources and Notes 1 and 2 of the Notes to Consolidated Financial
Statements included elsewhere herein.)
In the fourth quarter of 1997, the Company adopted a plan to discontinue its
Plumbing Products Group. Accordingly, the results of the Plumbing Products
Group have been excluded from earnings from continuing operations and
classified separately as discontinued operations for all periods presented.
(See Note 9 of the Notes to the Consolidated Financial Statements included
elsewhere herein.)
<PAGE> -16-
Results of Operations
The following tables set forth, for the three years ended December 31, 1997,
(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, 1996 1995
----------------------- to to
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
(Amounts in Millions)
Net sales $1,134.1 $841.6 $656.8 34.8% 28.1%
Cost of products sold 831.7 600.3 472.3 (38.5) (27.1)
Selling, general and admini-
strative expense 219.4 180.3 141.5 (21.7) (27.4)
Operating earnings 83.0 61.0 43.0 36.1 41.9
Interest expense (50.2) (28.4) (23.0) (76.8) (23.5)
Investment income 9.9 6.0 8.1 65.0 (25.9)
Earnings from continuing
operations before provision
for income taxes 42.7 38.6 28.1 10.6 37.4
Provision for income taxes 16.3 14.9 10.6 (9.4) (40.6)
Earnings from
continuing operations 26.4 23.7 17.5 11.4 35.4
Loss from discontinued operations (5.2) (1.7) (2.5) (205.9) 32.0
Net earnings 21.2 22.0 15.0 (3.6) 46.7
Percentage
Percentage of Net Sales Change
-------------
Year Ended December 31, 1996 1995
----------------------- to to
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% ---% ---%
Cost of products sold 73.4 71.3 71.9 (2.1) 0.6
Selling, general and admini-
strative expense 19.3 21.4 21.5 2.1 0.1
Operating earnings 7.3 7.3 6.6 --- 0.7
Interest expense (4.4) (3.4) (3.5) (1.0) 0.1
Investment income 0.9 0.7 1.2 0.2 (0.5)
Earnings from continuing
operations before provision
for income taxes 3.8 4.6 4.3 (0.8) 0.3
Provision for income taxes 1.4 1.8 1.6 0.4 (0.2)
Earnings from continuing
operations 2.4 2.8 2.7 (0.4) 0.1
Loss from discontinued operations (0.5) (0.2) (0.4) (0.3) 0.2
Net earnings 1.9 2.6 2.3 (0.7) 0.3
<PAGE> -17-
The following table presents the net sales for the Company's principal product
groups for the three years ended December 31, 1997, and the percentage change
of such results as compared to the prior year. Certain amounts in the table for
prior periods have been reclassified to conform to the presentation for 1997.
Percentage
Change
------
1996 1995
Year Ended December 31, to to
-----------------------
1997 1996 1995 1997 1996
Net Sales: ---- ---- ---- ---- ----
(Amounts in Millions)
Residential Building Products $430.5 $418.5 $293.4 2.9% 42.6%
Air Conditioning and
Heating Products 419.4 423.1 363.4 (0.9) 16.4
Windows, Doors and Siding 189.0 --- --- --- ---
Specialty Products and
Distribution 95.2 --- --- --- ---
-------- ------ ------ ----- -----
$1,134.1 $841.6 $656.8 34.8% 28.1%
======== ====== ====== ===== =====
Year Ended December 31, 1997 as Compared to the Year Ended December 31, 1996
Net sales increased approximately $292,500,000, or approximately 34.8%, as
compared to 1996 (or increased approximately $300,500,000, or approximately
35.7%, excluding the effect of foreign exchange). Net sales increased
principally as a result of the acquisition of Ply Gem on August 26, 1997, which
contributed approximately $284,200,000 to net sales. Excluding sales from the
acquisition, net sales increased approximately $8,300,000, or 1.0%, as compared
to 1996 (or increased approximately $16,400,000, or approximately 2.0%
excluding the effect of foreign exchange). This increase was principally as a
result of slightly higher sales volume in the Residential Building Products
Group (partially offset by the effects of foreign exchange) and residential
products of the Air Conditioning and Heating Products Group partially offset by
lower sales levels of commercial HVAC products and approximately $3,600,000
lower sales from the sale of a residential HVAC product line in 1997.
Cost of products sold as a percentage of net sales increased from approximately
71.3% in 1996 to approximately 73.4% in 1997. Excluding the Ply Gem businesses,
(which have a higher level of cost of sales than the overall group of
businesses owned prior to the acquisition), cost of products sold as a
percentage of net sales decreased from approximately 71.3% to approximately
70.4% in 1997, as compared to 1996. This decrease in the percentage principally
resulted from a reduction in the cost of certain raw materials and components
compared to 1996 and decreased labor as a percentage of net sales in the
Residential Building Products and Air Conditioning and Heating Products Groups
due to the increased volume of higher margin products and improved efficiency.
Had all year-end inventory values been stated on a FIFO basis, year-end
inventory would have been approximately $ 5,041,000 higher in 1997,
approximately $6,015,000 higher in 1996 and approximately $7,873,000 higher in
1995. Overall, changes in the cost of products sold as a percentage of net
sales for one period as compared to another period may reflect a number of
factors, including changes in the relative mix of products sold, the effect of
changes in sales prices, the material cost of Products sold and changes in
productivity levels.
<PAGE> -18-
Year Ended December 31, 1997 as Compared to the Year Ended December 31, 1996
Continued
Selling, general and administrative expense as a percentage of net sales
decreased from approximately 21.4% in 1996 to approximately 19.3% in 1997.
Excluding the Ply Gem businesses, (which have a lower level of selling, general
and administrative expense to net sales than the overall group of businesses
owned prior to the acquisition), selling, general and administrative expense as
a percentage of net sales decreased from approximately 21.4% in 1996 to
approximately 21.2% in 1997. This decrease in the percentage was due
principally to higher sales levels in the Residential Building Products Group
without a proportionate increase in expense and the effect of the sale of a
residential HVAC product line noted above, partially offset by lower sales
levels of commercial products by the Air Conditioning and Heating Products
Group without a proportionate decrease in expense.
Segment earnings were approximately $97,000,000 for 1997, as compared to
approximately $74,900,000 for 1996. Segment earnings are operating earnings
from continuing operations before corporate and other expenses that are not
directly attributable to the Company's product groups. The Ply Gem acquisition
in late August 1997 contributed approximately $11,300,000 to segment earnings.
Segment earnings have been reduced by depreciation and amortization expense of
approximately $26,600,000 and approximately $19,500,000 for 1997 and 1996,
respectively. The acquisition of Ply Gem contributed approximately $6,300,000
of the increase in depreciation and amortization expense in 1997. The overall
increase in segment earnings was due principally, in addition to the effect of
the acquisition of Ply Gem, to increased sales volume without a proportionate
increase in expense particularly in the Residential Building Products Group
and, to a lesser extent, the residential sector of the Air Conditioning and
Heating Products Group and was affected by the factors previously noted.
Earnings of foreign operations, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries, which
manufacture built-in ventilating products, decreased to approximately 10.8% of
segment earnings in 1997 from approximately 11.2% of such earnings in 1996. The
decrease in the percentage is due to an increase in domestic earnings in 1997,
in part as a result of $11,300,000 contributed by Ply Gem, which has primarily
domestic operations. Sales and earnings derived from the international market
are subject to the risks of currency fluctuations.
Operating earnings in 1997 increased approximately $22,000,000, or
approximately 36.1%, as compared to 1996, primarily due to the factors
previously discussed.
Interest expense in 1997 increased approximately $21,800,000 or approximately
76.8%, as compared to 1996, primarily as a result of the sale of $175,000,000
principal amount of 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") in March,
1997, the sale of $310,000,000 principal amount of 9 1/8% Senior Notes due 2007
("9 1/8 Notes")in August 1997 and the existing indebtedness of Ply Gem. This
increase was partially offset by the refinancing of certain outstanding
indebtedness of the Company's subsidiaries primarily in the second quarter of
1997. (See Notes 2 and 5 of the Notes to the Consolidated Financial statements
included elsewhere herein.)
Investment income in 1997 increased approximately $3,900,000, or approximately
65.0%, as compared to 1996, principally due to higher average invested balances
of short-term investments and marketable securities.
<PAGE> -19-
The provision for income taxes was approximately $16,300,000 for 1997, as
compared to approximately $14,900,000 for 1996. The provision for income taxes
was reduced by approximately $1,540,000 in 1997 and $481,000 in 1996 reflecting
the reversal of tax reserves no longer required. The income tax rates differed
from the United States Federal statutory rate of 35% principally as a result of
state income tax provisions, nondeductible amortization expense (for tax
purposes), changes in tax reserves, the effect of foreign income tax on foreign
source income and the effect of product development tax credits from foreign
operations. (See Note 4 of the Notes to the Consolidated Financial Statements
included elsewhere herein.)
