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 July 4, 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
August 7, 1998 was 11,177,768. The number of shares of
Special Common Stock outstanding as of August 7, 1998 was
573,455.
<PAGE> 2
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar Amounts in Thousands)
July 4, Dec. 31,
Assets 1998 1997
---- ----
(Unaudited)
Current Assets:
Unrestricted
Cash and cash equivalents $201,619 $125,842
Marketable securities available for sale 12,055 35,988
Restricted investments and marketable
securities at cost, which approximates
market 6,389 6,348
Net assets of a discontinued operation 32,256 22,386
Accounts receivable, less allowances
of $13,239,000 and $11,047,000 209,527 180,414
Inventories
Raw materials 54,436 72,693
Work in process 18,437 18,399
Finished goods 99,191 85,161
------- -------
172,064 176,253
------- -------
Prepaid expenses 11,779 8,391
Other current assets 9,982 12,627
Prepaid income taxes 46,800 46,800
------- -------
Total current assets 702,471 615,049
------- -------
Property and Equipment, at Cost:
Land 11,420 12,081
Buildings and improvements 94,281 96,606
Machinery and equipment 253,473 250,677
------- -------
359,174 359,364
Less accumulated depreciation 122,999 116,841
------- -------
Total property and equipment, net 236,175 242,523
------- -------
Other Assets:
Goodwill, less accumulated amortization
of $36,661,000 and $31,773,000 372,718 378,232
Intangible assets 8,246 8,752
Notes receivable and other investments 8,949 9,339
Deferred income taxes 8,473 10,022
Deferred debt expense 19,952 21,066
Other 21,480 19,563
------- -------
439,818 446,974
------- -------
$1,378,464 $1,304,546
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
<PAGE> 3
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Continued)
(Dollar Amounts in Thousands)
July 4, Dec. 31,
1998 1997
------- --------
(Unaudited)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term
obligations $ 11,156 $ 11,770
Current maturities of long-term debt 5,746 5,969
Accounts payable 122,567 91,488
Accrued expenses and taxes, net 152,218 164,001
------- -------
Total current liabilities 291,687 273,228
------- -------
Other Liabilities 64,697 67,390
------- -------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 826,350 835,840
------- -------
Stockholders' Investment:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 18,409,378 and
16,050,794 shares issued 18,409 16,051
Special common stock, $1 par value;
authorized 5,000,000 shares; 860,122
and 767,287 shares issued 860 767
Additional paid-in capital 198,886 135,345
Retained earnings 68,766 58,966
Cumulative translation, pension
and other adjustments (6,903) (5,327)
Less --treasury common stock at cost,
7,237,237 and 7,032,497 shares (82,331) (75,779)
--treasury special common stock
at cost, 285,987 and
285,304 shares (1,957) (1,935)
------- -------
Total stockholders' investment 195,730 128,088
------- -------
$1,378,464 $1,304,546
========== ==========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
<PAGE> 4
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Amounts)
For The
Three Months Ended
------------------
July 4, June 28,
1998 1997
------- --------
(Unaudited)
Net Sales $449,647 $223,795
-------- --------
Costs and Expenses:
Cost of products sold 333,941 158,725
Selling, general and
administrative expense 79,938 45,521
Amortization of acquired goodwill 2,614 717
------- -------
416,493 204,963
------- -------
Operating earnings 33,154 18,832
Interest expense (19,740) (10,245)
Investment income 2,086 3,113
------- -------
Earnings from continuing
operations before provision
for income taxes 15,500 11,700
Provision for income taxes 7,000 4,000
------- -------
Earnings from continuing operations 8,500 7,700
Loss from discontinued operations --- (1,000)
------- -------
Net Earnings $ 8,500 $ 6,700
======= =======
Net Earnings (Loss) Per Share:
Earnings from continuing operations:
Basic $ .79 $ .80
Diluted $ .78 $ .78
Loss from discontinued operations:
Basic $ --- $ (.10)
------- -------
Diluted $ --- $ (.10)
------- -------
Net Earnings:
Basic $ .79 $ .70
======= =======
Diluted $ .78 $ .68
======= =======
Weighted Average Number of Shares:
Basic 10,718 9,602
====== =======
Diluted 10,905 9,828
======= =======
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
<PAGE> 5
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands Except Per Share Amounts)
For The
Six Months Ended
------------------
July 4, June 28,
1998 1997
------- --------
(Unaudited)
Net Sales $842,115 $418,033
------- -------
Costs and Expenses:
Cost of products sold 628,595 295,711
Selling, general and
administrative expense 155,499 88,599
Amortization of acquired goodwill 5,174 1,429
------- -------
789,268 385,739
------- -------
Operating earnings 52,847 32,294
Interest expense (39,198) (17,568)
Investment income 4,351 4,574
------- -------
Earnings from continuing
operations before provision
for income taxes 18,000 19,300
Provision for income taxes 8,200 6,900
------- -------
Earnings from continuing operations 9,800 12,400
Loss from discontinued operations --- (2,000)
------- -------
Net Earnings $ 9,800 $ 10,400
======= =======
Net Earnings (Loss) Per Share:
Earnings from continuing operations:
Basic $ .97 $ 1.28
Diluted $ .95 $ 1.25
Loss from discontinued operations:
Basic $ --- $ (.20)
-------- ---------
Diluted $ --- $ (.20)
-------- ---------
Net Earnings:
Basic $ .97 $ 1.08
======== =========
Diluted $ .95 $ 1.05
======== =========
Weighted Average Number of Shares:
Basic 10,129 9,663
======= ========
Diluted 10,311 9,896
======= ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
<PAGE> 6
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
For the
Six Months Ended
------------------
July 4, June 28,
1998 1997
Cash Flows from operating activities: ------ -------
(Unaudited)
Earnings from continuing operations $ 9,800 $ 12,400
Loss from discontinued operations --- (2,000)
------- --------
Net earnings 9,800 10,400
------ --------
Adjustments to reconcile net earnings to cash:
Depreciation and amortization expense 19,876 10,439
Non-cash interest expense 1,611 583
