SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-K 405
(Mark One) ------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission file number: 1-6112
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Nortek, Inc.
(exact name of Registrant as specified in its charter)
Delaware 05-0314991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
50 Kennedy Plaza
Providence, Rhode Island 02903-2360
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (401) 751-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1.00 par value New York Stock Exchange
Preference Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Special Common Stock, $1.00 par value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 25, 2000 was $216,942,255. (See Item 12.)
The number of shares of Common Stock outstanding asof February 25, 2000 was
10,947,164. The number of shares of Special Common Stock outstanding as of
February 25, 2000 was 549,780
Documents Incorporated byReferencePortions of the registrant's Proxy Statement
for use at its 2000 Annual Meeting of Shareholders are incorporated by reference
into Part III.
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NORTEK, INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
General
- -------
The Company is a diversified manufacturer of residential and commercial building
products, operating within three principal segments: the Residential Building
Products Segment; the Air Conditioning and Heating Products Segment; and the
Windows, Doors and Siding Products Segment. Through these segments, the Company
manufactures and sells, primarily in the United States, Canada and Europe, a
wide variety of products for the residential and commercial construction,
manufactured housing, and the do-it-yourself and professional remodeling and
renovation markets. (As used in this report, the terms "Company" and "Nortek"
refer to Nortek, Inc., together with its subsidiaries, unless the context
indicates otherwise. Such terms as "Company" and "Nortek" are used for
convenience only and are not intended as a precise description of any of the
separate corporations, each of which manages its own affairs.)
The Company's performance is dependent to a significant extent upon the levels
of residential replacement and remodeling, new residential construction and
non-residential construction, which are affected by such factors as interest
rates, inflation seasonality, consumer spending habits and unemployment.
Additional information concerning the Company's business is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7 of Part II of this report, incorporated herein by reference.
Information on foreign and domestic operations is set forth in Note 10 of the
Notes to Consolidated Financial Statements, Item 8 of Part II of this report,
incorporated herein by reference.
Residential Building Products Segment
- --------------------------------
The Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction, do-it-yourself and
professional remodeling and renovation markets. The principal products sold by
the Segment are kitchen range hoods, built-in exhaust fans (such as bath fans
and fan, heater and light combination units), indoor air quality products, bath
cabinets, radio intercoms and central vacuum systems. The Segment is the largest
supplier in North America of range hoods, bath fans and combination units,
indoor air quality products (such as continuous-ventilation systems and
energy-recovery ventilators)
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NORTEK, INC. AND SUBSIDIARIES
and one of the leading suppliers in Western Europe, South America and the Middle
East of luxury "Eurostyle" range hoods. Products are sold under the Broan(R),
NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R) and Best(R) brand
names, among others, to distributors and dealers of electrical and lighting
products, kitchen and bath dealers, retail home centers and original equipment
manufacturers (OEMs). Customers for the Segment's products include residential
and electrical contractors, professional remodelers and do-it-yourself
homeowners. Other products sold by this Segment include, among others, wireless
security products, audio speakers, door chimes, ceiling fans, multi-room video
distribution equipment and infrared control equipment. The Company's sales of
kitchen range hoods and exhaust fans accounted for approximately 10.2% and
10.5%, respectively, of the Company's consolidated net sales in 1999.
A key component of the Segment's operating strategy is the introduction of new
products which capitalize on the strong Broan(R), NuTone(R), Nautilus(R),
Venmar(R), vanEE(R), Rangaire(R) and Best(R) brand names and the extensive
distribution system of the Segment's businesses. Products sold under these brand
names include the Broan Allure(TM) and Rangemaster(R) range hoods, Sensaire(R),
Solitaire(R) and Solitaire Ultra Silent(R) fans and fan lights, LoSone(R) and
Select(TM) fans, the Best by Broan(R) "Eurostyle" luxury range hoods, the
Venmar(R) and vanEE(R) Super Compact line of indoor air quality systems, NuTone
SenSonic(TM) stereo speakers and Whispaire(TM) range hoods and the Broan 12"
wide trash compactor.
With respect to certain product lines, several private label customers account
for a substantial portion of net sales. In 1999, approximately 7.6% of the total
sales of the Segment were made to private label customers.
Production generally consists of fabrication from coil and sheet steel and
formed metal utilizing stamping, pressing and welding methods, assembly with
components and subassemblies purchased from outside sources (motors, fan blades,
heating elements, wiring harnesses, controlling devices, glass, mirrors,
lighting fixtures, lumber, wood and polyethylene components, speakers, grilles
and similar electronic components, and compact disc and tape player mechanisms)
and painting, finishing and packaging.
The Segment offers a broad array of products with various features and styles
across a range of price points. The Company believes that the Segment's variety
of product offerings helps the Segment maintain and improve its market position
for its principal products. At the same time, the Company believes that the
Segment's status as a low-cost producer, in large part as a result of advanced
manufacturing processes, provides the Segment with a competitive advantage.
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NORTEK, INC. AND SUBSIDIARIES
The Segment's primary products compete with many domestic and international
suppliers in their various markets. The Segment competes with suppliers of
competitive products primarily on the basis of quality, distribution, delivery
and price. Although the Segment believes it competes favorably among other
suppliers of the Segment's products, certain of these suppliers have greater
financial and marketing resources than the Segment.
The Segment had 18 manufacturing plants and employed approximately 3,750
full-time people as of December 31, 1999, 180 of whom are covered by collective
bargaining agreements which expire in 2000 and 2001 and 729 of whom are covered
by collective bargaining agreements which expire in 2004 and 2005. The Company
believes that the Segment's relationships with its employees are satisfactory.
Air Conditioning and Heating Products Segment
- ---------------------------------------------
The Air Conditioning and Heating Products Segment manufactures and sells
heating, ventilating and air conditioning systems ("HVAC") for custom-designed
commercial applications and for manufactured and site-built residential housing.
Commercial Products
The Segment's commercial products consist of HVAC systems which are
custom-designed to meet customer specifications for commercial offices,
manufacturing and educational facilities, hospitals, retail stores and
governmental buildings. Such systems are primarily designed to operate on
building rooftops (including large self-contained walk-in-units) or on
individual floors within a building, and range from 40 to 600 tons of cooling
capacity. The Segment markets its commercial products under the Governair(R),
Mammoth(R), Temtrol(TM), Aston, Venmar(R), Ventrol(R) and Webco(TM) brand names.
The market for commercial HVAC equipment is segmented between standard and
custom-designed equipment. Standard equipment can be manufactured at a lower
cost and therefore offered at substantially lower initial prices than
custom-designed equipment. As a result, suppliers of standard equipment
generally have a larger share of the overall commercial HVAC market than
suppliers of custom-designed equipment, including the Segment. However, because
of certain building designs, shapes or other characteristics, the Company
believes there are many applications for which custom-designed equipment is
required or is more cost effective over the life of the building.
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NORTEK, INC. AND SUBSIDIARIES
Unlike standard equipment, the Segment's commercial HVAC equipment can be
designed to match the exact space, capacity and performance requirements of the
customer. The Segment's packaged rooftop and self-contained walk-in equipment
rooms maximize a building's rentable floor space because they are located
outside the building. In addition, factors relating to the manner of
construction and timing of installation of commercial HVAC equipment can often
favor custom-designed rather than standard systems. As compared with site-built
and factory built HVAC systems, the Segment's systems are factory assembled
according to customer specifications and then installed by the customer or third
parties, rather than assembled on site, permitting extensive testing prior to
shipment. As a result, the Segment's commercial systems can be installed later
in the construction process than site-built systems, thereby saving the owner or
developer construction and labor costs. The Segment sells its commercial
products primarily to contractors, owners and developers of commercial office
buildings, manufacturing and educational facilities, hospitals, retail stores
and governmental buildings. The Segment seeks to maintain strong relationships
nationwide with design engineers, owners and developers, and the persons who are
most likely to value the benefits and long-term cost efficiencies of the
Segment's custom-designed equipment.
The Company estimates that about half of the Segment's commercial sales in 1999
were attributable to replacement and retrofit activity, which typically is less
cyclical than new construction activity and generally commands higher margins.
The Segment continues to develop product and marketing programs to increase
penetration in the growing replacement and retrofit market.
The Segment's commercial products are marketed through independently-owned
manufacturers' representatives and an in-house sales, marketing and engineering
group of approximately 185 persons as of December 31, 1999. The independent
representatives are typically HVAC engineers, a factor which is significant in
marketing the Segment's commercial products because of the design intensive
nature of the market segment in which the Segment competes.
The Company believes that the Segment is among the largest suppliers of
custom-designed commercial HVAC products in the United States. The Segment's
three largest competitors in the commercial HVAC market are York International
Corporation (which sells under the "Pace" and "Miller-Picking" trade names),
McQuay International (a subsidiary of OYL Corporation), and The Trane Company (a
subsidiary of American Standard Inc.). The Segment
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NORTEK, INC. AND SUBSIDIARIES
competes primarily on the basis of engineering support, quality, flexibility in
design and construction and total installed system cost. Although the Company
believes that the Segment competes favorably with respect to certain of these
factors, most of the Segment's competitors have greater financial and marketing
resources than the Segment and enjoy greater brand awareness. However, the
Company believes that the Segment's ability to produce equipment that meets the
performance characteristics required by the particular product application
provides it with advantages not enjoyed by certain of these competitors.
Residential Products
The Segment manufactures air conditioners, heat pumps and furnaces for the
residential and light commercial markets. For site-built homes and light
commercial structures, the Segment markets its products under the licensed
names, Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R) and Gibson(R) names.
Within the residential market the Segment is one of the largest suppliers of
these products for manufactured homes in the United States and Canada. In the
manufactured housing market, the Segment markets its products under the
Intertherm(R) and Miller(R) brand names.
The principal factors affecting the market for the Segment's residential HVAC
products are the demand for replacement and modernization of existing equipment
and the levels of manufactured housing shipments and housing starts. The Company
anticipates that the replacement market will continue to expand as a large
number of previously installed heating and cooling products become outdated or
reach the end of their useful lives. This growth may be accelerated by a
tendency among consumers to replace older heating and cooling products with
higher efficiency models prior to the end of such equipment's useful life. The
market for residential cooling products, including those sold by the Segment, is
affected by spring and summer temperatures. The Segment does not sell window air
conditioners, a segment of the market which is highly seasonal and especially
affected by spring and summer temperatures. The Company believes that the
Segment's ability to offer both heating and cooling products helps offset the
effects of seasonality of the Segment's sales.
The Segment sells its manufactured housing products to builders of manufactured
housing and through distributors, to manufactured housing retailers and owners
of such housing. The majority of sales to builders of manufactured housing
consist of furnaces designed and engineered to meet or exceed certain standards
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NORTEK, INC. AND SUBSIDIARIES
mandated by federal agencies, including HUD. These standards differ in several
important respects from the standards for furnaces used in site-built
residential homes. The after market channel of distribution includes sales of
both new and replacement air conditioning units and heat pumps and replacement
furnaces. The Company believes that the Segment has one major competitor in the
furnace segment of this market, Evcon Industries, a subsidiary of York
International Corporation, which markets its products primarily under the
Coleman name. The Segment competes with most major industry manufacturers for
the air conditioning segment of the market.
Residential HVAC products for use in site-built homes are sold through
independently-owned distributors who sell to HVAC contractors. The site-built
residential HVAC market is very competitive. In this market, the Segment
competes with, among others, Carrier Corporation, Rheem Manufacturing Company,
Lennox Industries, The Trane Company, York International Corporation, and
Goodman Manufacturing. The Segment competes in both the manufactured housing and
site-built markets on the basis of breadth and quality of its product line,
distribution, product availability and price. The Segment believes that the
Segment competes favorably with respect to these factors.
The Company estimates that more than half of the Segment's sales of residential
HVAC products in 1999 were attributable to the replacement market, which tends
to be less cyclical than the new construction market.
The Segment had 14 manufacturing plants and employed approximately 2,700
full-time people as of December 31, 1999, 245 of whom are covered by a
collective bargaining agreement which expires in 2001. The Company believes that
the Segment's relationships with its employees are satisfactory.
Windows, Doors and Siding Products Segment
- ------------------------------------------
The Windows, Doors and Siding Products Segment is a manufacturer and distributor
of vinyl, wood and composite windows, vinyl, wood, steel and composite patio and
entry doors, vinyl siding, skirting, soffit and accessories, aluminum trim coil,
siding, soffit and accessories, blocks, vents, shutters, sunrooms and vinyl
fencing, railings and decking for use in the residential construction,
do-it-yourself and professional renovation markets. The Company's sales of
windows accounted for approximately 16.2% of the Company's consolidated net
sales in 1999. The Company's sales of siding and skirting products accounted for
approximately 11.3% of the Company's consolidated net sales in 1999. The Segment
competes with many other manufacturers in the sale of its products.
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NORTEK, INC. AND SUBSIDIARIES
Windows and Doors
The Segment manufactures and sells wood, clad, composition (wood and vinyl) and
vinyl windows and patio doors, steel and composite entry doors, glass and
polycarbonate skylights, and wooden interior bifold doors and sunrooms under the
Crestline(R), Vetter(R), Kenergy(R), AWC(R), Great Lakes Gold(R), PLY GEM(R),
Uniframe(R), Monitor(TM), Napco(R), Napco Premium(TM), Napco Prime(TM),
Peachtree(R), Vintage(TM), Image(TM), Thermal-Gard(R), CWD(TM), Ambassador(TM),
Regency(TM), Diplomat(TM), Envoy(TM) and Consul(TM) brand names. The products
are marketed to both the home improvement and new construction markets through
wholesale, millwork and specialty distributors, large contractors, home centers
and lumber yards.
The Segment differentiates itself from its competition with a multiple brand
strategy, multiple channels of distribution, an established distribution network
utilizing custom design and manufacturing capabilities, and a trained field
sales and service support network. Its ability to sell in full truckload and
less than truckload quantities is tailored to the desires of large home center
chains which prefer to purchase windows directly from the manufacturer. The
Segment's ability to offer a broad product line is also important to the
Segment's sales and marketing strategy together with the Segment's focus on one
of the fastest growing segments in the industry - home centers.
Siding and Exterior Products
The Segment is also a manufacturer of vinyl siding, skirting, soffit and
accessories, aluminum trim coil, siding, soffit and accessories and vinyl
fencing, railing and decking. These products are available in a variety of
colors and/or woodgrains. Aluminum trim coil is a product that is used to cover
wood products on the exterior areas of a home in which there is no vinyl
substitute available. The Segment's products are used in both remodeling and new
construction applications, including manufactured housing and light commercial.
Vinyl siding's share of the overall exterior market continues to grow due to its
low maintenance, durability, high performance and ease of installation compared
to alternative siding materials (including wood, metal and masonry). The
Segment's products are marketed under the Variform(R), Timber Oak(R), Varigrain
Preferred(R), Camden Pointe(TM), Duragrain(R), Hampton III(R), Contractors
Choice(R), Nostalgia Series(TM), Varitek(TM), Varibest(R), Proguard(TM),
Georgia-Pacific(R), Chateau(R), Chateau Legacy(R), Chateau Nobility(R),
Napco(R), American Splendor(TM), American Herald(R), American 76 Collection(R),
Sunnybrook(R), Olde Providence(TM), Richwood(R), Kroy(R), Timberlast(TM),
Classic Manor(TM) and Finyl Rail(TM) brand names.
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NORTEK, INC. AND SUBSIDIARIES
Vinyl siding and accessories are sold to specialty distributors (one-step
distribution) who, in turn, sell directly to remodeling contractors and
builders, or to wholesale distributors of building materials (two-step
distribution), who sell to home centers and lumberyards who, in turn, sell to
remodeling contractors, builders and consumers. The Company believes that it is
able to compete on favorable terms as a result of its distribution coverage,
high quality, innovative products and production efficiency.
The Segment also manufactures a line of injection molded siding components for
the remodeling and new construction markets. Siding components include blocks,
which allow for the flush mounting of items like light fixtures to the exterior
of a home, and gable vents that provide attic ventilation. These products are
sold to home centers, lumberyards and wholesale distributors of building
materials.
The Segment operates 16 manufacturing plants in the United States and employed
approximately 5,400 full-time people as of December 31, 1999, 1,528 of whom are
covered by collective bargaining agreements which expire in 2000 and 2001. The
Company believes that the Segment's relationships with its employees are
satisfactory.
Other Operations
The Company manufactures and distributes preservative and fire retardant treated
lumber and plywood products. These products are marketed to cooperative buying
groups, lumberyards and independent wholesale distributors for use generally in
residential decking, roofing, siding and landscaping as well as various
commercial construction applications.
GENERAL CONSIDERATIONS
Employees
The Company employed approximately 12,100 persons at December 31, 1999.
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NORTEK, INC. AND SUBSIDIARIES
Backlog
Backlog expected to be filled during 2000 was approximately $168,415,000 at
December 31, 1999 ($148,213,000 at December 31, 1998). Backlog is not regarded
as a significant factor for operations where orders are generally for prompt
delivery. While backlog stated for December 31, 1999 is believed to be firm, the
possibility of cancellations makes it difficult to assess the firmness of
backlog with certainty.
Research and Development
The Company's research and development activities are principally new product
development and represent approximately .9% of net sales.
Patents and Trademarks
The Company holds numerous design and process patents that it considers
important, but no single patent is material to the overall conduct of its
business. It is the Company's policy to obtain and protect patents whenever such
action would be beneficial to the Company. The Company owns or licenses numerous
trademarks that it considers material to the marketing of its products,
including Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R),
Best(R), Crestline(R), Vetter(R), AWC(R), Kenergy(R), Variform(R), Timber
Oak(R), Varigrain Preferred(R), Camden Pointe(TM), Duragrain(R), Hampton III(R),
Contractors Choice(R), Nostalgia Series(TM), Varitek(TM), Varibest(R),
Proguard(TM), Georgia-Pacific(R), Chateau(R), Chateau Legacy(R), Chateau
Nobility(R), Napco(R), American Splendor(TM), American Herald(R), American 76
Collection(R), Sunnybrook(R), Olde Providence(TM), Richwood(R), Kroy(R),
Timberlast(TM), Classic Manor(TM), Finyl Rail(TM), Great Lakes Gold(R), PLY
GEM(R), Uniframe(R), Monitor(TM), Napco Premium(TM), Napco Prime(TM),
Peachtree(R), Vintage(TM), Image(TM), Thermal-Gard(R), CWD(TM), Ambassador(TM),
Regency(TM), Diplomat(TM), Envoy(TM), Consul(TM), Governair(R), Mammoth(R),
Temtrol(R), Miller(R), Intertherm(R), Frigidaire(R), Tappan(R), Philco(R),
Kelvinator(R), Gibson(R), Ventrol(R), Webco(TM), Linear(R), Channel Plus(R),
Multi-Code(R) and Xantech(R). The Company believes that its rights in these
trademarks are adequately protected.
Raw Materials
The Company purchases raw materials and most components used in its various
manufacturing processes. The principal raw materials purchased by the Company
are rolled sheet, formed and galvanized steel, copper, aluminum, plate mirror
glass, PVC, polypropylene, glass, vinyl extrusions, particle board, fiberboard,
lumber, plywood, various chemicals, paints, resins, and plastics.
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NORTEK, INC. AND SUBSIDIARIES
The materials, molds and dyes, subassemblies and components purchased from other
manufacturers, and other materials and supplies used in manufacturing processes
have generally been available from a variety of sources. Whenever practical, the
Company establishes multiple sources for the purchase of raw materials and
components to achieve competitive pricing, ensure flexibility and protect
against supply disruption. From time to time increases in raw material costs can
affect future supply availability due in part to raw material demands by other
industries.
Working Capital
The carrying of inventories to support customers and to permit prompt delivery
of finished goods requires substantial working capital. Substantial working
capital is also required to carry receivables. During 1999, the Company
experienced an increase in the level of working capital in the Air Conditioning
and Heating Products Segment as a result of an expansion of distribution of HVAC
residential site-built products. The Company expects further increases in
working capital levels in the year 2000 as its distribution of these products
continues to expand. The demand for the Company's products is seasonal,
particularly in the Northeast and Midwest regions of the United States and in
Canada where inclement weather during the winter months usually reduces the
level of building and remodeling activity in both the home improvement and new
construction markets. Many of the businesses in the Company's Windows, Doors and
Siding Products Segment have in the past been more seasonal in nature than the
Company's other businesses. As a result, the demand for working capital of the
Company's subsidiaries is greater from late in the first quarter until early in
the fourth quarter. See "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
incorporated herein by reference.
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NORTEK, INC. AND SUBSIDIARIES
Executive Officers of the Registrant
Name Age Position
Richard L. Bready 55 Chairman, President and
Chief Executive Officer
Almon C. Hall 53 Vice President, Controller and
Chief Accounting Officer
Richard J. Harris 63 Vice President and
Treasurer
Kenneth J. Ortman 64 Senior Vice President -
Segment Operations
Kevin W. Donnelly 45 Vice President, General
Counsel and Secretary
The Executive Officers have served in the same or substantially similar
executive positions with the Company for at least the past five years. Executive
Officers are elected annually by the Board of Directors of the Company and serve
until their successors are chosen and qualified. Mr. Bready has an employment
agreement with the Company providing for his employment as Chief Executive
Officer through January 1, 2003, and at the end of each year during the term of
his employment the agreement will be extended for an additional year until
either party gives notice it will not be further extended. The Company's
executive officers include only those officers of the Company who perform
policy-making functions for the Company as a whole and have managerial
responsibility for major aspects of the Company's overall operations. A number
of other individuals who serve as officers of the Company's subsidiaries perform
policy-making functions and have managerial responsibilities for the subsidiary
or division by which they are employed, although not for the Company overall.
Certain of these individuals could, depending on earnings of such unit, be more
highly compensated than some executive officers of the Company.
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NORTEK, INC. AND SUBSIDIARIES
ITEM 2. PROPERTIES
Set forth below is a brief description of the location and general character of
the principal administrative and manufacturing facilities and other material
real properties of the Company, all of which the Company considers to be in
satisfactory repair. All properties are owned, except for those indicated by an
asterisk, which are leased.
Approximate
Location Description Square Feet
Residential Building Products Segment:
- --------------------------------------
Union, IL Manufacturing/Warehouse/Administrative 197,000
Hartford, WI Manufacturing/Warehouse/Administrative 477,000
Mississauga, ONT Manufacturing/Administrative 110,000
Brea, CA Manufacturing/Administrative 34,000*
Sylmar, CA Manufacturing/Administrative 35,000*
Carlsbad, CA Administrative 30,000
Xiang, Boaon, PRC Manufacturing 106,000*
Fabriano, Italy Manufacturing/Administrative 97,500*
Cerreto D'Esi, Italy Manufacturing/Administrative 56,000
Montefano, Italy Manufacturing/Administrative 140,000
Cleburne, TX Manufacturing/Administrative 210,000
Los Angeles, CA Manufacturing/Administrative 177,000
Drummondville, QUE Manufacturing/Administrative 76,000
Cincinnati, OH Manufacturing 836,000
Coppell, TX Manufacturing 144,000*
Saint-Ouen l'Aumone,
France Manufacturing/Administrative 43,000*
Air Conditioning and Heating Products Segment:
- ---------------------------------------------
St. Leonard d'Aston, QUE Manufacturing/Administrative 86,000
St. Peters, MO Warehouse/Administrative 250,000*
St. Louis, MO Manufacturing 214,000
St. Louis, MO Manufacturing 103,000*
Boonsville, MO Manufacturing 250,000
Tipton, MO Manufacturing 50,000
Chaska, MN Manufacturing/Administrative 230,000*
Oklahoma City, OK Manufacturing/Administrative 127,000
Okarche, OK Manufacturing/Administrative 203,000
Saskatoon, Canada Manufacturing 49,000
Springfield, MO Manufacturing 47,000*
Montreal, QUE Manufacturing 66,000*
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Approximate
Location Description Square Feet
Windows, Doors and Siding Products Segment:
- -------------------------------------------
Calgary, Alberta Manufacturing/Administrative 282,000
Toledo, OH Manufacturing/Warehouse/Administrative 258,000
Kearney, MO Manufacturing/Administrative 145,000
Martinsburg, WV Manufacturing 162,000
Jasper, TN Manufacturing 110,000
Mosinee, WI Manufacturing/Warehouse/Administrative 825,000*
Stevens Point, WI Manufacturing 107,000
Huntington, WV Manufacturing/Warehouse 286,000*
Butler, PA Manufacturing 110,000
York, NE Manufacturing/Administrative 94,000
Sarver, PA Manufacturing 126,000
Valencia, PA Manufacturing 174,000
Gainsville, GA Manufacturing/Administrative 430,000
Punxsutawney, PA Manufacturing/Administrative 133,000
Commerce, TX Manufacturing/Administrative 86,000
Other:
- ------
Pine Bluff, AR Manufacturing 35 Acres
Thomson, GA Manufacturing 29 Acres
Milford, VA Manufacturing 45 Acres
Detroit, MI Manufacturing 10 Acres
Providence, RI Administrative 23,900*
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ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company and its subsidiaries are subject to numerous federal, state and
local laws and regulations, including environmental laws and regulations that
impose limitations on the discharge of pollutants into the air and water and
establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company believes that it is in substantial compliance with
the material laws and regulations applicable to it. The Company is involved in
current, and may become involved in future, remedial actions under federal and
state environmental laws and regulations which impose liability on companies to
clean up, or contribute to the cost of cleaning up, sites at which their
hazardous wastes or materials were disposed of or released. Such claims may
relate to properties or business lines acquired by the Company after a release
has occurred. In other instances, the Company may be partially liable under law
or contract to other parties that have acquired businesses or assets from the
Company for past practices relating to hazardous substances management. The
Company believes that all such claims asserted against it, or such obligations
incurred by it, will not have a material adverse effect upon the Company's
financial condition or results of operations. Expenditures in 1998 and 1999 to
evaluate and remediate such sites were not material. However, the Company is
presently unable to estimate accurately its ultimate financial exposure in
connection with identified or yet to be identified remedial actions due among
other reasons to: (i) uncertainties surrounding the nature and application of
environmental regulations, (ii) the Company's lack of information about
additional sites to which it may be listed as a potentially responsible party
("PRP"), (iii) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions and (iv)
the time periods over which remediation may occur. Furthermore, since liability
for site remediation is joint and several, each PRP is potentially wholly liable
for other PRPs that become insolvent or bankrupt. Thus, the solvency of other
PRPs could directly affect the Company's ultimate aggregate clean-up costs. In
certain circumstances, the Company's liability for clean-up costs may be covered
in whole or in part by insurance or indemnification obligations of third
parties.
