FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
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 No. 1-6112
---------------------------
NORTEK, INC.
-------------
(Exact name of registrant as specified in its charter)
Delaware 05-0314991
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Kennedy Plaza, Providence, RI 02903-2360
--------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(401) 751-1600
---------------
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year
if changed since last year)
Indicate by check mark whether the 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
The number of shares of Common Stock outstanding as of November 6, 1998 was
11,141,192. The number of shares of Special Common Stock outstanding as of
November 6, 1998 was 570,911.
1
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar Amounts in Thousands)
Oct. 3, Dec. 31,
Assets 1998 1997
------- -------
(Unaudited)
Current Assets:
---------------
Unrestricted
Cash and cash equivalents $ 99,201 $ 125,842
Marketable securities available for sale 102,197 35,988
Restricted investments and marketable
securities at cost, which approximates
market 6,403 6,348
Net assets of a discontinued operation --- 22,386
Accounts receivable, less allowances
of $13,512,000 and $11,047,000 237,628 180,414
Inventories
Raw materials 66,267 72,693
Work in process 19,545 18,399
Finished goods 100,205 85,161
------- -------
186,017 176,253
------- -------
Prepaid expenses 10,863 8,391
Other current assets 14,352 12,627
Prepaid income taxes 42,847 46,800
------- -------
Total current assets 699,508 615,049
------- -------
Property and Equipment, at Cost:
--------------------------------
Land 12,420 12,081
Buildings and improvements 96,221 96,606
Machinery and equipment 271,342 250,677
------- -------
379,983 359,364
Less accumulated depreciation 123,476 116,841
------- -------
Total property and equipment, net 256,507 242,523
------- -------
Other Assets:
-------------
Goodwill, less accumulated amortization
of $40,130,000 and $31,773,000 607,564 378,232
Intangible assets 8,124 8,752
Notes receivable and other investments 9,350 9,339
Deferred income taxes 25,041 10,022
Deferred debt expense 25,436 21,066
Other 20,893 19,563
------- -------
696,408 446,974
------- -------
$1,652,423 $1,304,546
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Continued)
(Dollar Amounts in Thousands)
Oct. 3, Dec. 31,
1998 1997
--------- --------
(Unaudited)
Liabilities and Stockholders' Investment
Current Liabilities:
- --------------------
Notes payable and other short-term
obligations $ 10,365 $ 11,770
Current maturities of long-term debt 5,862 5,969
Accounts payable 128,562 91,488
Accrued expenses and taxes, net 172,397 164,001
--------- --------
Total current liabilities 317,186 273,228
--------- --------
Other Liabilities 112,398 67,390
- ------------------ --------- --------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 1,010,657 835,840
--------- --------
Stockholders' Investment:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 18,417,000, and
16,050,794 shares issued 18,417 16,051
Special common stock, $1 par value;
authorized 5,000,000 shares; 857,447
and 767,287 shares issued 857 767
Additional paid-in capital 200,829 135,345
Retained earnings 82,566 58,966
Cumulative translation, pension
and other adjustments (6,013) (5,327)
Less--treasury common stock at cost,
7,252,835 and 7,032,497 shares (82,516) (75,779)
--treasury special common stock
at cost, 286,009 and
285,304 shares (1,958) (1,935)
---------- ---------
212,183 128,088
---------- ---------
Total stockholders' investment $1,652,423 $1,304,546
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Amounts)
For The
Three Months Ended
------------------
Oct. 3, Sept. 27,
1998 1997
------- -------
(Unaudited)
Net Sales $458,193 $300,380
------- -------
Costs and Expenses:
Cost of products sold 331,573 220,076
Selling, general and
administrative expense 78,723 55,560
Amortization of acquired goodwill 3,610 1,432
------- -------
413,906 277,068
------- -------
Operating earnings 44,287 23,312
Interest expense (22,928) (13,521)
Investment income 3,141 3,109
------- -------
Earnings from continuing
operations before provision
for income taxes 24,500 12,900
Provision for income taxes 11,200 4,500
------- -------
Earnings from continuing operations
before extraordinary loss 13,300 8,400
Earnings (loss) from discontinued operations 600 (700)
Extraordinary loss from debt retirement (100) ---
-------- -------
Net Earnings $13,800 $ 7,700
======= =======
Net Earnings (Loss) Per Share:
Earnings from continuing operations
before extraordinary loss:
Basic $1.13 $ .87
Diluted $1.11 $ .85
Earnings (loss) from discontinued operations:
Basic $ .05 $(.07)
Diluted $ .05 $(.07)
Extraordinary loss from debt retirements:
Basic $(.01) $ ---
------ -----
Diluted $(.01) $ ---
------ -----
Net Earnings:
Basic $1.17 $ .80
===== =====
Diluted $1.15 $ .78
===== =====
Weighted Average Number of Shares:
Basic 11,721 9,569
Diluted 11,951 9,841
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Amounts)
For The
Nine Months Ended
-----------------
Oct. 3, Sept. 27,
1998 1997
--------- ---------
(Unaudited)
Net Sales $1,300,308 $ 718,413
Costs and Expenses:
Cost of products sold 960,168 515,787
Selling, general and
administrative expense 234,222 144,159
Amortization of acquired goodwill 8,784 2,861
--------- ---------
1,203,174 662,807
--------- ---------
Operating earnings 97,134 55,606
Interest expense (62,126) (31,089)
Investment income 7,492 7,683
--------- ---------
Earnings from continuing
operations before provision
for income taxes 42,500 32,200
Provision for income taxes 19,400 11,400
--------- ---------
Earnings from continuing operations
before extraordinary loss 23,100 20,800
Earnings(loss) from discontinued operations 600 (2,700)
Extraordinary loss from debt retirements (100) ---
---------- ---------
Net Earnings $ 23,600 $ 18,100
========= =========
Net Earnings (Loss) Per Share:
Earnings from continuing operations
before extraordinary loss:
Basic $2.17 $2.16
Diluted $2.13 $2.11
Earnings(loss) from discontinued operations:
Basic $ .05 $(.29)
Diluted $ .05 $(.28)
Extraordinary loss from debt retirements:
Basic $(.01) $ ---
------ -----
Diluted $(.01) $ ---
------ -----
Net Earnings:
Basic $2.21 $1.87
===== =====
Diluted $2.17 $1.83
===== =====
Weighted Average Number of Shares:
Basic 10,660 9,632
Diluted 10,858 9,878
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
For the
Nine Months Ended
-----------------
Oct. 3, Sept. 27,
1998 1997
-------- -------
(Unaudited)
Cash Flows from operating activities:
Earnings from continuing operations $ 23,100 $ 20,800
Earnings (loss) from discontinued operations 600 (2,700)
Extraordinary loss from debt retirements (100) ---
-------- -------
Net earnings 23,600 18,100
------- -------
Adjustments to reconcile net earnings to cash:
Depreciation and amortization expense 31,043 17,497
Non-cash interest expense 2,497 1,046
Loss on sale of a discontinued operation
before income taxes 2,500 ---
Loss on debt retirements before income taxes 150 ---
Deferred federal income tax provision (credit) 7,300 (3,100)
Deferred federal income tax credit from
discontinued operations (2,300) ---
Changes in certain assets and liabilities, net
of effects from acquisitions and dispositions:
Accounts receivable, net (36,315) (13,440)
Prepaid and other current assets (4,492) 3,547
Inventories (12,269) 1,658
Net assets of discontinued operations (6,659) (4,663)
Accounts payable 24,346 (2,363)
Accrued expenses and taxes (9,536) 20,695
Long-term assets, liabilities and other, net (3,150) (3,825)
------- -------
Total adjustments to net earnings (6,885) 17,052
------- -------
Net cash provided by operating activities 16,715 35,152
------- -------
Cash Flows from investing activities:
Capital expenditures (24,185) (12,989)
Net cash paid for businesses acquired (242,500) (386,952)
Purchase of investments and marketable
securities (100,512) (238,199)
Proceeds from the sale of investments
and marketable securities 36,123 183,329
Net proceeds from businesses sold or
discontinued 68,947 ---
Other, net (7,088) (3,943)
--------- ---------
Net cash used in investing activities (269,215) (458,754)
--------- ---------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
6
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Continued)
For the
Nine Months Ended
-----------------
Oct. 3, Sept. 27,
1998 1997
------- -------
(Unaudited)
Cash Flows from financing activities:
Sale of notes, net $203,492 $467,663
Purchase of notes (10,511) ---
Net decrease in borrowings (26,141) (27,599)