In the fourth quarter of 1997, the Company adopted a plan of disposition of its
Plumbing Products Group. Loss from discontinued operations related to the
Plumbing Products Group increased approximately $3,500,000; from a loss of
$1,700,000 in 1996 to a loss of $5,200,000 in 1997. Loss from discontinued
operations in 1997 includes a net after tax loss of $1,600,000 for operating
losses expected to occur during the disposal period and is net of an income tax
benefit of $900,000. Loss from discontinued operations includes net after tax
operating losses of $3,600,000 in 1997 and $1,700,000 in 1996 and are net of
income tax benefits of $2,100,000 and $900,000 for 1997 and 1996, respectively.
Operating results of discontinued operations reflect an allocation of corporate
interest expense of approximately $1,900,000 and $1,700,000 in 1997 and 1996,
respectively and are net of income tax benefits of $670,000 and $600,000 in
1997 and 1996, respectively. (See Note 9 of the Notes to the Consolidated
Financial Statements included elsewhere herein.)
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
Net sales increased approximately $184,800,000, or approximately 28.1%, 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 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 residential
HVAC products in the Air Conditioning and Heating Products Group.
Cost of products sold as a percentage of net sales decreased from approximately
71.9% in 1995 to approximately 71.3% 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. Had all year-end inventory values been stated on a FIFO
basis, year-end inventory would have been approximately $6,015,000 higher in
1996, approximately $7,873,000 higher in 1995 and approximately $4,254,000
higher in 1994.
Selling, general and administrative expenses as a percentage of net sales were
consistent between years at approximately 21.5% in 1995 and 21.4% in 1996. The
fourth quarter 1995 acquisitions, which have a lower level of selling, general
<PAGE> -20-
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
Continued
and administrative expense to net sales than the overall group of businesses
owned prior to the acquisitions, resulted in a decrease in the percentage which
was primarily offset by the effect of limited sales activity during an extended
shutdown period in the third quarter of 1996 by the Company's European
subsidiaries without a proportionate reduction in expense and higher net
unallocated expense.
Segment earnings were approximately $74,900,000 for 1996, as compared to
approximately $50,600,000 for 1995. 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.
Segment earnings have been reduced by depreciation and amortization expense of
approximately $19,500,000 and approximately $14,800,000 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 previously
noted.
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 11.2% of segment earnings in
1996 from approximately 5.8% 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 39.1% increase in domestic earnings. The
increase in 1996 was primarily attributable to earnings of the Company's 1995
Canadian and European acquisitions.
Operating earnings in 1996 increased approximately $18,000,000, or
approximately 41.9%, as compared to 1995, primarily due to the factors
previously discussed.
Interest expense in 1996 increased approximately $5,400,000, or approximately
23.5%, 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.
Investment income in 1996 decreased approximately $2,100,000, or approximately
25.9%, 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 $14,900,000 for 1996, as
compared to approximately $10,600,000 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
<PAGE> -21-
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
Continued
securities. The income tax rates differed from the United States Federal
statutory rate of 35% principally as a result of state income tax provisions,
nondeductible amortization expense (for tax purposes), the changes in tax
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.)
Loss from discontinued operations related to the Plumbing Products Group
decreased approximately $800,000 from a loss of $2,500,000 in 1995 to a loss of
$1,700,000 in 1996. Loss from discontinued operations includes a net after tax
operating loss of $1,700,000 in 1996 and $2,500,000 in 1995 and is net of tax
benefits of $900,000 and $1,300,000 for 1996 and 1995, respectively. Operating
results of discontinued operations reflect an allocation of corporate interest
expense of approximately $1,700,000 and $1,900,000 in 1996 and 1995,
respectively and are net of a tax benefit of $600,000 and $670,000 in 1996 and
1995, respectively. (See Note 9 of the Notes to Consolidated Financial
Statements included elsewhere herein.)
Liquidity and Capital Resources
On March 9, 1998, the Company through a wholly-owned subsidiary, entered
into an agreement to purchase NuTone, Inc., a wholly-owned subsidiary of
Williams plc, for approximately $242,500,000 in cash, subject to adjustment.
The acquisition is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act. In connection with its review of the transaction
under the Act, the Federal Trade Commission ("FTC") has issued a "second
request" for certain additional information. The FTC has taken no position with
respect to the transaction and there can be no assurance that the transaction,
as proposed, will be consummated. If the acquisition is not consummated, the
Company expects that it would incur an approximately $3,000,000 ($0.31 per
diluted share) net after tax charge to its earnings as a result of the fees,
expenses and other acquisition related costs. In order to consummate the
acquisition, the Company will need to raise additional funds through debt and
equity financings. (See discussion in Item 1 under Recent Developments and Note
13 to the Notes to the Consolidated Financial Statements.) Following the
acquisition, the Company anticipates that it will need to enter into a bank
facility in order to meet its working capital needs.
On August 26, 1997, a wholly-owned subsidiary of the Company, completed the
acquisition of Ply Gem Industries, Inc. ("Ply Gem") in a tender offer for a
cash price of $19.50 per outstanding share of common stock. Net cash paid for
the acquisition of Ply Gem, including expenses, settlement of stock options and
the payment to terminate Ply Gem's existing accounts receivable securitization
program was approximately $407,419,000 at December 31, 1997. On August 26,
1997, prior to the acquisition, Ply Gem refinanced approximately $108,900,000
of its existing indebtedness.
On August 26, 1997, the Company sold $310,000,000 principal amount of 9 1/8%
Notes due 2007 for approximately $297,269,000, net of a discount of
approximately $2,505,000 and approximately $10,226,000 of expenses incurred in
connection with the sale. The Company used a portion of these net proceeds,
<PAGE> -22-
together with available cash, to purchase the shares of Ply Gem, to fund the
approximate $45,000,000 payment to terminate Ply Gem's existing accounts
receivable securitization program and to pay certain fees and expenses.
On March 17, 1997, the Company sold $175,000,000 principal amount of 9 1/4%
Notes due 2007 for approximately $168,945,000, net of a discount of
approximately $1,011,000 and approximately $5,044,000 of expenses incurred in
connection with the sale.
Unrestricted cash and cash equivalents increased approximately $84,800,000 from
December 31, 1996 to December 31, 1997, primarily as the result of cash
generated from operations and the net proceeds from the sale of the 9 1/4% and
the 9 1/8% Notes, net of cash paid in connection with the acquisition of Ply
Gem as described above and the reduction in certain indebtedness of the
Company's subsidiaries.
The Company's investment in marketable securities at December 31, 1997
consisted primarily of investments in bank issued money market instruments,
commercial paper and United States Treasury securities. At December 31, 1997,
approximately $6,348,000 of the Company's cash and investments 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.
The Company's Board of Directors has authorized a program 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, cash availability and
provisions of the Company's outstanding debt instruments. As of February 28,
1998, the Company had purchased approximately 316,500 shares of its Common and
Special Common Stock under this program for approximately $9,314,000 and
accounted for such share purchases as Treasury Stock.
At March 1, 1998, approximately $ 6,872,000 was available for the payment of
cash dividends or stock payments under the terms of the Company's most
restrictive Indenture.
The Company's working capital and current ratio increased from approximately
$163,133,000 and 1.9:1, respectively, to approximately $341,821,000 and 2.3:1,
respectively, between December 31, 1996 and December 31, 1997. The increase was
principally as a result of the acquisition of Ply Gem, which contributed
approximately $212,971,000 to current assets and approximately $88,385,000 to
current liabilities at December 31, 1997 and an increase in unrestricted cash,
investments and marketable securities of approximately $84,800,000.
Accounts receivable increased approximately $72,212,000, or approximately
66.7%, between December 31, 1996 and December 31, 1997, while net sales
increased approximately $206,282,000, or approximately 98.5% in the fourth
quarter of 1997 as compared to the fourth quarter of 1996. Approximately
$69,000,000 of the increase in accounts receivable and approximately
$201,000,000 of the increase in net sales was principally due to the
acquisition of Ply Gem. 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. Increases or decreases in net sales
near the end of any period generally result in significant 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, 1997 as compared to December
<PAGE> -23-
31, 1996. The Company has not experienced any significant changes in credit
terms, collection efforts, credit utilization or delinquency in accounts
receivable in 1997.
Inventories increased approximately $86,264,000 or approximately 95.9%, between
December 31, 1996 and December 31, 1997. The increase is due to the inclusion
of approximately $88,000,000 of inventory related to Ply Gem at December 31,
1997.
Accounts payable increased approximately $24,660,000 or approximately 36.9%
between December 31, 1996 and December 31, 1997, including approximately
$28,355,000 of accounts payable at December 31, 1997 from the acquisition of
Ply Gem.
Unrestricted cash and cash equivalents increased approximately $84,800,000 from
December 31, 1996 to December 31, 1997, principally as a result of the
following:
Condensed
Consolidated
Cash Flows
----------
Operating Activities--
Cash flow from operations, net $ 52,407,000
Decrease in accounts receivable, net 10,259,000
Decrease in inventories 6,524,000
Decrease in prepaids and other current assets 5,699,000
Decrease in net assets of discontinued operations 4,934,000
Decrease in trade accounts payable (16,359,000)
Increase in accrued expenses and taxes 25,968,000
Investing Activities-
Net cash paid for a business acquired (407,419,000)
Purchase of marketable securities (283,918,000)
Proceeds from the sale of marketable securities 298,158,000
Capital expenditures (22,464,000)
Financing Activities-
Sale of Notes 466,214,000
Payment of borrowings, net (33,354,000)
Purchase of Nortek Common and Special
Common Stock (10,177,000)
Other, net (11,672,000)
------------
$ 84,800,000
============
The impact of changes in foreign currency exchange rates on cash was not
material and has been included in other, net.
