FORM 10-Q
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
November 17, 1998
--------------------
(Date)
40
<PAGE>
<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> 1,378,464
<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>
EXHIBIT 10-1
NORTEK, INC.
1998 EQUITY AND CASH INCENTIVE PLAN
1. Purpose
The purpose of this Equity and Cash Incentive Plan (the "Plan") is to advance
the interests of Nortek, Inc. (the "Company") and its subsidiaries by enhancing
their ability to attract and retain employees and other persons or entities who
are in a position to make significant contributions to the success of the
Company and its subsidiaries through ownership of shares of the Company's Common
Stock and Special Common Stock and cash incentives.
The Plan is intended to accomplish these goals by enabling the Company to grant
Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or
Unrestricted Stock Awards, Deferred Stock Awards or Performance Awards, or
combinations thereof, all as more fully described below.
2. Administration
Unless otherwise determined by the Board of Directors of the Company (the
"Board"), the Plan will be administered by a Committee of the Board designated
for such purpose (the "Committee"). The Committee shall consist of at least two
directors. A majority of the members of the Committee shall constitute a quorum,
and all determinations of the Committee shall be made by a majority of its
members. Any determination of the Committee under the Plan may be made without
notice or meeting of the Committee by a writing signed by a majority of the
Committee members. During such times as the Company's Common Stock is registered
under the Securities Exchange Act of 1934 (the "1934 Act"), all members of the
Committee shall be "nonemployee directors" within the meaning of Rule 16b-3
promulgated under the 1934 Act and "outside directors" within the meaning of
Section 162(m)(4)(C)(i) of the Internal Revenue Code of 1986, as amended (the
"Code").
The Committee will have authority, not inconsistent with the express provisions
of the Plan and in addition to other authority granted under the Plan, to (a)
grant Awards at such time or times as it may choose; (b) determine whether the
Award is with respect to the Company's Common Stock, $1.00 par value, or its
Special Common Stock, $1.00 par value (together, the "Stock"), or a combination
thereof and the size of each Award, including the number of shares of Stock
subject to the Award; (c) determine the type or types of each Award; (d)
determine the terms and conditions of each Award; (e) waive compliance by a
holder of an Award with any obligations to be performed by such holder under an
Award and waive any terms or conditions of an Award; (f) amend or cancel an
existing Award in whole or in part (and if an award is canceled, grant another
Award in its place on such terms and conditions as the Committee shall specify),
except that the Committee may not, without the consent of the holder of an
Award, take any action under this clause with respect to such Award if such
action would adversely affect the rights of such holder, (g) prescribe the form
or forms of instruments that are required or deemed appropriate under the Plan,
including any written notices and elections required of Participants (as defined
below), and change such forms from time to time; (h) adopt, amend and rescind
rules and regulations for the administration of the Plan; and (i) interpret the
Plan and decide any questions and settle all controversies and disputes that may
arise in connection with the Plan. Such determinations and actions of the
Committee, and all other determinations and actions of the Committee made or
taken under authority granted by any provision of the Plan, will be conclusive
and will bind all parties. Nothing in this paragraph shall be construed as
limiting the power of the Committee to make adjustments under Section 8.6.
3. Effective Date and Term of Plan
The Plan will become effective on the date on which it is approved by the
stockholders of the Company. Awards may be made prior to such stockholder
approval if made subject thereto. No Award may be granted under the Plan after
May 14, 2008, but Awards previously granted may extend beyond that date.
4. Shares Subject to the Plan
Subject to adjustment as provided in Section 8.6, the aggregate number of shares
of Stock that may be delivered under the Plan will be 475,000. If any Award
requiring exercise by the Participant for delivery of Stock terminates without
having been exercised in full, or if any Award payable in Stock or cash is
satisfied in cash rather than Stock, the number of shares of Stock as to which
such Award was not exercised or for which cash was substituted will be available
for future grants.
Subject to Section 8.6(a), the maximum number of shares of Stock as to which
Options or Stock Appreciation Rights may be granted to any Participant in any
one calendar year is 250,000, which limitation shall be construed and applied
consistently with the rules under Section 162(m) of the Code.