In addition to the legal matters described above, the Company and its
subsidiaries are parties to various legal proceedings incident to the conduct of
their businesses. None of these proceedings is expected to have a material
adverse effect, either individually or in the aggregate, on the Company's
financial position or results of operations (See Note 8 of the Notes to the
Consolidated Financial Statements, Item 8 of Part II of this report,
incorporated herein by reference).
16
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
A subsidiary of the Company is a defendant in a number of lawsuits alleging
damage caused by alleged defects in certain pressure treated wood products. Many
of the suits have been resolved by dismissal or settlement with amounts being
paid out of insurance proceeds or other third party recoveries. The subsidiary
continues to vigorously defend the remaining suits. Certain defense and
indemnity costs are being paid out of insurance proceeds and proceeds from a
settlement with suppliers of material used in the production of the treated wood
products.
The subsidiary has engaged in coverage litigation with certain insurers and has
settled coverage claims with several of the insurers. The Company believes that
the remaining coverage disputes will be resolved on a satisfactory basis and
additional coverage will be available. In reaching this belief, the Company
analyzed insurance coverage and the status of the coverage litigation,
considered the history of settlements with primary and excess insurers and
consulted with counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
Stockholders of record of Nortek Common and Special Common Stock at February 25,
2000, numbered 2,666 and 2,162, respectively. There were no dividends declared
on the Common and Special Common Stock in 1999 or 1998. The high and low sales
prices of Nortek's Common Stock traded on the New York Stock Exchange in each
quarter of 1999 and 1998 were:
1999
Quarter High Low
First 31 1/8 24 1/8
Second 32 25
Third 41 31 1/8
Fourth 35 22 1/4
1998
Quarter High Low
First 34 1/2 25
Second 33 1/4 28 3/4
Third 36 1/16 22 13/16
Fourth 30 3/8 20
See Note 6 of the Notes to the Consolidated Financial Statements, Item 8 of Part
II of this report, incorporated herein by reference.
17
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
For the Five Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Consolidated Summary of (In millions except ratios and per share amounts)
Operations:
Net sales $1,992.8 $1,738.3 $1,134.1 $841.6 $656.8
Operating earnings 178.5 133.1 83.0 61.0 43.0
Gain on Businesses sold --- 4.0 --- --- ---
Earnings from continuing
operations before
extraordinary loss 49.3 34.0 26.4 23.7 17.5
Earnings (loss) from
discontinued operations --- 1.2 (5.2) (1.7) (2.5)
Extraordinary loss from
debt retirements --- (.2) --- --- ---
Net earnings 49.3 35.0 21.2 22.0 15.0
Financial Position:
Unrestricted cash,
investments and
marketable securities $ 115.1 $209.6 $161.8 $ 92.1 $103.3
Working capital 324.5 337.2 341.8 163.1 180.2
Total assets 1,809.7 1,690.0 1,304.6 590.2 605.0
Total debt--
Current 14.0 17.7 17.7 36.5 41.9
Long-term 1,023.6 1,007.1 835.8 243.8 240.1
Current ratio 1.9:1 2.0:1 2.3:1 1.9:1 1.9:1
Debt to equity ratio 4.0:1 4.7:1 6.7:1 2.4:1 2.1:1
Depreciation and amorti-
tion expense including
non-cash interest 59.2 45.3 28.4 21.0 16.2
Capital expenditures 42.5 41.4 22.5 19.8 15.7
Stockholders' investment 259.8 217.6 128.1 118.8 131.3
Common and Special
Common shares
outstanding 11.5 11.7 9.5 9.9 12.1
Per Share:
Earnings from
continuing operations
Basic $ 4.19 $ 3.11 $ 2.75 $ 2.26 $ 1.41
Diluted $ 4.11 $ 3.06 $ 2.68 $ 2.23 $ 1.39
Net earnings
Basic $ 4.19 $ 3.20 $ 2.21 $ 2.10 $ 1.21
Diluted $ 4.11 $ 3.15 $ 2.15 $ 2.07 $ 1.19
Stockholders'
investment $22.60 $18.59 $13.48 $12.03 $10.87
See Notes 2, 9 to 11 and 13 of the Notes to the Consolidated Financial
Statements, and Management's Discussion and Analysis of Financial Condition and
Results of Operations, included elsewhere herein, regarding the effect on
operating results of acquisitions, discontinued operations, Businesses sold and
other matters. There have not been any cash dividends declared or paid on the
Company's Common or Special Common Stock during the past five years.
18
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The Company is a diversified manufacturer of residential and commercial building
products, operating within three principal segments: the Residential Building
Products Segment, the Air Conditioning and Heating Products Segment, and the
Windows, Doors and Siding Products Segment. In the results of operations
presented below, Other includes corporate related items, results of
insignificant operations and certain income and expense not allocable to
reportable segments. The results of operations and other data relating to
Businesses sold have been presented separately. (See Notes 2 and 10 of the Notes
to the Consolidated Financial Statements included elsewhere herein.) Through its
principal segments, 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, the do-it-yourself ("DIY") and
professional remodeling and renovation markets.
The Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction, DIY and professional
remodeling and renovation markets. The principal products sold by the Segment
include, kitchen range hoods, bath fans and combination units (fan, heater and
light combinations). The Air Conditioning and Heating Products Segment
manufactures and sells heating, ventilating, and air conditioning systems
("HVAC") for custom-designed commercial applications and for manufactured and
site-built residential housing. The Windows, Doors and Siding Products Segment
principally manufactures and distributes vinyl, wood and composite windows,
vinyl, wood, steel and composite patio and entry doors, vinyl siding, skirting,
soffit and accessories, aluminum trim coil, siding, soffit and accessories,
blocks, vents, shutters, sunrooms, fencing, railing and decking for use in the
residential construction, DIY and professional renovation markets.
19
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
The Company acquired Webco, Inc. ("Webco") on March 8, 1999. On April 23, 1999,
the Company acquired three businesses from Caradon plc of the United Kingdom:
Peachtree Windows and Doors, Thermal-Gard and CWD Windows and Doors (the
"Caradon Acquired Companies"). Other 1999 acquisitions included Multiplex
Technologies, Inc. ("Multiplex") on May 28, 1999, Kroy Building Products, Inc.
("Kroy") on September 9, 1999 and Xantech Corporation ("Xantech") on December 3,
1999. During 1998 the Company acquired NuTone, Inc. ("NuTone") on July 31, 1998
and Napco, Inc. and an affiliate ("Napco") on October 9, 1998. The Company
acquired Ply Gem Industries, Inc. ("Ply Gem") and its subsidiaries on August 26,
1997. These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the results of Webco, the Caradon Acquired Companies,
Multiplex, Kroy, Xantech, NuTone, Napco and Ply Gem are included in the
Company's consolidated results since the date of their acquisition. (See
"Liquidity and Capital Resources" and Note 2 of the Notes to the Consolidated
Financial Statements included elsewhere herein).
In the fourth quarter of 1997, the Company adopted a plan to discontinue its
plumbing products business. Accordingly, the results of the plumbing products
business have been excluded from earnings from continuing operations and
classified separately as discontinued operations for each of the three years
ended December 31, 1999. On July 10, 1998, the Company sold its plumbing
products business for approximately $33,700,000 in cash. (See Note 9 of the
Notes to the Consolidated Financial Statements included elsewhere herein).
20
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
During 1998, the Company made several dispositions of non-strategic assets
acquired in the 1997 acquisition of Ply Gem. On May 8, 1998, the Company sold
Studley Products, Inc. ("Studley"). Studley was treated as an operation held for
sale since the acquisition of Ply Gem and accordingly Studley's operating
results are not included in the Company's consolidated financial results. Four
additional Ply Gem subsidiaries were sold during 1998: on May 22, 1998, the
Company sold Sagebrush Sales Inc.; on July 2, 1998, the Company sold Goldenberg
Group Inc.; on July 31, 1998 the Company sold the Ply Gem Manufacturing division
of Ply Gem; and on December 10, 1998, the Company sold Allied Plywood
Corporation. Additionally, on December 30, 1998 the Company sold its M&S Systems
LP and Moore-O-Matic, Inc. subsidiaries. The operating results of these 1998
dispositions are included in the Company's 1998 consolidated results to the date
of sale. The combined net sales, operating earnings and earnings before
provision for income taxes of these dispositions for the period from January 1,
1998 to the date of sale were approximately $192,000,000, $6,400,000 and
$6,400,000, respectively. (See Notes 2, 9 and 10 of the Notes to the
Consolidated Financial Statements included elsewhere herein.)
21
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Results of Operations
- ---------------------
The tables that follow present the net sales and operating earnings for the
Company's principal segments for the three years ended December 31, 1999, and
the dollar amount and percentage change of such results as compared to the prior
year.
Net Change
Year Ended December 31, 1999 to 1998 1998 to 1997
----------------------- ------------ ------------
1999 1998 1997 $ % $ %
---- ---- ---- ----- ------ ----- -----
(Dollar amounts in millions)
Net Sales:
Residential Building
Products $ 637.8 $ 475.0 $ 381.8 $162.8 34.3% $ 93.2 24.4%
Air Conditioning and
Heating Products 540.6 465.2 419.4 75.4 16.2 45.8 10.9
Windows, Doors and
Siding Products 738.4 536.8 189.0 201.6 37.6 347.8 184.0
Other 76.0 69.3 21.3 6.7 9.7 48.0 225.4
------ -------- -------- ------ ------
1,992.8 1,546.3 1,011.5 446.5 28.9 534.8 52.9
Businesses sold --- 192.0 122.6 (192.0) (100.0) 69.4 56.6
------- -------- -------- ------ ------
$1,992.8 $1,738.3 $1,134.1 $254.5 14.6% $604.2 53.3%
======== ======== ======== ====== ======
Operating Earnings:
Residential Building
Products $94.7 $ 53.7 $ 40.3 $41.0 76.4% $13.4 33.3%
Air Conditioning and
Heating Products 67.0 55.7 41.3 11.3 20.3 14.4 34.9
Windows, Doors and
Siding Products 37.2 31.5 9.0 5.7 18.1 22.5 250.0
Other (20.4) (14.2) (14.5) (6.2) (43.7) 0.3 2.1
------ ------ ------- ----- -----
178.5 126.7 76.1 51.8 40.9 50.6 66.5
Businesses sold --- 6.4 6.9 (6.4) (100.0) (0.5) (7.2)
------ ------ ------- ---- -----
$178.5 $133.1 $ 83.0 $45.4 34.1% $50.1 60.4%
====== ====== ======== ===== =====
22
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
The tables that follow set forth, for the three years ended December 31, 1999,
(a) certain consolidated operating results, (b) the percentage change of such
results as compared to the prior year, (c) the percentage which such results
bear to net sales and (d) the change of such percentages as compared to the
prior year:
Percentage Change
1999 1998
Year Ended December 31, To to
1999 1998 1997 1998 1997
------ ------ ------ ------- -------
(Dollar amounts in millions)
Net sales $1,992.8 $1,738.3 $1,134.1 14.6% 53.3%
Cost of products sold 1,433.1 1,275.3 825.8 (12.4) (54.4)
Selling, general and
administrative expense 360.7 315.5 219.4 (14.3) (43.8)
Amortization of goodwill
and intangible assets 20.5 14.4 5.9 (42.4) (144.1)
Operating earnings 178.5 133.1 83.0 34.1 60.4
Gain on Businesses sold --- 4.0 --- (100.0) ---
Interest expense (96.5) (86.3) (50.2) (11.8) (71.9)
Investment income 8.0 10.5 9.9 (23.8) 6.1
Earnings from continuing
operations before
provision for
income taxes 90.0 61.3 42.7 46.8 43.6
Provision for income taxes 40.7 27.3 16.3 (49.1) (67.5)
Earnings from continuing
operations before
extraordinary loss 49.3 34.0 26.4 45.0 28.8
Earnings (loss) from
discontinued operations --- 1.2 (5.2)(100.0) 123.1
Extraordinary loss from
debt retirements --- (0.2) --- 100.0 ---
Net earnings $49.3 $35.0 $21.2 40.9% 65.1%
23
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Percentage
Change
Percentage of Net Sales 1999 1998
Year Ended December 31, to to
1999 1998 1997 1998 1997
------ ------ ------ ---- ----
Net sales 100.0% 100.0% 100.0% ---% ---%
Cost of products sold 71.9 73.4 72.8 1.5 (0.6)
Selling, general and
administrative expense 18.1 18.1 19.4 --- 1.3
Amortization of goodwill
and intangible assets 1.0 0.8 0.5 (0.2) (0.3)
Operating earnings 9.0 7.7 7.3 1.3 0.4
Gain on Businesses sold --- 0.2 --- (0.2) 0.2
Interest expense (4.9) (5.0) (4.4) 0.1 (0.6)
Investment income 0.4 0.6 0.9 (0.2) (0.3)
Earnings from continuing
operations before
provision for
income taxes 4.5 3.5 3.8 1.0 (0.3)
Provision for income taxes 2.0 1.6 1.4 (0.4) (0.2)
Earnings from continuing
operations before
extraordinary loss 2.5 1.9 2.4 0.6 (0.5)
Earnings (loss) from
discontinued operations --- 0.1 (0.5) (0.1) 0.6
Extraordinary loss from
debt retirements --- --- --- --- ---
Net earnings 2.5 2.0 1.9 0.5 0.1
24
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Year Ended December 31, 1999 as Compared to the Year Ended December 31, 1998
- ------------------------------------------------------------------------------
Net sales increased approximately $254,500,000 or approximately 14.6%(or
increased approximately $257,400,000 or approximately 14.8% excluding the effect
of changes in foreign exchange rates) as compared to 1998. Net sales increased
in 1999, principally as a result of acquisitions and higher sales volume,
partially offset by the effect of Businesses sold. Acquisitions contributed
approximately $127,400,000 of the total increase in net sales of approximately
$162,800,000 ($165,700,000 increase excluding the effect of changes in foreign
exchange rates) in the Residential Building Products Segment in 1999. Increased
domestic sales volume, partially offset by the effects of changes in foreign
exchange rates accounted for the balance of the increase in this segment. Net
sales in the Air Conditioning and Heating Products Segment increased
approximately $75,400,000 or 16.2% in 1999. The increase in net sales in this
segment is principally as a result of higher sales volume of products sold to
customers serving the residential site built and commercial markets partially
offset by lower sales of products to customers serving the manufactured housing
market in this segment. In the second half of 1999, this segment began to feel
the impact of a slowdown in the manufactured housing industry. It is anticipated
that the weakness in the manufactured housing industry will continue into the
year 2000 and will have an adverse effect on this segment's sales during the
next several quarters. This segment's sales of air conditioning and heating
products sold to manufactured housing customers should improve as the
manufactured housing industry takes steps to reduce its retail inventories of
manufactured homes. Approximately $12,100,000 of the increase in net sales in
this segment in 1999 was from an acquisition. Net sales of the Windows, Doors
and Siding Products Segment increased approximately $201,600,000 in 1999. The
increase arose primarily from net sales of acquired companies which contributed
approximately $215,900,000 in 1999. The increase in net sales in this segment
was partially offset by the effect of lower sales volume of certain lower margin
vinyl window products which were relocated to a lower cost manufacturing
facility as this operation closely controlled its sales as it continues to
implement cost control measures and improve operating systems. These overall net
increases in net sales in the Company's three principal segments were partially
offset by the effect of approximately $192,000,000 of net sales attributable to
Businesses sold in 1998. As a result of the acquisitions in the second and third
quarters of 1999 in the Windows, Doors and Siding Products Segment, the
performance of this segment will be more seasonal than in prior years due to the
effect of winter weather conditions normally experienced in the fourth and first
quarters in the U.S. and Canada.
The Securities and Exchange Commission released Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB No. 101), on December 3,
1999. This SAB provides additional guidance on the accounting for revenue
recognition including both broad conceptual discussions as well as certain
industry-specific guidance. The Company is in the process of accumulating the
information necessary to quantify the potential impact, if any, of this new
guidance.
25
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Cost of products sold as a percentage of net sales decreased from approximately
73.4% in 1998 to approximately 71.9% in 1999. Changes in the percentages were,
in large part, as a result of acquisitions and Businesses sold in 1998.
Excluding the effect of Businesses sold, cost of products sold as a percentage
of net sales decreased from approximately 72.9% in 1998 to approximately 71.9%
in 1999. The decrease in the percentage principally resulted from acquisitions
in the Residential Building Products Segment partially offset by acquisitions in
the Windows, Doors and Siding Products Segment (which, on a combined basis had a
net lower level of cost of sales than the overall group of businesses owned
prior to such acquisitions). To a lesser extent, the effect of higher sales
levels in the Residential Building Products Segment without a proportionate
increase in costs also contributed to the decrease in the percentage. These
decreases in the percentages were partially offset by the effect of higher vinyl
resin cost, due to higher oil prices, without a proportionate increase in sales
prices, in the Windows, Doors and Siding Products Segment. In the year 2000, the
rising cost of vinyl resin is also expected to adversely impact cost of sales
percentages. This situation should be mitigated as price increases for this
segment's vinyl products are implemented over the next several quarters. Had all
year-end inventory values been stated on a FIFO basis, year-end inventory would
have been approximately $2,252,000 higher in 1999, $3,640,000 higher in 1998 and
$5,041,000 higher in 1997. 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, material costs and changes in productivity
levels.
Selling, general and administrative expense as a percentage of net sales
remained unchanged at approximately 18.1% in 1998 and 1999. Excluding the effect
of Businesses sold, selling, general and administrative expense as a percentage
of net sales increased slightly from approximately 18.0% in 1998 to
approximately 18.1% in 1999. This increase in the percentage is principally as a
result of acquisitions in the Residential Building Products Segment (which have
a higher level of expense as a percentage of net sales then the overall group of
businesses owned prior to such acquisitions) partially offset by an increase in
net sales in the Air Conditioning and Heating Products Segment without a
proportionate increase in expense, a reduction in the level of expense in the
Windows, Doors and Siding Products Segment, including the effect of acquisitions
(which, for the most part, had a lower level of expense as a percentage of net
sales than the overall group of businesses owned prior to such acquisitions).
Amortization of goodwill and intangible assets, as a percentage of net sales,
increased from approximately .8% of net sales in 1998 to approximately 1.0% of
net sales in 1999, principally as a result of acquisitions.
26
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Consolidated operating earnings increased approximately $45,400,000 from
approximately $133,100,000 in 1998 to approximately $178,500,000 in 1999.
Businesses acquired in 1999 contributed approximately $30,900,000 of the
increase, of which approximately $18,500,000 was in the Residential Building
Products Segment, $900,000 was in the Air Conditioning and Heating Products
Segment and $11,500,000 was in the Windows, Doors and Siding Products Segment.
The increase in operating earnings for 1999 includes approximately $14,000,000
of estimated synergies and cost reductions realized from the integration of
NuTone into the Company's Residential Building Products Segment, net of
approximately $3,400,000 of costs and expenses. Consolidated operating earnings
have been reduced by depreciation and amortization expense (other than
amortization of deferred debt expense and debt discount) of approximately
$55,500,000 and $42,100,000 for 1999 and 1998, respectively. Businesses acquired
contributed approximately $10,500,000 of the increase in depreciation and
amortization expense in 1999, of which approximately $5,300,000 was in the
Residential Building Products Segment, $300,000 was in the Air Conditioning and
Heating Products Segment and $4,900,000 was in the Windows, Doors and Siding
Products Segment. Depreciation and amortization expense relating to the
operating results of Businesses sold in 1998 was approximately $1,700,000 for
1998. (See Note 10 of the Notes to the Consolidated Financial Statements
included elsewhere herein.) The increase in operating earnings was also due, in
part, to increased sales volume without a proportionate increase in costs and
expenses in the Residential Building Products Segment of approximately
$22,600,000 excluding the contribution from acquisitions; and increased sales
volume without a proportionate increase in costs and expenses in the Air
Conditioning and Heating Products Segment of approximately $10,300,000 excluding
the contribution from acquisitions. The increase in operating earnings in the
Air Conditioning and Heating Products Segment arose from higher sales levels of
commercial and site-built residential products, partially offset in the second
half of 1999, by lower operating earnings of air conditioning and heating
products sold to the manufactured housing market as compared to the prior year
due to a slowdown in the manufactured housing industry as noted above. The
slowdown in the manufactured housing industry is expected to adversely effect
this segment's operating earnings during the next several quarters. It is
anticipated that this segment's operating earnings will begin to improve from
increased sales of air conditioning and heating products once the manufactured
housing industry takes steps to reduce its retail inventories of manufactured
homes. It is also expected, that over the next several quarters, the effect of
this slowdown will continue to be somewhat offset by increased earnings from
higher sales levels of site-built residential air conditioning products.
Operating earnings in 1999 in the Windows, Doors and Siding Products Segment
decreased approximately $5,800,000 excluding the contribution from acquisitions,
principally as a result of higher vinyl resin costs and lower sales volume of
certain vinyl windows as noted above. The overall increase in the Company's
operating earnings was partially offset by the effect of approximately
$6,400,000 of operating earnings of Businesses sold in 1998. The integration of
27
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
the recently acquired Caradon Acquired Companies is taking longer than expected
and resulted in a lower contribution to earnings in 1999 than anticipated. The
Company anticipates lower earnings levels during the next several quarters in
the Windows, Doors and Siding Products Segment due to the seasonality of this
segment's 1999 acquisitions and as the effects of the integration of the Caradon
Acquired Companies and the lower sales levels of certain vinyl windows, noted
above, continue to be felt. The Company also expects future operating earnings
in this segment to be adversely affected by higher vinyl resin costs until
increases in sales prices to customers can be implemented.
Operating earnings of foreign operations, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries which manufacture
built-in ventilation products and windows and doors, were approximately 7.4% and
6.5% of operating earnings (before corporate overhead) in 1999 and 1998,
respectively. The increase in foreign operating earnings as a percentage of
operating earnings in 1999 as compared to 1998 is principally a result of the
increased operating earnings from foreign acquisitions. Sales and earnings
derived from the international market are subject to the risks of, among other
factors, currency fluctuations.
Interest expense in 1999 increased approximately $10,200,000 or approximately
11.8% as compared to 1998, primarily as a result of the sale of the 8 7/8%
Senior Notes due 2008 ("8 7/8% Notes") on July 31, 1998. This increase was
partially offset by the paydown of approximately $27,700,000 of debt with a
portion of the proceeds from the sale of businesses in 1998.
Investment income decreased approximately $2,500,000 or approximately 23.8% in
1999 as compared 1998. The decrease in 1999 is principally due to lower average
invested balances as a result of funds used for acquisitions and lower yields
earned on short-term investments and marketable securities.
The provision for income taxes was approximately $40,700,000 for 1999, as
compared to $27,300,000 for 1998. The income tax rates differed from the United
States Federal statutory rate of 35% principally as a result of state income tax
provisions, nondeductible amortization expense (for tax purposes), the effect of
foreign income tax on foreign source income, changes in tax reserves and the
effect of product development tax credits from foreign operations. (See Note 4
of the Notes to the Consolidated Financial Statements included elsewhere
herein.)
28
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Year Ended December 31, 1998 as Compared to the Year Ended December 31, 1997
- ----------------------------------------------------------------------------
Net sales increased approximately $604,200,000 or approximately 53.3%, as
compared to 1997 (or increased approximately $610,400,000 or approximately 53.8%
excluding the effect of changes in foreign exchange rates). Net sales increased
in 1998 principally as a result of acquisitions. The acquisition of NuTone on
July 31, 1998 contributed approximately $82,200,000 of the $93,200,000 increase
($99,400,000 increase excluding the effect of changes in foreign exchange rates)
in net sales in the Residential Building Products Segment in 1998. The balance
of the increase in net sales in this segment is as a result of higher sales
levels of higher margin built-in ventilation products in North America,
partially offset by lower sales levels of certain lower margin products. The
increase in net sales in the Air Conditioning and Heating Products Segment of
approximately $45,800,000 or 10.9%, is principally as a result of higher sales
volume related to products sold to the residential and manufactured housing
markets, partially offset by slightly lower sales of commercial HVAC products,
in part, as a result of a seven week strike in 1998 at one of this segment's
manufacturing facilities. The increase in net sales in the Windows, Doors and
Siding Products Segment principally arose in connection with the August 26, 1997
acquisition of Ply Gem (a full twelve months of operating results in 1998 as
compared to four months in 1997). The acquisition of Napco on October 9, 1998
contributed approximately $21,000,000 to this segment's increase in net sales in
1998. The net sales of Businesses sold increased approximately $69,400,000
principally as a result of certain non-strategic businesses, acquired in
connection with the August 26, 1997 acquisition of Ply Gem, which were sold in
1998.
Cost of products sold as a percentage of net sales increased from approximately
72.8% in 1997 to approximately 73.4% in 1998. Changes in the percentages were,
in large part, affected by acquisitions and will be affected in the future by
the effect of Businesses sold in 1998. The Ply Gem businesses have a higher
level of cost of sales as a percentage of net sales than the overall group of
businesses owned prior to the Ply Gem acquisition while NuTone's level of cost
of sales as a percentage of net sales is lower. Excluding the effect of
Businesses sold, cost of products sold as a percentage of net sales increased
from approximately 72.4% in 1997 to approximately 72.9% in 1998. This increase
in the percentage principally resulted from the acquisitions of Ply Gem and, to
a lesser extent, Napco in the Windows, Doors and Siding Products Segment,
partially offset by the acquisition of NuTone and the effect of higher sales
levels in the Residential Building Products and Air Conditioning and Heating
Product Segments without a proportionate increase in costs. Had all year-end
inventory values been stated on a FIFO basis, year-end inventory would have been
approximately $3,640,000 higher in 1998, approximately $5,041,000 higher in 1997
and approximately $6,015,000 higher in 1996. 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.