The Company's debt-to-equity ratio increased from approximately 2.4:1 at
December 31, 1996 to 6.7:1 at December 31, 1997, primarily as a result of the
sale of the 9 1/4% Notes and the 9 1/8% Notes, indebtedness of Ply Gem of
approximately $128,529,000 existing at the date of acquisition and the effect
of the purchase of the Company's Common and Special Common Stock (see Notes 2,
5 and 6 to Consolidated Financial Statements), partially offset by the payment
of certain subsidiary indebtedness and by net earnings for the year-ended
December 31, 1997. (See the Consolidated Statement of Stockholders' Investment
included elsewhere herein.)
<PAGE> -24-
At December 31, 1997, the Company had approximately $60,800,000 of net U.S.
federal prepaid income tax assets which are expected to be realized through
future operating earnings. (See Note 4 to the Notes to Consolidated Financial
Statements.)
The Company believes that its growth will be generated largely by internal
growth, 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.
Absent the acquisition of Nutone, the Company believes that cash flow from
subsidiary operations, unrestricted cash and marketable securities, and
borrowings under new credit facilities or arrangements which may be entered
into will provide sufficient liquidity to meet the Company's working capital,
capital expenditure, debt service and other ongoing business needs through the
next 12 months. Capital expenditures were approximately $22,500,000 in 1997 and
are expected to be approximately $40,000,000 in 1998.
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 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.
The demand for the Company's products is seasonal, particularly in the
Northeast and Midwest regions of the United States where inclement weather
during the winter months usually reduces the level of building and remodeling
activity in both the home improvement and new construction markets. The
Company's lower sales levels usually occur during the first and fourth
quarters. Since a high percentage of the Company's manufacturing overhead and
operating expenses are relatively fixed throughout the year, operating income
and net earnings tend to be lower in quarters with lower sales levels. In
addition, the demand for cash to fund the working capital of the Company's
subsidiaries is greater from late in the first quarter until early in the
fourth quarter.
The Company is in the process of updating its computer systems to ensure that
its systems are Year 2000 compliant and to improve the systems. The Company has
and will continue to make investments in its computer systems and applications
to ensure that the Company is Year 2000 compliant. The financial impact to the
Company of its Year 2000 compliance programs has not been and is not
anticipated to be material to its financial position or results of operations
in any given year. While the Company does not believe it will suffer any major
effect from the Year 2000 issue, it is possible that such effects could
materially impact future financial results.
Forward-Looking Statements
When used in this discussion and throughout this document, 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
<PAGE> -25-
cause actual results to differ materially from those presented. These risks and
uncertainties include increases in raw material costs, (including, among
others, steel, copper, packaging material, plastics, resins, glass, wood and
aluminum) and purchased component costs, the level of domestic and foreign
construction and remodeling activity affecting residential and commercial
markets, interest rates, employment, inflation, consumer spending levels,
operating in international economies, the rate of sales growth, price 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-K, 10-Q and
8-K, filed with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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
1998 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
1998 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 1998 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
1998 Annual Meeting of Stockholders, incorporated herein by reference.
<PAGE> -26-
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, 1997 29
Consolidated Balance Sheet
as of December 31, 1997 and 1996 30
Consolidated Statement of
Cash Flows for the three
years ended December 31, 1997 32
Consolidated Statement of
Stockholders' Investment
for the three years ended
December 31, 1997 33
Notes to Consolidated Financial Statements 35
Report of Independent Public Accountants 55
2. Financial Statement Schedules:
Schedule I Condensed Financial Information of Registrant 56
Schedule II Valuation and Qualifying Accounts 62
3. The exhibits are listed in the Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
<PAGE> -27-
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 March 26, 1998.
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 March 26, 1998.
/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)
<PAGE> -28-
Nortek, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Years Ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
(In Thousands Except Per Share Amounts)
Net Sales $1,134,129 $841,557 $656,800
---------- ------- -------
Costs and Expenses:
Cost of products sold 831,772 600,298 472,286
Selling, general and administrative
expense 219,376 180,308 141,541
--------- ------- -------
1,051,148 780,606 613,827
--------- ------- -------
Operating earnings 82,981 60,951 42,973
Interest expense (50,210) (28,400) (22,993)
Investment income 9,929 6,049 8,120
--------- ------- -------
Earnings from continuing
operations before provision
for income taxes 42,700 38,600 28,100
Provision for income taxes 16,300 14,900 10,600
-------- ------- -------
Earnings from continuing operations 26,400 23,700 17,500
Loss from discontinued operations (5,200) (1,700) (2,500)
-------- -------- --------
Net Earnings $ 21,200 $ 22,000 $ 15,000
======== ======== ========
Earnings Per Share:
Earnings from continuing operations:
Basic $2.75 $2.26 $1.41
Diluted $2.68 $2.23 $1.39
Loss from discontinued operations:
Basic $(.54) $(.16) $(.20)
----- ----- -----
Diluted $(.53) $(.16) $(.20)
----- ----- -----
Net Earnings:
Basic $2.21 $2.10 $1.21
==== ==== ====
Diluted $2.15 $2.07 $1.19
==== ==== ====
Weighted Average Number of Shares:
Basic 9,605 10,485 12,445
====== ====== ======
Diluted 9,855 10,641 12,569
====== ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE> -29-
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
------------------
Assets 1997 1996
---- ----
(Amounts in Thousands)
Current Assets:
Unrestricted
Cash and cash equivalents $ 125,842 $ 41,042
Marketable securities available for sale 35,988 51,051
Restricted
Investments and marketable
securities at cost, which approximates
market 6,348 5,681
Accounts receivable, less allowances
of $11,047,000 and $3,656,000 180,414 108,202
Inventories
Raw materials 72,693 35,160
Work in process 18,399 11,688
Finished goods 85,161 43,141
------- -------
176,253 89,989
------- -------
Prepaid expenses 8,391 4,736
Other current assets 12,627 9,209
Net assets of a discontinued operation 22,386 24,789
Prepaid income taxes 46,800 20,000
------- -------
Total current assets 615,049 354,699
------- -------
Property and Equipment, at Cost:
Land 12,081 6,461
Buildings and improvements 96,606 62,756
Machinery and equipment 250,677 152,454
------- -------
359,364 221,671
Less accumulated depreciation 116,841 100,124
------- -------
Total property and equipment, net 242,523 121,547
------- -------
Other Assets:
Goodwill, less accumulated amortization
of $31,773,000 and $26,615,000 378,232 90,679
Intangible assets 8,752 4,263
Notes receivable and other investments 10,235 1,379
Deferred income taxes 10,022 ---
Deferred debt expense 20,170 6,647
Other 19,563 11,019
------- -------
446,974 113,987
--------- -------
$1,304,546 $590,233
========== =======
The accompanying notes are an integral part of these financial statements.
<PAGE> -30-
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
------------------
1997 1996
---- ----
(Amounts in Thousands)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term
obligations $ 11,770 $ 25,334
Current maturities of long-term debt 5,969 11,152
Accounts payable 91,488 66,828
Accrued expenses and taxes, net 164,001 88,252
------- -------
Total current liabilities 273,228 191,566
------- -------
Other Liabilities:
Deferred income taxes --- 17,637
Other 67,390 18,466
------- -------
67,390 36,103
------- -------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 835,840 243,769
------- -------
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; 16,050,794 and
15,965,585 shares issued 16,051 15,966
Special common stock, $1 par value;
authorized 5,000,000 shares; 767,287 and
784,169 shares issued 767 784
Additional paid-in capital 135,345 135,028
Retained earnings 58,966 37,766
Cumulative translation, pension
and other adjustments (5,327) (3,212)
Less --treasury common stock at cost,
7,032,497 and 6,599,645 shares (75,779) (65,805)
--treasury special common stock
at cost, 285,304 and
276,910 shares (1,935) (1,732)
------- -------
Total stockholders' investment 128,088 118,795
---------- -------
$1,304,546 $590,233
========== =======
The accompanying notes are an integral part of these financial statements.