Stock delivered under the Plan may be either authorized but unissued Stock or
previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
5. Eligibility and Participation
Each key employee of the Company or any of its subsidiaries (an "Employee") and
each other person or entity (including without limitation non-Employee directors
of the Company or a subsidiary of the Company) who, in the opinion of the
Committee, is in a position to make a significant contribution to the success of
the Company or its subsidiaries will be eligible to receive Awards under the
Plan (each such Employee, person or entity receiving an Award, "a Participant").
A "subsidiary" for purposes of the Plan will be a corporation in which the
Company owns, directly or indirectly, stock possessing 50k or more of the total
combined voting power of all classes of stock.
6. Types of awards
6.1. Options
(a) Nature of Options
An Option is an Award giving the recipient the right on exercise thereof
to purchase stock. Both "incentive stock options," as defined in Section
422(b) of the Code (any Option intended to qualify as an incentive stock
option being hereinafter referred to as an "ISO"), and Options that are
not ISOs, may be granted under the Plan. ISOs shall be awarded only to
Employees. An Option awarded under the Plan shall be a non-ISO unless it
is expressly designated as an ISO at time of grant.
(b) Exercise Price.
The exercise price of an Option will be determined by the Committee
subject to the following:
(1) The exercise price of an ISO or an Option intended to qualify as
performance based compensation under Section 162(m) of the Code shall
not be less than 100% of the fair market value of the Stock subject
to the Option, determined as of the time the Option is granted.
(2) In no case may the exercise price paid for Stock, which is part of an
original issue of authorized Stock, be less than the par value per
share of the Stock.
(c) Duration of Options.
The latest date on which an Option may be exercised will be the tenth
anniversary of the day immediately preceding the date the Option was
granted, or such earlier date as may have been specified by the Committee
at the time the Option was granted.
(d) Exercise of Options.
An Option will become exercisable at such time or times, and on such
conditions, as the Committee may specify. The Committee may at any time
and from time to time accelerate the time at which all or any part of the
Option may be exercised. Any exercise of an Option must be in writing,
signed by the proper person and delivered or mailed to the Company,
accompanied by (I) any documents required by the Committee and (2) payment
in full in accordance with paragraph (e) below for the number of shares
for which the Option is exercised.
(e) Payment for Stock.
Stock purchased on exercise of an Option must be paid for as follows: (1)
in cash or by check (acceptable to the Company in accordance with
guidelines established for this purpose), bank draft or money order
payable to the order of the Company or (2) if so permitted by the
Committee at or after the grant of the Option or by the instrument
evidencing the Option, (i) through the delivery of shares of Stock which
have been held for at least six months (unless the Committee approves a
shorter period) and which have a fair market value equal to the exercise
price, (ii) by delivery of an unconditional and irrevocable undertaking by
a broker to deliver promptly to the Company sufficient funds to pay the
exercise price, or (iii) by any combination of the foregoing permissible
forms of payment.
(f) Discretionary Payments.
If (i) the market price of shares of Stock subject to an Option (other
than an Option which is in tandem with a Stock Appreciation Right as
described in Section 6.2) exceeds the exercise price of the Option at the
time of its exercise, and (ii) the person exercising the Option so
requests the Committee in writing, the Committee may in its sole
discretion cancel the Option and cause the Company to pay in cash or in
shares of Common Stock (at a price per share equal to the fair market
value per share) to the person exercising the Option an amount equal to
the difference between the fair market value of the Stock which would have
been purchased pursuant to the exercise (determined on the date the Option
is canceled) and the aggregate exercise price which would have been paid.
6.2. Stock Appreciation Rights.
(a) Nature of Stock Appreciation Rights
A Stock Appreciation Right (or "SAR") is an Award entitling the holder on
exercise to receive an amount in cash or Stock or a combination thereof
(such form to be determined by the Committee) determined in whole or in
part by reference to appreciation, from and after the date of grant, in
the fair market value of a share of Stock. SARs may be based solely on
appreciation in the fair market value of Stock or on a comparison of such
appreciation with some other measure of market growth such as (but not
limited) to appreciation in a recognized market index. The date as of
which such appreciation or other measure is determined shall be the
exercise date unless another date is specified by the Committee.