Net proceeds from the sale of Nortek
Common Stock 64,300 ---
Purchase of Nortek Common and Special
Common Stock (6,760) (8,824)
Other, net 1,479 395
------- -------
Net Cash Provided by Financing
Activities 225,859 431,635
------- -------
Net (decrease) increase in unrestricted
cash and cash equivalents (26,641) 8,033
Unrestricted cash and cash equivalents
at the beginning of the period 125,842 41,042
------- -------
Unrestricted cash and cash equivalents
at the end of the period $ 99,201 $ 49,075
======== ========
Interest paid $ 76,880 $ 32,717
======== ========
Income taxes paid, net $ 2,617 $ 8,203
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
7
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED September 27, 1997
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income Income
------- ----- -------- ------- --------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 28,
1997 $16,026 $ 774 $135,311 $48,166 $(75,232) $(3,948) $ ---
Net earnings --- --- --- 7,700 --- 7,700
Other comprehensive
income:
Translation adjustment --- --- --- --- --- (87) (87)
Unrealized increase
in the value of
marketable
securities --- --- --- --- --- 123 123
------
Comprehensive income $7,736
======
3,463 shares of
special common stock
converted into
3,463 shares of
common stock 3 (3) --- --- --- ---
11,900 shares of common
stock issued upon
exercise of stock
options 12 --- 22 --- --- ---
44,841 shares of
treasury stock
acquired --- --- --- --- (1,129) ---
------- ----- -------- ------- --------- -------
Balance, Sept. 27
1997 $16,041 $ 771 $135,333 $55,866 $(76,361) $(3,912)
======= ===== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
8
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income Income
------- ----- -------- ------- -------- ------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 4, 1998 $18,409 $ 860 $198,886 $68,766 $(84,288) $ (6,903) $ ---
Net earnings --- --- --- 13,800 --- --- 13,800
Other comprehensive
income:
Translation adjustment --- --- --- --- --- 416 416
Unrealized increase
in the value of
marketable
securities --- --- --- --- --- 474 474
-------
Comprehensive income $14,690
=======
2,675 shares of
special common stock
converted into
2,675 shares of
common stock 3 (3) --- --- --- ---
4,947 shares of
common stock
issued upon exercise
of stock options 5 --- (5) --- --- ---
15,620 shares of
treasury stock
acquired --- --- --- --- (360) ---
Other --- --- 1,948 --- 174 ---
------- ----- -------- ------- -------- -------
Balance, October 3, 1998
$18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013)
======= ===== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
9
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income Income
------- ----- -------- ------- ------- ------- ----------
(Unaudited)
<C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996 $15,966 $ 784 $135,028 $37,766 $(67,537) $(3,212) $ ---
Net earnings --- --- --- 18,100 --- --- 18,100
Other comprehensive
income:
Translation adjustment --- --- --- --- --- (1,192) (1,192)
Unrealized increase
in the value of
marketable
securities --- --- --- --- --- 492 492
-------
Comprehensive income $17,400
======
19,101 shares of
special common stock
converted into 19,101
shares of common stock 19 (19) --- --- --- ---
56,219 shares of
common stock and
5,808 shares of
special common stock
issued upon exercise
of stock options 56 6 305 --- --- ---
382,746 shares of
treasury stock
acquired --- --- --- --- (8,824) ---
------- ----- -------- ------- ------- -------
Balance, September 27,
1997 $16,041 $ 771 $135,333 $55,866 $(76,361) $(3,912)
======= ===== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
10
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Addi- Accumulated
Special tional Other
Common Common Paid-in Retained Treasury Comprehensive Comprehensive
Stock Stock Capital Earnings Stock Income Income
------ ----- -------- ------- ------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $16,051 $ 767 $135,345 $58,966 $(77,714) $(5,327) $ ---
Net earnings --- --- --- 23,600 --- --- 23,600
Other comprehensive
income:
Translation adjustment --- --- --- --- --- (1,181) (1,181)
Unrealized increase
in the value of
marketable securities --- --- --- --- --- 595 595
Minimum pension
liability
net of $65 tax benefit --- --- --- --- --- (100) (100)
-------
Comprehensive income $22,914
Sale of 2,182,500 shares
of common stock 2,182 --- 62,207 --- --- ---
10,831 shares of
special common stock
converted into
10,831 shares of
common stock 11 (11) --- --- --- ---
172,875 shares of
common stock and
100,991 shares of
special common stock
issued upon exercise
of stock options 173 101 3,277 --- --- ---
221,043 shares of
treasury stock acquired --- --- --- --- (6,934) ---
Other --- --- --- --- 174 ---
------ ----- -------- ------- ------- -------
Balance, October 3, 1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013)
======= ===== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
11
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(A) The unaudited condensed consolidated financial statements (the "Unaudited
Financial Statements") presented have been prepared by Nortek, Inc. and
include all of its wholly-owned subsidiaries (the "Company") after
elimination of intercompany accounts and transactions, without audit and,
in the opinion of management, reflect all adjustments of a normal recurring
nature necessary for a fair statement of the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted, although, the Company believes that the
disclosures included are adequate to make the information presented not
misleading. Certain amounts in the Unaudited Financial Statements for prior
periods have been reclassified to conform to the presentation at October 3,
1998, and for all periods presented, reflect the operations of the Plumbing
Products Group as discontinued operations (See Note H). It is suggested
that these Unaudited Financial Statements be read in conjunction with the
financial statements and the notes included in the Company's latest Annual
Report on Form 10-K.
(B) In March 1997, the Company sold, $175,000,000 principal amount of 9 1/4%
Senior Notes due March 15, 2007 ("9 1/4% Notes") at a slight discount. The
net proceeds were used to refinance certain outstanding indebtedness of
the Company's subsidiaries and for acquisitions and other general
corporate purposes, including investment in plant and equipment.
(C) During the second quarter of 1998, the Company sold, in a public offering,
2,182,500 shares of its Common Stock for net proceeds of approximately
$64,300,000 (the "Common Stock Offering").
(D) 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.
(E) On July 31, 1998, the Company, through a wholly-owned subsidiary, purchased
all of the issued and outstanding capital stock of NuTone Inc.("NuTone"), a
wholly-owned subsidiary of Williams plc ("Williams") for an aggregate
purchase price of approximately $242,500,000. In connection with the
acquisition, the Company assumed NuTone's operating liabilities (other than
intercompany borrowings), including certain liabilities of NuTone
concerning post-retirement and other benefit obligations. The purchase
price was funded through the use of the net proceeds from the sale of
$210,000,000 principal amount of 8 7/8 % Senior Notes due August 1, 2008
(the "8 7/8% Notes") at a slight discount, which occurred on July 31, 1998,
in a private Rule 144A offering to qualified investors together with
12
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
approximately $44,800,000 of the cash proceeds received from the Common
Stock Offering.
Consummation of the acquisition was subject to a Federal Trade Commission
("FTC") NuTone Agreement Containing Consent Order ("Order") which, under the
terms of which the Company must divest, at no minimum price, prior to
December 31, 1998, all of the assets, properties, business and goodwill of
its M&S Systems LP ("M&S") subsidiary. On November 2, 1998, the Company
entered into an agreement to sell M&S and another Nortek subsidiary; the
transaction is subject to FTC approval. (See Note K). If the Company has not
divested the M&S assets prior to December 31, 1998, the FTC may appoint a
trustee to divest the M&S assets. The Company will be responsible for any
costs and expenses incurred by the trustee that are necessary to carry out
the trustee's duties. The Company is required to file compliance reports
showing that it has fully complied with the Order. Violations of the final
consent order may result in substantial monetary penalties, which could have
a material adverse effect on the Company's business.