<PAGE> -31-
Nortek, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(Amounts in Thousands)
Cash Flows from operating activities:
Net earnings from continuing operations $26,400 $23,700 $17,500
Net loss from discontinued operations (5,200) (1,700) (2,500)
Net earnings 21,200 22,000 15,000
------ ------ ------
Adjustments to reconcile net earnings to cash:
Depreciation and amortization 26,696 19,831 15,155
Non-cash interest expense 1,711 1,164 1,070
Net gain on investments and marketable
securities (200) (750) (2,000)
Deferred federal income tax
provision (benefit) 4,000 (3,000) 1,200
Deferred federal income tax (benefit) provision
on discontinued operations (1,000) 1,200 100
Changes in certain assets and liabilities, net
of effects from acquisitions and dispositions:
Accounts receivable, net 10,259 (3,729) 2,302
Prepaids and other current assets 5,699 3,280 (781)
Inventories 6,524 11,828 5,405
Net assets of discontinued operations 4,934 817 1,666
Accounts payable (16,359) 1,699 (5,299)
Accrued expenses and taxes 25,968 (7,550) (2,698)
Long-term assets, liabilities and other, net (4,317) 583 2,219
------ ------ ------
Total adjustments to net earnings 63,915 25,373 18,339
------ ------ ------
Net cash provided by operating activities 85,115 47,373 33,339
------ ------ ------
Cash Flows from investing activities:
Capital expenditures (22,464) (19,267) (14,859)
Net cash paid for businesses acquired (407,419) --- (27,543)
Purchase of investments and marketable
securities (283,918) (66,901) (104,762)
Proceeds from the sale of investments
and marketable securities 298,158 82,435 112,173
Other, net (7,738) (1,477) (108)
------- ------- -------
Net cash used in investing activities (423,381) (5,210) (35,099)
------- ------- -------
Cash Flows from financing activities:
Sale of notes, net 466,214 --- ---
Increase in borrowings 612 9,609 10,763
Payment of borrowings (33,966) (13,598) (1,142)
Purchase of Nortek Common and Special Common
Stock (10,177) (34,822) (4,664)
Other, net 383 479 (822)
------- ------- -------
Net cash provided by (used in) financing
activities 423,066 (38,332) 4,135
------- ------- -------
Net increase in unrestricted
cash and cash equivalents 84,800 3,831 2,375
Unrestricted cash and cash equivalents
at the beginning of the year 41,042 37,211 34,836
------- ------- -------
Unrestricted cash and cash equivalents
at the end of the year $125,842 $ 41,042 $ 37,211
======= ======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE> -32-
Nortek, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Investment
For the Three Years Ended December 31, 1997
-------------------------------------------------------
Cumulative
Translation,
Addi- Pension and
Special tional Other
Common Common Paid-in Retained Adjust- Treasury
Stock Stock Capital Earnings ments Stock
----- ----- ------- ----------- ----- -------
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)
<PAGE> -33-
Nortek, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Investment
22,690 shares of
special common stock
converted into 22,690
shares of common stock 23 (23) --- --- --- ---
62,519 shares of common
stock and 5,808 shares of
special common stock
issued upon exercise of
stock options 62 6 317 --- --- ---
441,246 shares of treasury
stock acquired --- --- --- --- --- (10,177)
Translation adjustment --- --- --- --- (3,815) ---
Pension adjustment --- --- --- --- 919 ---
Unrealized appreciation
in the value of
marketable securities --- --- --- --- 781 ---
Net earnings --- --- --- 21,200 --- ---
------- ---- -------- ------- ------- --------
Balance
December 31, 1997 $16,051 $767 $135,345 $58,966 $(5,327) $(77,714)
The accompanying notes are an integral part of these financial statements.
<PAGE> -34-
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 four principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating Products
Group; the Windows, Doors and Siding Group and the Specialty Products and
Distribution 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, 1997.
Use of Estimates
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. Actual results
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, 1997,
approximately $6,348,000 of cash, 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 the 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, 1997, the fair value of marketable securities approximated
the amount on the Company's consolidated balance sheet.
<PAGE> -35-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Long-Term Debt--
At December 31, 1997, the fair value of long-term indebtedness was
approximately $14,000,000 higher than 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, 1997 and 1996, approximately
$53,817,000 and $53,933,000 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 $5,041,000
and $6,015,000 greater at December 31, 1997 and 1996, 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 sale 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, the cost and accumulated depreciation are
eliminated and the resulting gain or loss is recognized.
<PAGE> -36-
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 $5,319,000, $2,940,000
and $2,489,000 for 1997, 1996 and 1995, 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, 1997.
Earnings Per Share
In 1997, the Company adopted the provisions of SFAS No. 128, Earnings Per
Share. This statement was issued by the FASB in February 1997, establishes
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock. This
statement replaces the presentation of primary EPS with a presentation of basic
EPS. It requires dual presentation of basic and diluted EPS on the face of the
statement of operations for all entities with complex capital structures and
requires a reconciliation of the numerators and denominators of the basic and
diluted EPS computations. This statement also requires a restatement of all
prior-period EPS data presented.
Basic 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. Diluted earnings per share amounts have
been computed using the weighted average number of common and common equivalent
shares and the dilutive potential common shares outstanding during each year.
A reconciliation between basic and diluted earnings per share is as follows:
For the years ending December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
(In thousands, except per share amounts)
Earnings from continuing operations $26,400 $23,700 $17,500
Basic EPS:
Basic common shares 9,605 10,485 12,445
====== ====== ======
Basic EPS $ 2.75 $ 2.26 $ 1.41
====== ====== ======
Diluted EPS:
Basic common shares 9,605 10,485 12,445
Plus: Impact of stock options
(Note 6) 250 156 124
----- ------ ------
Diluted common shares 9,855 10,641 12,569
====== ====== ======
Diluted EPS $ 2.68 $ 2.23 $ 1.39
====== ====== ======
<PAGE> -37-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
which will be effective for the Company's financial statements issued for the
fiscal year ending December 31, 1998. This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). Components of comprehensive income are net
earnings and all other changes that are currently reflected in Stockholders
Investment. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
Segment Information
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information which will be effective for the Company's
financial statements for the fiscal year ending December 31, 1998. This
statement establishes standards for reporting information about segments in
annual and interim financial statements. This statement introduces a new model
for segment reporting, called the "management approach." The management
approach is based on the way the chief operating decision-maker organizes
segments within a Company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure and management structure.
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.
On August 26, 1997, a wholly owned subsidiary of the Company completed the
acquisition of Ply Gem Industries, Inc. ("Ply Gem") in a tender offer for a
cash price of $19.50 per outstanding share of common stock. The aggregate
purchase price, including expenses and settlement of stock options, was
approximately $444,300,000. Prior to accepting for payment the tendered shares
of Ply Gem on August 26, 1997, the Company sold $310,000,000 principal amount
of 9 1/8% Senior Notes due September, 2007 (the "9 1/8% Notes") at a slight
discount (see Note 5). The Company used a portion of these net proceeds,
together with available cash, to purchase the shares of Ply Gem, fund an
approximate $45,000,000 payment to terminate Ply Gem's existing accounts
receivable securitization program and pay certain fees and expenses.
Since the acquisition date, the Company has realized, and expects to continue
to realize, cost savings as a result of the acquisition. These savings result
from several actions, including: (i) the elimination of expenses associated
with Ply Gem's New York headquarters; (ii) the consolidation into Nortek of
certain of Ply Gem's corporate functions such as accounting, legal and risk
management; and (iii) the identification and rationalization of under-
performing product lines. Pro Forma earnings (see below) have been adjusted for
the pro forma effect of those estimated cost reductions directly attributable
<PAGE> -38-
to the acquisition. These expected pre-tax savings total approximately
$4,000,000 for the period from January 1, 1997 to the date of acquisition for
the year ended December 31, 1997 and approximately $7,800,000 for the year
ended December 31, 1996. As Adjusted earnings (see below) have been adjusted to
include cost reductions directly attributable to the acquisition and additional
estimated cost savings and operating efficiencies which management expects will
result from the acquisition. These additional pre-tax cost savings total
approximately $12,600,000 and approximately $13,500,000 for the periods January
1, 1997 to the date of acquisition for the year ended December 31, 1997 and the
year ended December 31, 1996, respectively. The actual cost savings achieved
since the acquisition of Ply Gem are reflected in the Company's historical
consolidated operating results for the period from the acquisition date to
December 31, 1997. Pro Forma earnings also include approximately $24,900,000
of net after-tax charges (approximately $41,500,000 before income taxes),
recorded by Ply Gem during the perio from January 1, 1997 through August 25,
1997, to provide certain valuation reserves and to conform accounting policies
to the Company's. These non-recurring charges have been excluded from the As
Adjusted results.
The following presents the approximate unaudited Pro Forma and As Adjusted net
sales, operating earnings, earnings from continuing operations and diluted
earnings per share of the Company for all periods presented and gives pro forma
effect to the acquisition of Ply Gem, the sale of $310,000,000 principal amount
of 9 1/8% Notes, the extension of credit under the Ply Gem credit facility to
refinance certain existing indebtedness and the termination of Ply Gem's
accounts receivable securitization program, the sale of $175,000,000 principal
amount of 9 1/4% Notes, the refinancing of certain subsidiary indebtedness, and
reflects the estimated cost reductions as described above as if such
transactions and adjustments had occurred on January 1, 1996 to the date of
acquisition. The Pro Forma and As Adjusted results below include the actual
results of Ply Gem since August 26, 1997 in accordance with the purchase method
of accounting for an acquisition.