(b) Grant of Stock Appreciation Rights
SARs may be granted in tandem with, or independently of, Options granted
under the Plan.
(1) Rules Applicable to Tandem Awards. When SARs are granted in tandem
with Options, (a) the SAR will be exercisable only at such time or
times, and to the extent, that the related Option is exercisable and
will be exercisable in accordance with the procedure required for
exercise of the related Option; (b) the SAR will terminate and no
longer be exercisable upon the termination or exercise of the related
Option, except that a SAR granted with respect to less than the full
number of shares covered by an Option will not be reduced until the
number of shares as to which the related Option has been exercised or
has terminated exceeds the number of shares not covered by the SAR;
(c) the Option will terminate and no longer be exercisable upon the
exercise of the related SAR; and (d) the SAR will be transferable
only with the related Option.
(2) Exercise of independent SARs. A SAR not granted in tandem with an
Option will become exercisable at such time or times, and on such
conditions, as the Committee may specify. The Committee may at any
time accelerate the time at which all or any part of the Right may be
exercised.
Any exercise of an independent SAR must be in writing, signed by the
proper person and delivered or mailed to the Company, accompanied by any
other documents required by the Committee.
6.3. Restricted and Unrestricted Stock.
(a) Grant of Restricted Stock
Subject to the terms and provisions of the Plan, the Committee may
grant shares of Stock in such amounts and upon such terms and
conditions as the Committee shall determine subject to the
restrictions described below ("Restricted Stock").
(b) Restricted Stock Agreement
The Committee may require, as a condition to an Award, that a
recipient of a Restricted Stock Award enter into a Restricted Stock
Award Agreement, setting forth the terms and conditions of the Award.
In lieu of a Restricted Stock Award Agreement, the Committee may
provide the terms and conditions of an Award in a notice to the
Participant of the Award, on the Stock certificate representing the
Restricted Stock, in the resolution approving the Award, or in such
other manner as it deems appropriate.
(c) Transferability and Other Restrictions
Except as otherwise provided in this Section 6.3, the shares of
Restricted Stock granted herein may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated until the
end of the applicable period or periods established by the Committee
and the satisfaction of any other conditions or restrictions
established by the Committee (such period during which a share of
Restricted Stock is subject to such restrictions and conditions is
referred to as the "Restricted Period"). Except as the Committee may
otherwise determine under Section 7.1, if a Participant suffers a
Termination of Service (as defined at Section 7.1) for any reason
during the Restricted Period, the Company may purchase the shares of
Restricted Stock subject to such restrictions and conditions for the
amount of cash paid by the Participant for such shares; provided,
that if no cash was paid by the Participant such shares of Restricted
Stock shall be automatically forfeited to the Company.
During the Restricted Period with respect to any shares of Restricted
Stock, the Company shall have the right to retain in the Company's
possession the certificate or certificates representing such shares.
(d) Removal of Restrictions
Except as otherwise provided in this Section 6.3, a share of
Restricted Stock covered by a Restricted Stock grant shall become
freely transferable by the Participant upon completion of the
Restricted Period, including the passage of any applicable period of
time and satisfaction of any conditions to vesting. The Committee, in
its sole discretion, shall have the right at any time immediately to
waive all or any part of the restrictions and conditions with regard
to all or any part of the shares held by any Participant.
(e) Voting Rights
Dividends and Other Distributions. During the Restricted Period,
Participants holding shares of Restricted Stock granted hereunder may
exercise full voting rights and shall receive all regular cash
dividends paid with respect to such shares. Except as the Committee
shall otherwise determine, any other cash dividends and other
distributions paid to Participants with respect to shares of
Restricted Stock including any dividends and distributions paid in
shares shall be subject to the same restrictions and conditions as
the shares of Restricted Stock with respect to which they were paid.
(f) Other Awards Settled with Restricted Stock
The Committee may, at the time any Award described in this Section 6
is granted, provide that any or all the Stock delivered pursuant to
the Award will be Restricted Stock.
(g) Unrestricted Stock
Subject to the terms and provisions of the Plan, the Committee may
grant shares of Stock free of restrictions under the Plan in such
amounts and upon such terms and conditions as the Committee shall
determine.