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. 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. 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.
The following presents the unaudited Pro Forma and As Adjusted net sales,
depreciation and amortization expense, operating earnings, earnings from
continuing operations and diluted earnings per share from continuing
operations of the Company for the three months and nine months ended
September 27, 1997 and October 3, 1998 and the year ended December 31,1997
and gives pro forma effect to the sale of the 8 7/8% Notes, the acquisition
of Nutone, the Common Stock Offering, the acquisition of Ply Gem, the sale
of the 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 the 9 1/4%
Notes in March 1997, the refinancing of certain subsidiary indebtedness, and
reflects estimated cost reductions as described below as if such
transactions and adjustments had occurred on January 1, 1997:
13
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
The As Adjusted information is presented as supplemental information only and
is not intended to and does not conform with Article 11 Pro Forma Financial
Information of Regulation S-X of the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Pro Forma
---------
Three Months Ended Nine Months Ended Year Ended
------------------ ----------------- ----------
Oct. 3, Sept. 27, Oct. 3 Sept. 27 Dec. 31,
1998 1997 1998 1997 1997
------- -------- ------ ------- ----------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $473,631 $484,383 $1,410,969 $1,379,321 $1,849,124
Depreciation and
amortization
expense 11,989 12,521 36,503 37,186 48,571
Operating earnings 38,400 4,300 99,000 59,000 91,600
Earnings (loss)
from continuing
operations 8,400 (11,400) 15,200 (9,100) (3,800)
Diluted earnings
(loss)per share
from continuing
operations $ .70 $(.97) $1.28 $(.76) $(.32)
</TABLE>
<TABLE>
<CAPTION>
As Adjusted
-----------
Three Months Ended Nine Months Ended Year Ended
------------------ ----------------- ----------
Oct. 3, Sept. 27, Oct. 3, Sept. 27, Dec. 31,
1998 1997 1998 1997 1997
------- --------- --------- -------- --------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $473,631 $484,383 $1,410,969 $1,379,321 $1,849,124
Depreciation and
amortization
expense 11,989 12,427 36,503 36,790 48,175
Operating earnings 48,100 36,600 116,200 106,500 142,900
Earnings from
continuing
operations 14,200 8,200 25,500 20,000 27,700
Diluted earnings
per share from
continuing
operations $1.19 $ .68 $2.14 $1.66 $2.30
</TABLE>
14
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
In computing Pro Forma earnings, earnings have been reduced by net interest
income on the aggregate cash portion of the purchase price of the
acquisitions at the historical rate earned by the Company and interest
expense on indebtedness incurred in connection with the acquisitions and the
refinancing and repayment of certain indebtedness of Ply Gem. Earnings have
been reduced by amortization of goodwill and, in relation to the Ply Gem
acquisition, 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 sale of the 9 1/4% Notes was
excluded at an average interest rate consistent with the indebtedness
outstanding which was refinanced, net of tax effect. Interest expense was
included on the 9 1/4% Notes, the 9 1/8% Notes, and the 8 7/8% Notes at the
applicable coupon rates plus amortization of deferred debt expense and debt
discount, net of tax effect. Pro Forma results reflect actual investment
income earned on the portion of the cash proceeds not used for the NuTone
acquisition from the date of the Common Stock Offering to October 3, 1998.
At the date of the NuTone acquisition, the Company achieved cost reductions
directly attributable to the acquisition from the elimination of fees and
charges paid by NuTone to Williams and related entities. Pro Forma operating
earnings have been increased (decreased) for the three and nine months ended
September 27, 1997 by approximately $1,711,000 and $2,586,000, respectively,
for the three and nine months ended October 3, 1998 by approximately
$(30,000) and $354,000, respectively, and for the year ended December 31,
1997 by approximately $1,746,000 for the pro forma effect of such cost
reductions. Subsequent to the NuTone acquisition, the Company expects to
realize approximately $15,000,000 in annual cost reductions ("NuTone Cost
Adjustments") that can be achieved as a result of integrating NuTone into
the Company's operations. As Adjusted operating earnings, as compared to Pro
Forma earnings, have been increased for the NuTone Cost Adjustments by
$3,750,000 and $11,250,000 for the three and nine months ended September 27,
1997, respectively, by $1,250,000 and $8,750,000 for the three and nine
months ended October 3, 1998, respectively, and by $15,000,000 for the year
ended December 31, 1997.
Since the Ply Gem acquisition date, the Company has realized cost savings as
a result of the acquisition. These savings resulted from several actions,
including: (i) the elimination of expenses associated with Ply Gem's New
York headquarters; (ii) the consolidation of Ply Gem's corporate functions
such as accounting, legal and risk management into Nortek; and (iii) the
elimination of certain under-performing product lines. Pro Forma operating
15
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
earnings for the three and nine months ended September 27, 1997 and the
year ended December 31, 1997, have been increased for the pro forma effect
of cost reductions directly attributable to the Ply Gem acquisition
totaling approximately $262,000, $3,983,000 and $4,000,000 respectively.
As Adjusted operating earnings for the three and nine months ended
September 27, 1997 and the year ended December 31, 1997, include the
effect of the cost reductions directly attributable to the Ply Gem
acquisition noted above and additional cost savings related to expenses
associated with the elimination of Ply Gem's New York headquarters, the
consolidation of Ply Gem's corporate functions and the elimination of
certain under-performing product lines which total approximately
$4,997,000, $12,661,000, and $14,100,000, respectively.
Included in Pro Forma operating earnings for the three and nine months
ended September 27, 1997 and the year ended December 31, 1997, are
approximately $22,200,000 of charges recorded by Ply Gem to provide
certain valuation reserves. Included in Pro Forma operating earnings for
the three and nine months ended October 3, 1998, are approximately
$8,400,000 of charges recorded by NuTone to provide certain valuation
reserves. The As Adjusted operating earnings, which is presented as
supplemental information, excludes the effect of these charges.
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, 1997, or which may be reported in the future.
(F) The Company's Board of Directors has authorized a number of programs to
purchase shares of the Company's Common and Special Common Stock. The most
recent of these programs was announced on April 30, 1997, 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 November 6, 1998, the Company has purchased approximately 356,400
shares of its Common and Special Common Stock under this program for
approximately $10,224,000 and accounted for such share purchases as
Treasury Stock.
At November 6, 1998, approximately $61,100,000 was available for the
payment of cash dividends, stock purchases or other restricted payments as
defined under the terms of the Company's most restrictive Indenture.
16
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
(G) In the fourth quarter of 1997, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share." This statement requires a restatement of all
prior-period earnings per share ("EPS") data presented. Accordingly, EPS for
the third quarter and first nine months of 1997 has been restated.
Basic earnings per share amounts have been computed using the weighted
average number of common and common equivalent shares outstanding during
each period. 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 period.
A reconciliation between basic and diluted earnings per share from
continuing operations is as follows:
Three Nine
Months Ended Months Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
(In thousands except per share amounts)
Earnings from continuing
operations $13,300 $8,400 $23,100 $20,800
Basic EPS:
Basic common shares 11,721 9,569 10,660 9,632
====== ===== ====== =====
Basic EPS $1.13 $ .87 $2.17 $2.16
===== ===== ===== =====
Diluted EPS:
Basic common shares 11,721 9,569 10,660 9,632
Plus: Impact of stock
options 230 272 198 246
------ ----- ------ -----
Diluted common shares 11,951 9,841 10,858 9,878
====== ===== ====== =====
Diluted EPS $1.11 $_.85 $2.13 $2.11
===== ===== ===== =====
(H) In the fourth quarter of 1997, the Company adopted a plan of disposition
for its Plumbing Products Group and provided a pre-tax reserve of
$2,500,000 for estimated future losses including interest expense. On July
10, 1998, the Company sold its Plumbing Products Group for approximately
$33,700,000 and recorded a $600,000 net after tax gain on the disposition.