For the Years Ended December 31,
--------------------------------
1997 1996
-------- --------
Pro Forma (Amounts in Thousands ,except per share amounts)
(unaudited)
Net sales $ 1,650,052 $ 1,616,485
Operating earnings 54,600 94,400
Earnings (loss) from
continuing operations (11,600) 7,700
Diluted earnings (loss) from
continuing operations per share $(1.21) $ .72
As Adjusted
Net sales $ 1,650,052 $ 1,616,485
Operating earnings 108,700 107,900
Earnings from
continuing operations 21,600 16,400
Diluted earnings from
continuing operations per share $ 2.19 $ 1.54
In computing the pro forma earnings, earnings have been reduced by the net
interest income on the aggregate cash portion of the purchase price of the
acquisition at the historical rate earned by the Company and interest expense
on indebtedness incurred in connection with the acquisition, the refinancing and
<PAGE> -39-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
repayment of certain indebtedness of Ply Gem. Earnings have been reduced by
amortization of goodwill and reflect net adjustments to depreciation expense as
a result of an increase in the estimated fair market value of property and
equipment and changes in depreciable lives. Interest expense on the subsidiary
indebtedness refinanced with funds from the 9 1/4% Notes offering was excluded
at an average interest rate consistent with the indebtedness outstanding which
was refinanced for all periods presented, net of the tax effect. Interest
expense was included on the 9 1/4% Notes at a rate of approximately 9 1/4%,
plus amortization of deferred debt expense and debt discount net of tax effect,
and on the 9 1/8% Notes at a rate of approximately 9 1/8%, plus amortization of
deferred debt expense and debt discount for the periods presented, net of tax
effect.
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, 1996, or which may be reported in the future.
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.
3. Cash Flows
Interest paid was $35,921,000, $30,568,000 and $23,203,000 in 1997, 1996 and
1995, respectively.
Fair value of assets acquired was $672,311,000 and $129,652,000 in 1997 and
1995, respectively. Liabilities assumed or created of businesses acquired was
$264,892,000 and $96,224,000 in 1997 and 1995, respectively. Cash paid for
acquisitions net of cash acquired was $407,419,000 and $27,543,000 in 1997 and
1995, respectively.
Cash proceeds from businesses sold totaled $1,129,000 in 1995 and included
$2,874,000 of proceeds from the sale of preferred stock net of $1,745,000 for
payments made in relation to businesses sold.
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 approximately $800,000 in 1995
and an increase of approximately $781,000, a decline of approximately $481,000
and an increase of approximately $2,969,000 in the fair market value of
marketable securities available for sale for 1997, 1996 and 1995, respectively.
<PAGE> -40-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
4. Income Taxes
The following is a summary of the components of earnings from continuing
operations before provision for income taxes:
For the Years Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(Amounts in Thousands)
Domestic $37,000 $ 35,100 $ 25,400
Foreign 5,700 3,500 2,700
------ ------ ------
$42,700 $38,600 $28,100
====== ====== ======
The following is a summary of the provision (benefit) for income taxes from
continuing operations included in the accompanying consolidated statement of
operations:
For the Years Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
(Amounts in Thousands)
Federal income taxes--
Current $9,000 $15,050 $7,100
Deferred 4,000 (3,000) 1,200
------ ------ -----
13,000 12,050 8,300
Foreign 1,000 1,300 1,300
State 2,300 1,550 1,000
------ ------ -----
$16,300 $14,900 $10,600
======= ======= =======
Income tax payments, net of refunds, were approximately $7,977,000, $18,611,000
and $3,739,000 in 1997, 1996 and 1995, respectively.
<PAGE> -41-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The following reconciles the federal statutory income tax rate of continuing
operations to the effective tax rate of such earnings of approximately 38.2%,
38.6% and 37.7% in 1997, 1996 and 1995, respectively.
For the Years Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(Amounts in Thousands)
Income tax provision from continuing
operations at the Federal statutory rate $14,945 $13,510 $9,835
Net change from statutory
rate:
Change in tax reserves, net (1,540) (481) (1,100)
State income taxes, net of
federal tax effect 1,520 1,008 650
Amortization not deductible for
income tax purposes 1,827 1,040 868
Product development income tax
credit from foreign operations (264) (478) ---
Tax effect on foreign income (86) 56 79
Effect of change in foreign tax law (766) --- ---
Other, net 664 245 268
------ ------ -------
$16,300 $14,900 $10,600
======= ======= =======
The tax effect of temporary differences which gave rise to significant portions
of deferred income tax assets and liabilities as of December 31, 1997 and
December 31, 1996 are as follows:
December 31,
---------------
1997 1996
---- ----
(Amounts in Thousands)
Prepaid Income Tax Assets
Arising From:
Net operating losses of Ply Gem $6,000 $ ---
Accounts receivable 4,038 1,246
Inventory 7,201 (610)
Insurance reserves 9,624 4,985
Other reserves, liabilities and
assets, net 19,937 14,379
------ ------
$46,800 $20,000
====== ======
Deferred (Prepaid) Income Tax (Assets) Liabilities
Arising From:
Property and equipment, net $30,032 $15,400
Other reserves, liabilities and
(assets), net (19,547) (608)
Capital loss carryforward (655) (6,462)
Net operating losses of Ply Gem (21,580) ---
Valuation allowances 7,771 10,238
Other tax assets (6,043) (931)
------ ------
$(10,022) $17,637
======== ======
<PAGE> -42-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
At December 31, 1997, the Company has approximately $60,800,000 of net U.S.
federal prepaid income tax assets which are expected to be realized through
future operating earnings. At December 31, 1997, the Company's wholly owned
subsidiary, Ply Gem, has a net operating loss carry-forward of approximately
$78,800,000 that expires in 2011 and is subject to certain limitations imposed
by the Internal Revenue Code. These losses may only be utilized against future
income of the Ply Gem Group and the utilization of these losses is limited to
approximately $17,500,000 per year.
5. Notes, Mortgage Notes and Obligations Payable
Short-term bank obligations at December 31, 1997 and 1996 consist of the
following:
December 31,
------------
1997 1996
---- ----
(Amounts in Thousands)
Secured revolving lines of credit of
a Canadian subsidiary $ --- $ 2,472
Secured lines of credit and bank advances
of the Company's European subsidiaries 11,318 22,118
Other obligations 452 744
------ ------
Short-term Bank Obligations $11,770 $25,334
======= =======
These short term bank obligations are secured by approximately $29,600,000 of
accounts receivable and inventory. These borrowings have an average weighted
interest rate of approximately 9.475%.
Notes, mortgage notes and obligations payable in the accompanying consolidated
balance sheet at December 31, 1997 and 1996 consist of the following:
December 31,
------------
1997 1996
---- ----
(Amounts in Thousands)
9 1/4% Senior Notes due 2007
("9 1/4% Note"), net of
unamortized original issue discount
of $961,000 $174,039 $ ---
9 1/8% Senior Notes due 2007
("9 1/8% Notes"), net of
unamortized original issue discount
of $2,451,000 307,549 ---
9 7/8% Senior Subordinated Notes
due 2004 ("9 7/8% Notes"), net of
unamortized original issue discount
of $1,259,000 and $1,396,000 217,241 217,104
Ply Gem Credit Agreement 103,940 ---
Mortgage notes payable 16,882 20,878
Other 22,158 16,939
------- -------
841,809 254,921
Less amounts included in current
liabilities 5,969 11,152
------- -------
$835,840 $243,769
======= =======
<PAGE> -43-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
On March 17, 1997, the Company sold $175,000,000 of its 9 1/4% Senior Notes due
March 15, 2007 ("9 1/4% Notes") at a discount of approximately $1,011,500,
which is being amortized over the life of the issue. Net proceeds from the sale
of the 9 1/4% Notes, after deducting underwriting commissions and expenses,
amounted to approximately $168,945,000, a portion of which was used to
refinance certain outstanding indebtedness of the Company's subsidiaries. The 9
1/4% Notes are redeemable at the option of the Company, in whole or in part, at
any time and from time to time, on or after March 15, 2002 at 104.625%,
declining to 100% on March 15, 2005 and thereafter. On August 26, 1997, the
Company sold $310,000,000 of its 9 1/8% Senior Notes due September 1, 2007 (9
1/8% Notes) at a discount of approximately $2,505,000, which is being amortized
over the life of the issue. Net proceeds from the sale of the 9 1/8% Notes,
after deducting underwriting commissions and expenses, amounted to
approximately $297,269,000. The 9 1/8% Notes are redeemable at the option of
the Company, in whole or in part, at any time and from time to time, on or
after September 1, 2002 at 104.563%, declining to 100% on September 1, 2005 and
thereafter. The Company used a portion of these net proceeds, together with
available cash, to purchase the shares of Ply Gem. (See Note 2).
The indenture governing the 9 7/8% Notes, the Company's most restrictive
indenture, 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 March 1, 1998
approximately $ 6,872,000 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.)
The Company's Ply Gem subsidiary has a credit facility with a syndicate of
banks, which provides Ply Gem with a term loan and a letter of credit facility.
Interest on borrowings is at varying rates based, at Ply Gem's option, on (a)
the London Interbank Offered Rate (LIBOR) plus a spread or (b) the higher of
(i) .5% above the federal funds rate or (ii) the bank's prime rate. Ply Gem
pays a facility fee quarterly which fluctuates between .20% and .30% of the
aggregate principal amount available under the facility. The average weighted
interest rate on the credit facility for the period from inception (August 26,
1997) to December 31, 1997 was 6.75%. The credit facility includes customary
covenants, including covenants limiting Ply Gem's ability to pledge assets or
incur liens on assets and maintain certain financial covenants. Borrowings
under this credit facility are collateralized by the common stock, inventory
and accounts receivable of Ply Gem's principal subsidiaries.