(h) Notice of Section 83(b) Election
Any Participant making an election under Section 83(b) of the Code with
respect to Restricted Stock must provide a copy thereof to the Company
within 10 days of filing such election with the Internal Revenue Service.
6.4. Deferred Stock.
A Deferred Stock Award entitles the recipient to receive shares of Stock
to be delivered in the future. Delivery of the Stock will take place at
such time or times, and on such conditions, as the Committee may specify.
The Committee may at any time accelerate the time at which delivery of all
or any part of the Stock will take place. At the time any Award described
in this Section 6.4 is granted, the Committee may provide that, at the
time Stock would otherwise be delivered pursuant to the Award, the
Participant will instead receive an instrument evidencing the
Participant's right to future delivery of Deferred Stock.
6.5. Performance Awards; Performance Goals.
(a) Nature of Performance Awards.
A Performance Award entitles the recipient to receive, without
payment, an amount in cash or Stock or a combination thereof such
form to be determined by the Committee) following the attainment of
Performance Goals (as hereinafter defined). Performance Goals may be
related to personal performance, corporate performance, departmental
performance or any other category of performance established by the
Committee. The Committee will determine the Performance Goals, the
period or periods during which performance is to be measured and all
other terms and conditions applicable to the Award.
(b) Other Awards Subject to Performance Condition.
The Committee may, at the time any Award described in this Section
6.5 is granted, impose the condition in addition to any conditions
specified or authorized in this Section 6 or any other provision of
the Plan) that Performance Goals be met prior to the Participant's
realization of any payment or benefit under the Award. Any such Award
made subject to the achievement of Performance Goals (other than an
Option or SAR) shall be treated as a Performance Award for purposes
of Section 6.5(c) below.
(c) Limitations and Special Rules.
In the case of any Performance Award intended to qualify for the
performance-based remuneration exception described in Section
162(m)(4)(c) of the Code and the regulations thereunder (an "Exempt
Award"), the Committee shall in writing preestablish specific
Performance Goals. A Performance Goal must be established prior to
passage of 25k of the period of time over which attainment of such
goal is to be measured. "Performance Goal" means criteria based upon
any one or more of the following (on a consolidated, divisional,
subsidiary, line of business or geographical basis or in combinations
thereof): (i) sales; revenues; assets; expenses; earnings before or
after deduction for all or any portion of interest, taxes,
depreciation or amortization, whether or not on a continuing
operations or an aggregate or per share basis; return on equity,
investment, capital or assets; inventory level or turns; one or more
operating ratios; borrowing levels, leverage ratios or credit rating;
market share; capital expenditures; cash flow; stock price;
stockholder return; or any combination of the foregoing; or (ii)
acquisitions and divestitures (in whole or in part); joint ventures
and strategic alliances; spin-offs, split-ups and the like;
reorganizations; recapitalizations, restructuring, financing
(issuance of debt or equity) and refinancing; transactions that would
constitute a Change of Control; or any combination of the foregoing.
A Performance Goal and targets with respect thereto determined by the
Committee need not be based upon an increase, a positive or improved
result or avoidance of loss. The maximum Exempt Award payable to any
Participant in respect of any such Performance Goal for any year
shall not exceed $2,500,000. Payment of Exempt Awards based upon a
Performance Goal for calendar years 2004 and thereafter is
conditioned upon reapproval by Employer's shareholders no later than
Employer's first meeting of shareholders in 2003.
7. Events Affecting Outstanding Awards
7.1. Termination of Service.
If a Participant who is an Employee ceases to be an Employee, or if
there is a termination of the consulting, service or similar
relationship in respect of which a non-Employee Participant was
granted an Award hereunder (such termination of the employment or
other relationship to be referred to as a "Termination of Service"),
except as otherwise provided by the Committee with respect to an
Award, the following will apply:
(a) Options and SARs.