29
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Selling, general and administrative expense as a percentage of net sales
decreased from approximately 19.4% in 1997 to approximately 18.1% in 1998. This
decrease in the percentage was principally affected as a result of acquisitions
and will be affected in the future by the effect of Businesses sold in 1998. Ply
Gem and Napco have a lower level of selling, general and administrative expense
as a percentage of net sales than the overall group of businesses owned prior to
the acquisitions and NuTone has a higher level of expense as a percentage of net
sales. Excluding the effect of Businesses sold, selling, general and
administrative expense as a percentage of net sales decreased from approximately
19.5% in 1997 to approximately 18.0% in 1998. The Air Conditioning and Heating
Products Segment, and to a lesser extent the Residential Building Products
Segment, contributed to the decrease in the percentage as a result of the
increases in sales noted above without a proportionate increase in expense. This
was partially offset by increased corporate overhead, principally as a result of
the acquisition of Ply Gem.
Amortization of goodwill and intangible assets, as a percentage of net sales,
increased from approximately .5% of net sales in 1997 to approximately .8% of
net sales in 1998, principally as a result of the acquisitions of Ply Gem and
NuTone.
Consolidated operating earnings increased approximately $50,100,000 from
approximately $83,000,000 in 1997 as compared to approximately $133,100,000 in
1998. Businesses acquired in 1998 contributed approximately $12,600,000 of the
increase, of which approximately $2,300,000 was in the Windows, Doors and Siding
Products Segment, and $10,300,000 was in the Residential Building Products
Segment. Operating earnings increased substantially in 1998 in the Windows,
Doors and Siding Products Segment, principally due to the effect of the August
26, 1997 acquisition of Ply Gem (a full twelve months of operating results in
1998 as compared to four months in 1997). Consolidated operating earnings have
been reduced by depreciation and amortization expense of approximately
$42,100,000 and approximately $26,700,000 for 1998 and 1997, respectively.
Businesses acquired in 1998 contributed approximately $4,300,000 of the increase
in depreciation and amortization expense in 1998, of which approximately
$500,000 was in the Windows, Doors and Siding Products Segment and $3,800,000
was in the Residential Building Products Segment. Depreciation and amortization
expense for the year ended December 31, 1998 related to the operating results of
Businesses sold in 1998 was approximately $1,700,000. (See Note 10 of the Notes
to the Consolidated Financial Statements included elsewhere herein.) The
increase in operating earnings was also due to increased sales volume without a
proportionate increase in cost and expense in the Air Conditioning and Heating
Products Segment (approximately $14,400,000 or 34.9%) and, to a lesser extent,
the Residential Building Products Segment (approximately $3,100,000 excluding
the contribution from NuTone), as noted above, partially offset by increased
other expense principally as a result of increased corporate overhead as a
result of the acquisition of Ply Gem.
30
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Operating earnings of foreign operations, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries which manufacture
built-in ventilating products, were approximately 6.5% and 9.0% of operating
earnings (before corporate overhead) in 1998 and 1997, respectively. The decline
in foreign operating earnings as a percentage of net sales is principally as a
result of the increased domestic sales and operating earnings from the Ply Gem
acquisition. Sales and earnings derived from the international market are
subject to the risks of currency fluctuations.
The gain on Businesses sold before provision for income taxes in 1998 of
approximately $4,000,000 arose in connection with the sale of M&S and MOM.
Interest expense in 1998 increased approximately $36,100,000 or approximately
71.9% as compared to 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 on August 26, 1997, indebtedness
of Ply Gem existing at the date of acquisition and the sale of the 8 7/8% Notes
on July 31, 1998. This increase was partially offset by the refinancing of
certain outstanding indebtedness of the Company's subsidiaries in 1997. (See
Notes 2 and 5 of the Notes to the Consolidated Financial Statements included
elsewhere herein.)
Investment income in 1998 increased approximately $600,000 or approximately 6.1%
as compared to 1997, principally due to higher average invested balances
partially offset by slightly lower yields earned on short-term investments and
marketable securities.
The provision for income taxes was approximately $27,300,000 for 1998, as
compared to approximately $16,300,000 for 1997. The income tax rates differed
from the United States Federal statutory rate of 35% principally as a result of
state income tax provisions, nondeductible amortization expense (for tax
purposes), changes in tax reserves, the effect of foreign income tax on foreign
source income and the effect of product development tax credits from foreign
operations. (See Note 4 of the Notes to the Consolidated Financial Statements
included elsewhere herein.)
Earnings from discontinued operations were approximately $1,200,000 in 1998 as
compared to a loss of approximately $5,200,000 in 1997. In the fourth quarter of
1997, the Company adopted a plan of disposition of the plumbing products
business and on July 10, 1998, this business was sold. The following is a
comparison of the operating results of discontinued operations for the two years
ended December 31, 1998. (See Note 9 of the Notes to the Consolidated Financial
Statements included elsewhere herein.)
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NORTEK, INC. AND SUBSIDIARIES
For the years ended December 31,
1998 1997
-------- --------
(Amounts in thousands)
Loss before income taxes $(2,800) $(3,800)
Allocated corporate interest
expense (1,000) (1,900)
------- -------
(3,800) (5,700)
Income tax benefit 5,000 2,100
------- -------
1,200 (3,600)
Reserve for future operating
expenses net of tax benefit
of $900,000 --- (1,600)
------- -------
Earnings (loss) from
discontinued operations $ 1,200 $(5,200)
======= =======
The income tax benefit in 1998 includes approximately $800,000 recorded as a
result of the realization of a portion of the tax capital loss arising from the
sale of the plumbing products business.
Liquidity and Capital Resources
- -------------------------------
The Company is highly leveraged and expects to continue to be highly leveraged
for the foreseeable future. At December 31, 1999, the Company had consolidated
debt of approximately $1,037,600,000 consisting of (i) $14,000,000 of short-term
borrowings and current maturities of long-term debt, (ii) $128,300,000 of notes,
mortgage notes and other indebtedness, (iii) $209,300,000 of the 8 7/8% Notes,
(iv) $307,900,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes") (v)
$174,200,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") and (vi)
$203,900,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes").
At December 31, 1999, the Company had consolidated unrestricted cash, cash
equivalents and marketable securities of approximately $115,100,000 as compared
to approximately $209,600,000 at December 31, 1998 and the Company's debt to
equity ratio was approximately 4.0:1 at December 31, 1999 as compared to 4.7:1
at December 31, 1998.
The Company's ability to pay interest on or to refinance its indebtedness
depends on the successful integration of the operations of recent acquisitions
and the Company's future performance, which is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. There can be no assurance that the Company will generate sufficient
cash flow from the operation of its subsidiaries or that future financings will
be available on acceptable terms or in amounts sufficient to enable the Company
to service or refinance its indebtedness, or to make necessary capital
expenditures.
32
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
The Company has evaluated and expects to continue to evaluate possible
acquisition transactions and 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 and its subsidiaries'
indebtedness (including the indentures for the 8 7/8% Notes, the 9 7/8% Notes,
the 9 1/4% Notes and the 9 1/8% Notes and the credit agreement for the Ply Gem
credit facility) contain restrictive financial and operating covenants including
covenants that restrict the ability of the Company and its subsidiaries to
complete acquisitions, pay dividends, incur indebtedness, make investments, sell
assets and take certain other corporate actions.
The Company expects to meet its cash flow requirements through fiscal 2000 from
cash generated from operations, existing cash, cash equivalents and marketable
securities, and financings, which may include securitization of accounts
receivable and mortgage or capital lease financings.
On March 8, 1999 the Company acquired Webco, a designer and manufacturer of
custom air handling equipment. For the year ended October 31, 1998, Webco had
net sales of approximately $13,900,000.
On April 23, 1999, the Company acquired the Caradon Acquired Companies from
Caradon America Inc. and Caradon Limited, which are wholly owned subsidiaries of
Caradon plc, a United Kingdom company. The Caradon Acquired Companies
manufacture and sell residential windows, entry doors and patio doors to both
the new construction and replacement markets. For the year ended December 31,
1998, the Caradon Acquired Companies had combined net sales of approximately
$169,700,000.
On May 28, 1999, the Company acquired Multiplex, a manufacturer and designer of
high-performance, multi-room video distribution equipment for home automation
and home entertainment. Multiplex had net sales of approximately $10,000,000 for
the year ended December 31, 1998.
On September 9, 1999 the Company acquired Kroy, a manufacturer of vinyl fencing,
railing profiles and vinyl decking systems for residential and light commercial
applications. Kroy had net sales of approximately $26,000,000 during the twelve
months ended June 30, 1999.
On December 3, 1999 the Company acquired Xantech, a designer and manufacturer of
residential infrared remote control systems for extending control of VCR, cable,
satellite and stereo systems to multiple rooms throughout an entire household.
Xantech had net sales of approximately $13,000,000 for the twelve months ended
November 30, 1999.
33
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Acquisitions in 1999 were principally funded through the use of unrestricted
cash, investments, the issuance of notes payable to sellers and the issuance of
common stock. As the Company integrates its recent acquisitions into its
businesses, it expects to achieve incremental synergies, cost savings and
reductions during 2000, partially offset by certain costs and expenses. As of
December 31, 1999, plans for eliminating certain activities have been finalized
for all significant acquisitions with the exception of certain severence
arrangements which the Company estimates will be approximately $1,000,000 and
will be finalized in the first half of 2000. Acquisition integration liabilities
and adjustments relate principally to additional employee terminations and other
exit costs of certain products and the consolidation of certain functions and
operations at the acquired businesses. The total future expenditures associated
with exit costs related to the integration effort at December 31, 1999 are
expected to be funded from the Company's operating cash flow. The integration of
the acquisitions within the Windows, Doors and Siding Products Segment is taking
longer than originally planned. If significant difficulty is encountered with
the integration of acquisitions within the Windows, Doors and Siding Products
Segment or acquisitions within other segments, or if synergies and cost savings
are not realized, the results of operations, cash flow and financial condition
of the Company likely will be adversely affected. There can be no assurance that
the Company will be able to successfully manage and integrate recent
acquisitions. (See Note 2 and 12 of the Notes to the Consolidated Financial
Statements included elsewhere herein.)
Unrestricted cash and cash equivalents decreased from approximately $87,876,000
at December 31, 1998 to approximately $80,893,000 at December 31, 1999.
Marketable securities available for sale decreased from approximately
$121,757,000 at December 31, 1998 to approximately $34,219,000 at December 31,
1999. The Company's investment in marketable securities at December 31, 1999
consisted primarily of certificates of deposit, commercial paper and bank issued
money market instruments. At December 31, 1999, approximately $26,917,000 (of
which approximately $11,240,000 is included in current assets) of the Company's
cash, investments and marketable securities were pledged as collateral for
insurance, employee benefits and other requirements and are classified as
restricted in the Company's accompanying consolidated balance sheet.
Capital expenditures were approximately $42,000,000 in 1999 and are expected to
range between $50,000,000 and $55,000,000 in 2000.
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 May 20, 1999, and allows the Company to purchase
up to 500,000 shares of the Company's Common and Special Common Stock in open
market or negotiated transactions, subject to market conditions, cash
availability and provisions of the Company's outstanding debt instruments. As of
February 25, 2000, the Company has purchased approximately 377,300 shares of its
Common and Special Common Stock under this program for approximately $10,800,000
and accounted for such share purchases as Treasury Stock.
34
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
At February 25, 2000, approximately $87,700,000 was available for the payment of
cash dividends, stock purchases or other restricted payments as defined under
the terms of the Company's most restrictive Indenture. (See Note 5 of the Notes
to the Consolidated Financial Statements included elsewhere herein.)
The Company's working capital and current ratio decreased slightly from
approximately $337,207,000 and 2.0:1, respectively, at December 31, 1998 to
approximately $324,492,000 and 1.9:1, respectively, at December 31, 1999,
principally as a result of payments related to acquisitions partially offset by
working capital acquired from such acquisitions and net of the factors described
below.
Accounts receivable increased approximately $38,404,000 or approximately 18.7%,
between December 31, 1998 and December 31, 1999, while net sales increased
approximately $50,504,000 or approximately 11.5% in the fourth quarter of 1999
as compared to the fourth quarter of 1998. These increases are a result of the
1999 acquisitions, which contributed approximately $54,941,000 to net sales in
the fourth quarter of 1999 and approximately $29,124,000 to accounts receivable
in 1999. The rate of change in accounts receivable in certain periods may be
different than the rate of change in sales in such periods principally due to
the timing of net sales. Increases or decreases in net sales near the end of any
period generally result in significant changes in the amount of accounts
receivable on the date of the balance sheet at the end of such period, as was
the situation on December 31, 1999 as compared to December 31, 1998. The Company
did not experience any significant overall changes in credit terms, collection
efforts, credit utilization or delinquency in accounts receivable in 1999.
Inventories increased approximately $49,971,000 or approximately 30.7%, between
December 31, 1998 and December 31, 1999. Acquisitions contributed approximately
$28,693,000 to the increase in inventory for 1999. A substantial portion of the
balance of the increase in inventories is as a result of expanded distribution
of HVAC residential site-built products by the Company's Air Conditioning and
Heating Products Segment.
Accounts payable increased approximately $29,671,000 or approximately 24.7%,
between December 31, 1998 and December 31, 1999. Acquisitions contributed
approximately $16,322,000 to the increase in accounts payable. A substantial
portion of the balance of the increase in accounts payable occurred in the
Company's Air Conditioning and Heating Products Segment as a result of increased
distribution of residential site-built products.
The Company expects further increases in working capital levels in the year 2000
as its distribution of HVAC residential site-built products by the Company's Air
Conditioning and Heating Products Segment continues to expand.
35
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Unrestricted cash and cash equivalents decreased approximately $6,983,000 from
December 31, 1998 to December 31, 1999, principallyas a result of the following:
Condensed
Consolidated
Cash Flows(*)
--------------
Operating Activities--
Cash flow from operations, net.............. $125,617,000
Increase in accounts receivable, net........ (7,899,000)
Increase in inventories ..................... (21,434,000)
Increase in prepaids and other current assets. (2,072,000)
Increase in accounts payable ............... 20,760,000
Decrease in accrued expenses and taxes...... (12,399,000)
Investing Activities---
Net cash paid for businesses acquired........ (125,788,000)
Proceeds from the sale of marketable
securities, net............................ 88,349,000
Capital expenditures......................... (42,013,000)
Increase in restricted cash and investments.. (7,952,000)
Financing Activities---
Payment of borrowings, net.................... (1,713,000)
Purchase of Nortek Common and Special
Common Stock .............................. (14,524,000)
Other, net ................................... (5,915,000)
------------
$(6,983,000)
============
(*) Prepared from the Company's Consolidated Statement of Cash Flows for the
year ended December 31, 1999. (See Nortek, Inc. and Subsidiaries Consolidated
Financial Statements for 1999 included elsewhere herein.)
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 4.7:1 at
December 31, 1998 to 4.0:1 at December 31, 1999, primarily as a result of the
increase in equity due to net earnings for 1999 and the issuance of Common Stock
as partial consideration for an acquisition. This was partially offset by the
effect of the purchase of Nortek Common and Special Common Stock, changes in
currency translation and the net increase in borrowings. (See the Consolidated
Statement of Stockholders' Investment included elsewhere herein.)
36
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
As a result of changes in the U.S. Federal income tax regulations in 1999, the
Company will utilize approximately $40,000,000 of net operating losses in its
1999 federal tax return, which resulted in approximately $14,000,000 lower than
expected federal income tax payments for 1999. At December 31, 1999, the
Company's wholly owned subsidiary, Ply Gem, had a net operating loss carry
forward of approximately $21,300,000 that expires in 2011 and is subject to
certain limitations imposed by the Internal Revenue Code. To the extent that the
Company has consolidated federal taxable income beginning in the year 2000, the
Company will be able to utilize this remaining net operating loss. Utilization
of this net operating loss is limited to approximately $17,500,000 annually.
Inflation, Trends and General Considerations
- --------------------------------------------
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 Company's performance is dependent to a significant extent upon the levels
of new residential construction, residential replacement and remodeling and
non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In the near term, the Company
expects to operate in an environment of relatively stable levels of construction
and remodeling activity. However, increases in interest rates could have a
negative impact on the level of housing construction and remodeling activity.
The demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets. The Company's lower
sales levels usually occur during the first and fourth quarters. Since a high
percentage of the Company's manufacturing overhead and operating expenses are
relatively fixed throughout the year, operating income and net earnings tend to
be lower in quarters with lower sales levels. As a result of the recent
acquisitions in the Windows, Doors and Siding Products Segment, the performance
of this Segment will be more seasonal than in prior years due to the number of
businesses that are affected by winter weather conditions. In addition, the
demand for cash to fund the working capital of the Company's subsidiaries is
greater from late in the first quarter until early in the fourth quarter.
Market Risk
- -----------
As discussed more specifically below, the Company is exposed to market risks
related to changes in interest rates, foreign currencies and commodity pricing.
The Company uses derivative financial instruments on a limited basis to hedge
economic exposures. The Company does not enter into derivative financial
instruments or other financial instruments for trading purposes.
37
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
A. Interest Rate Risk
The Company is exposed to market risk from changes in interest rates primarily
through its investing and borrowing activities. In addition, the Company's
ability to finance future acquisition transactions may be impacted if the
Company is unable to obtain appropriate financing at acceptable interest rates.
The Company's investing strategy, to manage interest rate exposure, is to invest
in short-term, highly liquid investments and marketable securities. Short-term
investments primarily consist of money market accounts and corporate commercial
paper with original maturities of 90 days or less. At December 31, 1999, the
fair value of the Company's short-term investments approximated market value.
Marketable securities primarily consist of certificates of deposit and bank
issued money market instruments, all with original maturities of between 91 and
180 days. Restricted investments and marketable securities primarily consist of
money market accounts, certificates of deposit and commercial paper with
original maturities of 90 days or less. At December 31, 1999, the fair value of
the Company's unrestricted and restricted investments and marketable securities
approximated market value.
The Company manages its borrowing exposure to changes in interest rates by
optimizing the use of fixed rate debt with extended maturities. In addition, as
of December 31, 1999, the Company through its Ply Gem subsidiary hedged its
exposure on a substantial portion of its variable rate debt by entering into an
interest rate collar transaction to lock in the interest rate between a floor of
5.76% and a cap of 7%. At December 31, 1999, approximately 95% of the carrying
values of the Company's long-term debt were either at fixed interest rates or
covered by the interest rate collar agreement.
See the table set forth in item D (Long-term Debt) below and Notes 1 and 5 of
the Notes to the Consolidated Financial Statements included elsewhere herein for
further disclosure of the terms of the Company's debt and interest rate collar
agreement.
B. Foreign Currency Risk
The Company's results of operations are affected by fluctuations in the value of
the U.S. dollar as compared to the value of currencies in foreign markets
primarily related to changes in the Italian Lira and the Canadian Dollar. In
1999, the net impact of foreign currency changes was not material to the
Company's financial condition or results of operations. The Company manages its
exposure to foreign currency exchange risk principally by trying to minimize the
Company's net investment in foreign assets through the use of strategic short
and long-term borrowings at the foreign subsidiary level. Consistent with this
strategy, notes payable and other short-term obligations at December 31, 1999
consist primarily of short-term borrowings by certain of the Company's foreign
subsidiaries. At December 31, 1999, the Company's net investment in foreign
assets was approximately $83,300,000. An overall unfavorable change in foreign
exchange rates of 10% would result in an approximate $7,600,000 reduction in
38
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
equity as a result of the impact on the cumulative translation adjustment. The
Company generally does not enter into derivative financial instruments to manage
foreign currency exposure. At December 31, 1999, the Company did not have any
outstanding foreign currency hedging contracts.
C. Commodity Pricing Risk
The Company is subject to significant market risk with respect to the pricing of
its principal raw materials, which include, among others, steel, copper,
packaging material, plastics, resins, glass, wood and aluminum. If prices of
these raw materials were to increase dramatically, the Company may not be able
to pass such increases on to its customers and, as a result, gross margins could
decline significantly. The Company manages its exposure to commodity pricing
risk by continuing to diversify its product mix, strategic buying programs and
vendor partnering. The Company generally does not enter into derivative
financial instruments to manage commodity-pricing exposure. At December 31,
1999, the Company did not have any outstanding commodity forward contracts. See
the discussion elsewhere herein under Management's Discussion and Analysis of
Financial Condition and Results of Operations, with respect to the increase in
the cost of resin material over the second half of 1999.
D. Long-term Debt
The table that follows sets forth as of December 31, 1999, the Company's
long-term debt obligations, principal cash flows by scheduled maturity, weighted
average interest rates and estimated fair market values. Approximately 1.5% of
the Company's total indebtedness is denominated in foreign currencies. The
weighted average interest rates for variable rate debt are based on December 31,
1999 interest rates. In addition, the table that follows sets forth the
outstanding notional amounts by year and floor and cap interest rates of the
Company's interest rate collar agreement.
39
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Long-term Debt:
Scheduled Maturity Average Interest Rate
Fixed Variable Fixed Variable
Year Ending Rate Rate Total Rate Rate Total
- ----------- ---- ---- ----- ---- ---- -----
(Dollar amounts in millions)
December 31, 2000 $ 3.0 $ 2.6 $ 5.6 6.51% 5.90% 6.23%
2001 6.9 2.9 9.8 8.07 6.25 7.53
2002 1.7 80.7 82.4 5.90 6.44 6.43
2003 1.5 2.2 3.7 5.78 7.84 6.98
2004 210.0 2.2 212.2 9.83 8.12 9.81
Thereafter (1) 709.4 10.6 720.0 9.00 5.91 8.95
------ ------ -------- ---- ---- ----
Total Principal 932.5 101.2 1,033.7 9.16 6.43 8.89
Unamortized Debt
Discount (4.5) --- (4.5)
------ ------ --------
Total Long-term Debt
at December 31, 1999 $928.0 $101.2 $1,029.2
====== ====== ========
Fair Market Value of
Long-term Debt
at December 31, 1999 $908.3 $101.2 $1,009.5
====== ====== ========
1) Senior notes with a total principal of $695,000,000 and a weighted average
interest rate of 9.08% mature at various times from 2007 through 2008. (See
Note 5 of the Notes to the Consolidated Financial Statements included
elsewhere herein.)
Interest Rate Collar:
Notional Floor Cap
Outstanding at Amount Rate Rate
---------- -------- -------
(Dollar amounts in millions)
December 31, 2000 $45.0 5.76% (2) 7% (3)
2001 45.0 5.76% (2) 7% (3)
Fair Market Value of
the asset related
to Interest Rate Collar
at December 31, 1999 $.3
2) If the interest rate is below 5.76% then the Company will pay the difference.
3) If the interest rate is above 7% then the Company is entitled to receive the
difference.
40
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
Year 2000 Disclosure
- --------------------
The following Year 2000 statements constitute a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
As of March 3, 2000, none of the Company's subsidiaries had experienced any
significant Year 2000 related problems. There have been no instances where
mission-critical and non-mission-critical systems have failed to perform
correctly. However, the Year 2000 issue still poses several potential risks to
the Company and its subsidiaries. A number of the Company's customers and
suppliers (third parties) utilize computers and computer software to varying
degrees in conjunction with the operation of their businesses. The customers and
suppliers of those businesses may utilize computers as well. Should the
Company's customers and suppliers, or the businesses on which they depend
experience any Year 2000 related computer problems, such third parties' cash
flow could be disrupted, adversely affecting their ability to pay the Company,
if a customer, or, if a supplier, their ability to pay their suppliers for goods
needed to supply the Company. Such disruptions could have adverse affects on the
Company and its subsidiaries. The Company assessed its Year 2000 third party
exposure through the use of questionnaires and personal interviews during 1999.
As of March 3, 2000, the Company was not aware of any supply or credit problems
related to the Year 2000 issue.
Should Year 2000 related problems occur which cause any of the systems of
certain third parties upon which the Company and its subsidiaries depends become
inoperative, increased personnel costs could be incurred if additional staff is
required to perform functions that the inoperative systems would have otherwise
performed. As of March 3, 2000, the Company had not experienced any disruptions
of third party services related to the Year 2000 issue.
The Company's expenditures for remediation directly related to correcting Year
2000 issues were approximately $6,000,000, including businesses acquired in
1999. The total expenditures of approximately $6,000,000 consisted of
approximately $2,000,000 of IT computer hardware equipment costs, approximately
$3,000,000 of IT software and non-IT computer hardware expenditures and
approximately $1,000,000 of other non-IT expenditures. All of the Company's Year
2000 compliance expenditures have been funded from the Company's operating cash
flow.
41
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
The Company's Year 2000 compliance budget does not include significant amounts
for hardware replacement because the Company has historically employed a
strategy to continually upgrade its computer systems. Consequently, the
Company's Year 2000 compliance budget has not required the diversion of funds
from or the postponement of the implementation of other planned IT projects.
The Company believes it is not possible to estimate the potential lost revenue
due to the remaining potential Year 2000 problems discussed above as the
occurrence, extent and longevity of such potential problems cannot be predicted.
As of March 3, 2000 the Company believes that it has not experienced any lost
revenue related to the Year 2000 issue.
Forward-Looking Statements
- --------------------------
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. When used in this discussion
and throughout this document, words, such as "intends," "plans," "estimates,"
"believes," "anticipates" and "expects" or similar expressions are intended to
identify forward-looking statements. These statements are based on the Company's
current plans and expectations and involve risks and uncertainties, over which
the Company has no control, that could cause actual future activities and
results of operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and operating results to differ include the availability and cost of
certain raw materials, (including, among others, steel, copper, packaging
materials, plastics, resins, glass, wood and aluminum) and purchased components,
the level of domestic and foreign construction and remodeling activity affecting
residential and commercial markets, interest rates, employment, inflation,
foreign currency fluctuations, consumer spending levels, exposure to foreign
economies, the rate of sales growth, price, and product and warranty 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 update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Readers are also urged to carefully
review and consider the various disclosures made by the Company, in this
document, as well as the Company's periodic reports on Forms 10-K, 10-Q, 10-Q/A
and 8-K, filed with the Securities and Exchange Commission ("SEC").
42
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk required by this Item
7A is set forth in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market
Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are set
forth at the pages indicated in item 14(a) included elsewhere herein.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Election of Directors in the definitive Proxy Statement for the Company's
2000 Annual Meeting of Stockholders, incorporated herein by reference. See also
Part I, Item 1, Business-General Considerations-Executive Officers of the
Registrant.