<PAGE> -44-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The Company's Ply Gem subsidiary has $75 million of interest rate swap
agreements, whereby Ply Gem will pay the counterparties interest at a fixed
rate of 5.53% and the counterparties will pay the Company interest at a
floating rate equal to one month LIBOR for a two year period ending December 3,
1998. At the option of the counterparties, the termination date may be extended
to December 3, 1999 upon notice to Ply Gem. Amounts to be paid or received
under interest rate swap agreements are accrued as interest rates change and
are recognized over the life of the swap agreements as an adjustment to
interest expense.
The Company's Ply Gem subsidiary also has $75 million of interest rate cap
agreements which entitles Ply Gem to receive from the counterparties on a
monthly basis an amount by which the LIBOR interest rate on $75 million of its
floating rate debt exceeds 7% during the period December 5, 1998 to December 5,
1999. The cost of interest rate cap agreements are amortized to interest
expense over the life of the cap. Payments received as a result of the cap
agreements reduce interest expense. The unamortized costs of the cap agreements
are included in other assets. The impact of these arrangements has not been
material to the Company's consolidated operating results.
Mortgage notes payable of approximately $16,882,000 outstanding at December 31,
1997 include various mortgage notes and other related indebtedness payable in
installments through 2012 and bearing interest at rates ranging from 3.875% to
9.3% and are collateralized by property and equipment with an aggregate net book
value of approximately $36,700,000 at December 31, 1997.
Other obligations of approximately $22,158,000 outstanding at December 31,
1997 include borrowings relating to equipment purchases and other borrowings
bearing interest at rates primarily ranging between 3.5% to 13.0% and maturing
at various dates through 2017. Approximately $18,400,000 of such indebtedness
is collateralized by property and equipment with an aggregate net book value of
approximately $21,400,000 at December 31, 1997.
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)
1999 $ 8,923
2000 9,315
2001 9,512
2002 92,755
Thereafter 720,006
-------
$840,511
=======
<PAGE> -45-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
6. Common Stock, Special Common Stock, Stock Options and Deferred
Compensation
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, 1997, a total of 1,804,134 shares of Common Stock was reserved
as follows:
Stock option plans 1,036,847
Conversion of Special Common Stock 767,287
---------
1,804,134
=========
At December 31, 1997, 755,000 shares of Special Common Stock were reserved for
stock option plans.
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, 1997, 51,067
additional options are available for grant under these plans. Options for
427,915 and 27,500 shares of Common and Special Common Stock became exercisable
during 1997 and 1996, respectively.
<PAGE> -46-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The following summarizes the Common and Special Common Stock option
transactions for the three years ended December 31, 1997:
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
--------- --------- -----
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
Granted 435,600 19.5-27.00 22.98
Exercised (71,953) 2.875-15.69 6.66
Canceled (6,667) 22.69 22.69
------- ------------ ------
Options outstanding at
December 31, 1997 985,780 $2.875-27.00 $16.48
======= ============ ======
22,100 of the 985,780 options outstanding at December 31, 1997 have an exercise
price of $2.875, with a weighted average contractual life of 2.8 years. All of
these options are exercisable. 259,747 options have exercise prices between
$7.69 and $9.38 with a weighted average exercise price of $8.75 and a weighted
average remaining contractual life of 6.0 years. All of these options are
exercisable. 275,000 options, all of which are exercisable, have an exercise
price of $14.75 and a remaining contractual life of 9.0 years. The remaining
428,933 options, 152,915 of which are exercisable, have exercise prices between
$19.50 and $27.00, with a weighted average exercise price of $22.976 and a
remaining contractual life of 10 years.
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 earnings from continuing operations and diluted
earnings per share from continuing operations would have been approximately
$24,100,000 and $2.45 for 1997 and approximately $23,300,000 and $2.19 for
1996, respectively, and net earnings and diluted net earnings per share would
have been approximately $19,000,000 and $1.92 for 1997 and approximately
$21,600,000 and $2.03 for 1996, respectively.
<PAGE> -47-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The weighted average grant date fair value of options granted was $9.82 and
$6.15 in 1997 and 1996, 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:
1997 1996
-------- --------
Risk-free interest rate Between 5.75% and 6.73% 7%
Expected life 5 years 5 years
Expected volatility 37% 33%
Expected dividend yield 0% 0%
The Company's Board of Directors has authorized a program 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, cash availability and
provisions of the Company's outstanding debt instruments. As of February 28
1998, the Company has purchased approximately 316,500 shares of its Common and
Special Common Stock for approximately $9,314,000 under this program and
accounted for such share purchases as treasury stock.
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 $6,624,000 in 1997, approximately $4,310,000 in 1996
and approximately $828,000 in 1995. 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 1997, 1996 and 1995
consists of the following components:
Years Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(Amounts in Thousands)
Service costs $ 485 $ 358 $1,156
Interest cost 2,655 2,226 2,069
Actual net income on plan assets (9,157) (3,944) (2,640)
Net amortization and deferred items 7,361 2,218 434
Net gain from freezing plan benefits --- --- (581)
----- ----- -----
Total expense $ 1,344 $ 858 $ 438
===== ===== =====
<PAGE> -48-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
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, 1997 and 1996:
Plan Assets
Exceeding
Benefit Obligations
-------------------
1997 1996
---- ----
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits $33,958 $23,945
Non-Vested benefits 585 ---
Accumulated benefit obligation 34,543 23,945
Effect of projected future compensation levels 2,394 ---
Projected benefit obligation 36,937 23,945
------ ------
Plan assets at fair value at September 30 48,673 28,040
Plan assets in excess of the projected
benefit obligation 11,736 4,095
Unrecognized net gain (6,026) (452)
------ ------
$5,710 $ 3,643
====== =======
Benefit Obligations
Exceeding Plan Assets
---------------------
1997 1996
---- ----
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits $11,027 $ 5,359
Non-vested benefits 810 520
------ ------
Accumulated benefit obligation 11,837 5,879
Effect of projected future compensation levels 3,662 2,439
------ ------
Projected benefit obligation 15,499 8,318
------ ------
Plan assets at fair value at September 30 3,639 804
Projected benefit obligation in excess (11,860) (7,514)
Of plan assets
Unrecognized net loss 1,707 212
Unrecognized prior service costs 7,125 6,335
Additional minimum liability (5,341) (4,108)
------ ------
$(8,369) $(5,075)
====== ======
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 1997, 1996 and 1995. The expected long-term rate of
return on assets was 8 1/2 percent in 1997, 1996 and 1995.
Recognition of a minimum pension liability and an intangible asset for certain
plans resulted in a cumulative reduction in the Company's stockholders'
investment of approximately $124,000, $1,043,000 and $916,000 in 1997, 1996,
and 1995, respectively.
<PAGE> -49-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
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.
At December 31, 1997, 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 $110,427,000 at December 31, 1997. The obligations are payable as
follows:
1998 $ 18,203,000
1999 15,094,000
2000 11,250,000
2001 8,026,000
2002 6,933,000
Thereafter 50,921,000
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
$8,700,000, $6,725,000, and $6,900,000, for the years ended December 31, 1997,
1996 and 1995, 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.
<PAGE> -50-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
9. Discontinued Operations
In the fourth quarter of 1997, the Company adopted a plan of disposition for
its Plumbing Products Group. The following is an unaudited summary of the
results of discontinued operations for the three years ended December 31, 1997:
Years Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(Amounts in Thousands)
Net sales $104,467 $128,241 $119,410
-------- -------- --------
Loss before income taxes $ (5,700) $ (2,600) $ (3,800)
Income tax benefit 2,100 900 1,300
------ ------ ------
Loss from discontinued operations (3,600) (1,700) (2,500)
Reserve for future operating expenses, net of
income tax benefit of $900,000 (1,600) --- ---
------- ------- -------
Loss from discontinued operations $ (5,200) $ (1,700) $ (2,500)
======= ======= =======
Loss from discontinued operations before income taxes includes an allocation of
corporate interest expense of approximately $1,900,000, $1,700,000 and
$1,900,000 in 1997, 1996 and 1995, respectively.
10. 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.
The following information by geographic area is presented for 1997 and 1996 for
the Company's continuing operations:
For the year ended December 31, 1997:
- -------------------------------------
Pre-Tax Earnings
Net from continuing Identifiable
Sales operations Assets
----- ---------------- ------------
(Amounts in Thousands)
Geographic areas:
Domestic operations $998,049 $86,491 $976,891
European operations 76,564 3,467 60,743
Other foreign operations 75,700 7,046 57,527
Eliminations (16,184) --- (7,986)
------- ------ -------
1,134,129 97,004 1,087,175
Unallocated --- (14,023) 217,371
Interest expense --- (50,210) ---
Investment income --- 9,929 ---
--------- ------ ----------
Consolidated Totals $1,134,129 $42,700 $1,304,546
========== ======= ==========
<PAGE> -51-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
For the year ended December 31, 1996:
- -------------------------------------
Pre-Tax Earnings
Net from continuing Identifiable
Sales operations Assets
----- ---------------- ------------
(Amounts in Thousands)
Geographic areas:
Domestic operations $706,548 $66,514 $303,273
European operations 82,363 3,520 73,285
Other foreign operations 67,503 4,886 64,609
Eliminations (14,857) --- (5,663)
------- ------ -------
841,557 74,920 435,504
Unallocated --- (13,969) 154,729
Interest expense --- (28,400) ---
Investment income --- 6,049 ---
------- ------ -------
Consolidated Totals $841,557 $38,600 $590,233
======= ====== =======
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,
1997, the Company had no significant concentrations of credit risk.