In the nine months ended October 3, 1998, approximately $1,000,000 of
corporate interest expense was allocated against this reserve. In the three
17
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
months and nine months ended September 27, 1997, the loss from discontinued
operations included an allocation of corporate interest expense of
approximately $425,000 and $1,375,000 respectively. Corporate interest
expense was allocated to discontinued operations based on the ratio of net
assets of the discontinued operation to the sum of the total consolidated
net assets of the Company plus consolidated debt of the Company, other than
debt of the discontinued operation assumed by the buyer, and debt that is
directly attributed to other operations of the Company. The following is a
summary of the results of discontinued operations for the three months and
nine months ended September 27, 1997:
Three Months Nine Months
Ended Sept. 27, Ended Sept. 27,
1997 1997
(In thousands except per share amounts)
Net sales $27,376 $78,561
======= =======
Loss before income taxes (900) (4,200)
Income tax benefit 200 1,500
------- -------
Loss from discontinued
operations $ (700) $(2,700)
======== ========
(I) In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No.
130") which requires the display of comprehensive income and its components
in the financial statements. Comprehensive income includes net earnings and
unrealized gains and losses from currency translation, marketable
securities and pension liability adjustments. The components of the
Company's comprehensive income and the effect on earnings, for the third
quarter and first nine months of 1997 and 1998, are detailed in the
Statements of Stockholders' Investment.
(J) In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"). The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
18
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998).
The Company is in the process of quantifying the impacts of adopting
Statement 133 on its financial statements and has not determined the timing
of or method of adoption of Statement 133.
(K) During the first nine months of 1998, the Company made several dispositions
of nonstrategic assets of Ply Gem. On May 8, 1998, the Company sold Studley
Products, Inc. ("Studley"). Studley, which had net sales and an operating
loss of approximately $7,300,000 and $1,600,000, respectively, for the
period January 1, 1998 to May 8, 1998, was treated as an operation held for
sale since the Ply Gem Acquisition. On May 22, 1998, the Company consummated
the sale of Sagebrush Sales, Inc. ("Sagebrush") for approximately $9,100,000
in cash. Sagebrush had net sales, operating (and pre-tax) earnings and
depreciation and amortization expense of approximately $19,000,000, $206,000
and $141,000, respectively, for the five months ended May 22, 1998. On July
2, 1998, the Company completed the sale of Goldenberg Group, Inc.
("Goldenberg") for approximately $11,000,000, including approximately
$2,100,000 in notes. Goldenberg had net sales, operating (and pre-tax)
earnings and depreciation and amortization expense of approximately
$21,500,000, $359,000 and $313,000, respectively, for the six months ended
July 4, 1998. On July 31, 1998, the Company completed the sale of another
Ply Gem business, Ply Gem Manufacturing, which had net sales, operating (and
pre-tax) earnings and depreciation and amortization expense of approximately
$23,300,000, $665,000 and $81,000, respectively, for the seven months ended
July 31, 1998. The operating results of Sagebrush, Goldenberg and Ply Gem
Manufacturing are included in the Company's 1997 and 1998 consolidated
results from the date of acquisition to the date of sale. The Company has
not recorded in net earnings any significant gains or losses associated with
these dispositions.
19
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
On November 2, 1998, the Company entered into an agreement to sell the
businesses of two wholly-owned subsidiaries: M&S and Moore-O-Matic, Inc.
("MOM") to the Chamberlain Group, Inc. M&S manufactures and sells intercom
systems, built-in music systems, central vacuum systems and related
products. MOM sells automatic garage door openers, gate operators and
electronic transmitters. Consummation of the transaction is subject to
customary conditions and, as to M&S, approval by the FTC pursuant to a
consent agreement entered into by the Company and the FTC as part of the
FTC's approval of the Company's acquisition of NuTone Inc., on July 31,
1998. For the year ended December 31, 1997, net sales, operating (and
pre-tax) earnings and depreciation and amortization expense of M&S and MOM
were approximately $37,300,000, $3,500,000 and $600,000, respectively. For
the three months ended October 3, 1998, net sales, operating (and pre-tax)
earnings and depreciation and amortization expense of M&S and MOM were
approximately $10,900,000, $1,000,000 and $160,000, respectively. For the
nine months ended October 3, 1998, net sales, operating (and pre-tax)
earnings and depreciation and amortization expense of M&S and MOM were
approximately $31,700,000, $2,800,000 and $490,000, respectively.
(L) On October 9, 1998, the Company completed the acquisition of Napco, Inc.
("Napco"), a privately held manufacturer of exterior building products
headquartered in Valencia, Pennsylvania for approximately $77,100,000 in
cash plus the assumption of debt of approximately $10,200,000. Napco
manufactures four principal product lines: (a) vinyl siding, soffit and
accessories, marketed under the American Comfort(R), American Herald(TM)
and American '76(R) collection labels; (b) vinyl window systems, marketed
under the Premium and American Comfort(R) labels; (c) accessory products,
including aluminum-trim coil, soffit, rainware and related specialty
products; and (d) coil coating. Napco's manufacturing operations are
conducted in three company-owned plants that are located in western
Pennsylvania. For the year ended December 31, 1997, Napco had net sales,
operating earnings and depreciation and amortization expense of
approximately $91,100,000, $8,000,000 and $2,300,000, respectively.
(M) The Year 2000 ("Y2K") issue refers to and arises from deficient computer
programs and related products, such as embedded chips, which do not
properly recognize or process a year that begins with "20" instead of "19."
If not corrected, many business and other processes could fail or create
erroneous results. The extent of the potential impact of the Y2K issue is
not yet known, and if not timely corrected, it could affect the global
economy. Although the Company believes that all modifications to
20
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(Continued)
information technology ("IT") and non-IT systems, material to the Company's
business, will be Y2K compliant on or before December 31, 1999, it cannot
predict the outcome or the success of its Y2K initiative, or that third
party systems are or will be Y2K compliant, or that the costs required to
address the Y2K issue, or that the impact of a failure to achieve
substantial Y2K compliance, will not have a material adverse effect on the
company's business, financial condition or results of operations.
21
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
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.
The Company acquired Ply Gem on August 26, 1997 and NuTone on July 31, 1998.
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the results of Ply Gem and NuTone are included in the
Company's consolidated results since that date. (See "Liquidity and Capital
Resources" and Note E of the Notes to the Unaudited 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. On July 10,
1998, the Company sold its Plumbing Products Group for approximately $33,700,000
in cash. During the second and third quarters of 1998, the Company made several
dispositions of nonstrategic assets of Ply Gem. On May 8, 1998, the Company sold
Studley. Studley, which had net sales and an operating loss of approximately
$7,300,000 and $1,600,000, respectively, for the period from January 1, 1998 to
May 8, 1998, was treated as an operation held for sale since the Ply Gem
Acquisition. On May 22, 1998, the Company consummated the sale of Sagebrush for
approximately $9,100,000 in cash. Sagebrush had net sales, operating (and
pre-tax) earnings and depreciation and amortization expense of approximately
$19,000,000, $206,000 and $141,000, respectively, for the five months ended May
22, 1998. On July 2, 1998, the Company completed the sale of Goldenberg for
approximately $11,000,000, including approximately $2,100,000 in notes.
Goldenberg had net sales, operating (and pre-tax) earnings and depreciation and
amortization expense of approximately $21,500,000, $359,000 and $313,000,
respectively, for the six months ended June 30, 1998. On July 31, 1998, the
Company completed the sale of another Ply Gem business, Ply Gem Manufacturing,
which had net sales, operating (and pre-tax) earnings and depreciation and
amortization expense of approximately $23,300,000, $665,000 and $81,000,
respectively, for the seven months ended July 31, 1998. See Notes H and K of the
Notes to the Unaudited Financial Statements included elsewhere herein.