ITEM 11. EXECUTIVE COMPENSATION
See Executive Compensation in the definitive Proxy Statement for the Company's
2000 Annual Meeting of Stockholders, incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Security Ownership of Certain Beneficial Owners and Management in the
definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders, incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Election of Directors in the definitive Proxy Statement for the Company's
2000 Annual Meeting of Stockholders, incorporated herein by reference.
43
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
-----------------------------------
The following documents are filed as part of this report:
1. Financial Statements: Page No.
Consolidated Statement of Operations for the
three years ended December 31, 1999 46
Consolidated Balance Sheet as of December 31,
1999 and 1998 47
Consolidated Statement of Cash Flows for the
three years ended December 31, 1999 49
Consolidated Statement of Stockholders' Investment
for the three years ended December 31, 1999 51
Notes to Consolidated Financial Statements 54
Report of Independent Public Accountants 90
2. Financial Statement Schedules:
Schedule I Condensed Financial Information of
Registrant 91
Schedule II Valuation and Qualifying Accounts 92
3. The exhibits are listed in the Exhibit Index, which is incorporated herein
by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last quarter
of the period covered by this report.
44
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 9, 2000.
NORTEK, INC.
/s/ Richard L. Bready
-------------------------
Richard L. Bready
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, as of March 9, 2000.
/s/ Richard L. Bready /s/ J. Peter Lyons
- ------------------------ ----------------------
Richard L. Bready, Chairman J. Peter Lyons,
of the Board and President Director
(principal executive officer)
/s/ Richard J. Harris /s/ William I. Kelly
- ------------------------ ----------------------
Richard J. Harris, Vice President William I. Kelly,
and Treasurer (principal financial Director
officer) and Director
/s/ Almon C. Hall /s/ Phillip L. Cohen
- ------------------------ ----------------------
Almon C. Hall, Vice President Phillip L. Cohen,
and Controller (principal Director
accounting officer)
45
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
------ ------ ------
(In thousands except per share amounts)
<S> <C> <C> <C>
Net Sales $1,992,820 $1,738,343 $1,134,129
---------- ---------- ----------
Costs and Expenses:
Cost of products sold 1,433,129 1,275,350 825,805
Selling, general and
administrative expense 360,674 315,449 219,376
Amortization of goodwill and
intangible assets 20,499 14,416 5,967
--------- ---------- ----------
1,814,302 1,605,215 1,051,148
--------- ---------- ----------
Operating earnings 178,518 133,128 82,981
Gain on Businesses sold --- 4,000 ---
Interest expense (96,490) (86,298) (50,210)
Investment income 7,972 10,470 9,929
--------- ---------- ----------
Earnings from continuing
operations before provision
for income taxes 90,000 61,300 42,700
Provision for income taxes 40,700 27,300 16,300
--------- ---------- ----------
Earnings from continuing operations
before extraordinary loss 49,300 34,000 26,400
Earnings (loss) from discontinued
operations --- 1,200 (5,200)
Extraordinary loss from debt
retirements --- (200) ---
--------- ------ ---------
Net Earnings $ 49,300 $ 35,000 $ 21,200
========= ========== ==========
Earnings (loss) Per Share:
Earnings from continuing
operations:
Basic $4.19 $3.11 $2.75
===== ===== =====
Diluted $4.11 $3.06 $2.68
===== ===== =====
Earnings (loss) from discontinued
operations:
Basic $ --- $ .11 $(.54)
===== ===== =====
Diluted $ --- $ .11 $(.53)
===== ===== =====
Extraordinary loss from debt
retirements:
Basic $ --- $(.02) $ ---
===== ===== =====
Diluted $ --- $(.02) $ ---
===== ===== =====
Net Earnings:
Basic $4.19 $3.20 $2.21
===== ===== =====
Diluted $4.11 $3.15 $2.15
===== ===== =====
Weighted Average Number of Shares:
Basic 11,763 10,923 9,605
====== ====== =====
Diluted 11,982 11,113 9,855
====== ====== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------ ------
(Amounts in thousands)
<S> <C> <C>
ASSETS
Current Assets:
Unrestricted
Cash and cash equivalents $ 80,893 $ 87,876
Marketable securities available for sale 34,219 121,757
Restricted
Cash, investments and marketable securities
at cost, which approximates market 11,240 13,818
Accounts receivable, less allowances of
$13,019,000 and $10,657,000 243,763 205,359
Inventories
Raw materials 89,581 69,247
Work in process 20,844 13,010
Finished goods 102,253 80,450
---------- ----------
212,678 162,707
Prepaid expenses 11,864 10,938
Other current assets 16,787 15,513
Prepaid income taxes 66,824 54,163
---------- ----------
Total current assets 678,268 672,131
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land 16,270 12,628
Buildings and improvements 127,736 102,455
Machinery and equipment 348,445 294,551
---------- ----------
492,451 409,634
Less accumulated depreciation 163,834 130,010
---------- ----------
Total property and equipment, net 328,617 279,624
---------- ----------
OTHER ASSETS:
Goodwill, less accumulated amortization
of $56,942,000 and $41,204,000 589,532 598,823
Intangible assets, less accumulated amorti-
zation of $15,956,000 and $11,235,000 133,040 73,441
Deferred debt expense 22,068 24,845
Restricted investments and marketable
securities 15,677 ---
Other 42,482 41,129
---------- ----------
802,799 738,238
---------- ----------
$1,809,684 $1,689,993
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATION BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------- -------
(Amounts in thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Notes payable and other short-term
obligations 8,476 $ 10,962
Current maturities of long-term debt 5,564 6,776
Accounts payable 149,772 120,101
Accrued expenses and taxes, net 189,964 197,085
---------- ---------
Total current liabilities 353,776 334,924
---------- ---------
Other Liabilities:
Deferred income taxes 73,499 26,040
Other 98,976 104,306
---------- ---------
172,475 130,346
---------- ---------
NOTES, MORTGAGE NOTES AND OBLIGATIONS
PAYABLE, LESS CURRENT MATURITIES 1,023,616 1,007,113
---------- ---------
Commitments and Contingencies (Note 8)
STOCKHOLDERS' INVESTMENT:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares; 18,738,292 and
18,427,595 shares issued 18,738 18,428
Special common stock, $1 par value;
authorized 5,000,000 shares; 840,436 and
854,935 shares issued 841 855
Additional paid-in capital 208,755 201,626
Retained earnings 143,266 93,966
Accumulated other comprehensive loss (11,822) (11,596)
Less --treasury common stock at cost,
7,793,217 and 7,290,335 shares (97,894) (83,711)
--treasury special common stock
at cost, 290,054 and 286,009 shares (2,067) (1,958)
Total stockholders' investment 259,817 217,610
---------- ----------
$1,809,684 $1,689,993
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
------ ------ ------
(Amounts in thousands)
<S> <C> <C> <C>
Cash Flows from operating activities:
Net earnings from continuing operations $49,300 $34,000 $26,400
Earnings (loss) from discontinued operations --- 1,200 (5,200)
Extraordinary loss from debt retirements --- (200) ---
------- ------- -------
Net earnings 49,300 35,000 21,200
------- ------- -------
Adjustments to reconcile net earnings to
cash:
Depreciation and amortization expense 55,532 42,084 26,696
Non-cash interest expense, net 3,685 3,237 1,711
Gain on sale of Businesses sold --- (4,000) ---
Loss on discontinued operations --- 3,800 2,500
Loss on debt retirement --- 300 ---
Net gain on investments and marketable
securities --- --- (200)
Deferred federal income tax provision 17,100 15,100 4,000
Deferred federal income tax benefit
on discontinued operations --- (3,200) (1,000)
Changes in certain assets and liabilities,
net of effects from acquisitions and
dispositions:
Accounts receivable, net (7,899) (4,554) 10,259
Inventories (21,434) (979) 6,524
Prepaids and other current assets (2,072) 1,581 5,699
Net assets of discontinued operations --- (7,426) 4,934
Accounts payable 20,760 12,532 (16,359)
Accrued expenses and taxes (12,399) 10,084 23,468
Long-term assets, liabilities and other, net (2,031) (2,374) (4,317)
-------- ------- -------
Total adjustments to net earnings 51,242 66,185 63,915
-------- ------- -------
Net cash provided by operating activities 100,542 101,185 85,115
-------- -------- -------
Cash Flows from investing activities:
Capital expenditures (42,013) (40,863) (22,464)
Net cash paid for businesses acquired (125,788) (324,702) (407,419)
Net cash received from Businesses sold or
discontinued --- 111,738 ---
Purchase of investments and marketable
securities (89,741) (179,582) (283,918)
Proceeds from the sale of investments and
marketable securities 178,090 95,143 298,158
Change in restricted cash and investments (7,952) (7,463) (674)
Other, net (4,368) (5,622) (7,064)
------- ------ ------
Net cash used in investing activities (91,772) (351,351) (423,381)
------- -------- --------
</TABLE>
49
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
------ ------ ------
(Amounts in thousands)
<S> <C> <C> <C>
Cash Flows from financing activities:
Sale of Notes, net --- 203,492 466,214
Sale of Nortek Common Stock --- 64,190 ---
Payment of borrowings and purchase
of Notes, net (1,713) (49,199) (33,354)
Purchase of Nortek Common and Special Common
Stock (14,524) (7,668) (10,177)
Other, net 484 1,385 383
------- ------- -------
Net cash (used in) provided by financing
activities (15,753) 212,200 423,066
-------- ------- -------
Net (decrease) increase in unrestricted
cash and cash equivalents (6,983) (37,966) 84,800
Unrestricted cash and cash equivalents at
the beginning of the year 87,876 125,842 41,042
------- ------- ------
Unrestricted cash and cash equivalents at
the end of the year $80,893 $87,876 $125,842
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHOCKHOLDERS' INVESTMENT
FOR THE YEAR ENDED DECEMBER 31, 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 (Loss) Income(Loss)
------- ------ -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996 $15,966 $ 784 $135,028 $37,766 $(67,537) $(3,212) $ ---
Net earnings --- --- --- 21,200 --- --- 21,200
Other comprehensive
income (loss):
Currency translation
adjustment --- --- --- --- --- (3,815) (3,815)
Minimum pension
liability --- --- --- --- --- 919 919
Unrealized appreciation
in the value of
marketable securities --- --- --- --- --- 781 781
-------
Comprehensive income $19,085
=======
22,690 shares of
special common stock
converted into 22,690
shares of common stock 23 (23) --- --- --- ---
62,519 shares of common
stock and 5,808
shares of special
common stock issued
upon exercise of stock
options 62 6 317 --- --- ---
441,246 shares of
treasury stock
acquired --- --- --- --- (10,177) ---
------- ----- ------- ------- -------- -------
Balance, December 31,
1997 $16,051 $ 767 $135,345 $58,966 $(77,714) $(5,327)
======= ===== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
51
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHOCKHOLDERS' INVESTMENT
FOR THE YEAR ENDED DECEMBER 31, 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 (Loss) Income (Loss)
------- ------ -------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 $16,051 $ 767 $135,345 $58,966 $(77,714) $ (5,327) $ ---
Net earnings --- --- --- 35,000 --- --- 35,000
Other comprehensive
income (loss):
Currency translation
adjustment --- --- --- --- --- (1,436) (1,436)
Minimum pension liabil-
ity net of $2,914 tax
benefit --- --- --- --- --- (4,898) (4,898)
Unrealized appreciation
in the value of
marketable securities --- --- --- --- --- 65 65
-------
Comprehensive income $28,731
=======
Sale of 2,182,500 shares
of common stock 2,183 --- 62,007 --- --- ---
13,343 shares of
special common stock
converted into 13,343
shares of common stock 13 (13) --- --- --- ---
180,958 shares of common
stock and 100,991 shares
of special common stock
issued upon exercise of
stock options 181 101 4,274 --- --- ---
258,543 shares of
treasury stock aquired --- --- --- --- (7,955) ---
------- ----- -------- -------- --------- ----------
Balance, December 31,
1998 $18,428 $ 855 $201,626 $93,966 $(85,669) $(11,596)
======= ===== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
52
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHOCKHOLDERS' INVESTMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(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 (Loss) Income (Loss)
------- ------ -------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 $18,428 $855 $201,626 $93,966 $(85,669) $(11,596) $ ---
Net earnings --- --- --- 49,300 --- --- 49,300
Other comprehensive
income (loss):
Currency translation
adjustment --- --- --- --- --- (1,891) (1,891)
Minimum pension liabil-
ity net of $976 tax
provision --- --- --- --- --- 1,495 1,495
Unrealized appreciation
in the value of
marketable securities --- --- --- --- --- 170 170
-------
Comprehensive income $49,074
=======
14,499 shares of
special common stock
converted into 14,499
shares of common stock 14 (14) --- --- --- ---
61,198 shares of common
stock issued upon exer-
cise of stock options 61 --- 1,049 --- --- ---
506,927 shares of
treasury stock acquired --- --- --- --- (14,292) ---
235,000 shares of common
stock issued as
partial consideration
for an acquisition 235 --- 6,080 --- --- ---
------- ----- -------- ------- -------- --------
Balance, December 31,
1999 $18,738 $841 $208,755 $143,266 $(99,961) $(11,822)
======= ===== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
53
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a diversified manufacturer of residential and commercial building
products, operating within three principal segments: the Residential Building
Products Segment; the Air Conditioning and Heating Products Segment; and the
Windows, Doors and Siding Products Segment. Through these principal segments,
the Company manufactures and sells, primarily in the United States, Canada and
Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, and the do-it-yourself and professional
remodeling and renovation markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Nortek, Inc. and
all of its significant wholly-owned subsidiaries (the "Company" or "Nortek")
after elimination of intercompany accounts and transactions. Certain amounts in
the prior years' consolidated financial statements have been reclassified to
conform to the presentation at December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles involves estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of income and expense during the reporting periods. Actual results could
vary from the amounts derived from such estimates and assumptions.
Cash, Investments and Marketable Securities
Cash equivalents consist of short-term highly liquid investments with original
maturities of three months or less which are readily convertible into cash.
The Company has classified as restricted in the accompanying consolidated
balance sheet certain investments and marketable securities that are not fully
available for use in its operations. At December 31, 1999, approximately
$26,917,000 (of which $11,240,000 is included in current assets) of cash,
investments and marketable securities have been pledged as collateral for
insurance, employee benefits and other requirements.
54
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents--
The carrying amount approximates fair value because of the short maturity
of those instruments.
Investments and Marketable Securities--
The fair value of investments and marketable securities are based on quoted
market prices. At December 31, 1999, the fair value of investments and
marketable securities approximated the amount on the Company's consolidated
balance sheet.
Long-Term Debt--
At December 31, 1999, the fair value of long-term indebtedness was
approximately $19,700,000 lower than the amount on the Company's
consolidated balance sheet, before original issue discount, based on market
quotations (see Note 5).
Inventories
Inventories in the accompanying consolidated balance sheet are valued at the
lower of cost or market. At December 31, 1999 and 1998, approximately
$111,349,000 and $83,286,000 of total inventories, respectively, were valued on
the last-in, first-out method (LIFO). Under the first-in, first-out method
(FIFO) of accounting, such inventories would have been approximately $2,252,000
and $3,640,000 greater at December 31, 1999 and 1998, respectively. All other
inventories were valued under the FIFO method.
Sales Recognition
The Company recognizes sales upon the shipment of its products net of applicable
provisions for discounts and allowances. The Company also provides for its
estimate of warranty and bad debts at the time of sale.
The Securities and Exchange Commission released Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements on December 3, 1999. This SAB
provides additional guidance on the accounting for revenue recognition including
both broad conceptual discussions as well as certain industry-specific guidance.
The Company is in the process of accumulating the information necessary to
quantify the potential impact of this new guidance, if any.
55
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Foreign Currency Translation
The financial statements of subsidiaries outside the United States are generally
measured using the local currency as the functional currency. The Company
translates the assets and liabilities of its foreign subsidiaries at the
exchange rates in effect at year-end. Net sales and expenses are translated
using average exchange rates in effect during the year. Gains and losses from
foreign currency translation are credited or charged to accumulated other
comprehensive loss included in stockholders' investment in the accompanying
consolidated balance sheet. Transaction gains or losses are recorded in selling,
general and administrative expense and have not been material during any of the
years ending December 31, 1999, 1998 and 1997.
Depreciation and Amortization
Depreciation and amortization of property and equipment are provided on a
straight-line basis over the estimated useful lives, which are generally as
follows:
Buildings and improvements 10-35 years
Machinery and equipment, including leases 3-15 years
Leasehold improvements term of lease
Expenditures for maintenance and repairs are expensed when incurred.
Expenditures for renewals and betterments are capitalized. When assets are sold,
or otherwise disposed, the cost and related accumulated depreciation are
eliminated and the resulting gain or loss is recognized.
Intangible Assets and Goodwill
Intangible assets consist principally of patents, trademarks, copyrights and
non-compete agreements and are amortized on a straight-line method over a
weighted average estimated useful life of 22 years. Amortization of intangible
assets charged to operations amounted to approximately $4,906,000, $2,026,000
and $648,000 for 1999, 1998 and 1997, respectively. The Company has classified
as goodwill the cost in excess of fair value of the net assets (including tax
attributes) of companies acquired in purchase transactions. Goodwill is being
amortized on a straight-line method over 40 years. Amortization of goodwill
charged to operations amounted to approximately $15,593,000, $12,390,000 and
$5,319,000 for 1999, 1998 and 1997, respectively. At each balance sheet date, in
accordance with SFAS No. 121, "Accounting for Long Lived Assets and for Long
56
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Lived Assets to be Disposed of," the Company evaluates the realizability of
"Long Lived Assets" which primarily consists of property, plant and equipment,
intangible assets and goodwill based on expectations of non-discounted future
cash flows for each subsidiary having a material amount of Long Lived Assets. If
the sum of the expected non-discounted future cash flows is less than the
carrying amount of all assets including Long Lived Assets, the Company would
recognize an impairment loss. Based on its most recent analysis, the Company
believes that no material impairment of Long Lived Assets exists at December 31,
1999.
Earnings Per Share
Basic earnings per share amounts have been computed using the weighted average
number of common and common equivalent shares outstanding during each year.
Special Common Stock is treated as the equivalent of Common Stock in determining
earnings per share results. Diluted earnings per share amounts have been
computed using the weighted average number of common and common equivalent
shares and the dilutive potential common and special common shares outstanding
during each year.
A reconciliation between basic and diluted earnings per share is as follows:
For the years ended December 31,
1999 1998 1997
------- ------- -------
(In thousands except per share amounts)
Earnings from continuing $49,300 $34,000 $26,400
operations
Basic EPS:
Basic common shares 11,763 10,923 9,605
====== ====== =====
Basic EPS $4.19 $3.11 $2.75
===== ===== =====
Diluted EPS:
Basic common shares 11,763 10,923 9,605
Plus: Impact of stock
options (Note 6) 219 190 250
------ ------ -----
Diluted common shares 11,982 11,113 9,855
====== ====== =====
Diluted EPS $4.11 $3.06 $2.68
====== ====== =====
57
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comprehensive Income (Loss)
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" which requires the display of
comprehensive income (loss) and its components in the financial statements.
Comprehensive income (loss) includes net earnings and unrealized gains and
losses from currency translation, marketable securities available for sale and
minimum pension liability adjustments net of tax benefit. The components of the
Company's comprehensive income (loss) and the effect on earnings, for the three
years ended December 31, 1999, are detailed in the Company's accompanying
Consolidated Statement of Stockholders' Investment.
The balances of each classification within accumulated other comprehensive loss
as of December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Total
Unrealized Minimum Accumulated
Foreign Gains Pension Other
Currency (Losses) on Liability Comprehensive
Translation Securities Adjustment Loss
----------- ---------- ------------ -------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Balance December 31, 1997 $(5,093) $(110) $ (124) $ (5,327)
Current period change (1,436) 65 (4,898) (6,269)
------- ----- ------- --------
Balance December 31, 1998 (6,529) (45) (5,022) (11,596)
Current period change (1,891) 170 1,495 (226)
------- ----- ------- --------
Balance December 31, 1999 $(8,420) $ 125 $(3,527) $(11,822)
======= ===== ======= ========
</TABLE>
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FAS No. 133 - Amendment of FAS No. 133" (combined "SFAS
133"). SFAS 133 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. SFAS 133 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.
58
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company
may also implement the Statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1999 and thereafter). SFAS
133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the Company's election, before January 1, 1998).
The Company is in the process of quantifying the impacts of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of
adoption of SFAS 133.
2. ACQUISITIONS AND BUSINESSES SOLD
Acquisitions are accounted for as purchases and, accordingly, have been included
in the Company's consolidated results of operations since the acquisition date.
Purchase price allocations are subject to refinement until all pertinent
information regarding the acquisitions is obtained.
On March 8, 1999, the Company acquired Webco, Inc. ("Webco"), a designer and
manufacturer of custom air handling equipment for industrial, institutional and
commercial customers. For the fiscal year ended October 31, 1998, Webco had net
sales of approximately $13,900,000.
On April 23, 1999, the Company completed the acquisition of three businesses
from Caradon plc of the United Kingdom: Peachtree Doors and Windows,
Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired Companies").
Peachtree Doors and Windows is a national supplier of residential windows, entry
doors and patio doors that target custom and high-end home markets. Thermal-Gard
manufactures replacement windows, patio doors and sunrooms. CWD Windows and
Doors is a provider of complete window and door systems for new homes in Western
Canada. For the year ended December 31, 1998, the Caradon Acquired Companies had
combined net sales of approximately $169,700,000.
On May 28, 1999, the Company acquired Multiplex Technologies, Inc.
("Multiplex"), a manufacturer and designer of high-performance, multi-room video
distribution equipment for home automation and home entertainment. Multiplex had
net sales of approximately $10,000,000 for the year ended December 31, 1998.
59
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On September 9, 1999 the Company acquired Kroy Building Products, Inc., ("Kroy")
a manufacturer of vinyl fencing, railing profiles and vinyl decking systems for
residential and light commercial applications. Kroy had net sales of
approximately $26,000,000 for the fiscal year ended June 30, 1999.
On December 3, 1999, the Company acquired Xantech Corporation ("Xantech"), a
designer and manufacturer of residential infrared remote control systems for
extending control of VCR, cable, satellite and stereo systems to multiple rooms
throughout an entire household. Xantech had net sales of approximately
$13,000,000 for the fiscal year ended November 30, 1999.
The 1999 acquisitions were funded through the use of unrestricted cash, cash
equivalents, marketable securities, the issuance of notes payable to sellers and
the issuance of 235,000 shares of Nortek Common Stock (see Note 6).
On October 9, 1998, the Company acquired Napco, Inc. and an affiliate ("Napco"),
for approximately $80,800,000 in cash and the assumption of approximately
$10,200,000 of debt
On July 31, 1998, the Company, through a wholly-owned subsidiary, purchased all
of the issued and outstanding capital stock of NuTone, Inc. ("NuTone"), a
wholly-owned subsidiary of Williams plc ("Williams") for an aggregate purchase
price of approximately $242,500,000 in cash plus approximately $5,500,000 in
expenses and fees. In connection with the acquisition, the Company assumed
NuTone's operating liabilities (other than intercompany borrowings), including
certain liabilities of NuTone concerning post retirement and other benefit
obligations. The purchase price was funded through the use of the net proceeds
from the sale of $210,000,000 principal amount of 8 7/8% Senior Notes due August
1, 2008 (the "8 7/8% Notes") at a slight discount, which occurred on July 31,
1998, together with approximately $44,800,000 of the cash proceeds received from
the Common Stock Offering (See Notes 5 and 6).
On August 26, 1997, the Company acquired Ply Gem Industries, Inc. ("Ply Gem") in
a tender offer for a cash price of $19.50 per outstanding share of common stock.
The aggregate purchase price of approximately $407,400,000 consisted of
$322,700,000 of cash paid to purchase the common stock and to settle stock
options of Ply Gem, $50,500,000 of cash paid to refinance existing indebtedness
of Ply Gem (including the repurchase of $45,000,000 of accounts receivable under
Ply Gem's securitization program), $23,500,000 of cash paid to certain officers
of Ply Gem in connection with termination agreements and $10,700,000 of cash
paid for expenses of the acquisition. 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")
60
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
at a slight discount (see Note 5). The Company used a portion of these net
proceeds, together with available cash, to purchase the shares of Ply Gem, fund
an approximate $45,000,000 payment to terminate Ply Gem's existing accounts
receivable securitization program and pay certain fees and expenses. The Company
accounted for Ply Gem's subsidiary, Studley Products, Inc. ("Studley"), a vacuum
bag manufacturer, as an operation held for sale since the date of the Ply Gem
acquisition. Studley's net sales and operating losses excluded from the
Company's consolidated results of operations from the acquisition date to
December 31, 1997 and for the period from January 1, 1998 to the date of sale,
May 8, 1998, were approximately $9,400,000 and $2,900,000, respectively, and
$7,300,000 and $1,600,000, respectively. Studley's operating losses from the
date of acquisition through the date of sale have been excluded from the
consolidated continuing operations of the Company and include approximately
$100,000 of allocated interest expense. These losses have been funded by the
Company and have been accounted for as an adjustment to the net realizable value
of Studley. The ultimate disposition of Studley resulted in a decrease in the
Company's goodwill of approximately $1,000,000.
Since the acquisition date, the Company has realized, and expects to continue to
realize, cost savings as a result of the Ply Gem acquisition. These savings
result from several actions, including: (i) the elimination of expenses
associated with Ply Gem's New York headquarters; (ii) the consolidation into
Nortek of certain of Ply Gem's corporate functions such as accounting, legal and
risk management; and (iii) the identification and rationalization of
under-performing product lines. Pro Forma earnings (see below) do not include
estimated cost savings and operating efficiencies for the period from January 1,
1997 to the date of acquisition. The actual cost savings achieved since the
acquisition of Ply Gem are reflected in the Company's historical consolidated
operating results for the period from the acquisition date to December 31, 1997
and for the years ended December 31, 1998 and 1999.