Net gain on investments and marketable
securities --- (175)
Deferred federal income tax
provision 4,400 200
Changes in certain assets and liabilities, net
of effects from acquisitions and dispositions:
Accounts receivable, net (40,952) (15,973)
Prepaid and other current assets (2,501) (2,286)
Inventories (11,761) (6,919)
Net assets of discontinued operations (6,659) (4,630)
Accounts payable 32,618 12,555
Accrued expenses and taxes (4,281) 5,180
Long-term assets,liabilities and other,net (3,640) (900)
------- -------
Total adjustments to net earnings (11,289) (1,926)
-------- -------
Net cash (used in) provided by (1,489) 8,474
operating activities -------- -------
Cash Flows from investing activities:
Capital expenditures (15,507) (7,748)
Purchase of investments and marketable
Securities --- (157,037)
Proceeds from the sale of investments
and marketable securities 23,978 37,220
Proceeds from businesses sold, net 24,937 ---
Other, net (5,048) (1,407)
-------- -------
Net cash provided by (used in)
investing activities 28,360 (128,972)
------- ---------
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
<PAGE> 7
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Continued)
For the
Six Months Ended
------------------
July 4, June 28,
1998 1997
-------- ---------
Cash Flows from financing activities: (Unaudited)
Sale of notes, net --- 169,395
Net decrease in borrowings (10,312) (26,223)
Net proceeds from the sale of Nortek
Common Stock 64,300 ---
Purchase of Nortek Common and Special
Common Stock (6,574) (7,626)
Other, net 1,492 679
------- -------
Net cash provided by financing
activities 48,906 136,225
------- --------
Net increase in unrestricted cash
and cash equivalents 75,777 15,727
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 $201,619 $ 56,769
======== ========
Interest paid $ 40,301 $ 13,092
======== ========
Income taxes paid, net $ 3,856 $ 5,289
======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
<PAGE> 8
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED June 28, 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, March 29,
1997 $16,021 $779 $135,311 $41,466 $(74,071) $ (4,536)
Net earnings --- --- --- 6,700 --- $6,700
Other comprehensive
income:
Translation adjustment --- --- --- --- --- 281 281
Unrealized increase
in the value of
marketable
securities 307 307
------
Comprehensive income $7,288
4,972 shares of ======
special common stock
converted into
4,972 shares of
common stock 5 (5) --- --- --- ---
57,005 shares of
treasury stock
acquired --- --- --- --- (1,161) ---
Balance, June 28, -------- ------ -------- -------- --------- ---------
1997 $ 16,026 $ 774 $135,311 $ 48,166 $(75,232) $ (3,948)
======== ====== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE> 9
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTHS ENDED JULY 4, 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, April 4,
1998 $16,213 $ 865 $136,736 $ 60,266 $(84,356) $ (6,033)
Net earnings --- --- --- 8,500 --- --- $8,500
Other comprehensive
income:
Translation adjustment --- --- --- --- --- (940) (940)
Unrealized increase
in the value of
marketable
securities --- --- --- --- --- 70 70
------
Comprehensive income $7,630
=======
Sale of 2,182,500 shares
of common stock 2,182 --- 62,207 --- --- ---
4,459 shares of
special common stock
converted into
4,459 shares of
common stock 5 (5) --- --- ---
8,996 shares of
common stock
issued upon exercise
of stock options 9 --- (57) --- --- ---
Other --- --- --- --- 68 ---
------- ------ -------- ------- -------- -------
Balance, July 4,1998 $18,409 $ 860 $198,886 $68,766 $(84,288) $(6,903)
======= ====== ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE> 10
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE SIX MONTHS ENDED JUNE 28, 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)
Balance, December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 15,966 $ 784 $ 135,028 $ 37,766 $ (67,537) $ (3,212)
Net earnings --- --- --- 10,400 --- --- $10,400
Other comprehensive
income:
Translation adjustment --- --- --- --- --- (1,105) (1,105)
Unrealized increase
in the value of
marketable
securities --- --- --- --- --- 369 369
------
Comprehensive income $9,664
------
15,638 shares of
special common stock
converted into
15,638 shares of
common stock 16 (16) --- --- --- ---
44,319 shares of
common stock and
5,808 shares of
special common stock
issued upon exercise
of stock options 44 6 283 --- --- ---
337,905 shares of
treasury stock
acquired --- --- --- --- (7,695) ---
Balance, June 28, -------- ------ --------- -------- ---------- ---------
1997 $ 16,026 $ 74 $ 135,311 $ 48,166 $ (75,232) $ (3,948)
======== ====== ========= ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE> 11
NORTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE SIX MONTHS ENDED JULY 4, 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)
Balance, December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $ 16,051 $ 767 $ 135,345 $ 58,966 $ (77,714) $(5,327)
Net earnings --- --- --- 9,800 --- --- $ 9,800
Other comprehensive
income:
Translation adjustment --- --- --- --- --- (1,597) (1,597)
Unrealized increase
in the value of
marketable securities --- --- --- --- --- 121 121
Minimum pension liability
Net of $65 tax benefit --- --- --- --- --- (100) (100)
-------
Comprehensive income $ 8,224
=======
Sale of 2,182,500 shares
of common stock 2,182 --- 62,207 --- --- ---
8,156 shares of
special common stock
converted into
8,156 shares of
common stock 8 (8) --- --- --- ---
167,982 shares of
common stock and
100,991 shares of
special common stock
issued upon exercise
of stock options 168 101 1,334 --- --- ---
205,423 shares of
treasury stock acquired --- --- --- --- (6,574) ---
Balance, July 4, -------- ------- -------- -------- --------- --------
1998 $ 18,409 $ 860 $ 98,886 $ 68,766 $(84,288) $(6,903)
======== ====== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE> 12
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 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 the prior period have been reclassified to
conform to the presentation at July 4, 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 Sale").