11. Net Gain (Loss) on Marketable Securities
At December 31, 1997 and 1996, the reduction in the Company's stockholders'
investment for gross unrealized losses was approximately $ 110,000 and
$891,000, respectively. At December 31, 1997, there were no gross unrealized
gains on the Company's marketable securities.
The Company's unrestricted marketable securities at December 31, 1997 consist
primarily of U. S. Government Treasury Notes, certificates of deposit, and bank
issued money market instruments of which approximately $26,006,000 mature
within one year; approximately $5,978,000 mature within one to five years and
approximately $4,004,000 mature within five to ten years.
<PAGE> -52-
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, 1997
and 1996:
December 31,
-----------
1997 1996
---- ----
(Amounts in Thousands)
Insurance $23,880 $12,205
Payroll, management incentive and
accrued employee benefits 37,600 23,136
Interest 22,049 7,749
Accrued product warranty expense 9,471 7,770
Other, net 71,001 37,392
------ ------
$164,001 $88,252
======= ======
13. Subsequent Events
On March 9, 1998, the Company through a wholly-owned subsidiary, entered into an
agreement to purchase NuTone, Inc., a wholly-owned subsidiary of Williams plc,
for approximately $242,500,000 in cash. The acquisition is subject to the
requirements of the Hart-Scott-Rodino Antitrust Improvements Act. In
connection with its review of the transaction under the Act, the Federal Trade
Commission ("FTC") has issued a "second request" for certain additional
information. The FTC has taken no position with respect to the transaction and
there can be no assurance that the transaction, as proposed, will be
consummated. If the acquisition is not consummated, the Company expects that it
would incur an approximately $3,000,000 ($0.31 per diluted share) net after tax
charge to its earnings as a result of fees, expenses and other acquisition
related costs.
<PAGE> -53-
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
14. Summarized Quarterly Financial Data (Unaudited)
The following summarizes unaudited quarterly financial data for the years ended
December 31, 1997 and December 31, 1996:
For the Quarters Ended
----------------------
March 29 June 28 Sept. 27 Dec. 31
-------- ------ -------- -------
(In Thousands Except Per Share Amounts)
1997
Net sales $194,238 $223,795 $300,380 $415,716
Gross profit 56,540 64,353 78,872 102,592
Earnings from continuing
operations 4,700 7,700 8,400 5,600
Earnings per share from
Continuing operations:
Basic .48 .80 .88 .59
Diluted .47 .78 .86 .57
Net earnings 3,700 6,700 7,700 3,100
Net earnings per share:
Basic .38 .70 .80 .33
Diluted .37 .68 .78 .32
For the Quarters Ended
----------------------
March 30 June 29 Sept. 28 Dec. 31
-------- ------- -------- -------
(In Thousands Except Per Share Amounts)
1996
Net sales $189,762 $226,737 $215,624 $209,434
Gross profit 51,225 63,892 61,687 64,455
Earnings from continuing
operations 3,200 6,000 6,700 7,800
Earnings per share from
Continuing operations:
Basic .27 .58 .67 .78
Diluted .27 .57 .66 .77
Net earnings 2,400 5,800 6,500 7,300
Net earnings per share:
Basic .20 .56 .65 .73
Diluted .20 .55 .64 .72
See Notes 2 and 9 regarding certain other quarterly transactions included in
the operating results in the above table.
Increased net sales in the third and fourth quarters of 1997, as compared to
1996, reflect, primarily, the effect of the Ply Gem acquisition (see Note 2).
<PAGE> -54-
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, 1997 and 1996, and the related statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 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 schedules listed in Item 14(a)(2) are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state 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,
March 9, 1998
<PAGE> -55-
NORTEK, INC.(Parent Company)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheet
December 31,
-----------------
1997 1996
------ ------
Assets (Amounts in thousands)
Current Assets:
Unrestricted
Cash and investments at cost which
approximates market $91,644 $29,974
Marketable securities 35,988 50,688
Restricted
Cash and investments at cost which
approximates market 3,548 2,104
Marketable securities 2,800 3,423
Notes receivable, accounts receivable, net 4,283 3,422
Prepaid expenses and other current assets 16,331 18,885
Net assets of discontinued operations 22,386 24,789
U.S. Federal income taxes receivable 4,200 3,600
------- -------
Total Current Assets 181,180 136,885
------- -------
Property and equipment, at cost 1,588 1,522
Less- accumulated depreciation 1,211 1,090
------- -------
Total property and equipment, net 377 432
------- -------
Investments and Other Assets:
Net intercompany balance and investment
in subsidiaries 681,425 217,974
Deferred debt expense, net 20,139 6,519
Other 25,798 14,196
-------- -------
727,362 238,689
-------- -------
$908,919 $376,006
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE> -56-
NORTEK, INC. (Parent Company)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheet
(continued)
December 31,
---------------------
1997 1996
------ ------
(Amounts in thousands)
Liabilities and Stockholders' Investment
Current Liabilities:
Accounts payable $ 557 $ 619
Accrued expenses and taxes, net 49,311 22,578
------ ------
Total Current Liabilities 49,868 23,197
------ ------
Other Liabilities:
Deferred income taxes 5,300 4,500
Other 26,834 12,410
------ ------
32,134 16,910
------ ------
Senior notes 481,588 ---
Senior subordinated notes 217,241 217,104
Commitments and Contingencies (Note 2)
Stockholders' Investment:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common Stock, $1 par value; authorized
40,000,000 shares, 16,050,794 and
15,965,585 shares issued 16,051 15,966
Special common
stock, $1 par value;
Authorized 5,000,000 shares, 767,287
and 784,169 shares issued 767 784
Additional paid-in
Capital 135,345 135,028
Retained earnings 58,966 37,766
Cumulative translation, pension, and
other adjustments (5,327) (3,212)
Less - treasury common stock at cost,
7,032,497 and 6,599,645 shares (75,779) (65,805)
- treasury special common stock at
cost, 285,304 and 276,910 shares (1,935) (1,732)
Total Stockholders' Investment 128,088 118,795
-------- --------
$908,919 $376,006
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE> -57-
NORTEK, INC. (Parent Company)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statement of Operations
For the Year Ended December 31,
--------------------------------------
1997 1996 1995
------ ------ ------
(In thousands except per share amounts)
Revenues:
Charges and allocations to
Subsidiaries $34,498 $33,829 $30,134
Interest and dividend income 9,073 4,956 5,635
Net gain on investment securities 200 750 2,000
Other income 518 664 2,992
------- ------- -------
Total revenues $44,289 $40,199 $40,761
------- ------- -------
Expenses:
Selling, administrative
and other, net 13,605 11,503 9,220
Interest expense 43,921 20,912 20,776
Other expense 784 731 535
------- ------- -------
Total expenses $58,310 $33,146 $30,531
------- ------- -------
(Loss) earnings from continuing
operations, before equity in
subsidiaries' earnings (14,021) 7,053 10,230
Equity in subsidiaries earnings
before income taxes 56,721 31,547 17,870
------- ------- -------
Earnings from continuing
operations before provision
for income taxes 42,700 38,600 28,100
Provision for income taxes 16,300 14,900 10,600
------- ------- -------
Earnings from continuing
operations 26,400 23,700 17,500
Loss from discontinued operations (5,200) (1,700) (2,500)
------- ------- -------
Net earnings $21,200 $22,000 $15,000
======= ======= =======
Earnings (loss) per share
Continuing operations
Basic $2.75 $2.26 $1.41
Diluted $2.68 $2.23 $1.39
Loss from discontinued operations
Basic $(0.54) $(0.16) $(0.20)
------ ------ ------
Diluted $(0.53) $(0.16) $(0.20)
------ ------ ------
Net earnings
Basic $2.21 $2.10 $1.21
===== ===== =====
Diluted $2.15 $2.07 $1.19
===== ===== =====
Weighted average number of shares:
Basic 9,605 10,485 12,445
====== ====== ======
Diluted 9,855 10,641 12,569
====== ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE> -58-
NORTEK, INC. (Parent Company)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statement of Cash Flows
For the Years Ended December 31,
--------------------------------
1997 1996 1995
--------- -------- --------
(Amounts in thousands)
Cash flows from operating activities:
Earnings from continuing operations $26,400 $23,700 $17,500
Net loss from discontinued operations (5,200) (1,700) (2,500)
------- ------- -------
Net earnings 21,200 22,000 15,000
------- ------- -------
Adjustments to reconcile net earnings to cash:
Depreciation and amortization 139 320 275
Noncash interest expense 1,421 802 1,018
Equity in subsidiaries' earning (56,721) (31,547) (17,870)
Charges and allocations to subsidiaries (34,498) (33,829) (30,134)
Net transfers from subsidiaries,
principally cash 57,038 71,889 55,253
Gain on sale of investments and
marketable securities (200) (750) (2,000)
Deferred federal income tax provision
(benefit) 4,000 (3,000) 1,200
Deferred federal income tax(benefit)
provision on discontinued operations (1,000) 1,200 100
Changes in certain assets and liabilities, net
of effects from acquisitions and dispositions
Prepaids and other current assets 1,687 (4,003) 1,393
Other assets (5,562) (570) 356
Net assets of discontinued operations 4,934 817 1,666
Accrued expenses and taxes 6,991 (2,704) (294)
Long-term liabilities 4,832 903 (34)
Other, net 277 482 (1,087)
------- ------- -------
Total adjustments to net earnings (16,662) 10 9,842
------- ------- -------
Net cash provided by operating activities 4,538 22,010 24,842
------- ------- -------
Cash flows from investing activities:
Capital expenditures (70) (123)
(379)
Purchase of investments and marketable
securities (283,918) (66,901) (104,762)
Proceeds from the sale of investments
and marketable securities 297,133 82,242 112,173
Proceeds either received directly or from
subsidiaries relating to businesses
sold or discontinued --- --- 1,129
Cash transferred to subsidiaries or paid
directly for acquired businesses (407,419) --- (27,543)
Other, net (5,016) (1,758) (600)
------- ------- -------
Net cash (used in) provided by investing
activities (399,290) 13,460 (19,982)
-------- ------- -------
<PAGE> -59-
NORTEK, INC. (Parent Company)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statement of Cash Flows
(Continued)
For the Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(Amounts in thousands)
Cash flows from financing activities:
Sale of Notes, net 466,213 --- ---
Purchase of Nortek Common and Special
Common Stock (10,177) (34,822) (4,665)
Other, net 386 356 105
------- -------- -------
Net cash provided by (used in) financing
activities 456,422 (34,466) (4,560)
------- -------- -------
Net increase in unrestricted cash and
investments 61,670 1,004 300
Unrestricted cash and investments at the
beginning of the year 29,974 28,970 28,670
------- ------- -------
Unrestricted cash and investments at the
end of the year $91,644 $29,974 $28,970
======= ======= =======
Interest paid on indebtedness $29,581 $21,662 $21,577
======= ======= =======
Net income taxes paid $7,977 $18,611 $ 3,739
======= ======= =======
The accompanying notes are an integral part of these financial statements.