At the date of the NuTone acquisition, the Company achieved cost reductions
directly attributable to the acquisition from the elimination of fees and
charges paid by NuTone to Williams and related entities. The unaudited Pro Forma
operating earnings have been increased for the years ended December 31, 1998 and
1997 by approximately $354,000 and $1,746,000, respectively. Subsequent to the
NuTone acquisition, the Company has realized and expects to realize additional
cost reductions ("NuTone Cost Reductions") as a result of integrating NuTone
61
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
into the Company's operations. Pro Forma earnings have not been increased for
the NuTone Cost Reductions for the periods presented, except for NuTone Cost
Reductions actually achieved since the date of acquisition. The Company's
operating earnings for the year ended December 31, 1999, reflect approximately
$14,000,000 (unaudited) of net cost savings related to NuTone Cost Reductions
which are net of approximately $3,400,000 (unaudited) of related costs and
expenses. The Company expects to realize future incremental net NuTone Cost
Reductions in excess of 1999 levels of approximately $6,000,000 to $9,000,000
(unaudited), annually. Future NuTone Cost Reductions are estimates and actual
savings achieved could differ materially (see Note 12).
The following presents the approximate unaudited Pro Forma net sales, operating
earnings, depreciation and amortization expense (other than amortization of
deferred debt expense and debt discount), earnings from continuing operations
and diluted earnings per share of the Company for all periods presented and
gives pro forma effect to the acquisitions of NuTone and Ply Gem, the sale of
the 8 7/8% Notes, the Common Stock Offering, 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 9 1/4% Senior Notes due 2007 (the "9 1/4%
Notes"), the refinancing of certain subsidiary indebtedness, and reflects the
estimated cost reductions directly attributable to the NuTone acquisition as
described above as if such transactions and adjustments had occurred on January
1, 1997. The Pro Forma results below include the actual results of Ply Gem and
NuTone since August 26, 1997 and July 31, 1998, respectively, in accordance with
the purchase method of accounting for an acquisition.
The following Pro Forma results do not give pro forma effect to the dispositions
of businesses that occurred in 1998, the acquisition of Napco which occurred on
October 9, 1998 or acquisitions in 1999.
For the Years Ended December 31,
----------------------------------
1998 1997
----------- ------------
(In thousands except per share amounts)
(Unaudited)
Pro Forma
Net sales.................................. $1,849,000 $1,849,100
Depreciation and amortization expense..... 47,400 47,000
Operating earnings......................... 142,500 104,500
Earnings from continuing operations....... 31,400 5,000
Diluted earnings per share from
continuing operations.................... $ 2.63 $ .42
62
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In computing the pro forma earnings, earnings have been reduced by the net
interest income on the aggregate cash portion of the purchase price of the
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 intangible assets and reflect net
adjustments to depreciation expense as a result of an increase in the estimated
fair market value of property and equipment and changes in depreciable lives.
Interest expense on the subsidiary indebtedness refinanced with funds from the 9
1/4% Notes was excluded at an average interest rate consistent with the
indebtedness outstanding which was refinanced, net of the tax effect. Interest
expense was included on the 9 1/4% Notes, the 9 1/8 % Notes, and the 8 7/8 %
Notes at the applicable coupon rate plus amortization of deferred debt expense
and debt discount, net of tax effect.
The pro forma information presented does not purport to be indicative of the
results which would have been reported if these transactions had occurred on
January 1, 1997, or which may be reported in the future.
On December 30, 1998, the Company sold its M&S Systems LP ("M&S") subsidiary and
Moore-O-Matic, Inc. ("MOM") for approximately $27,500,000 in cash and recorded a
pre-tax gain of approximately $4,000,000 ($.12 per share, net of tax). For the
years ended December 31, 1998 and 1997, combined net sales, operating earnings
and earnings from continuing operations before provision for income taxes of M&S
and MOM were approximately $42,100,000, $3,600,000 and $3,600,000, and
$37,300,000, $3,400,000 and $3,400,000, respectively.
During 1998, the Company made several dispositions of certain non-strategic
assets acquired in connection with the 1997 acquisition of Ply Gem. As discussed
above, on May 8, 1998, the Company sold Studley. On May 22, 1998, the Company
sold Sagebrush Sales, Inc. ("Sagebrush") for approximately $9,100,000 in cash;
on July 2, 1998, the Company sold Goldenberg Group, Inc. for approximately
$11,100,000 including approximately $2,000,000 in notes; on July 31, 1998, the
Company sold another Ply Gem business, Ply Gem Manufacturing; and on December
10, 1998, the Company sold Allied Plywood Corporation ("Allied") for
approximately $16,500,000 in cash and approximately $7,000,000 in notes. The
operating results of Sagebrush, Goldenberg, Ply Gem Manufacturing and Allied,
are included in the Company's 1997 and 1998 consolidated results from the date
of the Ply Gem acquisition, August 26, 1997, to the date of sale. For the full
year ended December 31, 1997, the combined net sales, operating earnings and
63
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
earnings before provision for income taxes of these dispositions were
approximately $221,600,000, $3,800,000 and $3,800,000, respectively. Combined
net sales, operating earnings and earnings before provision for income taxes of
these dispositions were approximately $144,200,000, $2,200,000 and $2,200,000,
respectively, for the period from January 1, 1998 to the date of sale. The
disposition of these four businesses did not result in any significant gains or
losses. Approximately $27,700,000 of the proceeds from the sale of these four
businesses was used to pay down debt. The remaining proceeds (including the
proceeds from the sale of the plumbing products business, Studley, M&S and MOM)
of approximately $84,000,000 were used for general corporate purposes (see Notes
9 and 10).
3. Cash Flows
Interest paid was $92,592,000, $78,988,000 and $35,921,000 in 1999, 1998 and
1997, respectively.
The fair value of the assets of the businesses acquired was $192,719,000 and
$436,074,000 in 1999 and 1998, respectively. Liabilities assumed or created of
businesses acquired was $60,616,000 and $111,372,000 in 1999 and 1998,
respectively. In 1999, 235,000 shares of Nortek Common Stock were issued as
partial consideration for an acquisition, resulting in a $6,315,000 increase in
Stockholders' Investment. Cash paid for acquisitions was $125,788,000 and
$324,702,000 in 1999 and 1998, respectively.
Significant non-cash financing and investing activities excluded from the
accompanying consolidated statement of cash flows include capitalized lease
additions of approximately $445,000 in 1999 and $565,000 in 1998 and increases
of approximately $170,000, $65,000 and $781,000 in the fair market value of
marketable securities available for sale for 1999, 1998 and 1997, respectively.
64
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. INCOME TAXES
The following is a summary of the components of earnings from continuing
operations before provision for income taxes:
For the Years Ended December 31,
1999 1998 1997
------- -------- --------
(Amounts in thousands)
Domestic........................ $77,000 $54,600 $37,000
Foreign ........................ 13,000 6,700 5,700
------- ------- -------
$90,000 $61,300 $42,700
======= ======= =======
The following is a summary of the provision for income taxes from continuing
operations included in the accompanying consolidated statement of operations:
For the Years Ended December 31,
1999 1998 1997
------- -------- --------
(Amounts in thousands)
Federal income taxes
Current.................... $15,000 $ 6,900 $ 9,000
Deferred................... 17,100 15,100 4,000
------- ------- -------
32,100 22,000 13,000
Foreign......................... 5,800 2,000 1,000
State........................... 2,800 3,300 2,300
------- ------- -------
$40,700 $27,300 $16,300
======= ======= =======
Income tax payments, net of refunds, were approximately $25,500,000, $4,568,000
and $7,977,000 in 1999, 1998 and 1997, respectively. The current provision for
1998 does not reflect tax benefits of approximately $2,000,000 from the exercise
of non-qualified stock options. These benefits have been recorded as an increase
in additional paid-in capital.
65
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table that follows reconciles the federal statutory income tax rate of
continuing operations to the effective tax rate of such earnings of
approximately 45.2%, 44.5% and 38.2% in 1999, 1998 and 1997, respectively.
For the Years Ended December 31,
1999 1998 1997
------- -------- --------
(Amounts in thousands)
Income tax provision from
continuing operations at
the federal statutory rate...... $31,500 $21,455 $14,945
Net change from statutory rate:
Amortization not deductible
for income tax purposes ........ 5,189 4,200 1,827
State income taxes, net of
federal tax effect.............. 1,804 2,145 1,520
Change in tax reserves, net....... 807 (713) (1,540)
Product development income tax
credit from foreign operations. (118) (309) (264)
Tax effect resulting from
foreign activities.............. 917 807 (25)
Effect of change in foreign
tax law .......................... --- --- (766)
Other, net........................ 601 (285) 603
------- ------- -------
$40,700 $27,300 $16,300
======= ======= =======
66
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effect of temporary differences which give rise to significant portions
of deferred income tax assets and liabilities as of December 31, 1999 and
December 31, 1998 are as follows:
December 31,
1999 1998
-------- --------
(Amounts in thousands)
Prepaid Income Tax Assets (classified current)
Arising From:
Accounts receivable...................... $ 2,270 $ 135
Inventory................................ 3,142 3,884
Insurance reserves....................... 12,384 11,698
Warranty accrual......................... 12,979 10,511
Net operating losses of Ply Gem.......... 6,125 ---
Other reserves and assets, net........... 29,924 27,935
------- --------
$66,824 $ 54,163
======= ========
Deferred Income Tax Assets (Liabilities)
(classified non-current)
Arising From:
Property and equipment, net.............. $(47,062) $(40,767)
Intangible assets, net................... (29,273) (21,997)
Capital loss carryforward................ 7,781 6,326
Net operating losses of Ply Gem.......... 1,325 21,457
Valuation allowances..................... (7,781) (6,326)
Other reserves and assets, net........... 1,511 15,267
-------- --------
$(73,499) $(26,040)
======== ========
As a result of changes in the U.S. Federal income tax regulations in 1999, the
Company will utilize approximately $40,000,000 of net operating losses in its
1999 federal tax return, which resulted in approximately $14,000,000 of lower
than expected federal income tax payments for 1999. At December 31, 1999, the
Company's wholly owned subsidiary, Ply Gem, has a net operating loss
carry-forward of approximately $21,300,000 that expires in 2011 and is subject
to certain limitations imposed by the Internal Revenue Code. Utilization of
these losses is limited to approximately $17,500,000 per year. The Company has
established valuation allowances related to certain capital losses. Of the total
valuation allowance, approximately $2,200,000 will reduce goodwill if the tax
benefit is ultimately realized.
67
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.NOTES, MORTGAGE NOTES AND OBLIGATIONS PAYABLE
Short-term bank obligations at December 31, 1999 and 1998 consist of
the following:
December 31,
1999 1998
-------- --------
(Amounts in thousands)
Secured lines of credit and bank
advances of the Company's European
subsidiaries $6,834 $10,589
Secured line of credit of a Canadian
subsidiary 1,642 ---
Other obligations --- 373
------ -------
Short-term bank obligations $8,476 $10,962
====== =======
These short-term bank obligations are secured by approximately $32,100,000 of
accounts receivable and inventory, and have an average weighted interest rate of
approximately 4.7% at December 31, 1999.
68
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Notes, mortgage notes and obligations payable included in the accompanying
consolidated balance sheet at December 31, 1999 and 1998 consist of the
following:
December 31,
1999 1998
-------- --------
(Amounts in thousands)
8 7/8% Senior Notes due 2008, net of
unamortized original issue discount
of $683,000 and $735,000 .................. $209,317 $ 209,265
9 1/4% Senior Notes due 2007,
net of unamortized original issue
discount of $816,000 and $892,000.......... 174,184 174,108
9 1/8% Senior Notes due 2007,
net of unamortized original issue
discount of $2,104,000 and $2,286,000...... 307,896 307,714
9 7/8% Senior Subordinated Notes due
2004 ("9 7/8% Notes"), net of
unamortized original issue
discount of $876,000 and $1,035,000........ 203,946 203,787
Ply Gem term loan............................ 77,965 78,440
Mortgage notes payable....................... 28,268 22,184
Other........................................ 27,604 18,391
---------- ----------
$1,029,180 $1,013,889
Less amounts included in current liabilities 5,564 6,776
---------- ----------
$1,023,616 $1,007,113
========== ==========
69
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On July 31, 1998, the Company sold $210,000,000 of its 8 7/8% Notes at a
discount of approximately $753,900, which is being amortized over the life of
the issue. Net proceeds from the sale of the 8 7/8% Notes, after deducting
underwriting commissions and expenses, amounted to approximately $203,492,000.
The Company used a portion of these net proceeds, together with approximately
$44,800,000 of the cash proceeds received from the Common Stock Offering, to
purchase NuTone (See Notes 2 and 6).
The indentures and other agreements governing the Company and its subsidiaries'
indebtedness (including the indentures for the 8 7/8% Notes, the 9 1/8% Notes,
the 9 1/4% Notes, (collectively, the "Senior Notes") the 9 7/8% Notes and the
credit agreement covering the Ply Gem credit facility) contain restrictive
financial and operating covenants including covenants that restrict, among other
things, the payment of cash dividends, repurchase of the Company's capital stock
and the making of certain other restricted payments, the incurrence of
additional indebtedness, the making of certain investments, mergers,
consolidations and sale of assets (all as defined in the indentures and other
agreements). Upon certain asset sales (as defined in the indentures), the
Company will be required to offer to purchase, at 100% principal amount plus
accrued interest to the date of purchase, Senior Notes in a principal amount
equal to any net cash proceeds (as defined in the indentures) that are not
invested in properties and assets used primarily in the same or related business
to those owned and operated by the Company at the issue date of the Senior Notes
or at the date of such asset sale and such net cash proceeds were not applied to
permanently reduce Senior Indebtedness (as defined in the indentures). At
February 25, 2000 approximately $87,700,000 was available for the payment of
cash dividends, stock payments or other restricted payments under the terms of
the Company's most restrictive indenture governing the Senior and Senior
Subordinated Notes. (See Note 6.)
The Company's Ply Gem subsidiary has a credit facility with a syndicate of
banks, which provides Ply Gem with a term loan and a letter of credit facility.
Interest on borrowings is at varying rates based, at Ply Gem's option, on (a)
the London Interbank Offered Rate (LIBOR) plus a spread or (b) the higher of (i)
.5% above the federal funds rate or (ii) the bank's prime rate. Ply Gem pays a
facility fee quarterly which fluctuates between .20% and .30% of the aggregate
principal amount available under the facility. The average weighted interest
rate on the credit facility for the year ended December 31, 1999 was 5.8% for
the year 1999. The credit facility includes customary covenants, including
covenants limiting Ply Gem's ability to pledge assets or incur liens on assets
and maintain certain financial covenants. Borrowings under this credit facility
are collateralized by the common stock, inventory and accounts receivable of Ply
Gem's principal subsidiaries.
70
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During 1999, $35,000,000 of Ply Gem interest rate swap agreements expired.
Another $40,000,000 of interest rate swaps, due to expire on December 3, 2003,
were terminated and replaced with a $45,000,000 interest rate collar. This
collar will terminate on August 27, 2002 (the "Termination Date"). The collar
has a floor of 5.76% and a cap of 7.00%. To the extent that the one month US
Dollar Libor rate is below the collar floor, payment is due from Ply Gem for the
difference. To the extent the one month US Dollar Libor rate is above the collar
cap, Ply Gem is entitled to receive the difference. The one month US Dollar
Libor rate at December 31, 1999 was 5.8225%. Amounts received or paid as a
result of the collar agreements increase or reduce interest expense. The fair
market value of the asset related to the interest rate collar is approximately
$300,000 at December 31, 1999.
Mortgage notes payable of approximately $28,268,000 outstanding at December 31,
1999 include various mortgage notes and other related indebtedness payable in
installments through 2014. These notes bear interest at rates ranging from 2% to
9.25%. Approximately, $26,217,000 of such indebtedness is collateralized by
property and equipment with an aggregate net book value of approximately
$61,092,000 at December 31, 1999.
Other obligations of approximately $27,604,000 outstanding at December 31, 1999
include borrowings relating to equipment purchases, notes payable issued for
acquisitions and other borrowings bearing interest at rates primarily ranging
between 2.9% to 12% and maturing at various dates through 2017. Approximately
$16,784,000 of such indebtedness is collateralized by property and equipment
with an aggregate net book value of approximately $19,033,000 at December 31,
1999.
71
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table that follows is a summary of maturities of all of the Company's debt
obligations, excluding unamortized debt discount, due after December 31, 2000:
(Amounts in thousands)
2001.................... $ 9,815
2002.................... 82,396
2003.................... 3,676
2004.................... 212,248
Thereafter.............. 719,960
6. COMMON STOCK, SPECIAL COMMON STOCK, STOCK OPTIONS AND DEFERRED COMPENSATION
In the first half of 1998 the Company sold 2,182,500 shares of its Common Stock
in a public offering for approximately $64,190,000 in net cash proceeds (the
"Common Stock Offering"), after deducting underwriting commission and offering
expense, and credited $2,182,500 to Common Stock and $62,007,500 to additional
paid in capital. A portion of the net proceeds were used to acquire NuTone (see
Note 2).
Each share of Special Common Stock has 10 votes on all matters submitted to a
stockholder vote, except that the holders of Common Stock, voting separately as
a class, have the right to elect 25% of the directors to be elected at a
meeting, with the remaining 75% being elected by the combined vote of both
classes. Shares of Special Common Stock are generally non-transferable, but are
freely convertible on a share-for-share basis into shares of Common Stock.
The Company has a shareholder rights plan which expires March 31, 2006. Each
shareholder right entitles shareholders to buy 1/100 of a share of a new series
of preference stock of Nortek at an exercise price of $72 per share, subject to
adjustments for stock dividends, splits and similar events.
The rights, that are not currently exercisable, are attached to each share of
Common Stock and may be redeemed by the Directors at $.01 per share at any time.
After a shareholder acquires beneficial ownership of 17% or more of the
Company's Common Stock and Special Common Stock, the rights will trade
separately and become exercisable entitling a rights holder to acquire
additional shares of the Company's Common Stock having a market value equal to
twice the amount of the exercise price of the right. In addition, after a person
or group ("Acquiring Company") commences a tender offer or announces an
intention to acquire 30% or more of the Company's Common Stock and Special
Common Stock, the rights will trade separately and, under certain circumstances
72
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NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
will permit each rights holder to acquire common stock of the Acquiring Company,
having a market value equal to twice the amount of the exercise price of the
right.
At December 31, 1999, a total of 2,506,516 shares of Common Stock were reserved
as follows:
Stock option plans...................... 1,666,080
Conversion of.Special Common Stock...... 840,436
---------
2,506,516
=========
At December 31, 1999 1,662,333 shares of Special Common Stock were reserved for
stock option plans.
The Company has several Equity and Cash Incentive Plans which provide for the
granting of options and other awards to certain officers, employees and
non-employee directors of the Company. The Company has a cash incentive program
for certain key employees under the 1999 Equity and Cash Incentive Plan based on
the performance of the Company's stock price. No amounts have been paid under
this cash incentive program. Options granted under the Equity and Cash Incentive
Plans vest over periods ranging up to five years and expire ten years from the
date of grant. At December 31, 1999, 164,467 additional options are available
for grant under these plans.
At December 31, 1999, 1998 and 1997, approximately 1,073,759, 652,702 and
709,762 respectively, of options to acquire shares of Common and Special Common
stock were exercisable.
73
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table that follows summarizes the Common and Special Common Stock option
transactions for the three years ended December 31, 1999:
Weighted
Average
Number Option Price Exercise
of Shares Per Share Price
Options outstanding at
December 31, 1996 628,800 $ 2.875 - $15.69 $10.93
Granted 435,600 19.50 - 27.00 22.98
Exercised (71,953) 2.875 - 15.69 6.66
Canceled (6,667) 22.69 22.69
--------
Options outstanding at
December 31, 1997 985,780 $ 2.875 - $27.00 $16.48
Granted 382,300 22.938 - 31.875 23.23
Exercised (350,934) 2.875 - 22.690 10.63
Canceled (10,000) 22.690 22.69
--------
Options outstanding at
December 31, 1998 1,007,146 $ 2.875 - $31.875 $21.03
Granted 584,300 24.75 - 33.063 28.22
Exercised (69,833) 2.875 - 22.938 13.63
Canceled (20,000) 20.750 - 30.375 25.05
----------
Options outstanding at
December 31, 1999 1,501,613 $ 8.75 - 33.063 $24.11
=========
3,747 options have an exercise price of $8.75 and a weighted average remaining
contractual life of 4 years. All of these options are exercisable. 173,849
options, all of which are exercisable, have an exercise price of $14.75 and a
remaining contractual life of 6 years. 919,117 options, 709,847 of which are
exercisable, have exercise prices between $19.50 and $27.00 with a weighted
average exercise price of $23.43 and a remaining contractual life of 8 years.
The remaining 404,900 options, 186,316 of which are exercisable, have exercise
prices between $29.563 and $33.063, with a weighted average exercise price of
$29.814 and a remaining contractual life of 9 years.
The Company accounts for stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized since options are granted with
exercise prices equal to the fair market value of the Common Stock at the date
of grant. Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Company's earnings from continuing operations and diluted
earnings per share from continuing operations would have been approximately
$44,800,000 and $3.74 for 1999, approximately $31,700,000 and $2.86 for 1998 and
approximately $24,100,000 and $2.45 for 1997, respectively, and net earnings and
74
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
diluted net earnings per share would have been approximately $44,800,000 and
$3.74 for 1999, approximately $32,700,000 and $2.95 for 1998 and approximately
$19,000,000 and $1.92 for 1997, respectively.
The weighted average grant date fair value of options granted was $11.60, $9.40
and $9.82 in 1999, 1998 and 1997, respectively. The fair value of each option
grant is estimated on the date of the grant using the Black-Scholes option
pricing model with the following assumptions used:
1999 1998 1997
---- ---- ----
Risk-free interest rate Between Between Between
4.91% and 6.31% 4.50% and 5.66% 5.75% and 6.73%
Expected life 5 years 5 years 5 years
Expected volatility 36% 37% 37%
Expected dividend yeild 0% 0% 0%
The Company's Board of Directors has authorized a program to purchase up to
500,000 shares of the Company's Common and Special Common Stock in open market
or negotiated transactions, subject to market conditions, cash availability and
provisions of the Company's outstanding debt instruments. As of February 25,
2000, the Company had purchased approximately 377,300 shares of its Common and
Special Common Stock for approximately $10,800,000 under this program and
accounted for such share purchases as treasury stock.
7.PENSION, PROFIT SHARING AND OTHER POST RETIREMENT BENEFITS
The Company and its subsidiaries have various pension, supplemental retirement
plans for certain officers, profit sharing and other post retirement benefit
plans requiring contributions to qualified trusts and union administered funds.
During 1998, the Company assumed certain liabilities of NuTone concerning
pension obligations and post retirement obligations that provide certain
retirement, medical and life insurance benefits to eligible retired employees
and certain active employees.
Pension and profit sharing expense charged to operations aggregated
approximately $12,400,000 in 1999, approximately $9,800,000 in 1998 and
approximately $6,624,000 in 1997. The Company's policy is to fund currently the
actuarially determined annual contribution of its various qualified defined
benefit plans.
75
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table that follows provides a reconciliation of benefit obligations, plan
assets and funded status of the plans in the Company's consolidated balance
sheet at December 31, 1999 and 1998:
Pension Benefits
1999 1998
---- ----
(Amounts in thousands)
Change in benefit obligation:
Benefit obligation at October 1, $154,850 $ 56,884
Service cost 2,289 2,329
Interest cost 10,377 5,594
Amendments 755 851
Curtailment gains (8,976) ---
Actuarial loss excluding assumption changes 13,482 4,828
Actuarial (gain) loss due to assumption
changes (13,254) 7,593
Obligations from an acquisition --- 81,822
Benefits and expenses paid (9,848) (5,051)
-------- --------
Benefit obligation at September 30, $149,675 $154,850
======== ========
Change in plan assets:
Fair value of plan assets at October 1, $114,336 $ 56,842
Actual return on plan assets 15,643 (2,980)
Plan assets from an acquisition --- 63,118
Employer contribution 1,761 2,407
Benefits and expenses paid (9,848) (5,051)
-------- --------
Fair value of plan assets at September 30, $121,892 $114,336
======== ========
76
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pension Benefits
1999 1998
---- ----
(Amounts in thousands)
Funded status and statement of financial
position:
Fair value of plan assets at September 30, $121,892 $114,336
Benefit obligation at September 30, (149,675) (154,850)
Funded status (27,783) (40,514)
Amount contributed during fourth quarter 513 335
Unrecognized actuarial loss 5,467 15,896
Unrecognized prior service cost 7,163 7,224
-------- --------
Accrued benefit cost $(14,640) $(17,059)
======== =========
Amount recognized in the statement of
financial position consists of:
(a) Prepaid benefit cost $ 7,296 $ 6,130
(b) Accrued benefit liability (33,503) (38,111)
(c) Intangible asset 6,021 6,907
(d) Accumulated other comprehensive loss 5,546 8,015
-------- --------
Accrued benefit cost $(14,640) $(17,059)
======== =========
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $106,127,000, $97,972,000 and $67,220,000,
respectively, as of December 31, 1999 and $109,588,000, $102,880,000 and
$66,365,000, respectively, as of December 31, 1998.
Plan assets include commingled funds, marketable securities, insurance contracts
and cash and short-term investments. Also at December 31, 1999, the Company has
recorded as long-term restricted investments and marketable securities in other
assets, in the accompanying consolidated balance sheet, approximately
$15,700,000 which has been contributed to a trust and is available to fund
obligations included in the table above relating to supplemental retirement
plans.