(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 $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 is subject to adjustment based on NuTone's net asset value determined
as of August 1, 1998. If the final closing net asset value, as determined
in accordance with the NuTone purchase agreement, is within the range
<PAGE> 13
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
of $65,100,000 to $67,100,000 (inclusive), then there will be no
adjustment to the purchase price. If the final closing net asset
value, as determined in accordance with the NuTone purchase
agreement, exceeds $67,100,000, then the Company is obligated to pay
Williams an amount equal to the difference between the final closing
net asset value and $67,100,000. If the final closing net asset
value is less than $65,100,000, then Williams is obligated to pay
the Company an amount equal to the difference between $65,100,000
and the final closing net asset value. The purchase price was
funded, and any adjustments will be 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 offering
(under an exemption pursuant to securities and Exchange Commission
("SEC") Rule 144A to qualified investors together with a portion of
the cash proceeds from the Common Stock Sale.
Consummation of the acquisition was subject to expiration or
termination of the applicable waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). On or about June 29, 1998, after a review of the acquisition
by the Federal Trade Commission ("FTC"), and in response to the
FTC's concerns about the potential adverse competitive effects the
acquisition might have on the market for certain hard-wired intercom
systems, Nortek executed an Agreement Containing Consent Order ("FTC
Order") providing for the divestiture of the Company's M&S System LP
("M&S") subsidiary, which manufactures hard-wired intercom systems and
other products. The FTC Order was provisionally accepted by the FTC
commissioners on July 27, 1998. The FTC Order was placed on public
record on or about July 27, 1998, and is subject to public comment
for a period of 60 days. Upon the expiration of the comment period,
the FTC will decide whether to withdraw, modify or make final its
acceptance of the FTC Order.
Under the terms of the FTC Order, the Company must divest, at no
minimum price, prior to December 31, 1998, all of the assets,
properties, business and goodwill of M&S. Any acquirer must be
approved by the FTC. If the Company has not divested the M&S
assets within the prescribed time, 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. Notwithstanding the FTC Order, at
<PAGE> 14
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
at any time after the consummation of the acquisition, the FTC
or the Department of Justice ("DOJ") could take such actions under
the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the consummation of the
acquisition or seeking divestiture of certain assets of the
acquisition. Furthermore, at any time after the consummation of
the acquisition, any state could take such action under the
antitrust laws as it deems necessary or desirable to the public
interest. While the Company does not expect the FTC, the DOJ or
any state to challenge the acquisition on antitrust grounds, there
is no assurance that such a challenge will not be made or, if made
and successful, would not have a material adverse affect on the
Company.
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, operating earnings, earnings from continuing operations and
diluted earnings per share from continuing operations of the
Company for the three months and six months ended June 28, 1997 and
July 4, 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 Sale, 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.
<PAGE> 15
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
<TABLE>
<CAPTION>
Pro Forma
---------
Three Months Ended Six Months Ended Year Ended
------------------ ---------------- ----------
July 4, June 28, July 4, June 28, Dec. 31,
1998 1997 1998 1997 1997
------- -------- ------- -------- --------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $495,306 $491,327 $937,338 $894,938 $1,849,124
Operating
earnings 37,822 37,724 60,770 54,828 91,932
Earnings (loss)
from continuing
operations 7,900 7,700 7,500 2,400 (3,500)
Diluted earnings
(loss)per share
from continuing
operations $0.66 $0.64 $0.63 $0.20 $(0.30)
</TABLE>
<TABLE>
<CAPTION>
As Adjusted
-----------
Three Months Ended Six Months Ended Year Ended
------------------ ---------------- ----------
July 4, June 28, July 4, June 28, Dec. 31,
1998 1997 1998 1997 1997
------- -------- -------- -------- ---------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C>
Net sales $495,306 $491,327 $937,338$894,938 $1,849,124
Operating
Earnings 41,572 45,510 68,270 70,042 143,193
Earnings from
continuing
operations 10,200 12,500 12,000 12,000 28,000
Diluted Earnings
per share from
continuing
operations $0.85 $1.04 $1.01 $0.99 $2.33
</TABLE>
In computing pro forma earnings, earnings have been reduced by the 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
<PAGE> 16
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
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 at a rate of approximately 9 1/4%, plus amortization
of deferred debt expense and debt discount, net of tax effect, on the
9 1/8% Notes at a rate of approximately 9 1/8%, plus amortization of
deferred debt expense and debt discount, net of tax effect and on the
8 7/8% Notes, at a rate of approximately 8 7/8% plus amortization of
deferred debt expense and debt discount, net of tax effect. Pro forma
results reflect investment income earned on the cash proceeds from the
actual date of the Common Stock Sale to July 4, 1998.
Subsequent to the Nutone acquisition, the Company expects to realize
net savings from the elimination of fees and charges paid by NuTone to
Williams and related entities. Pro Forma operating earnings for the
three and six months ended June 28, 1997 have been adjusted by
approximately $474,000 and approximately $875,000, respectively, for
the three and six months, ended July 4, 1998 have been adjusted by
approximately $482,000 and approximately $384,000, respectively, and
for the year ended December 31, 1997 have been adjusted by
approximately $1,746,000 for the pro forma effect of estimated cost
reductions directly attributable to the acquisition. 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 the NuTone acquisition. As Adjusted
earnings have been adjusted for the NuTone Cost Adjustments by
$3,750,000 and $7,500,000 for the three and six months ended July 4,
1998 and June 28, 1997, respectively, and by $15,000,000 for the year
ended December 31, 1997.