<PAGE> -60-
NORTEK, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Notes to Condensed Financial Statements
1. The accompanying condensed financial statements of Nortek, Inc. ("the
Registrant") have been prepared in accordance with the reduced disclosure
requirements permitted by form 10-K, Part IV, Item 14, Schedule I - Condensed
Financial Information of the Registrant. The consolidated financial statements
and related notes of Nortek, Inc. and subsidiaries, are included elsewhere
herein in this form 10-K (Part II, Item 8)and are incorporated herein by
reference.
2. Descriptions of material contingencies, significant provisions of long-term
debt obligations and commitments of the Registrant are included in Notes 5 and
8 of Notes to Consolidated Financial Statements, which are incorporated herein
by reference. The following is a summary of long-term debt of all the
Registrant's debt obligations, excluding unamortized discount, at December 31,
1997:
(Amounts in thousands)
1998 $ ---
1999 ---
2000 ---
2001 ---
2002 ---
Thereafter $ 720,006
3. The Registrant's net investment in subsidiaries is net of the cumulative
amount of intercompany cash transfers and other transactions.
4. Included in the Registrants condensed statement of cash flows for the three
years ended December 31, 1997 (in net transfers from subsidiaries, principally
cash) are dividends (declared by subsidiaries' Board of Directors) from
subsidiaries of $70,000,000 in 1997 and $2,456,900 in 1995. The subsidiaries'
Board of Directors did not declare any dividends in 1996.
5. Certain of the Registrant's subsidiaries have entered into financing
agreements which contain various restrictive covenants that place limitations
on the amount of distributions and advances to the Registrant. At December
31,1997, approximately $381,540,000 (of which approximately $307,045,000 is
goodwill) of subsidiary net assets, principally Ply Gem, were restricted
and approximately $117,427,000 principal amount of subsidiary indebtedness was
outstanding under these financing agreements.
<PAGE> -61-
NORTEK, INC. AND SUBSIDIARIES
SCHEDULE II
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, 1995:
Allowances for doubtful
accounts and sales
allowances $3,225 $ 719 $ 666 $ 368 $(1,539)(a) $ 3,439
===== ===== ===== ===== ====== =====
For the year ended
December 31, 1996:
Allowances for doubtful
accounts and sales
allowances $3,439 $ --- $1,951 $ 119 $(1,853)(a) $ 3,656
===== ===== ===== ===== ====== =====
For the year ended
December 31, 1997:
Allowances for doubtful
accounts and sales
allowances $3,656 $7,434 $2,303 $ 171 $(2,517)(a) $11,047
===== ===== ===== ===== ====== =====
(a) Amounts written off, net of recoveries.
<PAGE> -62-
Nortek, Inc. and Subsidiaries
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).
4.3 Indenture dated as of March 17, 1997 between the Company
and State Street Bank and Trust Company, as Trustee, relating to the
9.25% Series A and Series B Senior Notes due March 15, 2007 (Exhibit
4.2 to Registration Statement No. 333-25505 filed April 18, 1997).
4.4 Indenture dated as of August 26, 1997 between the Company
and State Street Bank and Trust Company, as Trustee, relating to the
9 1/8% Series A and Series B Senior Notes due September 1, 2007
(Exhibit 4.1 to Registration Statement No. 333-36711 filed September
30, 1997).
**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 Employment Agreement between Richard L. Bready and the
Company dated as of February 26, 1997 (Exhibit 10.3 to Form 10-Q
filed May 12, 1997, File No. 1-6112).
**10.5 Amendment No. 1 dated June 13, 1997 to Employment Agreement
between Richard L. Bready and the Company dated as of February 26,
1997 (Exhibit 10.2 to Form 10-Q filed August 8, 1997, File No. 1-
6112).
**10.6 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).
**10.7 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).
**10.8 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).
**10.9 1984 Stock Option Plan, as amended through May 27, 1987
(Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15,
1988).
**10.10 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).
**10.11 Change in Control Severance Benefit Plan for Key Employees
as Amended and Restated June 12, 1997, and form of agreement with
employees (Exhibit 10.1 to Form 10-Q filed August 8, 1997, file No. 1-
6112).
**10.12 1987 Stock Option Plan (Exhibit 28.3 to Registration
Statement No. 33-22527 filed June 15, 1988).
**10.13 1997 Equity and Cash Incentive Plan (Exhibit 10.1 to Form 10-Q filed
May 12, 1997, File No. 1-6112).
**10.14 1997 Stock Option Plan for Directors (Exhibit 10.2 to Form 10-Q filed
May 12, 1997, File No. 1-6112).
**10.15 Nortek, Inc. Supplemental Executive Retirement Plan dated July 1,
1997 (Exhibit 10.3 to Form 10-Q filed August 8, 1997, File No. 1-
6112).
**10.16 First Amendment dated July 1, 1997 to Nortek, Inc. Supplemental
Executive Retirement Plan dated July 1, 1997 (Exhibit 10.4 to Form 10-
Q filed August 8, 1997, File No. 1-6112).
**10.17 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).
10.18 Stock Purchase and Sale Agreement dated March 9, 1998 between
Williams YandN Holdings, Inc. and NTK Sub, Inc. (Exhibit Z to Form 8-
K/A filed March 18, 1998, File No. 1-6112).
*21.1 List of subsidiaries.
*23.1 Consent of Independent Public Accountants.
*27.1 Financial Data Schedule.
Exhibit 21.1
LIST OF SUBSIDIARIES
--------------------
Set forth below is a list of all subsidiaries of the Company as of
December 31, 1997 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
Jensen Industries, Inc. Delaware
Linear Corporation California
Linear H.K. Manufacturing Limited Hong Kong
We Monitor America Incorporated Colorado
Moore-O-Matic, Inc. Wisconsin
Ivon Inernational, Inc. California
M & S Systems LP, 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
Ply Gem Industries, Inc. Delaware
Allied Plywood Corporation Delaware
Currier Lumber Co., Inc. Michigan
Continental Wood Preservers, Inc. Michigan
Goldenberg Group, Inc. California
Great Lakes Window, Inc. Ohio
Hoover Treated Wood Products Delaware
Richwood Building Products, Inc. Delaware
Sagebrush Sales, Inc. New Mexico
SNE Enterprises, Inc. Delaware
Variform, Inc. Missouri
Rangaire LP, 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 March 9, 1998,
included in this Form 10-K, into the Company's previously
filed Registration Statements on Form S-8 (Files Nos. 33-
22527, 33-47897 and 333-39293).
/s/Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1998
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