The weighted average rate assumptions used in determining pension costs and the
projected benefit obligation are as follows:
Years ended December 31,
1999 1998 1997
---- ---- ----
Discount rate 7.50% 6.75% 7.50%
Expected return on plan assets 8.50 8.50 8.50
Rate of compensation increase 5.00 4.50 5.00
77
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's net periodic benefit cost for its defined benefit plans for 1999,
1998, and 1997 consist of the following components:
Years ended December 31,
1999 1998 1997
---- ---- ----
(Amounts in thousands)
Service cost $ 2,289 $2,329 $ 597
Interest cost 10,377 5,594 2,979
Expected return on plan assets (9,713) (5,135) (2,819)
Amortization of prior service cost 816 217 636
Recognized actuarial loss 939 311 93
------- ------ ------
Net periodic benefit cost $4,708 $3,316 $1,486
====== ====== ======
The table that follows provides a reconciliation of the benefit obligations,
plan assets and funded status of the Post Retirement Health Benefit Plan in the
Company's consolidated balance sheet at December 31, 1999 and 1998:
Non-pension
Post Retirement
Health Benefits
1999 1998
---- ----
(Amounts in thousands)
Change in benefit obligation:
Benefit obligation at October 1, $29,561 $ ---
Obligations from an acquisition --- 29,022
Service cost 226 155
Interest cost 1,189 800
Curtailment gain (13,344) ---
Actuarial loss (gain) excluding assumption changes 734 (384)
Actuarial loss due to assumption changes 199 ---
Benefits and expenses paid (1,753) (32)
Benefit obligation at September 30, $16,812 $29,561
Change in plan assets:
Fair value of plan assets at October 1, $ --- $ ---
Employer contribution 1,753 32
Benefits and expenses paid (1,753) (32)
------- -------
Fair value of plan assets at September 30, $ --- $ ---
======= =======
Funded status and statement of financial
position:
Fair value of plan assets at September 30, $ --- $ ---
Benefit obligation at September 30, (16,812) (29,561)
------- --------
Funded status (16,812) (29,561)
Amount contributed during fourth quarter 466 339
Unrecognized actuarial loss (gain) 548 (384)
------- --------
Accrued benefit cost $(15,798) $(29,606)
======== ========
78
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company's net periodic benefit cost for its Post Retirement Health Benefit
Plan for 1999 and 1998 consists of the following components:
Years ended
December 31,
1999 1998
---- ----
(Amounts in thousands)
Service Cost $ 226 $155
Interest Cost 1,189 800
------ ----
Net periodic post retirement
health benefit cost $1,415 $955
====== ====
For purposes of calculating the post retirement health benefit cost, a medical
inflation rate of 8% was assumed for 1999. The rate was assumed to decrease
gradually to an ultimate rate of 5% by 2005.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the post retirement health benefit plan. A one-percentage-point
change in assumed health care cost trend rate would have the following effect:
Decrease Trend 1% Increase Trend 1%
----------------- -----------------
(Amounts in thousands)
Effect on the total service
and interest cost components $ (154) $ 188
Effect on the post retirement
benefit obligation $(1,888) $2,256
8. COMMITMENTS AND CONTINGENCIES
The Company provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated.
79
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 1999, the Company and its subsidiaries are obligated under lease
agreements for the rental of certain real estate and machinery and equipment
used in its operations. Minimum annual rental expense aggregates approximately
$90,924,000 at December 31, 1999. The obligations are payable as follows:
2000......................... $13,444,000
2001......................... 10,648,000
2002......................... 8,553,000
2003......................... 7,264,000
2004 ........................ 6,346,000
Thereafter................... 44,669,000
Certain of these lease agreements provide for increased payments based on
changes in the consumer price index. Rental expense charged to operations in the
accompanying consolidated statement of operations was approximately $14,800,000,
$15,000,000 and $8,700,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Under certain of these lease agreements, the Company or its
subsidiaries are also obligated to pay insurance and taxes.
The Company is subject to other contingencies, including legal proceedings and
claims arising out of its businesses that cover a wide range of matters,
including, among others, environmental matters, contract and employment claims,
product liability, warranty and modification, adjustment or replacement of
component parts of units sold, which may include product recalls. The Company
has used various substances in its products and manufacturing operations which
have been or may be deemed to be hazardous or dangerous, and the extent of its
potential liability, if any, under environmental, product liability and workers'
compensation statutes, rules, regulations and case law is unclear. Further, due
to the lack of adequate information and the potential impact of present
regulations and any future regulations, there are certain circumstances in which
no range of potential exposure may be reasonably estimated.
A subsidiary of the Company is a defendant in a number of lawsuits alleging
damage caused by alleged defects in certain pressure treated wood products. Many
of the suits have been resolved by dismissal or settlement with amounts being
paid out of insurance proceeds or other third party recoveries. The subsidiary
continues to vigorously defend the remaining suits. Certain defense and
indemnity costs are being paid out of insurance proceeds and proceeds from a
settlement with suppliers of material used in the production of the treated wood
products.
80
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The subsidiary has engaged in coverage litigation with certain insurers and has
settled coverage claims with several of the insurers. The Company believes that
the remaining coverage disputes will be resolved on a satisfactory basis and
additional coverage will be available. In reaching this belief, the Company
analyzed insurance coverage and the status of the coverage litigation,
considered the history of settlements with primary and excess insurers and
consulted with counsel.
The Company has recorded liabilities of approximately $11,048,000 at December
31, 1999 for the estimated costs to resolve these outstanding matters. The
Company has also recorded receivables at December 31, 1999 of approximately
$9,803,000 for the estimated recoveries which are deemed probable of collection
related to insurance litigation matters discussed above.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company believes
that the aggregate amount of such liabilities, if any, in excess of amounts
provided, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
9. DISCONTINUED OPERATIONS
In the fourth quarter of 1997, the Company adopted a plan of disposition for its
plumbing products business which was sold on July 10, 1998 for approximately
$33,700,000 in cash. The following is a summary of the results of discontinued
operations for the two years ended December 31, 1998:
Years Ended December 31,
1998 1997
---- ----
(Amounts in thousands)
Net sales $50,110 $104,467
======= ========
Loss before income taxes $(3,800) $ (5,700)
Income tax benefit 5,000 2,100
------- --------
Earnings (loss) from discontinued
operations 1,200 (3,600)
Reserve for future operating expenses,
net of income tax benefit of
$900,000 --- (1,600)
------- --------
Earnings (loss) from discontinued
operations $ 1,200 $ (5,200)
======= ========
81
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Loss from discontinued operations before income taxes includes an allocation of
corporate interest expense of approximately $1,000,000 and $1,900,000 in 1998
and 1997, respectively. Corporate interest was allocated to discontinued
operations based on the ratio of net assets of the discontinued operation to the
sum of the total consolidated net assets of the Company plus consolidated debt
of the Company other than debt of the discontinued operation assumed by the
buyer and debt that is directly attributed to other operations of the Company.
The income tax benefit in 1998 includes approximately $800,000 recorded as a
result of the realization of a portion of the tax capital loss arising from the
sale of the plumbing products business.
10.OPERATING SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company is a diversified manufacturer of residential and commercial building
products, which is organized within three principal operating segments: the
Residential Building Products Segment; the Air Conditioning and Heating Products
Segment; and the Windows, Doors and Siding Products Segment. Individual
subsidiary companies are included in each of the Company's three principal
operating segments based on the similarity of products, production processes,
customers and expected long-term financial performance to other subsidiary
companies included in the particular operating segment. In the tables below,
Other includes corporate related items, results of insignificant operations,
intersegment eliminations and certain income and expense items not allocated to
reportable segments. The operating results labeled Businesses Sold consist of
entities sold during 1998.
The Residential Building Products Segment manufactures and distributes built-in
products primarily for the residential new construction, do-it-yourself (DIY)
and professional remodeling and renovation markets. The principal products sold
by the Segment include, kitchen range hoods, exhaust fans (such as bath fans and
fan, heater and light combination units) indoor air quality products, bath
cabinets, radio intercoms and central vacuum systems. The Air Conditioning and
Heating Products Segment principally manufactures and sells heating, ventilating
and air conditioning ("HVAC") systems for custom-designed commercial
applications and for manufactured and site-built residential housing. The
Windows, Doors and Siding Products Segment principally manufactures and
distributes vinyl, wood and composite windows, vinyl, wood, steel and composite
patio and entry doors, vinyl siding, soffit, skirting and accessories, aluminum
trim coil, siding, columns and accessories, soffit, skirting, shutters, sun
82
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
rooms and vinyl fencing, railings and decking for use in the residential
construction, DIY and professional renovation markets.
The Windows, Doors and Siding Products Segment was purchased in connection with
the acquisition of Ply Gem on August 26, 1997 and, accordingly, information
presented below excludes results of operations for this Segment for periods
prior to the acquisition date.
The accounting policies of the segments are the same as those described in Note
1. Summary of Significant Accounting Policies. The Company evaluates segment
performance based on operating earnings before allocations of corporate overhead
costs. Intersegment net sales are not material for any of the periods presented.
Intersegment eliminations were not material for any of the periods presented.
The income statement impact of all purchase accounting adjustments, including
goodwill and intangible assets amortization, is reflected in the operating
earnings of the applicable operating segment; however, the corresponding
purchase accounting balance sheet adjustments related to goodwill and intangible
assets are not allocated to the individual operating segments. Unallocated
assets consist primarily of cash and cash equivalents, marketable securities,
net assets of discontinued operations (in 1997), prepaid and deferred income
taxes, goodwill, intangible assets, deferred debt expense and long term
restricted investments and marketable securities.
The tables that follow exclude the results of operations for the plumbing
products business which was sold in 1998 and was accounted for as a discontinued
operation.
83
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Summarized financial information for the Company's reportable segments is
presented in the tables that follow for each of the three years in the period
ended December 31, 1999.
Years ended December 31,
1999 1998 1997
---- ---- ----
(Amounts in thousands)
Net Sales:
Residential Building Products $ 637,815 $ 475,029 $ 381,750
Air Conditioning and Heating
Products 540,575 465,164 419,368
Windows, Doors and Siding Products 738,398 536,781 189,027
Other 76,032 69,322 21,322
---------- ---------- ----------
$1,992,820 1,546,296 1,011,467
Businesses sold --- 192,047 122,662
---------- ---------- ----------
Consolidated net sales $1,992,820 $1,738,343 $1,134,129
========== ========== ==========
Operating Earnings (Loss):
Residential Building Products $ 94,704 $ 53,674 $40,287
Air Conditioning and Heating
Products 66,958 55,729 41,267
Windows, Doors and Siding Products 37,207 31,492 8,991
Other, net (20,351) (14,157) (14,428)
-------- -------- -------
178,518 126,738 76,117
Businesses sold --- 6,390 6,864
-------- -------- -------
Consolidated operating earnings 178,518 133,128 82,981
Unallocated:
Gain on Businesses sold --- 4,000 ---
Interest expense (96,490) (86,298) (50,210)
Investment income 7,972 10,470 9,929
-------- ------- -------
Earnings from continuing
operations before provision
for income taxes $ 90,000 $61,300 $42,700
======== ======= =======
84
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years ended December 31,
1999 1998 1997
---- ---- ----
(Amounts in thousands)
Segment Assets:
Residential Building Products $273,371 $252,533 $172,686
Air Conditioning and Heating
Products 198,360 164,710 132,772
Windows, Doors and Siding
Products 311,668 242,014 203,902
Other 31,639 17,029 27,546
---------- ---------- ----------
815,038 676,286 536,906
Businesses sold --- --- 86,205
---------- ---------- ----------
Total segment assets 815,038 676,286 623,111
Unallocated:
Cash, cash equivalents and
marketable securities 126,352 223,451 168,178
Goodwill and intangible assets 722,572 672,264 386,984
Prepaid and deferred income taxes 66,824 54,163 56,822
Other assets 78,898 63,829 69,451
---------- ---------- ----------
Consolidated assets $1,809,684 $1,689,993 $1,304,546
========== ========== ==========
Years ended December 31,
1999 1998 1997
---- ---- ----
(Amounts in thousands)
Depreciation and
Amortization expense:
Residential Building Products $20,584 $14,641 $10,980
Air Conditioning and Heating
Products 10,625 8,920 8,412
Windows, Doors and Siding Products 22,677 15,614 5,414
Other 1,646 1,222 525
------- ------- -------
55,532 40,397 25,331
Businesses sold --- 1,687 1,365
------- ------- -------
Consolidated depreciation and
amortization expense $55,532 $42,084 $26,696
======= ======= =======
Capital Expenditures:
Residential Building Products $10,840 $ 8,638 $6,361
Air Conditioning and Heating
Products 10,814 20,665 10,724
Windows, Doors and Siding Products 18,917 9,809 3,244
Other 1,442 536 314
------- ------- -------
42,013 39,648 20,643
Businesses sold --- 1,215 1,821
------- ------- -------
Consolidated capital expenditures $42,013 $40,863 $22,464
======= ======= =======
85
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Foreign net sales were approximately 9%, 8% and 11% of consolidated net sales
for the years ended December 31, 1999, 1998 and 1997, respectively. Foreign Long
Lived Assets were approximately 7%, 6% and 9% of consolidated Long Lived Assets
for the years ended December 31, 1999, 1998 and 1997, respectively. Foreign net
sales are attributed based on the location of the Company's subsidiary
responsible for the sale. As required, Long Lived Assets exclude financial
instruments and deferred income taxes.
No single customer accounts for 10% or more of consolidated net sales.
The Company operates internationally and is exposed to market risks from changes
in foreign exchange rates. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company places its temporary cash
investments with high credit quality financial institutions and limits the
amount of credit exposure to any one financial institution. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base and their dispersion
across many different geographical regions. At December 31, 1999, the Company
had no significant concentrations of credit risk.
11.NET GAIN (LOSS) ON MARKETABLE SECURITIES
At December 31, 1999 the increase in the Company's stockholders' investment for
gross unrealized gains was approximately $125,000. At December 31, 1998 and 1997
the reduction in the Company's stockholders' investment for gross unrealized
losses was approximately $45,000 and $110,000 respectively.
The Company has unrestricted marketable securities, of approximately $34,219,000
at December 31, 1999, consisting of certificates of deposit and bank issued
money market instruments, all of which mature within one year.
86
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. ACCRUED EXPENSES AND TAXES, NET
Accrued expenses and taxes, net, consist of the following at December 31, 1999
and 1998:
December 31,
1999 1998
(Amounts in thousands)
Insurance $ 31,021 $ 28,658
Employee compensation and benefits 47,004 48,094
Interest 29,213 29,231
Product warranty 19,423 13,962
Sales and marketing 21,617 19,435
Employee termination and other costs 2,865 2,666
Other, net 38,821 55,039
-------- --------
$189,964 $197,085
======== ========
The Company has recorded liabilities, in connection with acquisitions, which
occurred in 1997, 1998 and 1999 related to employee terminations and other exit
costs associated with management's plans to eliminate certain activities of the
acquired entities. Management's plans for eliminating certain Ply Gem activities
were completed in 1998 and relate principally to the elimination of Ply Gem's
corporate headquarters and the consolidation of certain duplicate Ply Gem
corporate functions such as accounting, legal and risk management into the
Company. The finalization of management's initial plans relative to the Ply Gem
acquisition resulted in decreases of approximately $2,700,000 to the initial
liabilities recorded in 1997. These decreases were identified within one year of
the acquisition date and, accordingly, were recorded as adjustments to the
purchase price allocation for the Ply Gem acquisition. The Company has recorded
liabilities of approximately $5,200,000 and $1,900,000 in the years ended
December 31, 1999 and 1998, respectively, for the 1998 and 1999 acquisitions,
which principally related to termination of certain employees and closing
certain facilities of acquired businesses. As of December 31, 1999, plans for
eliminating certain activities have been finalized for all significant
acquisitions with the exception of certain severence arrangements which the
Company estimates will be approximately $1,000,000 and will be finalized in the
first half of 2000.
87
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Charges to the liabilities for employee termination include payroll, payroll
taxes and insurance benefits related to severance packages and were
approximately $3,600,000, $5,300,000 and $1,700,000 for the years ended December
31, 1999, 1998 and 1997, respectively. Charges to the liabilities for other exit
costs relate principally to lease costs and other costs of closing facilities
and legal and consulting fees that were incurred due to the implementation of
the Company's exit strategies. Charges to the liabilities for other exit costs
were approximately $1,400,000, $1,400,000 and $400,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
In addition, during 1999 the Company expensed in the accompanying consolidated
statement of operations approximately $3,400,000 of costs related to the
integration activities of NuTone into the Company's operations.
88
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13.SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables that follow summarize unaudited quarterly financial data for the
years ended December 31, 1999 and December 31, 1998:
For the Quarters Ended
April 3 July 3 October 2 December 31
---------- ---------- ---------- -----------
(In thousands except per share amounts)
1999
- -----
Net sales $406,700 $544,088 $553,493 $488,539
Gross profit 109,784 159,117 157,479 133,311
Earnings from continuing
operations 3,500 19,800 20,600 5,400
Earnings per share from
continuing operations:
Basic .30 1.67 1.74 .46
Diluted .29 1.64 1.70 .46
Net earnings $ 3,500 $ 19,800 $ 20,600 $ 5,400
Net earnings per share:
Basic .30 1.67 1.74 .46
Diluted .29 1.64 1.70 .46
For the Quarters Ended
April 4 July 4 October 3 December 31
---------- ---------- ---------- -----------
(In thousands except per share amounts)
1998
- -----
Net sales $392,468 $449,647 $458,193 $438,035
Gross profit 98,148 116,141 127,001 121,703
Earnings from continuing
operations 1,300 8,500 13,300 10,900
Earnings per share from
continuing operations:
Basic .14 .79 1.13 .93
Diluted .13 .78 1.11 .92
Net earnings $ 1,300 $ 8,500 $ 13,800 $ 11,400
Net earnings per share:
Basic .14 .79 1.17 .97
Diluted .13 .78 1.15 .96
89
<PAGE>
Report of Independent Public Accountants
To Nortek, Inc.:
We have audited the accompanying consolidated balance sheets of Nortek, Inc. (a
Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this form 10-K
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' investment and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nortek, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in Item 14(a)(2) are presented
for purposes of complying with the Securities and Exchange Commissions rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/ARTHUR ANDERSEN LLP
Boston, Massachusetts,
March 8, 2000
90
<PAGE>
NORTEK, INC. (PARENT COMPANY)
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEET
December 31,
1999 1998
-------- --------
(Amounts in thousands)
Assets
Current Assets:
Unrestricted
Cash and investments at cost which
approximates market $ 21,681 $ 60,238
Marketable securities at cost which
approximates market 29,225 86,736
Restricted
Cash and investments at cost which
approximates market 8,303 10,801
Marketable securities at cost which
approximates market 1,107 2,796
Notes and accounts receivable, net 2,674 3,435
Prepaid expenses and other current assets 491 197
Prepaid income taxes 5,700 6,200
---------- ----------
Total Current Assets 69,181 170,403
---------- ----------
Property and equipment, at cost 1,515 1,708
Less--accumulated depreciation 1,179 1,350
---------- ----------
Total property and equipment, net 336 358
---------- ----------
Investments and Other Assets:
Net intercompany balance and investment
in subsidiaries 1,083,695 955,987
Deferred debt expense, net 21,184 23,843
Restricted investments and marketable securities 15,236 ---
Other 32,801 25,787
---------- ----------
1,152,916 1,005,617
---------- ----------
$1,222,433 $1,176,378
========== ==========
The accompanying notes are an integral part of these financial statements.
91
<PAGE>
NORTEK, INC. (PARENT COMPANY)
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEET
(Continued)
December 31,
1999 1998
-------- --------
(Amounts in thousands)
Liabilities and Stockholders' Investment
Current Liabilities:
Accounts payable $ 1,041 $ 1,340
Accrued expenses and taxes 34,830 45,319
---------- ----------
Total current liabilities 35,871 46,659
---------- ----------
Other Liabilities:
Deferred income taxes 5,200 3,500
Other 17,414 13,735
---------- ----------
22,614 17,235
---------- ----------
Senior notes 691,397 691,087
---------- ----------
Senior subordinated notes 203,946 203,787
---------- ----------
Other long-term debt 8,788 ---
---------- ----------
Commitments and Contingencies (Note 2)
Stockholders' Investment:
Preference stock, $1 per value; authorized
7,000,000 shares, none issued --- ---
Common Stock, $1 par value; authorized
40,000,000 shares, 18,738,292 and 18,427,595
shares issued 18,738 18,428
Special common stock, $1 par value; authorized
5,000,000 shares, 840,436 and 854,935 shares
issued 841 855
Additional paid-in capital 208,755 201,626
Retained earnings 143,266 93,966
Accumulated other comprehensive loss (11,822) (11,596)
Less--treasury common stock at cost,
7,793,217 and 7,290,335 shares (97,894) (83,711)
--treasury special common stock at cost,
290,054 and 286,009 shares (2,067) (1,958)
----------- ----------
Total Stockholders' Investment 259,817 217,610
---------- ----------
$1,222,433 $1,176,378
========== ==========
The accompanying notes are an integral part of these financial statements.
92
<PAGE>
NORTEK, INC. (PARENT COMPANY)
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
For the Years Ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
(In thousands except per share amounts)
Revenues:
Charges and allocations to subsidiaries $ 73,307 $75,208 $34,498
Gain on sale of businesses --- 4,000 ---
Investment income 5,441 8,777 9,273
Other income 508 556 518
-------- ------- -------
Total revenues 79,256 88,541 44,289
-------- ------- -------
Expenses:
Selling, general and administrative
expense 21,885 15,030 13,605
Interest expense 87,326 75,922 43,921
Other expense 1,149 679 784
-------- ------- -------
Total expenses 110,360 91,631 58,310
-------- ------- -------
Loss from continuing
operations, before equity in
subsidiaries' earnings (31,104) (3,090) (14,021)
Equity in subsidiaries earnings
before provision for income taxes 121,104 64,390 56,721
------- ------- -------
Earnings from continuing operations
before provision for income taxes 90,000 61,300 42,700
Provision for income taxes 40,700 27,300 16,300
-------- ------- -------
Earnings from continuing operations
before extraordinary loss 49,300 34,000 26,400
Earnings (loss) from discontinued
operations --- 1,200 (5,200)
Extraordinary loss from debt
retirements --- (200) ---
-------- ------- -------
Net earnings $ 49,300 $35,000 $21,200
======== ======= =======
Earnings (loss) per share:
Earnings per share from continuing
operations:
Basic $4.19 $3.11 $ 2.75
Diluted $4.11 $3.06 $ 2.68
Earnings (loss) from discontinued
operations:
Basic $--- $ .11 $(0.54)
Diluted $--- $ .11 $(0.53)
Extraordinary loss from debt
retirements:
Basic $--- $(.02) $---
Diluted $--- $(.02) $---
Net earnings:
Basic $4.19 $3.20 $ 2.21
Diluted $4.11 $3.15 $ 2.15
Weighted average number of shares:
Basic 11,763 10,923 9,605
Diluted 11,982 11,113 9,855
The accompanying notes are an integral part of these financial statements.
93
<PAGE>
NORTEK, INC. (PARENT COMPANY)
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
(Amounts in thousands)
Cash flows from operating activities:
Earnings from continuing operations $49,300 $ 34,000 $ 26,400
Net earnings (loss) from discontinued
operations --- 1,200 (5,200)
Extraordinary loss from debt retirements --- (200) ---
------- ---------- --------
Net earnings 49,300 35,000 21,200
------- -------- --------
Adjustments to reconcile net earnings
to cash:
Depreciation and amortization expense 446 117 139
Non-cash interest expense, net 3,253 2,856 1,421
Gain on sale of Businesses sold --- (4,000) ---
Loss on discontinued operations --- 3,800 2,500
Loss on debt retirement --- 300 ---
Equity in subsidiaries' earnings
Before provision for income taxes (121,104) (64,390) (56,721)
Charges and allocations to subsidiaries (73,307) (75,208) (34,498)
Net transfers from subsidiaries,
principally cash 112,916 97,905 57,034
Net gain on sale of investments and
marketable securities --- --- (200)
Deferred federal income tax provision 17,100 15,100 4,000
Deferred federal income tax benefit
on discontinued operations --- (3,200) (1,000)
Changes in certain assets and liabilities
net of effects from acquisitions and
dispositions:
Notes and accounts receivable and other
current assets (3,080) (2,672) (994)
Other assets (1,844) (1,034) (2,877)
Net assets of discontinued operations --- (7,426) 4,934
Accrued expenses and taxes (11,787) 13,558 4,491
Long-term liabilities 691 (1,243) 4,832
Other, net 317 948 277
-------- -------- --------
Total adjustments to net earnings (76,399) (24,589) (16,662)
--------- -------- --------
Net cash (used in) provided by
operating activities $(27,099) $ 10,411 $ 4,538
--------- -------- --------
94
<PAGE>
NORTEK, INC. (PARENT COMPANY)
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS (Continued)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Cash flows from investing activities:
Capital expenditures (135) (65) (70)
Purchases of investments and marketable
securities (84,596) (124,986) (283,918)
Proceeds from the sale of investments and
marketable securities 142,794 75,255 297,133
Proceeds either received directly or from
subsidiaries relating to Businesses sold
or discontinued --- 61,162 ---
Cash contributed to subsidiaries for
businesses acquired (44,737) (294,040) (407,419)
Change in restricted cash, investments and
marketable securities (8,115) (7,234) (828)
Other, net (2,802) (56) (4,188)
-------- -------- --------
Net cash provided by (used in) investing
activities 2,409 (289,964) (399,290)
-------- -------- --------
Cash flows from financing activities:
Sale of Notes, net --- 203,492 466,214
Purchase of Notes --- (13,678) ---
Sale of Nortek Common Stock --- 64,190 ---
Purchase of Nortek Common and Special
Common Stock (14,524) (7,668) (10,177)
Other, net 657 1,811 385
-------- -------- --------
Net cash (used in) provided by financing
activities (13,867) 248,147 456,422
-------- -------- --------
Net (decrease) increase in unrestricted
cash and investments (38,557 (31,406) 61,670
Unrestricted cash and investments at the
beginning of the year 60,238 91,644 29,974
-------- -------- --------
Unrestricted cash and investments at the
end of the year $ 21,681 $ 60,238 $ 91,644
======== ======== ========
Interest paid on indebtedness $ 83,947 $ 65,599 $ 29,581
======== ======== ========
Net income taxes paid, including those
paid by subsidiaries $ 25,500 $ 4,568 $ 7,977
======== ======== ========
The accompanying notes are an integral part of these financial statements.