In addition, since the Ply Gem acquisition date, the Company has
realized, and expects to continue to realize, cost savings as a result
of the acquisition. These savings result from several actions,
including: (i) the elimination of expenses associated with Ply Gem's
New York headquarters; (ii) the consolidation 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 earnings for the three and six months ended June
28, 1997 and the year ended December 31, 1997, have been adjusted for
the pro forma effect of estimated cost reductions directly attributable
to the Ply Gem acquisition totaling approximately $2,054,000,
approximately $3,721,000 and approximately $4,000,000 respectively. As
Adjusted operating earnings for the three and six months ended June 28,
1997 and the year ended December 31, 1997, include cost reductions
directly attributable to the Ply Gem acquisition and additional
estimated cost savings related to expenses associated with the
elimination of Ply Gem's New York headquarters, the consolidation
<PAGE> 17
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
of Ply Gem's corporate functions and the elimination of certain
under-performing product lines which total approximately $4,036,000,
$7,714,000, and $14,100,000, respectively.
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 August 7, 1998, the Company has
purchased approximately 317,250 shares of its Common and Special Common
Stock under this program for approximately $9,300,000 and accounted for
such share purchases as Treasury Stock.
At August 7, 1998, approximately $64,289,000 was available for the
payment of cash dividends or stock purchases under the terms of the
Company's most restrictive Indenture.
(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 second quarter and first six
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.
<PAGE> 18
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
A reconciliation between basic and diluted earnings per share from
continuing operations is as follows:
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
-------------------- ------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------- ------- ------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Earnings from continuing
operations $8,500 $7,700 $9,800 $12,400
Basic EPS:
Basic common shares 10,718 9,602 10,129 9,663
====== ====== ====== ======
Basic EPS $ .79 $ .80 $ .97 $1.28
====== ====== ====== ======
Diluted EPS:
Basic common shares 10,718 9,602 10,129 9,663
Plus: Impact of stock
Options 187 226 182 233
------ ------ ------ ------
Diluted common shares 10,905 9,828 10,311 9,896
====== ====== ====== ======
Diluted EPS $ .78 $ .78 $.95 $1.25
====== ====== ====== ======
</TABLE>
(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 future expenses including interest expense. On July 10,
1998, the Company sold its Plumbing Products Group, including a product
line included in the Company's Residential Building Products Group, for
approximately $33,700,000. In the three months and six months ended July 4,
1998, approximately $525,000 and $1,000,000, respectively, of corporate
interest expense was allocated against this reserve. In the three months
and six months ended June 28, 1997, the loss for discontinued operations
included an allocation of corporate interest expense of approximately
$425,000 and $950,000 respectively. The following is an unaudited summary
of the results of discontinued operations for the three months and six
months ended June 28, 1997:
<PAGE> 19
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
Three Months Six Months
Ended June 28, Ended June 28,
1997 1997
---------------------------------------
(In thousands except per share amounts)
Net sales $25,796 $51,185
======= =======
Loss before income taxes $(1,700) $(3,300)
Income tax benefit 700 1,300
-------- --------
Loss from discontinued operations $(1,000) $(2,000)
======== ========
(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
second quarter and first six 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. 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 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).
<PAGE> 20
NORTEK, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1998 AND JUNE 28, 1997
(Continued)
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 second quarter of 1998, the Company made several
dispositions of nonstrategic assets. On May 8, 1998, the Company sold
Studley Products, Inc. ("Studley"). Studley had net sales of approximately
$22,000,000 for the year ended December 31, 1997 and had been treated as an
asset held for sale since the Ply Gem acquisition. On May 22, 1998,
the Company consummated the sale of another Ply Gem subsidiary, Sagebrush
Sales, Inc. ("Sagebrush") for approximately $9,800,000 in cash. Sagebrush
had net sales of approximately $47,600,000, for the year ended December 31,
1997. On July 2, 1998, the Company completed the sale of another Ply Gem
subsidiary, Goldenberg Group, Inc. ("Goldenberg") for approximately
$11,000,000, including approximately $2,100,000 in notes. Goldenberg had
net sales of approximately $41,300,000 for the year ended December 31,
1997.
The Company is currently negotiating for the sale of all of the
outstanding equity interests of the Electronics Group of the Company.
The Electronics Group includes M&S and certain other of Nortek's
businesses. The sale of the Electronics Group is subject to the
completion of satisfactory due diligence by the purchaser, expiration
or termination of the applicable waiting period under the HSR Act and
the negotiation of definitive documentation, which is expected to
contain customary terms and conditions. In addition, under the FTC
Order, the disposition of M&S is subject to the prior approval of the
FTC. For the year ended December 31, 1997, net sales, operating
earnings and earnings before interest, taxes and depreciation and
amortization expense ("EBITDA") of the Electronics Group were approx-
imately $70,300,000, $6,300,000 and $8,300,000, respectively. For the
three months ended July 4, 1998, net sales, operating earnings and
earnings before interest, taxes and depreciation and amortization
("EBITDA") of the Electronics Group were approximately $16,600,000,
$700,000 and $1,200,000, respectively. For the six months ended
July 4, 1998, net sales, operating earnings and EBITDA of the Electronics
Group were approximately $36,100,000, $2,300,000 and $3,300,000,
respectively.
<PAGE> 21
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 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.
On August 26, 1997, the Company acquired Ply Gem, which has been accounted
for under the purchase method of accounting. Accordingly, the results of
Ply Gem are included in the Company's consolidated results since that date.
(See "Liquidity and Capital Resources" and Note D 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, including a product line included in the Residential Building Products
Group, for approximately $33,700,000. In the second and third quarter of
1998 the Company also sold several businesses acquired with the Ply Gem
acquisition, is currently negotiating to sell the Electronics Group and is
continuing its program of divesting certain other businesses. (See Notes
E, H and K of the Notes to the Unaudited Financial Statements included
elsewhere herein.)
<PAGE> 22
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 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 second quarter ended July 4,
1998 are not necessarily indicative of the results of operations to be
expected for any other interim period or the full year.