The Company has entered into an agreement for the sale of M&S and MOM. M&S
manufactures and sells intercom systems, built-in music systems, central vacuum
systems and related products. M&S and MOM had net sales, operating (and pre-tax)
22
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
earnings and depreciation and amortization expense of $37,300,000, $3,500,000
and $600,000, respectively, for the year ended December 31, 1997. Consummation
of the transaction is subject to customary terms and conditions. In addition,
under the FTC Order, the disposition of M&S is subject to the prior approval of
the FTC. See Notes E and K of the Notes to the Unaudited Financial Statements
included elsewhere herein.
Results of Operations
- ---------------------
The tables below and on the next page set forth, for the periods presented, (a)
certain consolidated operating results, (b) the change in the amount and the
percentage change of such results as compared to the prior comparable period,
(c) the percentage which such results bear to net sales and (d) the change of
such percentages as compared to the prior comparable period. The results of
operations for the third quarter ended October 3, 1998 are not necessarily
indicative of the results of operations to be expected for any other interim
period or the full year.
Change in
Third Quarter Ended Third Quarter 1998
Oct. 3, Sept. 27, as Compared to 1997
1998 1997 $ %
----- ----- ----- -----
(Dollar amounts in millions)
Net sales $458.2 $300.4 $157.8 52.5%
Cost of products sold 331.6 220.1 (111.5) (50.7)
Selling, general and
administrative expense 78.7 55.6 (23.1) (41.5)
Amortization of acquired
goodwill 3.6 1.4 (2.2) NM
----- ----- ----- -----
Operating earnings 44.3 23.3 21.0 90.1
Interest expense (22.9) (13.5) (9.4) (69.6)
Investment income 3.1 3.1 --- ---
----- ----- ----- -----
Earnings from continuing
operations before provision
for income taxes 24.5 12.9 11.6 89.9
Provision for income taxes 11.2 4.5 (6.7) (148.9)
----- ----- ------ -------
Earnings from continuing
operations 13.3 8.4 4.9 58.3
Earnings (loss) from
discontinued operations .6 (.7) 1.3 NM
Extraordinary loss from debt
retirement (.1) --- (.1) NM
----- ----- ---- ----
Net earnings $13.8 $ 7.7 $6.1 79.2%
===== ===== ==== =====
NM = not meaningful
23
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Change in
Percentage of Net Sales Percentage
Third Quarter Ended for the Third
Oct. 3, Sept. 27, Quarter 1998
1998 1997 as Compared to 1997
------ ------- -------------------
Net sales 100.0% 100.0% ---
Cost of products sold 72.3 73.3 1.0
Selling, general and
administrative expense 17.2 18.5 1.3
Amortization of acquired
goodwill .8 .5 (.3)
---- ---- -----
Operating earnings 9.7 7.7 2.0
Interest expense (5.0) (4.5) (.5)
Investment income .6 1.1 (.5)
---- ---- ----
Earnings from continuing
operations before provision
for income taxes 5.3 4.3 1.0
Provision for income taxes 2.4 1.5 (.9)
---- ---- -----
Earnings from continuing
operations 2.9 2.8 .1
Earnings(loss) from
discontinued operations .1 (.3) .4
Extraordinary loss from debt
retirements --- --- ---
---- ---- ----
Net earnings 3.0% 2.5% .5
===== ===== ====
24
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Results of Operations
- ---------------------
The tables below and on the next page set forth, for the periods presented, (a)
certain consolidated operating results, (b) the change in the amount and the
percentage change of such results as compared to the prior comparable period,
(c) the percentage which such results bear to net sales and (d) the change of
such percentages as compared to the prior comparable period. The results of
operations for the first nine months ended October 3, 1998 are not necessarily
indicative of the results of operations to be expected for any other interim
period or the full year.
Change in
Nine Months Ended First Nine Months 1998
Oct. 3, Sept. 27, as Compared to 1997
1998 1997 $ %
------- -------- ------- ------
(Dollar amounts in millions)
Net sales $1,300.3 $718.4 $581.9 81.0%
Cost of products sold 960.2 515.8 (444.4) (86.2)
Selling, general and
administrative expense 234.2 144.2 (90.0) (62.4)
Amortization of acquired
goodwill 8.8 2.8 (6.0) NM
------ ------ ------- -------
Operating earnings 97.1 55.6 41.5 74.6
Interest expense (62.1) (31.1) (31.0) (99.7)
Investment income 7.5 7.7 (.2) (2.6)
------ ------ ------- -------
Earnings from continuing
operations before provision
for income taxes 42.5 32.2 10.3 32.0
Provision for income taxes 19.4 11.4 (8.0) (70.2)
------ ------ ------- -------
Earnings from continuing
operations 23.1 20.8 2.3 11.1
Earnings (loss) from
discontinued operations .6 (2.7) 3.3 122.2
Extraordinary loss from debt
retirement (.1) --- (.1) NM
------ ------ ------ ------
Net earnings $ 23.6 $ 18.1 $ 5.5 30.4%
====== ====== ====== ======
NM = not meaningful
25
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Change in
Percentage of Net Sales Percentage
First Nine Months Ended for the First
Oct. 3, Sept. 27, Nine Months 1998
1998 1997 as Compared to 1997
---- ---- -------------------
Net sales 100.0% 100.0% ---
Cost of products sold 73.8 71.8 (2.0)
Selling, general and
administrative expense 18.0 20.1 2.1
Amortization of acquired
goodwill .7 .4 (.3)
---- ---- -----
Operating earnings 7.5 7.7 (.2)
Interest expense (4.8) (4.3) (.5)
Investment income .6 1.1 (.5)
---- ---- -----
Earnings from continuing
operations before provision
for income taxes 3.3 4.5 (1.2)
Provision for income taxes 1.5 1.6 .1
---- ---- ----
Earnings from continuing
operations 1.8 2.9 (1.1)
Earnings (loss) from
discontinued operations --- (.4) .4
Extraordinary loss from debt
retirements --- --- ---
---- --- ---
Net earnings 1.8% 2.5% (.7)
===== ==== =====
The following presents net sales for the Company's principal product groups for
the third quarter and the nine months ended October 3, 1998 as compared to the
third quarter and nine months ended September 27, 1997 and the amount and the
percentage change of such results as compared to the prior comparable period:
Third Quarter Ended
-------------------
Oct. 3, Sept. 27, Increase
1998 1997 $ %
---- ---- ------ -------
(000's omitted)
Net Sales:
Residential Building
products $141,611 $105,532 $36,079 34.2%
Air Conditioning and
heating products 121,975 111,656 10,319 9.2
Windows, Doors and Siding 150,306 55,343 94,963 171.6
Specialty Products and
distribution 44,301 27,849 16,452 59.1
------- -------- ------- ----
Total $458,193 $300,380 $157,813 52.5%
======== ======= ======== =====
26
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Nine Months Ended
-----------------
Oct. 3, Sept. 27, Increase
1998 1997 $ %
---- ---- ------- ------
(000's omitted)
Net Sales:
Residential Building
products $369,369 $316,967 $ 52,402 16.5%
Air Conditioning and
heating products 356,645 318,254 38,391 12.1
Windows, Doors and Siding 390,677 55,343 335,334 605.9
Specialty Products and
distribution 183,617 27,849 155,768 559.3
---------- -------- -------- ------
Total $1,300,308 $718,413 $581,895 81.0%
========== ======== ======== ======
Certain amounts in the tables for the prior periods have been reclassified to
conform to the presentation for the third quarter and the nine months ended
October 3, 1998.