95
<PAGE>
NORTEK, INC. (PARENT COMPANY)
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying condensed financial statements of Nortek, Inc. ("the
Registrant") have been prepared in accordance with the reduced disclosure
requirements permitted by form 10-K, Part IV, Item 14, Schedule I - Condensed
Financial Information of the Registrant. The consolidated financial statements
and related notes of Nortek, Inc. and Subsidiaries, are included elsewhere
herein in this form 10-K (Part II, Item 8)and are incorporated herein by
reference. Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
2. Descriptions of material contingencies, significant provisions of long-term
debt obligations and commitments of the Registrant are included in Notes 5 and 8
of the Notes to the Nortek, Inc. and Subsidiaries Consolidated Financial
Statements, which are incorporated herein by reference. The following is a
summary of maturities of long-term debt of the Registrant's debt obligations,
excluding unamortized discount, at December 31, 1999:
(Amounts in thousands)
2000 $ ---
2001 5,000
2002 ---
2003 ---
2004 208,610
Thereafter 695,000
3. The Registrant's net investment in subsidiaries is net of the cumulative
amount of intercompany cash transfers and other transactions.
4. Included in the Registrant's condensed statement of cash flows for the years
ended December 31, 1999 and 1997 (in net transfers from subsidiaries,
principally cash) are dividends (declared by subsidiaries' Board of Directors)
from subsidiaries of $250,000,000 and $70,000,000, respectively.There were no
dividends declared in 1998.
5. Certain of the Registrant's subsidiaries have entered into financing
agreements which contain various restrictive covenants that place limitations on
the amount of distributions and advances to the Registrant. At December 31,
1999, approximately $397,693,000 (of which approximately $300,555,000 is
goodwill) of subsidiary net assets, principally Ply Gem and its subsidiaries,
were restricted and approximately $94,477,000 principal amount of subsidiary
indebtedness was outstanding under these financing agreements.
96
<PAGE>
NORTEK, INC. AND SUBSIDIARIE
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged
at to Cost Charged Deduction Balance
Beginning Acqui- and to Other from at End
Classification of Year sitions Expense Accounts Reserves of Year
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997:
Allowance for doubtful
accounts and sales allowances $ 3,656 $7,434 $2,303 $ 171 (c) $ (2,517)(a) $11,047
For the year ended
December 31, 1998:
Allowance for doubtful
accounts and sales allowances $11,047 $2,172 $8,711 $(1,434)(b) $(10,138)(a) $10,657
$ 299 (c)
For the year ended
December 31, 1999:
Allowance for doubtful
accounts and sales allowances $10,657 $2,995 $2,911 $ 318 (c) $(3,862)(a) $13,019
</TABLE>
(a) Amounts written off, net of recoveries
(b) Businesses sold
(c) Other
97
<PAGE>
NORTEK, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Exhibits marked with a double asterisk identify each
management contract or compensatory plan or arrangement.
3.1 Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 2 to Form
8-K filed April 23, 1987, File No. 1-6112).
3.2 Amendment to Restated Certificate of Incorporation of Nortek, Inc.
effective May 10, 1989 (Exhibit 3.2 to Form 10-K filed March 30, 1990, File
No. 1-6112).
3.3 By-laws of Nortek, Inc. (as amended through September 19, 1996) (Exhibit
3.3 to Form 10-Q filed November 5, 1996, File No. 1-6112).
3.4 Amendment to By-laws of Nortek, Inc. (Exhibit 3.1 to Form 8-K filed April
23, 1999, File No. 1-6112).
4.1 Second Amended and Restated Rights Agreement dated as of April 1, 1996
between the Company and State Street Bank and Trust Company, as Rights
Agent (Exhibit 1 to Form 8-K filed April 2, 1996, File No. 1-6112).
4.2 Indenture dated as of February 14, 1994 between the Company and State
Street Bank and Trust Company, as Trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K filed March 25, 1994,
File No. 1-6112).
4.3 Indenture dated as of March 17, 1997 between the Company and State Street
Bank and Trust Company, as Trustee, relating to the 9.25% Series A and
Series B Senior Notes due March 15, 2007 (Exhibit 4.2 to Registration
Statement No. 333-25505 filed April 18, 1997).
4.4 Indenture dated as of August 26, 1997 between the Company and State Street
Bank and Trust Company, as Trustee, relating to the 9 1/8% Series A and
Series B Senior Notes due September 1, 2007 (Exhibit 4.1 to Registration
Statement No. 333-36711 filed September 30, 1997).
98
<PAGE>
4.5 Indenture dated as of July 31, 1998 between the Company and State Street
Bank and Trust Company, as Trustee, relating to the 8 7/8% Series A and
Series B Senior Notes due August 1, 2008 (Exhibit 4.1 to Registration
Statement No. 333-64731 filed September 30, 1998).
**10.1 Employment Agreement between Richard L. Bready and the Company, dated as
of January 1, 1984 (Exhibit 10.2 to Form 10-K filed March 31, 1986, File
No. 1-6112).
**10.2 Amendment dated as of March 3, 1988 to Employment Agreement between
Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 19.2
to Form 10-Q filed May 17, 1988, File No. 1-6112).
**10.3 Second Amendment dated as of November 1, 1990 to Employment Agreement
between Richard L. Bready and the Company dated as of January 1, 1984
(Exhibit 10.3 to Form 10-K filed April 1, 1991, File No. 1-6112).
**10.4 Employment Agreement between Richard L. Bready and the Company dated as
of February 26, 1997 (Exhibit 10.3 to Form 10-Q filed May 12, 1997, File
No. 1-6112).
**10.5 Amendment No. 1 dated June 13, 1997 to Employment Agreement between
Richard L. Bready and the Company dated as of February 26, 1997 (Exhibit
10.2 to Form 10-Q filed August 8, 1997, File No. 1-6112).
**10.6 Amendment No. 2 dated June 30, 1998 to Employment Agreement between
Richard L. Bready and the Company dated as of February 26, 1997 (Exhibit
10.1 to Form 10-Q/A filed December 1, 1998, File No. 1-6112).
**10.7 Deferred Compensation Agreement dated March 7, 1983 between Richard L.
Bready and the Company (Exhibit 10.4 to Registration Statement No. 33-69778
filed February 9, 1994).
**10.8 Deferred Compensation Agreement dated March 7, 1983 between Almon C. Hall
and the Company (Exhibit 10.5 to Registration Statement No. 33-69778 filed
February 9, 1994).
**10.9 Deferred Compensation Agreement dated March 7, 1983 between Richard J.
Harris and the Company (Exhibit 10.6 to Registration Statement No. 33-69778
filed February 9, 1994).
99
<PAGE>
**10.10 1984 Stock Option Plan, as amended through May 27, 1987 (Exhibit 28.2 to
Registration Statement No. 33-22527 filed June 15, 1988).
**10.11 Change in Control Severance Benefit Plan for Key Employees adopted
February 10, 1986, and form of agreement with employees (Exhibit 10.19 to
Form 10-K filed March 31, 1986, File No. 1-6112).
**10.12 Change in Control Severance Benefit Plan for Key Employees as Amended
and Restated June 12, 1997, and form of agreement with employees (Exhibit
10.1 to Form 10-Q filed August 8, 1997, file No. 1-6112).
**10.13 1987 Stock Option Plan (Exhibit 28.3 to Registration Statement No.
33-22527 filed June 15, 1988).
**10.14 1997 Equity and Cash Incentive Plan (Exhibit 10.1 to Form 10-Q filed May
12, 1997, File No. 1-6112).
**10.15 1997 Stock Option Plan for Directors (Exhibit 10.2 to Form 10-Q filed
May 12, 1997, File No. 1-6112).
**10.16 1998 Equity and Cash Incentive Plan (Exhibit 10.1 to Form 10-Q filed
August 18, 1998, File No. 1-6112).
**10.17 1999 Equity and Cash Incentive Plan (Exhibit 4.1 to
Registration Statement No. 333-76345 filed May 28, 1999).
**10.18 Nortek, Inc. Supplemental Executive Retirement Plan dated July 1, 1997
(Exhibit 10.3 to Form 10-Q filed August 8, 1997, File No. 1-6112).
**10.19 First Amendment dated July 1, 1997 to Nortek, Inc. Supplemental
Executive Retirement Plan dated July 1, 1997 (Exhibit 10.4 to Form 10-Q
filed August 8, 1997, File No. 1-6112).
**10.20 Form of Indemnification Agreement between the Company and its directors
and certain officers (Appendix C to Proxy Statement dated March 23, 1987
for Annual Meeting of Nortek Stockholders, File No. 1-6112).
* **10.21 1999 Equity Performance Plan approved July 1, 1999.
100
<PAGE>
10.22 Second Amended and Restated Credit Agreement, dated as of August 26,
1997 and restated as of December 30, 1998, among Ply Gem Industries,
Inc., Fleet National Bank, as Agent, and the banks signatory thereto
(Exhibit 10.19 to Form 10-K filed March 30, 1999, File No. 1-6112).
*10.23 First Amendment dated as of April 22, 1999 to Second Amended & Restated
Credit Agreement dated as of August 26, 1997 and restated as of
December 30, 1998 among Ply Gem Industries, Inc., Fleet National Bank,
as Agent, and the banks signatory thereto.
*10.24 Second Amendment dated as of September 9, 1999 to Second Amended &
Restated Credit Agreement dated as of August 26, 1997 and restated as
of December 30, 1998, among Ply Gem Industries, Inc., Fleet National
Bank, as Agent, and the banks signatory thereto.
*21.1 List of subsidiaries.
*23.1 Consent of Independent Public Accountants.
*27.1 Financial Data Schedule.
101
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
Set forth below is a list of all subsidiaries of the Company as of
December 31, 1999 the assets and operations of which are included in the
Consolidated Financial Statements of Nortek, Inc., except subsidiaries that,
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary:
NAME OF SUBSIDIARY Jurisdiction
Broan-NuTone Canada, Inc. Ontario, Canada
Venmar Ventilation Inc. Quebec, Canada
Aston Industries Inc. Quebec, Canada
Innergy Tech Inc. Quebec, Canada
Venmar CES, Inc. Saskatchewan, Canada
Venmar Ventilation (H.D.H.) Inc. Quebec, Canada
Broan-NuTone LLC Delaware
Aubrey Manufacturing, Inc. Delaware
NuTone Inc. Delaware
Rangaire LP Delaware
Jensen Industries, Inc. Delaware
Linear Corporation California
Linear H.K. Manufacturing, Limited Hong Kong
Multiplex Technology, Inc. California
We Monitor America Incorporated Colorado
Xantech Corporation California
Nordyne Inc. Delaware
Commercial Environmental Systems Group, Inc. Delaware
Governair Corporation Oklahoma
Mammoth, Inc. Delaware
Temtrol, Inc. Oklahoma
Ventrol Air Handling Systems Inc. Quebec, Canada
Webco, Inc. Missouri
Nortek (UK) Limited United Kingdom
Best S.p.A. Italy
Best Deutschland GmbH Germany
Best France S.A. France
Elektromec S.p.A. Italy
Ply Gem Industries, Inc. Delaware
Great Lakes Window, Inc. Ohio
Hoover Treated Wood Products, Inc. Delaware
Kroy Building Products, Inc. Delaware
Napco, Inc. Delaware
Peachtree Doors and Windows, Inc. Tennessee
Thermal-Gard, Inc. Pennsylvania
Richwood Building Products, Inc. Delaware
SNE Enterprises, Inc. Delaware
Variform, Inc. Missouri
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nortek, Inc.:
As independent public accountants, we hereby consent to the incorporation of
our report dated March 8, 2000, included in this Form 10-K, into the
Company's previously filed Registration statements on Form S-8 (File Nos.
33-22527, 333-39293, 333-76345 and 333-79651).
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
March 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 80,893
<SECURITIES> 45,459
<RECEIVABLES> 256,782
<ALLOWANCES> 13,019
<INVENTORY> 212,678
<CURRENT-ASSETS> 678,268
<PP&E> 492,451
<DEPRECIATION> 163,834
<TOTAL-ASSETS> 1,809,684
<CURRENT-LIABILITIES> 353,776
<BONDS> 1,023,616
0
0
<COMMON> 19,579
<OTHER-SE> 240,238
<TOTAL-LIABILITY-AND-EQUITY> 1,809,684
<SALES> 1,992,820
<TOTAL-REVENUES> 1,992,820
<CGS> 1,433,129
<TOTAL-COSTS> 1,433,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 000000
<INTEREST-EXPENSE> 96,490
<INCOME-PRETAX> 90,000
<INCOME-TAX> 40,700
<INCOME-CONTINUING> 49,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,300
<EPS-BASIC> 4.19
<EPS-DILUTED> 4.11
</TABLE>
Exhibit 10.21
NORTEK, INC.
1999 EQUITY PERFORMANCE PLAN
ARTICLE I. INTRODUCTION
1.1 Authority for Plan. This 1999 Equity Performance Plan (the "Plan") is
adopted pursuant to the 1999 Equity and Cash Incentive Plan (the "Basic Plan")
of Nortek, Inc. (the "Corporation"), and is subject to all provisions of the
Basic Plan, including without limitation Section 2 (administration), Section 5
(eligibility and participation), Section 6.5 (relating to Performance Awards and
Performance Goals), Section 7 (events affecting outstanding awards), Section 8
(general provisions) and Section 9 (effect, amendment and termination). In the
event of any inconsistency between this Plan and the Basic Plan, this Plan shall
control, unless prohibited by the Basic Plan.
1.2 Defined Terms. Capitalized terms not defined herein shall have the
meanings set forth in the Basic Plan.
1.3 Purpose of Plan. The purpose of the Plan is to reward certain employees
of the Corporation for their contributions to the success of the Corporation and
its subsidiaries as reflected in the value of the Corporation's common stock.
1.4 Authorization. The Plan was approved by the Committee on July 1, 1999
(the "Effective Date").
<PAGE>
ARTICLE II. PARTICIPATION AND AWARDS
2.1 Participants. The employees set forth in the attached Schedule A will
become participants in the Plan (the "Participants") on the Effective Date.
Participants in the Plan are eligible for cash awards ("Performance Awards")
based on the Performance Goal of increasing the Corporation's stock price, as
set forth below. Each Participant will be allocated the percentage (the
"Applicable Percentage of Participation") of any Aggregate Performance Award (as
defined below) set forth next to each Participant's name on Schedule A.
2.2 Awards. In the event that the closing price of the Corporation's common
stock on the New York Stock Exchange Composite Transactions (or on such other
exchange as the Corporation's common stock may then be traded) equals or exceeds
the Target Price set forth below for any 20 trading days (which need not be
consecutive) within any 60 consecutive trading day-period, the Corporation shall
distribute among the Participants, in accordance with their Applicable
Percentages of Participation, an aggregate cash award (an "Aggregate Performance
Award") within 30 days of the twentieth trading day of such 20 trading days.
Each Aggregate Performance Award shall be equal to the amount calculated by the
following formula:
A = (TP-SP) * CS * AP
where A = Aggregate Performance Award
TP = Target Price, as set forth in the following table SP = Starting
Price, which shall be the immediately preceding Target Price in
the following table, or, in the case of the first Target Price,
the relevant Starting Price shall be $28.00 CS = Common Shares,
which shall be the number of shares of the Corporation's common
stock and special common stock outstanding on the twentieth
(20th) trading day of the 20 trading days in which the relevant
Target Price is achieved
AP = Aggregate Percentage set forth in the following table
corresponding to the relevant Target Price
2
<PAGE>
Performance Awards will be calculated based on the following Target
Prices and Aggregate Percentages:
Target Price Aggregate Percentage
------------ --------------------
$38 4%
$45 5%
$50 6%
$55 6%
$60 6%
The Target Prices and Starting Prices shall be subject to equitable
adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Corporation's common
stock. Individual Performance Awards will be calculated by multiplying the
Aggregate Performance Award by the Applicable Percentage of Participation for
each Participant.
3
<PAGE>
ARTICLE III. OTHER PROVISIONS
3.1 Change of Control. Upon the occurrence of a Change of Control (as
defined in Section 7.2(b) of the Basic Plan), an Aggregate Performance Award
shall be distributed among the Participants immediately upon such Change of
Control equal to the sum of:
(a) a cumulative amount determined by the formula set forth in Section 2.2
(substituting the definition of Common Shares below in place of the definition
of Common Shares in Section 2.2) based on all Target Prices set forth in Section
2.2 (except for those Target Prices for which an Aggregate Performance Award has
been paid pursuant to Section 2.2) which are lower than or equal to the Change
of Control Price, as defined below, plus
(b) an amount calculated by the following formula:
C = X * A
where C = additional Aggregate Performance Award to be paid pursuant to
Section 3.1(b) hereof upon the occurrence of a Change of
Control
X = (CP-SP)/(TP-SP)
A = (TP-SP) * CS * AP
CP = Change of Control Price, which shall be equal to the final
price obtained by the Corporation's shareholders upon the
occurrence of a Change of Control or, in the event of a
Change of Control as defined in Section 7.2(b)(5) of the
Basic Plan, the average closing price of the Corporation's
common stock on the New York Stock Exchange Composite
Transactions (or on such other exchange as the
Corporation's common stock may then be traded) for the 20
trading days immediately prior to (and including) the date
of such a Change of Control
4
<PAGE>
T = Target Price set forth in the table in Section 2.2 above that
is the next Target Price for which an Aggregate Performance Award
has not yet become payable pursuant to Section 2.2 or included in
the calculation pursuant to Section 3.1(a) above
SP = Starting Price, which shall be the highest Target Price for
which an Aggregate Performance Award was payable pursuant to
Section 2.2 or included in the calculation pursuant to Section
3.1(a) above, or, in the case of a Change of Control prior to the
first Aggregate Performance Award under this Plan becoming
payable where the Change of Control Price is less than $38.00,
the relevant Starting Price shall be $28.00
CS = Common Shares, which shall be the number of shares of the
Corporation's common stock and special common stock outstanding
immediately prior to the occurrence of a Change of Control
AP = Aggregate Percentage set forth in Section 2.2 above
corresponding to the next Target Price for which an Aggregate
Performance Award has not yet become payable
provided, however, that no Aggregate Performance Award under Section 3.1(b)
hereof shall be paid if the Change of Control Price does not exceed the last
Target Price for which an Aggregate Performance Award was payable.
The Trading Prices and Starting Prices shall be subject to equitable
adjustment as set forth in Section 2.2. Individual Performance Awards under this
Section 3.1 will be calculated by multiplying the Aggregate Performance Award
calculated pursuant to this Section 3.1 by the Applicable Percentage of
Participation for each Participant.
5
<PAGE>
3.2 Termination of Service. If there is a Termination of Service (as
defined in Section 7.1 of the Basic Plan) with respect to any Participant, such
Participant shall cease to be a Participant under this Plan and no payment under
this Plan shall be made to such Participant except for those payments due to
such Participant as a result of either (a) there having been 20 trading days in
which the closing price of the Corporation's common stock equals or exceeds a
Target Price in accordance with Section 2.2 above prior to such Termination of
Service or (2) the satisfaction of the Change of Control condition set forth in
Section 3.1 above prior to such Termination of Service. In the event that there
is a Termination of Service with respect to any Participant, such Participant's
Applicable Percentage of Participation shall be immediately proportionately
reallocated among the remaining Participants; provided, however, that if there
is a Termination of Service with respect to Richard L. Bready, 60% of his
Applicable Percentage of Participation on the Effective Date shall be forfeited
to the Corporation, and the remainder of his Applicable Percentage of
Participation as in effect at the time of the Termination of Service shall be
proportionately reallocated among the remaining Participants. The sum of all
Applicable Percentages of Participation, together with any percentage points
forfeited to the Corporation pursuant to this Section 3.2, shall at all times
equal 100%.
3.3 Annual Cap on Individual Performance Awards. The maximum Performance
Award payable to any Participant, combined with any other Exempt Award (as
defined in Section 6.5(c) of the Basic Plan) payable to such Participant, shall
not in any year exceed $10,000,000.
3.4 Employment Rights, etc. The grant of Performance Awards under this Plan
does not confer upon any person any right to continued retention by the
Corporation or any subsidiary as an employee or otherwise, or affect in any way
the right of the Corporation 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
Performance 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
Corporation to the Participant.
3.5 Termination of Plan. This Plan will terminate three years from the
Effective Date, and no further Performance Awards shall become payable after
such termination. Any Performance Awards that have become payable prior to such
termination shall be paid in accordance with the terms of the Plan.
6
<PAGE>
Schedule A
Applicable Percentage
Participant of Participation
Richard L. Bready 50%
Richard J. Harris 15%
Almon C. Hall 15%
Robert E.G. Ractliffe 15%
Kevin W. Donnelly 5%
7
Exhibit 10.23
FIRST AMENDMENT TO
SECOND AMENDED & RESTATED CREDIT AGREMENT
This First Amendment to Second Amended & Restated Credit Agreement is
dated as of April 22, 1999 and is by and between Ply Gem Industries, Inc.,
a Delaware corporation (the "Company"), the Designated Subsidiaries party
to the Credit Agreement (as defined below), the Banks party to the Credit
Agreement (as defined below) and Fleet National Bank, as the Agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
The parties hereto mutually agrees as follows:
1. Capitalized terms used herein and not expressly defined herein shall
have the respective meanings assigned thereto in that certain Seconded
Amended and Restated Credit Agreement dated as of August 26, 1997 and
amended and restated as of December 30, 1998, among the Company, said
Designated Subsidiaries, said Banks and the Agent (the "Credit
Agreement").
2. The Credit Agreement is hereby amended, effective as of the date
hereof, in the following respects:
(a) The definition of "Material Operating Subsidiaries" is deleted
and replaced in its entirety by the following definition:
""Material Operating Subsidiaries" shall mean (a) each Designated
Subsidiary; (b) any Subsidiary of the Company other than (i)
Napco and its Subsidiaries, (ii) Peachtree and its Subsidiaries
and (iii) Thermal-Gard and its Subsidiaries, which conducts
business operations and is material to the operations of the
business of the Company and its Subsidiaries taken as a whole;
and (c) each Subsidiary of the Company which the Company
designates as a Material Operating Subsidiary."
(b) The following definitions are added to subsection 1.1 of the Loan
Agreement each at the location in subsection 1.1 necessary to
place such definition in alphabetical order with the existing
definitions therein.
(i) "Peachtree" shall mean Caradon Doors and Windows, Inc., a
Tennessee corporation which is changing its name to
Peachtree Doors and Windows Inc. on or about April 26, 1999.
(ii) "Thermal-Gard" shall mean Caradon Thermal-Gard, Inc., a
Pennsylvania corporation which is changing its name to
Thermal-Gard, Inc. on or about April 26, 1999.
<PAGE>
(c) Subsection 6.7(e)(ii)A) is deleted and replaced in its entirety
by the following language:
""(A)$50,000,000 in the aggregate during any fiscal year of the
Company (plus, in the case of the 1999 fiscal year, the
amount, if any, by which the Company's investment in
Peachtree and Thermal-Gard exceeds $50,000,000)."
(d) Section 9.2 of the Credit Agreement is amended by deleting the
address for the Agent's counsel and replacing same with the
following:
"with a copy to:
Hinckley, Allen & Snyder
1500 Fleet Center
Providence, RI 02903
Attn: Malcolm Farmer III, Esquire
Telephone: (401) 274-2000
Telecopy: (401) 277-9600"
3. The Credit Agreement, amended as set forth above, is hereby ratified,
approved and confirmed and shall remain in full force and effect.
4. The Company and the Designated Subsidiaries represent and warrant that
each of the representations and warranties in Section 3 of the Credit
Agreement is accurate and complete as of the date hereof and that no
Default or Event of Default exists under any of the Loan Documents.
The Company and the Designated Subsidiaries represent and covenant
that none of the Company and the Designated Subsidiaries has any
claim, defense or setoff to any of its obligations under any of the
Loan Documents.
5. On the date of this First Amendment to Second Amended and Restated
Credit Agreement the Company shall pay to the Agent for the pro rata
account of the Banks an amendment fee equal to .10% of the Commitment.
6. This First Amendment to Second Amended and Restated Credit Agreement
shall be governed by and construed and interpreted in accordance with
the laws of the State of New York.
7. Section 9.14 of the Credit Agreement entitled "Governing Law; Consent
to Jurisdiction; Waiver of Trial by Jury" is by this reference fully
incorporated herein.
8. This First Amendment to Second Amended and Restated Credit Agreement
may be executed by one or more of the parties on any number of
separate counterparts and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
2
<PAGE>
9. A set of the copies of this First Amendment to Second Amended and
Restated Credit Agreement signed by all of the parties shall be lodged
with the Company and the Agent.
IN WITNESS WHEREOF each of the parties hereto has caused this First
Amendment to Second Amended and Restated Credit Agreement to be duly executed
by its duly authorized officer as of the date first set forth above.
BORROWER:
PLY GEM INDUSTRIES, INC.
By: ___________________
Title:
DESIGNATED SUBSIDIARIES:
SNE ENTERPRISES, INC.
By: _________________________
Title:
VARIFORM, INC.
By:___________________________
Title:
GREAT LAKES WINDOW, INC.
By: ___________________________
Title:
3
<PAGE>
AGENT:
FLEET NATIONAL BANK,
as Agent and as a Bank
By: ________________________
Title:
BANKS:
BANK OF MONTREAL
By: __________________________
Title:
EUROPEAN AMERICAN BANK
By: ________________________
Title:
CITIZENS BANK OF RHODE ISLAND
By: __________________________
Title:
SOVEREIGN BANK
By: ___________________________
Title
ERSTE BANK
By: ___________________________
Title:
By: ___________________________
Title:
4
<PAGE>
Exhibit 10.24
SECOND AMENDMENT TO
SECOND AMENDED & RESTATED CREDIT AGREEMENT
This Second Amendment to Second Amended & Restated Credit Agreement is
dated as of September 9, 1999 and is by and between Ply Gem Industries,
Inc., a Delaware corporation (the "Company"), the Designated Subsidiaries
party to the Credit Agreement (as defined below), the Banks party to the
Credit Agreement (as defined below) and Fleet National Bank, as the Agent
for the Banks (in such capacity, together with its successors in such
capacity, the "Agent").
The parties hereto mutually agree as follows:
1. Capitalized terms used herein and not expressly defined herein
shall have the respective meanings assigned thereto in that
certain Second Amended and Restated Credit Agreement dated as of
August 26, 1997, amended and restated as of December 30, 1998 and
amended as of April 22, 1999, among the Company, said Designated
Subsidiaries, said Banks and the Agent (the "Credit Agreement").