<TABLE>
<CAPTION>
Change in
Second Quarter Ended Second Quarter 1998
-------------------
July 4, June 28, as Compared to 1997
------------------
1998 1997 $ %
---- ---- ----- ------
(Dollar amounts in millions)
<S> <C> <C> <C> <C>
Net sales $449.6 $223.8 $225.8 100.9%
Cost of products sold 334.0 158.7 (175.3) (110.5)
Selling, general and
administrative expense 79.9 45.6 (34.3) (75.2)
Amortization of acquired
goodwill 2.6 .7 (1.9) NM
------ ------ ------ ------
Operating earnings 33.1 18.8 14.3 76.1
------ ------ ------ ------
Interest expense (19.7) (10.3) (9.4) (91.3)
Investment income 2.1 3.2 (1.1) (34.3)
------ ------ ------- -------
Earnings from continuing
operations before provision
for income taxes 15.5 11.7 3.8 32.5
Provision for income taxes 7.0 4.0 (3.0) (75.0)
------ ------ ------ ------
Earnings from continuing
operations 8.5 7.7 .8 10.4
Loss from discontinued
operations --- (1.0) 1.0 NM
------ ------- ------ ------
Net earnings $8.5 $6.7 $1.8 26.9%
====== ======= ====== ======
</TABLE>
NM = not meaningful
<PAGE> 23
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
<TABLE>
<CAPTION>
Change in
Percentage of Net Sales Percentage
Second Quarter Ended for the Second
-------------------
July 4, June 28, Quarter 1998
1998 1997 as Compared to 1997
------- ------- -------------------
<S> <C> <C> <S>
Net sales 100.0% 100.0% ---
Cost of products sold 74.3 70.9 (3.4)
Selling, general and
administrative expense 17.7 20.4 2.7
Amortization of acquired
goodwill .6 .3 (.3)
------ ------ -------
Operating earnings 7.4 8.4 (1.0)
Interest expense (4.4) (4.6) .2
Investment income .5 1.4 (.9)
------- ------ -------
Earnings from continuing
operations before provision
for income taxes 3.5 5.2 (1.7)
Provision for income taxes 1.6 1.8 .2
------ ------ -------
Earnings from continuing
operations 1.9 3.4 (1.5)
Loss from discontinued
operations --- (.4) .4
------ ------ -------
Net earnings 1.9% 3.0% (1.1)
====== ====== ========
</TABLE>
<PAGE> 24
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 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 six months ended July 4,
1998 are not necessarily indicative of the results of operations to be
expected for any other interim period or the full year.
<TABLE>
<CAPTION>
Change in
Six Months Ended First Six Months 1998
------------------- as Compared to 1997
July 4, June 28,
------- -------- ------------------
1998 1997 $ %
---- ---- ----- ------
(Dollar amounts in millions)
<S> <C> <C> <C> <C>
Net sales $842.1 $418.0 $424.1 101.5%
Cost of products sold 628.6 295.7 (332.9) (112.6)
Selling, general and
administrative expense 155.5 88.6 (66.9) (75.5)
Amortization of acquired
goodwill 5.2 1.4 (3.8) NM
------ ------ ------ ------
Operating earnings 52.8 32.3 20.5 63.5
------ ------ ------ ------
Interest expense (39.2) (17.6) (21.6) (122.7)
Investment income 4.4 4.6 (.2) (4.3)
------ ------ ------ ------
Earnings from continuing
operations before provision
for income taxes 18.0 19.3 (1.3) (6.7)
Provision for income taxes 8.2 6.9 (1.3) (18.8)
------ ------ ------ ------
Earnings from continuing
operations 9.8 12.4 (2.6) (21.0)
Loss from discontinued
operations --- (2.0) 2.0 NM
------ ------ ------ ------
Net earnings $9.8 $10.4 $ (.6) (5.8)%
====== ====== ====== ======
</TABLE>
NM = not meaningful
<PAGE> 25
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
<TABLE>
<CAPTION>
Change in
Percentage of Net Sales Percentage
First Six Months Ended for the First
-------------------
July 4, June 28, Six Months 1998
1998 1997 as Compared to 1997
---- ---- -------------------
<S> <C> <C> <S>
Net sales 100.0% 100.0% ---
Cost of products sold 74.7 70.7 (4.0)
Selling, general and
administrative expense 18.4 21.2 2.8
Amortization of acquired
goodwill .6 .4 (.2)
------ ------ ------
Operating earnings 6.3 7.7 (1.4)
Interest expense (4.7) (4.2) (.5)
Investment income .5 1.1 (.6)
------ ------ ------
Earnings from continuing
operations before provision
for income taxes 2.1 4.6 (2.5)
Provision for income taxes .9 1.6 .7
------ ------ ------
Earnings from continuing
operations 1.2 3.0 (1.8)
Loss from discontinued
operations --- (.5) .5
------ ------ ------
Net earnings 1.2% 2.5% (1.3)
====== ====== ======
</TABLE>
The following presents net sales for the Company's principal product groups
for the second quarter and the six months ended July 4, 1998 as compared to
the second quarter and six months ended June 28, 1997 and the amount and
the percentage change of such results as compared to the prior comparable
period.
<TABLE>
<CAPTION>
Second Quarter Ended
-------------------------------------
July 4, June 28, Increase
l998 1997 $ %
---- ---- ----- -----
<S> <C> <C> <C> <C>
(000's omitted)
Net Sales:
Residential Building
Products $108,809 $108,276 $ 533 .5%
Air Conditioning and
Heating Products 133,794 115,519 18,275 15.8
Windows, Doors and Siding 141,142 --- 141,142 ---
Specialty Products and
Distribution 65,902 --- 65,902 ---
-------- -------- -------- -----
Total $449,647 $223,795 $225,852 100.9%
======== ======== ======== =====
</TABLE>
<PAGE> 26
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
July 4, June 28, Increase
-------------------
1998 1997 $ %
---- ---- ----- -----
(000's omitted)
<S> <C> <C> <C> <C>
Net Sales:
Residential Building
Products $227,758 $211,435 $ 16,323 7.7%
Air Conditioning and
Heating Products 234,670 206,598 28,072 13.6
Windows, Doors and Siding 240,371 --- 240,371 ---
Specialty Products and
Distribution 139,316 --- 139,316 ---
------- -------- -------- -----
Total $842,115 $418,033 $424,082 101.5%
======== ======== ======== =====
</TABLE>
Certain amounts in the tables for the prior periods have been reclassified
to conform to the classifications for the second quarter and the six months
ended July 4, 1998.