Operating Results
- -----------------
Net sales increased approximately $157,800,000 or approximately 52.5%, (or
increased approximately $158,900,000 or approximately 52.9% excluding the effect
of foreign exchange) in the third quarter of 1998 as compared to the third
quarter of 1997 and increased approximately $581,900,000 or approximately 81.0%,
(or increased approximately $587,600,000 or approximately 81.8% excluding the
effect of foreign exchange) for the first nine months of 1998 as compared to
1997. Net sales increased principally as a result of the acquisition of Ply Gem
on August 26, 1997, which contributed approximately $194,600,000 and
approximately $574,300,000 to net sales in the third quarter and first nine
months of 1998, respectively, as compared to approximately $83,200,000 for the
third quarter and first nine months of 1997 and the acquisition of NuTone on
July 31, 1998 which contributed approximately $33,200,000 to net sales in the
third quarter and first nine months of 1998. Excluding the effect of increased
net sales from the acquisition of Ply Gem and NuTone, net sales increased
approximately $13,200,000 or approximately 6.1% (or increased approximately
$14,300,000, or approximately 6.6% excluding the effect of foreign exchange),
and increased approximately $57,600,000 or approximately 9.1%, (or increased
approximately $63,200,000 or approximately 10.0% excluding the effect of foreign
exchange) for the third quarter and the first nine months of 1998, respectively
as compared to 1997. Excluding the effect of acquisitions, the increase in net
sales in the third quarter and first nine months is principally as a result of
higher sales volume in the Air Conditioning and Heating Products Group related
to products sold to the residential and manufactured housing markets, and to a
lesser extent, increased sales volume in the Residential Building Products
Group.
27
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
As noted above, during the second and third quarters of 1998, the Company sold
several nonstrategic assets. The Company's net sales for the first nine months
of 1998, include approximately $63,800,000 of net sales related to certain
businesses of Ply Gem which were sold in various transactions in 1998 and are
included in the Specialty Products and Distribution Group.
Cost of products sold as a percentage of net sales decreased from approximately
73.3% in the third quarter of 1997 to approximately 72.3% in the third quarter
of 1998, and increased from approximately 71.8% in the first nine months of 1997
to approximately 73.8% in the first nine months of 1998. Changes in the
percentages were, in large part, affected by acquisitions. The Ply Gem
businesses have a higher level of cost of sales than the overall group of
businesses owned prior to the Ply Gem acquisition while NuTone has a lower
percentage. Excluding the effect of acquisitions, cost of products sold as a
percentage of net sales decreased from approximately 70.5% in the third quarter
of 1997 to approximately 68.8% in the third quarter of 1998, and decreased from
approximately 70.7% in the first nine months of 1997 to approximately 69.2% in
the first nine months of 1998. Excluding the effect of acquisitions, the
decreases in the percentages principally resulted from increased sales without a
proportionate increase in costs, including lower material costs, in both periods
in the Air Conditioning and Heating Products Group and, to a lesser extent,
increased net sales without a proportionate increase in costs in the Residential
Building Products Group. 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.
Selling, general and administrative expense as a percentage of net sales
decreased from approximately 18.5% in the third quarter of 1997 to approximately
17.2% in the third quarter of 1998 and decreased from approximately 20.1% in the
first nine months of 1997 to approximately 18.0% in the first nine months of
1998. These decreases in the percentages were principally affected as a result
of acquisitions. Ply Gem has a lower level of selling, general and
administrative expense to net sales than the overall group of businesses owned
prior to the acquisition and NuTone has a higher level of expense. Excluding the
affect of acquisitions, selling, general and administrative expense as a
percentage of net sales decreased from approximately 20.8% in the third quarter
of 1997 to approximately 20.0% in the third quarter of 1998, and decreased
slightly from approximately 21.1% in the first nine months of 1997 to
approximately 20.9% in the first nine months of 1998 in both the Residential
Products and Air Conditioning and Heating Products Groups, as net sales
increased without a proportionate increase in expense.
28
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Amortization of acquired goodwill, as a percentage of net sales, increased from
approximately .5% of net sales in the third quarter of 1997 to approximately .8%
of net sales in the third quarter of 1998, and increased from approximately .4%
of net sales in the first nine months of 1997 to approximately .7% in the first
nine months of 1998, principally as a result of the acquisitions of Ply Gem and
NuTone.
Consolidated segment earnings were approximately $49,500,000 for the third
quarter of 1998 as compared to approximately $27,200,000 for the third quarter
of 1997, and approximately $109,700,000 for the first nine months of 1998 as
compared to approximately $66,200,000 for the first nine months of 1997. Segment
earnings are operating earnings from continuing operations before corporate and
other expenses that are not directly attributable to the Company's product
groups. Acquisitions contributed approximately $19,500,000 and $5,200,000 to
segment earnings in the third quarter of 1998 and 1997, respectively, and
approximately $30,600,000 and $5,200,000 in the first nine months of 1998 and
1997, respectively. The Company's segment earnings for the first nine months of
1998 include approximately $1,200,000 of earnings related to businesses sold in
1998 (to the date of sale) which are included in the Specialty Products and
Distribution Group. Consolidated segment earnings have been reduced by
consolidated depreciation and amortization expense of approximately $11,100,000
and approximately $7,000,000 for third quarter 1998 and 1997, respectively, and
approximately $30,900,000 and $17,400,000 for the first nine months of 1998 and
1997, respectively. Acquisitions contributed approximately $4,400,000 and
$2,000,000 of the increase in consolidated depreciation and amortization expense
in the third quarter of 1998 and 1997, respectively, and approximately
$13,800,000 and $2,000,000 for the first nine months of 1998 and 1997,
respectively. The overall increase in segment earnings related to businesses
owned prior to the acquisitions was due principally to increased sales volume
without a proportionate increase in cost and expense in the Air Conditioning and
Heating Products Group and, to a lesser extent, in the Residential Building
Products Group.
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 were approximately 6.7% and 7.0% of segment
earnings in the third quarter and first nine months of 1998, respectively. Sales
and earnings derived from the international market are subject to the risks of
currency fluctuations.
Operating earnings in the third quarter of 1998 increased approximately
$21,000,000 or approximately 90.1% as compared to the third quarter of 1997, and
increased approximately $41,500,000 or approximately 74.6% as compared to the
first nine months of 1997 primarily due to the factors previously discussed.
29
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Interest expense in the third quarter of 1998 increased approximately $9,400,000
or approximately 69.6% as compared to the third quarter of 1997, and increased
approximately $31,000,000 or approximately 99.7% as compared to the first nine
months of 1997, primarily as a result of the sale of the 9 1/4% Notes on March
17, 1997, the sale of the 9 1/8% Notes in August 1997, indebtedness of Ply Gem
existing at the date of acquisition and the sale of the 8 7/8% Notes on July 31,
1998. This increase was partially offset by the refinancing of certain
outstanding indebtedness of the Company's subsidiaries in 1997. (See Notes B and
E of the Notes to the Unaudited Financial Statements included elsewhere herein.)
Investment income was approximately $3,100,000 in the third quarter of 1998 and
1997, and decreased slightly from approximately $7,700,000 in the first nine
months of 1997 to approximately $7,500,000 in the first nine months of 1998 or
approximately 2.6%, principally due to slightly lower yields earned on
short-term investments and marketable securities.
The provision for income taxes was approximately $11,200,000 for the third
quarter of 1998, as compared to approximately $4,500,000 for the third quarter
of 1997, and approximately $19,400,000 for the first nine months of 1998 as
compared to approximately $11,400,000 for the first nine months of 1997.
The income tax rates differed from the United States Federal statutory rate of
35% principally as a result of applying an estimated annual effective tax rate,
which rates include the effects of nondeductible amortization expense (for tax
purposes), state income tax provisions, 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.
In the fourth quarter of 1997, the Company adopted a plan to discontinue its
Plumbing Products Group and provided a pre-tax reserve of $2,500,000 for
estimated future losses including interest expense. On July 10, 1998, the
Plumbing Products Group was sold for approximately $33,700,000 in cash and the
Company recorded a $600,000 net after tax gain on the disposition. For the nine
months ended October 3, 1998, approximately $1,000,000 of corporate interest
expense was allocated against this reserve. The loss from discontinued
operations related to the Plumbing Products Group was approximately $900,000 and
$4,200,000 excluding income tax benefits of approximately $200,000 and
$1,500,000 for the third quarter and first nine months of 1997, respectively and
reflect an allocation of corporate interest expense of approximately $475,000
and $1,425,000 for the third quarter and the first nine months of 1997
respectively. (See Note H of the Notes to the Unaudited Financial Statements
included elsewhere herein.)