(1) All Options and SARs held by the Participant immediately prior to the
Termination of Service, to the extent then exercisable, may be
exercised as follows:
(i) If the Termination of Service is on account of the Participant's
death, such Awards may be exercised by the Participant's executor or
administrator or the person or persons to whom the Option or Right is
transferred by will or the applicable laws of descent and
distribution, at any time within the one year period ending with the
first anniversary of the Participant's death, and shall thereupon
terminate.
(ii) If the Termination of Service is on account of the Participant's
retirement with consent of the Company after attainment of age 65
or total and permanent disability (as determined by the Committee),
such Awards may be exercised by the Participant at any time in
accordance with the original terms of the Award.
(iii) If the Termination of Service is for any other reason, such
Awards may be exercised by the Participant at any time within the
three month period following the Termination, and shall thereupon
terminate, unless the Award provides by its terms for immediate
termination of the Award in the event of such a Termination of
Service or unless the Termination of Service results from a
discharge for cause that, in the opinion of the Committee, casts
such discredit on the Participant as to justify immediate
termination of the Award.
(2) In no event, however, shall an Option or SAR remain exercisable
beyond the latest date on which it could have been exercised without
regard to this Section 7.
(3) Options and SARs held by a Participant immediately prior to the
Termination of Service that are not then exercisable shall terminate
upon the Termination of Service.
(b) Restricted Stock.
Restricted Stock held by the Participant must be transferred to the
Company (and, in the event the certificates representing such Restricted
Stock are held by the Company, such Restricted Stock will be so
transferred without any further action by the Participant) in accordance
with Section 6.3(c).
(c) Deferred Stock and Performance Awards.
Any payment or benefit under a Deferred Stock Award or Performance Award
to which the Participant was not irrevocably entitled prior to the
Termination of Service will be forfeited and the Award canceled upon the
Termination of Service.
(d) Special Circumstances.
In the case of a Participant who is an Employee, a Termination of Service
shall not be deemed to have resulted by reason of (i) a sick leave or
other bona fide leave of absence approved for purposes of the Plan by the
Committee, so long as the Employee's right to reemployment is guaranteed
7.2. Change of Control Provisions.
(a) Effect of Change of Control
Notwithstanding any other provision of the Plan to the contrary,
except as otherwise explicitly provided by the Committee in writing
with respect to a particular Award at the time the Award is granted,
in the event of a Change of Control:
(1) Acceleration of Awards. As of the date on which such Change of
Control is determined to have occurred, (i) Options and SARs
that are outstanding and that are not then exercisable shall,
become exercisable to the full extent of the original grants;
(ii) shares of Restricted Stock that are not otherwise vested
shall vest (and any Stock to be delivered under any other Award
as Restricted Stock shall upon delivery be unrestricted); and
(iii) holders of Performance Awards granted hereunder as to
which the relevant performance period has not ended shall be
entitled at the time of the Change of Control to receive a cash
payment per Performance Award equal to the full value of the
cash component of such Award (if any) plus the fair market value
of any Stock included in such Award.
(2) Termination of Awards in Certain Transactions. If, as part of,
or in connection with, the Change of Control, there occurs a
merger or consolidation in which the Company is not the
surviving corporation or which results in the acquisition of
substantially all the Company's outstanding stock by a person,
entity or group of persons and/or entities acting in concert or
there is a dissolution or liquidation of the Company, Awards
payable in Stock that are not cashed out or otherwise disposed
of in or prior to the transaction will terminate.
(3) Restriction on Termination of Awards Due to Termination of
Employment. Awards that remain outstanding after a Change of
Control shall not be terminated as a result of a Termination of
Service, other than by reason of death, for a period of at least
seven months following such Termination of Service.
(4) Restriction on Amendment. In connection with or following a
Change of Control, neither the Committee nor the Board may
impose additional conditions upon exercise or otherwise amend or
restrict an Award, or amend the terms of the Plan in any manner
adverse to the holder thereof, without the written consent of
such holder.
Notwithstanding the foregoing, if any right granted pursuant to this
Section 7.2 would make a Change of Control transaction ineligible for
pooling of interests accounting under applicable accounting
principles that but for this Section 7.2 would otherwise be eligible
for such accounting treatment, the Committee shall have the authority
to substitute stock for the cash which would otherwise be payable
pursuant to this Section 7.2 having a fair market value equal to such
cash.