Operating Results
- -----------------
Net sales increased approximately $225,800,000 or approximately 100.9%, (or
increased approximately $227,400,000 or approximately 101.6% excluding the
effect of foreign exchange) in the second quarter of 1998 as compared to
the second quarter of 1997 and increased approximately $ 424,100,000, or
approximately 101.5%, (or increased approximately $428,700,000 or
approximately 102.6% excluding the effect of foreign exchange) for the
first six months of 1998 as compared to 1997. Net sales increased
principally as a result of the acquisition of Ply Gem, which contributed
approximately $207,100,000 and approximately $379,700,000 to net sales in
the second quarter and first six months of 1998, respectively. Excluding
sales from the Ply Gem acquisition, net sales increased approximately
$18,700,000 or approximately 8.4% (or increased approximately $20,300,000,
or approximately 9.1% excluding the effect of foreign exchange), and
increased approximately $44,400,000 or approximately 10.6%, (or increased
approximately $49,000,000 or approximately 11.7% excluding the effect of
foreign exchange) for the second quarter and the first six months of 1998,
respectively as compared to 1997. The increase in the second quarter and
first six months, is a result of higher sales volume in the Air
Conditioning and Heating Products Group, principally related to the
residential and manufactured housing markets, in both periods and increased
sales volume in the Residential Building Products Group in the first six
months, with the majority of the increase occurring in the first quarter.
<PAGE> 27
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
In the second quarter of 1998, the Company sold three Ply Gem businesses,
one of which was treated as an asset held for sale as of the date of the
Ply Gem acquisition. Subsequent to July 4, 1998, the Company sold its
Plumbing Products Group which was discontinued in the fourth quarter of
1997, together with a product line which was included in the Residential
Building Products Group and sold another Ply Gem business. The Company's
sales for the first half of 1998, include approximately $66,900,000 of
sales related to businesses sold in 1998 through July 31, 1998 of which
approximately $5,800,000 of such sales are included in the Residential
Building Products Group and approximately $61,100,000 are included in the
Specialty Products and Distribution Group.
Cost of products sold as a percentage of net sales increased from
approximately 70.9% in the second quarter of 1997 to approximately 74.3% in
the second quarter of 1998, and increased from approximately 70.7% in the
first six months of 1997 to approximately 74.7% in the first six months of
1998. These increases in the percentage were in large part due to the Ply
Gem businesses, which have a higher level of cost of sales than the overall
group of businesses owned prior to the Ply Gem acquisition, combined with
the effect of low sales levels (seasonality) related to Ply Gem in the
first quarter, but with fairly constant quarterly levels of fixed costs
throughout the year. Ply Gem's Windows, Doors and Siding Group's net sales
levels, with their heavy concentration in the upper mid-west and northeast
regions of the country, tend to be significantly lower in the first quarter
than the other three quarters of the year, while fixed labor, overhead and
depreciation remain constant among the four quarters of each year.
Excluding the Ply Gem businesses, cost of products sold as a percentage of
net sales decreased from approximately 70.9% in the second quarter of 1997
to approximately 69.6% in the second quarter of 1998, and decreased from
approximately 70.7% in the first six months of 1997 to approximately 69.4%
in the first six months of 1998. The decrease in the percentage principally
resulted from increased sales without a proportionate increase in fixed
costs, combined with a decrease in material costs in both periods in the
Air Conditioning and Heating Products Group and to a lesser extent
increased sales without a proportionate increase in fixed costs in the
second quarter and the first six months 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.
<PAGE> 28
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
Selling, general and administrative expense as a percentage of net sales
decreased from approximately 20.4% in the second quarter of 1997 to
approximately 17.7% in the second quarter of 1998 and decreased from
approximately 21.2% in the first six months of 1997 to approximately 18.4%
in the first six months of 1998. These decreases in the percentages were
principally the result of the acquisition of Ply Gem, which has a lower
level of selling, general and administrative expense to net sales than the
overall group of businesses owned prior to the acquisition, partially
offset by the effect of certain constant fixed expense levels throughout the
year at Ply Gem on relatively low first quarter and first half sales levels
dueto the seasonality of the Windows, Doors and Siding Products Group.
Excluding the Ply Gem businesses, selling, general and administrative
expense as a percentage of net sales increased slightly from approximately
20.4% in the second quarter of 1997 to approximately 21.1% in the second
quarter of 1998, and increased slightly from approximately 21.2% in the first
six months of 1997 to approximately 21.3% in the first six months of 1998
principally in the Air Conditioning and Heating Products Group.
Amortization of acquired goodwill as a percentage of net sales increased
from approximately .3% of net sales in the second quarter of 1997 to
approximately .6% of net sales in the second quarter of 1998, and increased
from approximately .4% of net sales in the first six months of 1997 to
approximately .6% in the first six months of 1998, principally as a result
of the acquisition of Ply Gem.