30
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged and expects to continue to be highly leveraged
for the foreseeable future. At October 3, 1998, on a pro forma basis, after
giving effect to the acquisition of Napco, the Company had consolidated debt of
approximately $1,037,085,000 and consolidated unrestricted cash, cash
equivalents and marketable securities of approximately $124,298,000. On a pro
forma basis, the Company's debt to equity ratio was approximately 4.89:1 at
October 3, 1998 as compared to 6.66:1 at December 31, 1997. The Company's
ability to pay interest on or to refinance its indebtedness depends on the
successful integration of the operations of recent acquisitions and the
Company's future performance, which, in part, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. There can be no assurance that the Company will generate sufficient
cash flow from the operation of its subsidiaries or that future financings will
be available on acceptable terms or in amounts sufficient to enable the company
to service or refinance its indebtedness, or to make necessary capital
expenditures.
The Company has evaluated and expects to continue to evaluate possible
acquisition transactions and the possible dispositions of certain of its
businesses on an ongoing basis and at any given time may be engaged in
discussions or negotiations with respect to possible acquisitions or
dispositions. (See Notes K and L of the Notes to the Unaudited Financial
Statements included elsewhere herein.)
The indentures and other agreements governing the Company's and its subsidiary's
indebtedness (including the indentures for the 8 7/8% Notes, the 9 7/8% Notes,
the 9 1/4% Notes and the 9 1/8% Notes and the credit agreement for the Ply Gem
Credit Facility) contain restrictive financial and operating covenants including
covenants that restrict the ability of the Company and its subsidiaries to
complete acquisitions, pay dividends, incur indebtedness, make investments, sell
assets and take certain other corporate actions.
The Company expects to meet its cash flow requirements through fiscal 1999 from
cash generated from operations, existing cash, cash equivalents and marketable
securities, the sale of assets and possible financings, which may include
securitization of accounts receivables and mortgage or capital lease financings.
In 1998 the Company improved its liquidity and reduced its leverage from the
sale of 2,182,500 shares of common stock for net proceeds of approximately
$64,300,000 and net proceeds of approximately $68,947,000 from the sale of
certain businesses. Approximately $44,800,000 of the proceeds received from the
31
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
sale of common stock was used for the acquisition of NuTone, and $20,000,000 of
the net proceeds received from the sale of businesses was used to reduce debt.
(See Notes C, E and K of the Notes to the Unaudited Condensed Consolidated
Financial Statements.)
On October 9, 1998, the Company, through a wholly-owned subsidiary, purchased
all of the issued and outstanding capital stock of Napco for approximately
$77,100,000 in cash plus the assumption of approximately $10,200,000 of debt.
The acquisition was funded through the use of unrestricted cash, cash
equivalents and marketable securities.
On July 31, 1998, the Company through a wholly-owned subsidiary, purchased all
of the issued and outstanding capital stock of NuTone from Williams, for an
aggregate purchase price of $242,500,000. In connection with the acquisition,
the Company assumed NuTone's operating liabilities (other than intercompany
borrowings), including certain liabilities of NuTone concerning post retirement
and other benefit obligations. The purchase price was funded from the net
proceeds from the sale of the 8 7/8% Notes which occurred on July 31, 1998
together with a portion of the cash proceeds from the Common Stock Offering,
(see Note E of the Notes to the Unaudited Financial Statements included
elsewhere herein.)
Unrestricted cash and cash equivalents decreased from approximately $125,842,000
at December 31, 1997 to approximately $99,201,000 at October 3, 1998. Marketable
securities available for sale increased from approximately $35,988,000 at
December 31, 1997 to approximately $102,197,000 at October 3, 1998. The
Company's investment in marketable securities at October 3, 1998 consisted
primarily of investments in bank issued money market instruments and commercial
paper. At October 3, 1998, approximately $6,403,000 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.
Capital expenditures were approximately $22,500,000 in 1997 and are expected to
be approximately $40,000,000 in 1998.
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 November 6,
1998, the Company purchased approximately 356,400 shares of its Common and
Special Common Stock under this program for approximately $10,224,000 and
accounted for such share purchases as Treasury Stock.
32
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
At November 6, 1998, approximately $61,100,000 was available for the payment of
cash dividends, stock payments or other restricted payments as defined under the
terms of the Company's most restrictive Indenture. (See Note F of the Notes to
the Unaudited Financial Statements included elsewhere herein.)
The Company's working capital increased and its current ratio decreased slightly
from approximately $341,821,000 and 2.25:1, respectively, to approximately
$386,275,000 and 2.21:1, respectively, between December 31, 1997 and October 3,
1998, principally as a result of the acquisition of NuTone, the net proceeds
from the Common Stock Offering (net of funds used to acquire NuTone) and the
sale of the Plumbing Products Group, partially offset by the effect of the sale
of other businesses. NuTone contributed approximately $62,632,000 of current
assets and approximately $36,189,000 of current liabilities to the net increase
in working capital at October 3, 1998.
Accounts receivable increased approximately $57,214,000 or approximately 31.7%,
between December 31, 1997 and October 3, 1998, while net sales increased
approximately $42,477,000 or approximately 10.2% in the third quarter of 1998 as
compared to the fourth quarter of 1997. The increase in accounts receivable is
primarily attributable to the acquisition of NuTone, which contributed
approximately $36,606,000 to the increase and is offset by a decrease of
approximately $12,843,000 attributable to businesses sold. 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 October 3, 1998
as compared to December 31, 1997. The Company has not experienced any
significant overall changes in credit terms, collection efforts, credit
utilization or delinquency in accounts receivable in 1998.
Inventories increased approximately $9,764,000 or approximately 5.5%, between
December 31, 1997 and October 3, 1998. Excluding the effects of the acquisition
of NuTone and businesses sold, inventories increased $9,149,000.
Accounts payable increased approximately $37,074,000 or approximately 40.5%,
between December 31, 1997 and October 3, 1998 and is net of an increase of
approximately $13,878,000 attributable to the acquisition of NuTone partially
offset by a decrease of approximately $2,095,000 attributable to businesses
sold.
33
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
Unrestricted cash and cash equivalents decreased approximately $26,641,000 from
December 31, 1997 to October 3, 1998, principally as a result of the following:
Condensed
Consolidated
Cash Flows
Operating Activities--
Cash flow from operations, net $ 64,790,000
Increase in accounts receivable, net (36,315,000)
Increase in inventories (12,269,000)
Increase in prepaids and other current assets (4,492,000)
Increase in net assets of discontinued operations (6,659,000)
Increase in trade accounts payable 24,346,000
Decrease in accrued expenses and taxes (9,536,000)
Investing Activities---
Net cash paid for a business acquired (242,500,000)
Proceeds from businesses sold or discontinued 68,947,000
Purchase of marketable securities (100,512,000)
Proceeds from the sale of marketable securities 36,123,000
Capital expenditures (24,185,000)
Financing Activities---
Sale of notes 203,492,000
Purchase of notes (10,511,000)
Payment of borrowings, net (26,141,000)
Net proceeds from the Common Stock Offering 64,300,000
Purchase of Nortek Common and Special
Common Stock (6,760,000)
Other, net (8,759,000)
-------------
$(26,641,000)
=============
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 decreased from approximately 6.66:1 at
December 31, 1997 to 4.84:1 at October 3, 1998, primarily as a result of the
Common Stock Offering, net earnings for the first nine months ended October 3,
1998 and the net decrease in borrowings, partially offset by the effect of the
sale of the 8 7/8% Notes. (See the Unaudited Condensed Consolidated Statement of
Stockholders' Investment included elsewhere herein.)
34
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
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.
Year 2000 Disclosure
- --------------------
The Year 2000 ("Y2K") issue refers to and arises from deficient computer
programs and related products, such as embedded chips, which do not properly
recognize or process a year that begins with "20" instead of "19". If not
corrected, many business and other processes could fail or create erroneous
results. The extent of the potential impact of the Y2K problem is not yet known,
and if not timely corrected, it could affect the global economy. As required by
recent guidance from the SEC applicable to all public companies, the following
disclosure provides more detail regarding the Company's Y2K compliance than
previous reports filed by the Company.