(b) Definition of Change of Control
A "Change of Control" shall be deemed to have occurred if and when:
(1) The Company ceases to be a publicly owned corporation having at
least 500 stockholders; or
(2) There occurs any event or series of events that would be
required to be reported as a change of control in response to
Item l(a) on a Form 8-K filed by the Company under the Exchange
Act or in any other filing by the Company with the Securities
and Exchange Commission unless the person (persons), as that
term is defined or used in Section 13(d) or 14(d)(2) of the 1934
Act, acquiring control is an affiliate of the Company as of the
date the Plan is approved by stockholders of the Company;
(3) The Company executes an agreement of acquisition, merger, or
consolidation which contemplates that after the effective date
provided for in the agreement all or substantially all of the
business and/or assets of the Company will be controlled by
another Person; provided, however, for purposes of this
subparagraph (3) that (i) if such an agreement requires as a
condition precedent approval by the Company's shareholders of
the agreement or transaction, a Change of Control shall not be
deemed to have taken place unless and until such approval is
secured and, (ii) if the voting shareholders of such other
Person shall, immediately after such effective date, be
substantially the same as the voting shareholders of the Company
immediately prior to such effective date, the execution of such
agreement shall not, by itself, constitute a "Change of
Control"; or
(4) Any Person (other than the Company, a majority-owned subsidiary
of the Company, an employee benefit plan maintained by the
Company or a majority-owned subsidiary of the Company or members
of the Board on the date the Plan is approved by stockholders of
the Company) becomes the beneficial owner, directly or
indirectly (either as a result of the acquisition of securities
of as the result of an arrangement or understanding, including
the holding of proxies, with or among security holders), of
securities of the Company representing 25% or more of the votes
that could then be cast in an election for members of the Board
unless within 15 days of being advised that such ownership level
has been reached, the Company's board of directors adopts a
resolution approving the acquisition of that level of securities
ownership by such Person; or
(5) During any period of 24 consecutive months, commencing after the
date this Plan is approved by stockholders of the Company,
individuals who at the beginning of such 24-month period were
directors of the Company shall cease to constitute at least a
majority of the Board, unless the election of each director who
was not a director at the beginning of such period has been
approved in advance by directors representing at least two
thirds of (i) the directors then in office who were directors at
the beginning of the 24-month period, or (ii) the directors
specified in clause (i) plus directors whose election has been
so approved by directors specified in clause (i).
8. General Provisions
8.1. Documentation of Awards
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Committee from time to time. Such instruments may be in the
form of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.
8.2. Rights as a Stockholder, Dividend Equivalents.
Except as specifically provided by the Plan, the receipt of an Award will not
give a Participant rights as a stockholder, the Participant will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, only upon the issuance of Stock. However, the Committee
may, on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of cash dividends that would have been payable on any
or all Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Committee may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.
8.3. Conditions on Delivery of Stock.
The Company will not be obligated to deliver any shares of Stock pursuant to the
Plan or to remove restriction from shares previously delivered under the Plan
(a) until all conditions of the Award have been satisfied or removed, (b) until,
in the opinion of the Company's counsel, all applicable federal and state laws
and regulation have been complied with, (c) if the outstanding Stock is at the
time listed on any stock exchange or The NASDAQ National Market, until the
shares to be delivered have been listed or authorized to be listed on such
exchange or market upon official notice of notice of issuance, and (d) until all
other legal matters in connection with the issuance and delivery of such shares
have been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Award, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.
If an Award is exercised by the Participant's legal representative, the Company
will be under no obligation to deliver Stock pursuant to such exercise until the
Company is satisfied as to the authority of such representative.
8.4. Tax Withholding.
The Company will withhold from any cash payment made pursuant to an Award an
amount sufficient to satisfy all federal, state and local withholding tax
requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the Committee
will have the right to require that the Participant or other appropriate person
remit to the Company an amount sufficient to satisfy the withholding
requirements, or make other arrangements satisfactory to the Committee with
regard to such requirements, prior to the delivery of any Stock or removal of
restrictions thereon. If and to the extent that such withholding is required,
the Committee may permit the Participant or such other person to elect at such
time and in such manner as the Committee provides to have the Company hold back
from the shares to be delivered, or to deliver to the Company, Stock having a
value calculated to satisfy the withholding requirement. The Committee may make
such share withholding mandatory with respect to any Award at the time such
Award is made to a Participant.