Segment earnings were approximately $37,400,000 for the second quarter of
1998 as compared to approximately $22,400,000 for the second quarter of
1997, and approximately $60,200,000 for the first six months of 1998 as
compared to approximately $39,000,000 for the first six 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. The Ply Gem acquisition contributed approximately
$11,300,000 to segment earnings in the second quarter of 1998, and
approximately $11,200,000 in the first six months of 1998. Ply Gem's
segment earnings, due to the seasonal nature of the Windows, Doors and
Siding Group with their heavy concentration in the upper mid-west and north
east regions of the country are proportionately lower in the first quarter
than the results expected in other quarters. The Company's segment
earnings for the first half of 1998 include approximately $2,000,000 of
operating earnings related to businesses sold in 1998 through July 31,
1998, of which approximately $600,000 are included in the Residential
Building Products Group and approximately $1,400,000 are included in the
Specialty Products and Distribution Group. Segment earnings have been
reduced by depreciation and amortization expense of approximately
$9,800,000 and approximately $5,700,000 for second quarter 1998 and 1997,
<PAGE> 29
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
respectively, and approximately $19,800,000 and $10,500,000 for the first
six months of 1998 and 1997 respectively. The acquisition of Ply Gem
contributed approximately $4,600,000 of the increase in depreciation and
amortization expense in the second quarter of 1998, and approximately
$9,400,000 for the first six months of 1998. The overall increase in
segment earnings related to businesses owned prior to the acquisition of
Ply Gem was due principally to increased sales volume without a
proportionate increase in expense particularly in the Air Conditioning and
Heating 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 5.5% and 7.1%
of segment earnings in the second quarter and first six months of 1998,
respectively. Sales and earnings derived from the international market are
subject to the risks of currency fluctuations.
Operating earnings in the second quarter of 1998 increased approximately
$14,300,000 or approximately 76.1% as compared to the second quarter of
1997, and increased approximately $20,500,000 or approximately 63.5% as
compared to the first six months of 1997 primarily due to the factors
previously discussed.
Interest expense in the second quarter of 1998 increased approximately
$9,400,000 or approximately 91.3% as compared to the second quarter of
1997, and increased approximately $21,600,000 or approximately 122.7% as
compared to the first six 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 and indebtedness of Ply Gem existing at the date of acquisition.
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 in the second quarter of 1998 decreased approximately
$1,100,000 or approximately 34.3% as compared to the second quarter 1997,
and decreased approximately $200,000 or approximately 4.3% as compared to
the first six months of 1997, principally due to lower average invested
balances of short-term investments and marketable securities.
The provision for income taxes was approximately $7,000,000 for the second
quarter of 1998, as compared to approximately $4,000,000 for the second
quarter of 1997, and approximately $8,200,000 for the first six months of
1998 as compared to approximately $6,900,000 for the first six months 1997.
<PAGE> 30
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
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 state income tax provisions,
nondeductible amortization expense (for tax purposes), changes in tax
reserves, the effect of foreign income tax on foreign source income and the
effect of product development tax credits from foreign operations.
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 future expenses including interest expense. On July 10,1998, the
Plumbing Products Group, together with a product line included in the
Residential Building Products Group, was sold for approximately
$33,700,000. In the second quarter of 1998, approximately $525,000 and for
the first six months of 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
$1,700,000 and $3,300,000 net of income tax benefits of approximately
$700,000 and $1,300,000 for the second quarter and first six months of
1997, respectively and reflect an allocation of corporate interest expense
of approximately $475,000 and $950,000 for the second quarter and the first
six months of 1997 respectively. (See Note H of the Notes to the Unaudited
Financial Statements included elsewhere herein.)
Liquidity and Capital Resources
- -------------------------------
The Company took several actions in 1998 that improved its liquidity and
reduced its leverage. These included the Common Stock Sale for net
proceeds to Nortek of approximately $64,300,000 and the sale of certain
businesses. The Company continues to explore additional sources of
liquidity, including the sale of certain other assets, the establishment of
an accounts receivable securitization program and the issuance of equity
securities in one or more public or private placements.
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 is subject to adjustment based on NuTone's net asset value determined
as of August 1, 1998. If the final closing net asset value, as determined
in accordance with the NuTone Purchase Agreement, is within the range of
$65,100,000 (inclusive) to $67,100,000 (inclusive), then there will be
<PAGE> 31
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
no adjustment to the purchase price. If the final closing net asset value,
as determined in accordance with the NuTone Purchase Agreement, exceeds
$67,100,000, then the Company is obligated to pay Williams an amount equal
to the difference between the final closing net asset value and
$67,100,000. If the final closing net asset value is less than
$65,100,000, then Williams is obligated to pay the Company an amount equal
to the difference between $65,100,000 and the final closing net asset
value. The purchase price was funded, and any adjustments will be 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 Sale, (see Note E of the Notes to the Unaudited Financial Statements
included elsewhere herein.)
Unrestricted cash and cash equivalents increased from approximately
$125,842,000 at December 31, 1997 to approximately $201,619,000 at July 4,
1998 and was $205,291,000 at July 4, 1998 after giving pro forma effect to
the acquisition of NuTone, the sale of the 8 7/8% Notes, the sale of the
Plumbing Products Group, together with a product line included in the
Residential Building Products Group, and the sales of certain Ply Gem
businesses through July 31, 1998 (after $20,000,000 of mandatory debt
payments under the Ply Gem Credit Facility.) The Company's investment in
marketable securities at July 4, 1998 consisted primarily of investments in
bank issued money market instruments, commercial paper and United States
Treasury securities. At July 4, 1998, approximately $6,389,000 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.
As a result of the acquisition of NuTone and the sale of the 8 7/8% Notes,
the Company will continue to be highly leveraged and expects to continue to
be highly leveraged for the foreseeable future. As of July 4, 1998, after
giving pro forma effect to the acquisition of Nutone, the sale of the 8
7/8% Notes and mandatory debt payments under the Ply Gem Credit Facility
relating to sales of certain Ply Gem businesses through July 31, 1998, the
Company had pro forma consolidated total debt of approximately
$1,038,500,000.
Capital expenditures were approximately $22,500,000 in 1997 and are
expected to be approximately $40,000,000 in 1998.
<PAGE> 32
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
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 August 7, 1998, the Company had purchased approximately 317,250
shares of its Common and Special Common Stock under this program for
approximately $9,300,000 and accounted for such share purchases as Treasury
Stock.