A. The Company's Readiness:
To manage its Y2K program, the Company established a corporate-wide initiative
and has divided its efforts into five areas: awareness (communication to
employees, vendors and suppliers of the Y2K issue), assessment (a complete
inventory of all aspects of the business that might be affected),
remediation/validation (develop plans to correct all issues identified from the
assessment stage), implementation (corrective measures taken to solve the Y2K
issues identified) and contingency (alternative actions developed in the event
that all corrective measures are not implemented by Y2K). Further, the Company
has identified three key areas of concentration: information technology systems,
non-IT systems and third parties (suppliers and customers). The Company's
subsidiaries are in various stages of completion of this readiness, including
the assessment, remediation and implementation stages, for the Y2K issue.
Certain of the Company subsidiaries are simultaneously working on the
assessment, remediation and implementation stages of this initiative. During the
next two fiscal quarters, the company's subsidiaries expect to make significant
progress in the remediation and implementation stages. Overall the Company
believes that it is in the assessment stage of addressing the Y2K issue and
expects by the end of its next fiscal quarter to provide a more definitive
assessment of the status of each stage. Although the Company believes that all
modifications to information technology ("IT") and non-IT systems, material to
the Company's business, will be Y2K compliant on or before December 31, 1999, it
cannot predict the outcome or the success of its Y2K program, or that third
party systems are or will be Y2K compliant, or that the costs required to
address the Y2K initiative, or that the impact of a failure to achieve
substantial Y2K compliance, will not have a material adverse effect on the
Company's business, financial condition or results of operations.
35
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
1. Information Technology (IT) systems: The Company is conducting a
comprehensive review of its computer systems to identify those that could
be affected by the Y2K issue. The Company's operating systems and database
systems are not all Y2K compliant. The Company presently believes that with
minor modifications (conversion and testing in progress) to existing
software and replacement of others, the Y2K problem will not pose
significant operational problems for the Company's computer systems as so
modified.
2. Non IT systems: Non IT systems are those that typically include "embedded"
technology such as microcontrollers and chips. The Company currently is in
the process of evaluating the effect of the Y2K problem on all non-IT
systems including all telecommunications equipment, shop-floor controls,
alarm systems and any other equipment that can potentially use
microcontrollers, chips or other systems affected by the Y2K problem.
3. Third parties: Due to the pervasive use of computers by the Company in its
dealings with suppliers, customers, financial institutions, and other third
parties, the Y2K problem could have a material impact on the Company if not
timely addressed by such third parties. To assess third party readiness,
the Company is surveying its principal suppliers and financial institutions
and receiving responses that indicate that such parties are in the process
of adequately addressing the problem. In cases where key suppliers have not
responded or are not adequately addressing the issue, the Company will
determine what contingency plans will be necessary to protect the Company's
interests. While the Company has not surveyed all its customers, it has
received surveys from many of its principal customers that indicate that
they are also addressing the problem.
B. Cost:
The Company has completed a preliminary evaluation of anticipated Y2K
remediation costs among the various systems for all its businesses and is in the
process of validating and finalizing cost projections. Based on information
known to date, the Company believes that total remediation costs will not be
significant. Actual costs to be incurred by the Company will depend on a number
of factors which cannot be accurately predicted including, among others, the
extent and difficulty of the remediation and other work to be done, the
availability and cost of consultants, and the extent of testing required to
demonstrate Y2K compliance.
36
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
C. Risks:
Based on current information, the Company believes that the Y2K problem will not
have a material adverse effect on the Company, its business or its financial
condition. There can, however, be no assurances that Y2K remediation by the
Company or third parties will be properly and timely completed, and failure to
do so could have a material adverse effect on the Company, its business and its
financial condition. The Company believes that the greatest risk presented by
the Y2K problem is from third parties, such as suppliers, financial
institutions, utility providers, etc. who may not have adequately addressed the
problem. A failure of any such third party's computer or other applicable
systems in sufficient magnitude could materially and adversely affect the
Company. The Company is not presently able to quantify this risk.
D. Contingency Plans:
The Company is in the process of preparing appropriate contingency plans in the
event that a significant internal or external exposure is identified. While the
Company is not presently aware of any such significant exposure, there can be no
guarantee that the systems of third parties on which the Company relies will be
converted in a timely manner, or that a failure to properly convert by another
company would not have a material adverse effect on the Company.
Readers are cautioned that Y2K forward looking statements should be read in
conjunction with the Company's disclosure under the heading "Forward Looking
Statements" below.
Forward Looking Statements
- --------------------------
When used in this discussion and throughout this document, the words "believes",
"anticipates", "are expected" and "expects" and similar expressions are intended
to identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, over which the Company has no control, which could
cause actual results to differ materially from those 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, Y2K readiness, 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
37
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998
AND THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 1997
(Continued)
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.
38
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amendment No. 2 dated June 30, 1998 to Employment Agreement
between Richard L. Bready and the Company dated as of
February 26, 1997 (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) The following reports on Form 8-K were filed by the Registrant
during the period:
July 15, 1998, Item 2, Acquisition or Disposition of Assets; Item
5, Other Events; Item 7, Financial Statements and Exhibits.
July 28, 1998, Item 5, Other Events; Item 7, Financial Statements
and Exhibits.
August 12, 1998, Item 2, Acquisition or Disposition of Assets;
Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits.
39
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
NORTEK, INC.
(Registrant)
/s/ Almon C. Hall
-------------------
Almon C. Hall, Vice President and
Controller and Chief Accounting
Officer
December 1, 1998
--------------------
(Date)
40
<PAGE>
Exhibit 10.1
NORTEK, INC. and RICHARD L. BREADY
EMPLOYMENT AGREEMENT
Amendment No. 2
The Employment Agreement between Nortek, Inc. and Richard L. Bready
dated as of February 26, 1997, as amended by the Amendment thereto dated June
13, 1997, is hereby amended as follows:
1. Section 2.(a) is restated in its entirety to read:
"During the Employment Period, Employee shall receive a basic
annual salary of not less than $975,000 subject to increase as
hereinafter provided and subject to annual increases as determined
by the compensation committee of the board of directors of the
Employer (the "Committee") in their discretion (hereinafter called
the "Basic Salary"), payable in equal monthly installments on the
15th day of each month."
2. The last paragraph of Section 2.(c)(i) is restated in its entirety to
read:
"Payment of Incentive Compensation in stock shall be in shares of
Employer's common stock or special common stock as determined by
the Committee with such shares valued at fair market value as
determined by the Committee."
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as
of June 30, 1998.
ATTEST NORTEK, INC.
/s/ Kevin W. Donnelly By: /s/ Richard J. Harris
- --------------------- -------------------------
Secretary Richard J. Harris
Vice President and Treasurer
WITNESS:
/s/ Donna Z. Laflamme /s/ Richard L.Bready
- --------------------- ---------------------
Richard L.Bready,Employee
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-03-1998
<CASH> 99,201
<SECURITIES> 108,600
<RECEIVABLES> 251,140
<ALLOWANCES> 13,512
<INVENTORY> 186,017
<CURRENT-ASSETS> 699,508
<PP&E> 379,983
<DEPRECIATION> 123,476
<TOTAL-ASSETS> 1,652,423
<CURRENT-LIABILITIES> 317,186
<BONDS> 1,010,657
0
0
<COMMON> 19,274
<OTHER-SE> 192,908
<TOTAL-LIABILITY-AND-EQUITY> 1,652,423
<SALES> 1,300,308
<TOTAL-REVENUES> 1,300,308
<CGS> 960,168
<TOTAL-COSTS> 960,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,126
<INCOME-PRETAX> 42,500
<INCOME-TAX> 19,400
<INCOME-CONTINUING> 23,100
<DISCONTINUED> 600
<EXTRAORDINARY> (100)
<CHANGES> 0
<NET-INCOME> 23,600
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.17
</TABLE>