2. The following recitals are accurate:
WHEREAS, on or about the date of this Second Amendment to
Second Amended and Restated Credit Agreement, KBP Acquisition
Corp., Inc., a Delaware corporation ("KBP") and a wholly-owned
subsidiary of the Company, is being merged into Kroy Building
Products, Inc., a Delaware corporation ("Kroy") with the result
that Kroy shall thereupon become a wholly-owned Subsidiary of the
Company and the existing shareholders of Kroy shall receive the
agreed upon cash consideration in accordance with the Agreement
and Plan of Merger dated as of August 17, 1999 among the Company,
KBP, Kroy & Specialty Materials and Chemicals II Limited
Partnership, as Agent; and
WHEREAS, Nortek has caused one of its affiliates to loan
sufficient funds to KBP to provide the consideration to the
shareholders of Kroy in accordance with the above-referenced
Agreement and Plan of Merger, and
WHEREAS, Kroy is the account party on the Existing Kroy L/C
(as hereinafter defined); and
WHEREAS, the Company has requested the Banks to amend the
Credit Agreement to permit Fleet to issue a substitute letter of
credit in replacement of the Existing Kroy L/C; and
WHEREAS, such stand-by letter of credit will be used to
refinance the Existing Kroy L/C (as hereinafter defined); and
1
<PAGE>
WHEREAS, the Banks have agreed to amend the Credit Agreement
and Fleet has agreed to issue the requested stand-by letter of
credit for the account of the Company, in each case on the terms
and conditions of the Credit Agreement, as amended by this Second
Amendment to Second Amended and Restated Credit Agreement;
3. Subsection 1.1 of the Credit Agreement is hereby amended,
effective as of the date hereof, in the following respects:
(a) The definition of "Account Party" is deleted and replaced in
its entirety by the following definition:
""Account Party" shall mean with respect to (i) each
Company L/C, the Company or any Designated Subsidiary, as
the case may be, in its capacity as the Person for the
account of which such Company L/C is issued or deemed
issued, (ii) the Napco L/C, the Company, and (iii) the Kroy
L/C, the Company."
(b) The definition of "Commitment" is deleted and replaced in
its entirety by the following definition:
""Commitment" shall mean, as to any Bank, its
obligation to make or maintain Company Loans pursuant to
subsection 2.1 and participate in L/Cs in an aggregate
amount not to exceed at any one time outstanding the amount
set forth on Schedule I under the heading "Commitment", as
such amount may be adjusted from time to time pursuant to
subsection 2.6, 2.8 or 9.7; and, as to Fleet in its capacity
as issuing bank, its obligation to issue and maintain
Company L/Cs, the Napco L/C and the Kroy L/C in an aggregate
amount not to exceed at any time outstanding the Company L/C
Sublimit, the Napco Commitment and the Kroy Commitment,
respectively, as such amounts may be reduced from time to
time pursuant to subsection 2.6."
(c) The definition of "Company L/C" is deleted and replaced
in its entirety by the following definition:
""Company L/C" shall mean each Stand-by L/C and Trade L/C
issued or deemed issued under this Agreement for the
account of the Company or any Designated Subsidiary other
than the Napco L/C or the Kroy L/C."
(d) The definition of "Consolidated EBIT" is deleted and
replaced in its entirety by the following definition:
2
<PAGE>
""Consolidated EBIT" shall mean, for any period, the
sum of (a) Consolidated Net Income for such period, plus (b)
all taxes based upon income deducted in calculating such
Consolidated Net Income plus (c), to the extent deducted in
calculating Consolidated Net Income, Consolidated Interest
Expense and consolidated amortization of Debt Discount and
of expenses incurred in connection with the incurrence of
Indebtedness for such period, plus (d) all extraordinary
losses and the unusual losses set forth in clauses (i)
through (ix) below in each case to the extent deducted in
calculating Consolidated Net Income, plus (e) the amount of
the Nortek Administrative Fee and interest on Approved
Nortek Loans accrued during such period, minus (f) all
extraordinary gains and the unusual gains set forth in
clauses (i) through (ix) below in each case to the extent
included in calculating Consolidated Net Income: (i) gain or
loss arising from the sale, abandonment or other disposition
of any property or asset outside of the ordinary course of
business or realized on the disposition of a segment of a
business; (ii) gain or loss resulting from any
extinguishments of debt; (iii) gain or loss resulting from a
casualty, including but not limited to fire, earthquake or
hurricane; (iv) loss resulting from write-off of intangible
assets; (v) gain arising from the write-up in the book value
of any asset; (vi) provisions for plant closings and
realignment of operations or restructuring costs; (vii)
cumulative effects of changes in accounting principles;
(viii) losses from expropriation or condemnation; and (ix)
gain or loss arising from a change from FIFO to LIFO
inventory accounting, provided that for any portion of any
period ending on or before October 9, 1998, such amounts
shall be calculated on a pro forma basis giving effect to
the Napco Acquisition as though the Napco Acquisition had
occurred at the beginning of such period and for any period
ending on or prior to the effective date of the Second
Amendment, such amounts shall be calculated on a pro forma
basis giving effect to the Kroy Acquisition as though the
Kroy Acquisition had occurred at the beginning of such
period."
(e) The definition of "Consolidated EBITDA" is deleted and
replaced in its entirety by the following definition:
""Consolidated EBITDA" shall mean, for any period, the
sum of (a) Consolidated EBIT, plus (b) depreciation expense
plus (c) amortization expense, in each case of the Company
and its Subsidiaries determined on a consolidated basis in
accordance with GAAP for such period, provided that for any
portion of any period ending on or before October 9, 1998,
such amounts shall be calculated on a pro forma basis giving
effect to the Napco Acquisition as though the Napco
Acquisition had occurred at the beginning of such period and
for any period ending on or prior to the effective date of
the Second Amendment, such amount shall be calculated on a
pro forma basis giving effect to the Kroy Acquisition as
though the Kroy Acquisition had occurred at the beginning of
such period."
3
<PAGE>
(f) The definition of "Consolidated Interest Expense" is deleted
and replaced in its entirety by the following definition:
""Consolidated Interest Expense" shall mean, for any
period, (a) the aggregate amount of all interest charges
paid or accrued during such period (including imputed
interest on obligations consisting of Financing Leases and
all amounts accrued or paid pursuant to Hedge Agreements but
excluding amortization of Debt Discount and of expenses
incurred in connection with the incurrence of Indebtedness)
on Indebtedness of the Company and its consolidated
Subsidiaries, minus (b) the sum of (i) interest income and
(ii) all amounts received or receivable pursuant to Hedge
Agreements, in each case of the Company and its Subsidiaries
determined on a consolidated basis, provided that for any
portion of any period ending on or before October 9, 1998,
such amounts shall be calculated on a pro forma basis giving
effect to the Napco Acquisition as though the Napco
Acquisition had occurred at the beginning of such period and
for any period ending on or prior to the effective date of
the Second Amendment, such amount shall be calculated on a
pro forma basis giving effect to the Kroy Acquisition as
though the Kroy Acquisition had occurred at the beginning of
such period."
(g) The definition of "Consolidated Net Income" is deleted and
replaced in its entirety by the following definition:
""Consolidated Net Income" shall mean, for any period,
the amount which, in conformity with GAAP, would be set
opposite the caption "net income" (or any like caption) on a
consolidated statement of income of the Company and its
consolidated Subsidiaries for such period; provided that for
any portion of any period ending on or before October 9,
1998, such amounts shall be calculated on a pro forma basis
giving effect to the Napco Acquisition as though the Napco
Acquisition had occurred at the beginning of such period and
for any period ending on or prior to the effective date of
the Second Amendment, such amounts shall be calculated on a
pro forma basis giving effect to the Kroy Acquisition as
though the Kroy Acquisition had occurred at the beginning of
such period; and provided, further, that neither the Nortek
Administrative Fee nor interest on Approved Nortek Loans
shall be deducted from the income of the Company and such
Subsidiaries for the purpose of determining "net income"."
4
<PAGE>
(h) The definition of "Consolidated Net Worth" is deleted and
replaced in its entirety by the following definition:
""Consolidated Net Worth" shall mean, at a particular
date (a) all amounts which would, in conformity with GAAP,
be included under stockholders' equity on a consolidated
balance sheet of the Company and its consolidated
Subsidiaries at such date, plus (b) any unrealized losses to
the extent reflected in the calculation of stockholders'
equity, plus (c) all accrued and unpaid liabilities in
respect of the Nortek Administrative Fee or any Approved
Nortek Loans, minus (d) the sum of (i) any unrealized gains
to the extent reflected in the calculation of shareholders'
equity, and (ii) any investments made by the Company or any
of its Subsidiaries in Nortek or any of its Subsidiaries
(other than Subsidiaries consisting of the Company or any of
its Subsidiaries).
(i) The definition of "Facilities" is deleted and replaced in
its entirety by the following definition:
""Facilities" shall mean the Company Facility, the Napco
Facility and the Kroy Facility."
(j) The definition of "L/Cs' is deleted and replaced in its
entirety by the following definition:
""L/Cs" shall mean the Company L/C, the Napco L/C and the
Kroy L/C."
(k) The definition of "Material Operating Subsidiaries" is
deleted and replaced in its entirety by the following
definition:
""Material Operating Subsidiaries" shall mean (a)
each Designated Subsidiary; (b)any Subsidiary of the Company
other than (i) Napco and its Subsidiaries, (ii) Peachtree
and its Subsidiaries, (iii) Thermal-Gard and its
Subsidiaries and (iv) Kroy and its Subsidiaries, which
conducts business operations and is material to the
operations of the business of the Company and its
Subsidiaries taken as a whole; and (c) each Subsidiary of
the Company which the Company designates as a Material
Operating Subsidiary."
(l) The definition of "Specified Company L/C Obligations" is
deleted and replaced in its entirety by the following
definition:
5
<PAGE>
""Specified Company L/C Obligations" at any date shall
mean the sum of (a) the aggregate undrawn amount of all
letters of credit as to which the Company or any Subsidiary
is an account party at such date excluding (i) the Fifth
Third Letters of Credit, the First American Letter of
Credit, the Napco L/C, and the Kroy L/C and (ii) any
renewals, extensions and replacements of any of the Fifth
Third Letters of Credit, the First American Letter of
Credit, the Napco L/C or the Kroy L/C, plus (b) the amount
of all Unpaid Drawings in respect of Company L/Cs."
4. The following definitions are added to subsection 1.1 of the
Credit Agreement each at the location in subsection 1.1 necessary
to place such definition in alphabetical order with the existing
definitions therein.
(a) ""Approved Company Loans" shall mean loans by the Company to
any of its Subsidiaries which are subordinated to the
Obligations on the following basis: such Subsidiary shall
not make, and the Company shall not demand or receive,
payment of any amount on account of such loan if such
Subsidiary would be prohibited from making a distribution to
the Company pursuant to Section 6.5 hereof."
(b) ""Approved Nortek Loans" shall mean loans by Nortek or any
of its Subsidiaries (other than the Company and its
Subsidiaries) to the Company or any of its Subsidiaries
which are subordinated to the Obligations on the following
basis: the Company or such Subsidiary shall not make, and
neither Nortek nor any of its Subsidiaries shall demand or
receive, payment of any amount on account of such loan if
and to the extent that the Company or such Subsidiary would
be prohibited from making a distribution to Nortek pursuant
to Section 6.5 hereof."
(c) ""Available Kroy Commitment" shall mean, as to each Bank, at
a particular time, an amount equal to the difference between
(a) such Bank's Kroy Commitment at such time and (b) the
aggregate unpaid principal amount at such time of such
Bank's Commitment Percentage of Bank L/C Obligations to the
extent arising solely from the issuance of the Kroy L/C."
(d) ""Existing Kroy L/C" shall mean the stand-by letter of
credit issued by Harris Trust and Savings Bank to Firstar
Trust Company, as trustee under the Trust Indenture dated as
of June 1, 1998 between the City of York, Nebraska and said
trustee for the account of Kroy, in the amount of
$5,653.699."
6
<PAGE>
(d) ""Kroy" shall mean Kroy Building Products, Inc., a Delaware
corporation.
(e) ""Kroy Acquisition" shall mean the transaction described in
the fourth "WHEREAS" clause in paragraph 2, above."
(f) ""Kroy Commitment" shall mean, as to any Bank, that portion
of its Commitment set forth on Schedule I under the heading
"Kroy commitment" opposite such Bank's name, as such amount
may be adjusted from time to time pursuant to subsection
2.6, 2.8 or 9.7."
(g) ""Kroy Facility" shall mean, at any time, the aggregate
amount of the Banks' Kroy Commitments."
(h) ""Kroy L/C" shall mean a Stand-by L/C issued under this
Agreement for the account of the Company in substitution for
the Existing Kroy L/C."
5. Subsection 2.1(c)(i)(B) is hereby deleted and replaced in its
entirety with the following language:
"(B) L/Cs. Upon the execution and delivery by the Company or
a Designated Subsidiary, as the case may be, to Fleet of an
Application for a Company L/C, the Napco L/C or the Kroy
L/C, and upon payment by the Company to Fleet of the
standard charges and fees then customarily imposed by Fleet
in connection with such Application (which have been
supplied to the Company) for the sole account of Fleet,
Fleet shall from time to time on any Business Day, subject
to the terms and conditions of this Agreement and in
reliance on the agreements of the other Banks set forth in
subsection 2.19(c), in a timely manner in accordance with
its standard operating procedures, issue Company L/Cs for
the account of the Company or any Designated Subsidiary, in
each case in an aggregate face amount up to the Available
Company L/C Commitment as then in effect and issue the Napco
L/C for the account of the Company in a face amount equal to
the Available Napco Commitment as then in effect and issue
the Kroy L/C for the account of the Company in a face amount
equal to the Available Kroy Commitment then in effect, in
each case with a term selected by the Company or such
Designated Subsidiary, as the case may be, which shall not
exceed one year plus renewals as provided therein, in the
case of Stand-by L/Cs except that the Kroy L/C may expire on
June 15, 2001 plus renewals as provided therein, and 180
days in the case of Trade L/Cs, and which shall expire in
either case no later than 30 days prior to the Termination
Date. The Agent shall notify each Bank of the issuance of an
L/C hereunder, and Fleet will be deemed to have sold and
transferred an undivided interest and participation in
respect of each L/C issued by it and each Bank hereunder
will be deemed to have purchased and received, without
further action on the part of any party, an undivided
interest and participation in such L/C, based on such Bank's
Commitment Percentage of such L/C. The Company may only
request the issuance of one Stand-by L/C under the Napco
Facility or the Kroy L/C Facility."
7
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6. Subsection 2.1(c)(D)(iii) is hereby deleted and replaced in its
entirety with the following language:
"(iii) If, notwithstanding the other provisions of
this subsection 2.1(c), on the Termination Date there are
outstanding any L/Cs which have not expired or been
terminated with the consent of the Company, the applicable
Account Party and the respective beneficiaries thereof, then
this Agreement (including, without limitation, this
subsection 2.1(c) and subsection 2.22) and the respective
rights, obligations and covenants of the Company, the
Designated Subsidiaries, Fleet and the Banks under this
Agreement shall remain in full force and effect until the
date on which the last of the L/Cs expires or is terminated
with the consent of the Company, the applicable Account
Party and the respective beneficiaries thereof and all
payments made or to be made by Fleet under the L/Cs are paid
or reimbursed in full by the Company or one or more of the
Designated Subsidiaries, in the case of Company L/Cs, or by
the Company, in the case of the Napco L/C or the Kroy L/C,
except that Fleet's Commitment shall terminate on the
Termination Date."
7. The next-to-last sentence of Section 2.2 is deleted and replaced
in its entirety with the following language:
"EachNote shall (a) be dated the date of its issuance,
payable with respect to principal as set forth in subsection
2.9, and (c) bear interest on the unpaid principal amount
thereof from time-to-time outstanding until payment in full
of the principal amount thereof at the applicable interest
rate per annum determined as provided in subsection 2.10."
8. Section 2.6 is hereby deleted and replaced in its entirety with
the following language:
"2.6 Termination or Reduction of Commitments.(a) Optional.
The Company shall have the right, upon not less than three
Business Days' notice to the Agent, to terminate the Company
Commitments, the Napco Commitments or the Kroy Commitments
or, from time to time, to reduce the amount of the Company
Commitments, the Napco Commitments or the Kroy Commitments,
provided that no such reduction or termination shall be
permitted if, after giving effect thereto, and to any
prepayments of the Company Loans and any payments or
reimbursements in respect of Company L/Cs, the Napco L/C or
the Kroy L/C, as the case may be, by the Company or any
Designated Subsidiary made on the effective date of such
reduction or termination, the then outstanding principal
amount of the Company Loans and Bank L/C Obligations arising
with respect to the Company L/Cs, the Napco L/C and/or the
Kroy L/C, as the case may be, would exceed the amount of the
Company Commitments, the Napco Commitments or the Kroy
Commitments, respectively, then in effect. The aggregate
amount of all reductions indicated on the same notice
delivered under this subsection shall be in an amount of (i)
$5,000,000 or a whole multiple of $1,000,000 in excess
thereof or (ii) (in the case of a termination) the aggregate
amount of the Company Commitment, the Napco Commitments
and/or the Kroy Commitments, as the case may be, then in
effect, and shall reduce permanently in accordance with the
allocations set forth in such notice the amount of the
Company Commitments, Napco Commitments and/or the Kroy
Commitments then in effect. The Commitments once terminated
or reduced may not be reinstated.
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(b) Mandatory. After giving effect to the Company Loans
made on or before the Second Closing Date and the issuance
of the Napco L/C and the Kroy L/C, upon each repayment or
prepayment of the Company Loans, upon each drawing under the
Napco L/C or the Kroy L/C and payment by the Company of
amounts due hereunder in respect of such drawing and upon
the expiration or termination of such Napco L/C or Kroy L/C,
the aggregate Company Commitments, or the Napco Commitments
or the Kroy Commitments, as applicable, of the Banks shall
be automatically and permanently reduced, on a pro rata
basis, by an amount equal to the amount by which the
aggregate Company Commitments, the Napco Commitments or the
Kroy Commitments, respectively, immediately prior to such
reduction exceed the aggregate unpaid principal amount or
face amount, as the case may be, of the Company Loans and
the Company L/C Sublimit and the remaining face amount, if
any, of the Napco L/C and/or the Kroy L/C and the
outstanding principal amount, if any, of any Unpaid Drawings
in respect of the Napco L/C and/or the Kroy L/C immediately
after giving effect to any such drawing and payment,
expiration or termination, respectively. The Commitments
once terminated or reduced may not be reinstated."
9. Subsection 2.22(f) is hereby deleted and replaced in its entirety
with the following language:
"(f) In the event that the credit rating of Fleet is
downgraded to less than "A-" by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. or any successor
to the rating agency business thereof and such down-grading
will cause the Company or any Designated Subsidiary to incur
any additional expense or otherwise be adversely affected,
the Company or any Designated Subsidiary may replace any L/C
issued or deemed issued by Fleet with an L/C issued by any
Bank or any other banks, in each case with a credit rating
of "A-" or better, provided that any such letter of credit
shall not be entitled to the benefits of this Agreement and,
to the extent such letter of credit replaces a Company L/C
shall constitute Specified Company L/C Obligations (to the
extent provided in the definition thereof), with the effect
of reducing the Available Company L/C Commitment (in
accordance with the definition thereof), and, to the extent
such letter of credit replaces the Napco L/C or the Kroy
L/C, shall have the effect of terminating the Available
Napco Commitment or the Available Kroy Commitment, as the
case may be, in full."
10. Subsection 6.1(b) is hereby deleted and replaced in its entirety
with the following language:
"(b) (i) Indebtedness of the Company to any Subsidiary,
and of any Subsidiary to the Company, any other subsidiary,
so long as such Indebtedness remains subordinated to the
Obligations under the Loan Documents on terms and conditions
satisfactory to the Banks and (ii) Approved Company Loans."
9
<PAGE>
11. Subsection 6.1(f) is hereby deleted and replaced in its entirety
with the following language:
"(f) (i) unsecured subordinated Indebtedness of the
Company, provided that such Indebtedness is on such terms
and pursuant to such documentation as the Required Banks
shall approve, which approval shall not be unreasonably
withheld and (ii) Approved Nortek Loans."
12. Subsection 6.7(e)(ii)(A) is deleted and replaced in its entirety
by the following language:
"(A) $50,000,000 in the aggregate during any fiscal year of
the Company (plus, in the case of the 1999 fiscal year, the
amount, if any, by which the Company's investment in Peachtree,
Thermal-Gard and Kroy exceeds $50,000,000)."
13. Section 6.8 is amended by adding at the end thereof the following
language:
"(c) prepaying any Approved Nortek Loans if permitted to do
so pursuant to the subordination provisions thereof."
14. Section 6.10 is amended by adding at the end of clause (a) after
"...Subsidiaries..." the following language:
"(exclusive of any Approved Nortek Loans)"
15. Section 6.11 is amended by adding to clause (b) immediately after
..."Interest Expense..." the following language:
"(exclusive of interest on any Approved Nortek Loans)"
16. Section 9.14 of the Credit Agreement entitled "Governing Law;
Consent to Jurisdiction; Waiver of Trial by Jury" is by this
reference fully incorporated herein.
17. Schedule 1 to the Credit Agreement is deleted and replaced in its
entirety with Schedule 1 to this Second Amendment.
18. Paragraph 4 of Exhibit D to the Credit Agreement is amended by
changing the first line thereof to read:
"As additional security for the payment of and performance of all
our present and future ...".
19. The Credit Agreement, amended as set forth above, is hereby
ratified, approved and confirmed and shall remain in full force
and effect.
10
<PAGE>
20. Effective on the date of this Second Amendment, the Notes
outstanding prior to such date shall be surrendered by the
holders thereof for cancellation and new Notes reflecting the
increased maximum amount of the Obligations shall be concurrently
executed and delivered by the Company and the Designated
Subsidiaries to the Banks.
21. The Company and the Designated Subsidiaries represent and warrant
that each of the representations and warranties in Section 3 of
the Credit Agreement is accurate and complete as of the date
hereof and that no Default or Event of Default exists under any
of the Loan Documents. The Company and the Designated
Subsidiaries represent and covenant that none of the Company and
the Designated Subsidiaries has any claim, defense or setoff to
any of its obligations under any of the Loan Documents.
22. On the date of this Second Amendment to Second Amended and
Restated Credit Agreement the Company shall pay to the Agent for
the pro rata account of the Banks an amendment fee equal to .065%
of the Commitment.
23. This Second Amendment to Second Amended and Restated Credit
Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of New York.
24. This Second Amendment to Second Amended and Restated Credit
Agreement may be executed by one or more of the parties on any
number of separate counterparts and all of said counterparts
taken together shall be deemed to constitute one and the same
instrument.
25. A set of the copies of this Second Amendment to Second Amended
and Restated Credit Agreement signed by all of the parties shall
be lodged with the Company and the Agent.
IN WITNESS WHEREOF each of the parties hereto has caused this Second
Amendment to Second Amended and Restated Credit Agreement to be duly
executed by its duly authorized officer as of the date first set forth
above.
BORROWER:
PLY GEM INDUSTRIES, INC.
By:_____________________
Title:
DESIGNATED SUBSIDIARIES:
11
<PAGE>
SNE ENTERPRISES, INC.
By:______________________
Title:
VARIFORM, INC.
By:_______________________
Title:
GREAT LAKES WINDOW, INC.
By:________________________
Title:
AGENT:
FLEET NATIONAL BANK,
as Agent and as a Bank
By:________________________
Title:
BANKS:
BANK OF MONTREAL
By:________________________
Title:
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<PAGE>
EUROPEAN AMERICAN BANK
By:_______________________
Title:
CITIZENS BANK OF RHODE IS
By:______________________
Title:
SOVEREIGN BANK
By:_______________________
Title:
ERSTE BANK
By:_______________________
Titlr
By:_______________________
Title:
13
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
COMMITMENTS AND APPLICABLE LENDING OFFICES
<S> <C> <C> <C> <C> <C> <C>
Name of Initial Lender Commitment Company Kroy Napco Domestic Lending Office Eurodollar Lending Office
Percentage Commintment Commitment Commitment and Address for Notices
Fleet National Bank 30.992931 $28,274,302.67 $1,752,247.06 $1,619,908.42 56 East 42nd Street 56 East 42nd Street
New York, NY 10017 New York, NY 10017
ATTN: Peter Hall ATTN: Peter Hall
Fax: (212) 907-5614 Fax: (212) 907-5614
Bank of Montreal 28.752575 26,230,463.81 1,625,584.08 1,502,811.59 430 Park Avenue 430 Park Avenue
14th Floor 14th Floor
New York, NY 10022 New York, NY 10022
ATTN: Jordan Fragiacomo ATTN: Jordan Fragiacomo
Fax: (212) 605-1454 Fax: (212) 605-1454
Citizens Bank of RI 8.215022 7,494,418.75 464,452.62 429,374.74 One Citizens Plaza One Citizens Plaza
Providence, RI 02903 Providence, RI 02903
ATTN: Michael DiSandro ATTN: Michael DiSandro
Fax: (401) 455-5404 Fax: (401) 455-5404
Sovereign Bank 8.566908 7,815,438.10 484,347.19 447,766.81 10 Weybosset Street 10 Weybosset Street
Suite 905 Suite 905
Providence, RI 02903 Providence, RI 02903
ATTN: Robert Leach ATTN: Robert Leach
Fax: (401) 421-7537 Fax: (401) 421-7537
Erste Bank 8.092563 7,382,701.58 457,529.15 422,974.15 280 Park Avenue 280 Park Avenue
West Office Building West Office Building
32nd Floor 32nd Floor
New York, NY 10017 New York, NY 10017
ATTN: Rima Terradista ATTN: Rima Terradista
Fax: (212) 984-5627 Fax: (212) 984-5627
European American Bank 15.379999 14,030,900.09 869,538.90 803,866.79 335 Madison Avenue 335 Madison Avenue
17th Floor 17th Floor
New York, NY 10017 New York, NY 10017
ATTN: Kristen Burke ATTN: Kristen Burke
Fax: (212) 503-2667 Fax: (212) 503-2667
TOTALS 100% $91,220,225.00 $5,653,699.00 $5,226,702.50
</TABLE>