At August 7, 1998, approximately $64,289,000 was available for the payment
of cash dividends or stock payments 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 and current ratio increased slightly from
approximately $341,821,000 and 2.3:1, respectively, to approximately
$410,784,000 and 2.4:1, respectively, between December 31, 1997 and July 4,
1998, principally as a result of the investment of approximately
$64,300,000 of the proceeds from the Common Stock Sale, in addition to the
factors described below.
Accounts receivable increased approximately $29,113,000 or approximately
16.1%, between December 31, 1997 and July 4, 1998, while net sales
increased approximately $33,931,000 or approximately 8.2% in the second
quarter of 1998 as compared to the fourth quarter of 1997. The increase in
accounts receivable is net of a decrease of approximately $8,424,000
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 July 4,
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 decreased approximately $4,189,000 or approximately 2.4%,
between December 31, 1997 and July 4, 1998. Excluding the effects of
businesses sold inventories increased $7,656,000.
Accounts payable increased approximately $31,079,000 or approximately
34.0%, between December 31, 1997 and July 4, 1998 and is net of a decrease
of approximately $722,000 attributable to businesses sold.
<PAGE> 33
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
Unrestricted cash and cash equivalents increased approximately $75,777,000
from December 31, 1997 to July 4, 1998, principally as a result of the
following:
Condensed
Consolidated
Cash Flows
----------
Operating Activities--
Cash flow from operations, net $35,687,000
Increase in accounts receivable, net (40,952,000)
Increase in inventories (11,761,000)
Increase in prepaids and other current assets (2,501,000)
Increase in net assets of discontinued operations (6,659,000)
Increase in trade accounts payable 32,618,000
Decrease in accrued expenses and taxes (4,281,000)
Investing Activities--
Proceeds from businesses sold 24,937,000
Proceeds from the sale of marketable securities 23,978,000
Capital expenditures (15,507,000)
Financing Activities--
Payment of borrowings, net (10,312,000)
Net proceeds from the Common Stock Sale 64,300,000
Purchase of Nortek Common and Special
Common Stock (6,574,000)
Other, net (7,196,000)
-----------
$75,777,000
===========
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 6.7:1 at
December 31, 1997 to 4.3:1 at July 4, 1998, primarily as a result of the
Common Stock Sale, the net decrease in borrowings, and net earnings for the
first six months ended July 4, 1998 partially offset by the purchase of
treasury stock, principally in the first quarter of 1998. (See the
Consolidated Statement of Stockholders' Investment included elsewhere
herein.) As of July 4, 1998, after giving pro forma effect to the
acquisition of NuTone, the sale of the 8 7/8% Notes and mandatory debt
payments under the Ply Gem Credit Facility relating to the sale of certain
Ply Gem businesses through July 31, 1998, the Company's debt-to-equity
ratio was 5.3 to 1.
<PAGE> 34
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 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.
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.
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.
General Considerations
- ----------------------
The Company is in the process of updating its computer systems to ensure
that its systems are Year 2000 compliant and to improve the systems. The
Company has and will continue to make investments in its computer systems
and applications to ensure that the Company is Year 2000 compliant.
Although the Company does not believe it will suffer any major effects from
the Year 2000 issue, there can be no assurance that the Company, any
business acquired by the Company, or any of the Company's customers or
vendors will not experience interruptions of operations because of
Year 2000 problems. Year 2000 problems might require the company to incur
unanticipated expenses and such expenses could have a material adverse
effect on the Company's business, financial condition and results of
operations.
<PAGE> 35
NORTEK, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 1998
AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 28, 1997
(Continued)
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, consumer spending levels, operating
in international economies, the rate of sales growth, price and product
liability claims. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date hereof.
The Company undertakes no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date thereof or to
reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by the Company,
in this report, as well as the Company's periodic reports on Forms 10-K,
10-Q and 8-K, filed with the Securities and Exchange Commission.
<PAGE> 36
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders held on May 14, 1998, the following
directors were elected by the following votes:
By the holders of Common Stock voting separately as a class
Name For Withheld
Class III ( for a term
Expiring at the 2001
Annual Meeting)
Philip L. Cohen 8,048,987 53,986
By the holders of Common Stock and Special Common Stock voting together as
a class
Name For Withheld
Class III ( for a term
Expiring at the 2001
Annual Meeting)
Richard L. Bready 12,915,236 66,467
The other matter voted upon at the meeting and the vote was as follows:
Proposal 2: Approval of the 1998 Equity and Cash Incentive Plan
For Against Abstain
11,457,419 1,461,513 62,771
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 1998 Equity and Cash Incentive Plan (filed herewithin).
27 Financial Data Schedule (filed herewith).
(b) The following reports on Form 8-K were filed by the
Registrant during the period:
May 7, 1998, Item 5. Other Events, Item 7. Financial
Statements and Exhibits
June 15, 1998, Item 5. Other Events.
<PAGE> 37
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
August 18, 1997
- -------------------------
(Date)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000072423
<NAME> NORTEK, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUL-4-1998
<CASH> 201,619
<SECURITIES> 18,444
<RECEIVABLES> 222,766
<ALLOWANCES> 13,239
<INVENTORY> 172,064
<CURRENT-ASSETS> 702,471
<PP&E> 359,174
<DEPRECIATION> 122,999
<TOTAL-ASSETS> 1,378,464
<CURRENT-LIABILITIES> 291,687
<BONDS> 826,350
0
0
<COMMON> 19,269
<OTHER-SE> 176,461
<TOTAL-LIABILITY-AND-EQUITY> 1,378,464
<SALES> 842,115
<TOTAL-REVENUES> 842,115
<CGS> 628,595
<TOTAL-COSTS> 628,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,198
<INCOME-PRETAX> 18,000
<INCOME-TAX> 8,200
<INCOME-CONTINUING> 9,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,800
<EPS-PRIMARY> .97
<EPS-DILUTED> .95
</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.