If at the time an ISO is exercised the Committee determines that the Company
could be liable for withholding requirements with respect to the exercise or
with respect to a disposition of the Stock received upon exercise, the Committee
may require as a condition of exercise that the person exercising the ISO agree
(a) to provide for withholding under the preceding paragraph of this Section
8.4, if the Committee determines that a withholding responsibility may arise in
connection with tax exercise, (b) to inform the Company promptly of any
disposition (within the meaning of section 424(c) of the Code) of Stock received
upon exercise, and (c) to give such security as the Committee deems adequate to
meet the potential liability of the Company for the withholding requirements and
to augment such security from time to time in any amount reasonably deemed
necessary by the Committee to preserve the adequacy of such security.
8.5. Transferability of Awards.
Unless otherwise permitted by the Committee, no Award (other than an Award in
the form of an outright transfer of cash or Unrestricted Stock) may be
transferred other than by will or by the laws of descent and distribution.
8.6. Adjustments in the Event of Certain Transactions.
(a) In the event of a stock dividend, stock split or combination of shares,
recapitalization or other change in the Company's capitalization, or
other distribution to holders of Stock other than normal cash dividends,
after the effective date of the Plan, the Committee will make any
appropriate adjustments to the maximum number of shares that may be
delivered under the Plan under the first paragraph of Section 4 above
and to the limits described in the second paragraph of Section 4 and in
Section 6.5(c).
(b) In any event referred to in paragraph (a), the Committee will also make
any appropriate adjustments to the number and kind of shares of Stock or
securities subject to Awards then outstanding or subsequently granted,
any exercise prices relating to Awards and any other provision of Awards
affected by such change. The Committee may also make such adjustments
to take into account material changes in law or in accounting practices
or principles, mergers, consolidations, acquisitions, dispositions or
similar corporate transactions, or any other event, if it is determined
by the Committee that adjustments are appropriate to avoid distortion
in the operation of the Plan; provided, that adjustments pursuant to
this sentence shall not be made to the extent it would cause any Award
intended to be exempt under Section 162(m) (4) (c) of the Code to fail
to be so exempt.
(c) In the case of ISOs, the adjustments described in (a) and (b) will be made
only to the extent consistent with continued qualification of the Option
under Section 422 of the Code (in the case of an ISO) or Section 162(m) of
the Code.
8.7 Employment Rights, Etc.
Neither the adoption of the Plan nor the grant of Awards will confer upon
any person any right to continued retention by the Company or any
subsidiary as an Employee or otherwise, or affect in any way the right of
the Company or subsidiary to terminate an employment, service or similar
relationship at any time. Except as specifically provided by the Committee
in any particular case, the loss of existing or potential profit in Awards
granted under the Plan will not constitute an element of damages in the
event of termination of an employment, service or similar relationship
even if the termination is in violation of an obligation of the Company to
the Participant.
8.8 Deferral of Payments
The Committee may agree at any time, upon request of the Participant, to
defer the date on which any payment under an Award will be made.
8.9 Past Services as Consideration
Where a Participant purchases Stock under an Award for a price equal to
the par value of the Stock the Committee may determine that such price has
been satisfied by past services rendered by the Participant.
9. Effect, Amendment and Termination
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are
not subject to the Plan, to issue to such Participant Stock as a bonus or
otherwise, or to adopt other plans or arrangements under which Stock may
be issued to Employees.
The Committee may at any time or times amend the Plan or any outstanding
Award for any purpose which may at the time be permitted by law, or may at
any time terminate the Plan as to any further grants of Awards, provided
that (except to the extent expressly required or permitted by the Plan) no
such amendment will, without the approval of the stockholders of the
Company, effectuate a change for which stockholder approval is required in
order for the Plan to continue to qualify for the award of ISOs under
Section 422 of the Code or for the award of performance-based compensation
under Section 162(m) of the Code.
