-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GjI8KcuLJag8nHR57m05sID58ferQagGWbbvrmCaMrE00C3KjjEgpNZi4t8nhPqW 0BI2kkeeab+ENIY+oua31g== 0000072423-99-000008.txt : 19990331 0000072423-99-000008.hdr.sgml : 19990331 ACCESSION NUMBER: 0000072423-99-000008 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06112 FILM NUMBER: 99578812 BUSINESS ADDRESS: STREET 1: 50 KENNEDY PLZ CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4017511600 MAIL ADDRESS: STREET 1: 50 KENNEDY PLAZA CITY: PROVIDENCE STATE: RI ZIP: 02903 10-K405 1 NORTEK 1998 ANNUAL REPORT 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-6112 ------------------------ 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]. 1 The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 5, 1999 was $292,420,423. See Item 12. The number of shares of Common Stock outstanding as of March 5, 1999 was 11,302,630. The number of shares of Special Common Stock outstanding as of March 5, 1999 was 559,913. Documents Incorporated by Reference Portions of the registrant's Proxy Statement for use at its 1999 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 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 ("HVAC") 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 domestic 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, consumer spending habits and unemployment. Additional information concerning the Company's business is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 7, Part II of this report, incorporated herein by reference. Information on foreign and domestic operations is set forth in Note 10, Notes to Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference. Residential Building Products 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, bath fans, combination units (fan, heater and light combinations), 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) and one of the leading suppliers in Western Europe, 3 NORTEK, INC. AND SUBSIDIARIES South America and the Middle East of luxury "Eurostyle" range hoods. Products are sold under the Broan(R), NuTone(R), Nautilus(R), Venmar(R), Flair(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 and ceiling fans. The Company's sales of kitchen range hoods accounted for approximately 10.4% of the Company's consolidated net sales in 1998. 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), Flair(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 Rangemaster(R) and Finesse(R) rangehood, Sensaire(R), Solitaire(R) and Solitaire Ultra Silent(R) fans and fan lights, LoSone(R) fans, the Best by Broan(TM) "Eurostyle" luxury rangehoods, the Venmar(R), Flair(R) and vanEE(R) Super Compact line of indoor air quality systems 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 1998, approximately 22.6% 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. 4 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 suppliers of the Segment's products, certain of these suppliers have greater financial and marketing resources than the Segment. The Segment has 16 manufacturing plants and employed 3,424 full-time people as of December 31, 1998, 747 of whom are covered by collective bargaining agreements which expire in 1999, 2000 and 2001. 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 HVAC systems 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. 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 5 NORTEK, INC. AND SUBSIDIARIES are located outside the building. In addition, factors relating to the manner of construction and timing of installation of commercial HVAC equipment can often favor custom-designed rather than standard systems. As compared with site-built and standard HVAC systems, the Segment's systems are factory assembled and then installed, 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 1998 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 145 persons as of December 31, 1998. 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 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 6 NORTEK, INC. AND SUBSIDIARIES 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 manufactured housing market, which are marketed under the Intertherm(R) and Miller(R) brand names. The Segment is one of the largest suppliers of these products to the manufactured housing market in the United States. In addition, the Segment manufactures HVAC and light commercial products for site-built homes and light commercial structures, which are marketed under the Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R) and Gibson(R) names. The principal factors affecting the market for the Segment's residential HVAC products are the demand for replacements 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 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 this segment of this market, Evcon Industries, a subsidiary of York International Corporation which markets its products under the "Evcon/Coleman" name. 7 NORTEK, INC. AND SUBSIDIARIES 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, and many suppliers of such equipment have substantially greater financial and marketing resources than the Segment and enjoy greater brand awareness. In these markets, the Segment competes with, among others, Carrier Corporation, Rheem Manufacturing Company, Lennox Industries, The Trane Company, York International Corporation, International Comfort Products 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 Company 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 1998 were attributable to the replacement market, which tends to be less cyclical than the new construction market. The Segment had eleven manufacturing plants and employed 2,279 full-time people as of December 31, 1998, 216 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 and wood windows, doors, vinyl siding, aluminum trim coil, soffit, skirting and shutters for use in the residential construction, do-it-yourself and professional renovation markets. The Company's sales of windows accounted for approximately 18.7% of the Company's consolidated net sales in 1998. The Company's sales of non-wood siding material accounted for approximately 11.1% of the Company's consolidated net sales in 1998. The Segment competes with many other manufacture in the sale of its products. Windows and Doors. The Segment manufactures and sells wood, clad, composition (wood and vinyl) and vinyl windows and patio doors, glass and polycarbonate skylights, and wooden interior bifold doors under the Crestline(R), Vetter(R), Kenergy(R), AWC(R), Gold(R), PLY GEM(R), Uniframe(R), Monitor(TM) and American Comfort(R) 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. 8 NORTEK, INC. AND SUBSIDIARIES 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 Segments' sales and marketing strategy together with the Segment's focus on one of the fastest growing segments in the industry - home centers. Siding. The Segment is also a manufacturer of vinyl siding, aluminum trim coil, soffit, skirting and accessories, which are available in a variety of woodgrains and colors. Aluminum trim coil is a product that is used in most vinyl siding applications to cover exterior areas of a home which are not appropriate for vinyl, such as fascia and corners. Its products are used in both remodeling and new construction applications, including manufactured housing. Vinyl siding's share of the overall market for exterior siding materials has been increasing due to its ease of installation, high performance, durability, low maintenance requirements and price stability as compared to alternative siding materials (including wood, aluminum and masonry). The Segment's products are marketed under the Varigrain Preferred(R), Duragrain(R), Timber Oak(R), Contractors Choice(R), Proguard(R), Varibest(R), American Comfort(R), American Herald(TM), American '76(TM) Collection and Georgia-Pacific(R) brand names. Vinyl siding is sold to either specialty distributors (one-step distribution) who, in turn, sell directly to remodeling contractors or builders, or to building materials wholesale distributors (two-step distribution) who sell to home centers and lumberyards who, in turn, sell to remodeling contractors 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, 9 NORTEK, INC. AND SUBSIDIARIES and gable vents that provide attic ventilation. These products are sold to home centers, lumberyards and wholesale distributors of building materials. The Segment operates 13 manufacturing plants in the United States and employed 3,705 full-time people as of December 31, 1998, 1,597 of whom are covered by collective bargaining agreements which expire in 1999, 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. RECENT DEVELOPMENTS On March 8, 1999, the Company acquired Webco, Inc., a designer and manufacturer of custom air handling equipment with 1998 sales of approximately $14 million. GENERAL CONSIDERATIONS Employees The Company employed approximately 9,640 persons at December 31, 1998. Backlog Backlog expected to be filled during 1999 was approximately $148,213,000 at December 31, 1998 ($127,137,000 at December 31, 1997). Backlog is not regarded as a significant factor for operations where orders are generally for prompt delivery. While backlog stated for December 31, 1998 is believed to be firm, the possibility of cancellations makes it difficult to assess the firmness of backlog with certainty. Research and Development The Company's research and development activities are principally new product development and represent approximately 1% of net sales. 10 NORTEK, INC. AND SUBSIDIARIES 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), Flair(R), vanEE(R), Rangaire(R), Best(R), Crestline(R), Vetter(R), AWC(R), Kenergy(R), Varigrain(R), Duragrain(R), Timber Oak(R), Contractors Choice(R), Proguard(R), Varibest(R), American Comfort(R), American Herald(TM), Gold(R), PLY GEM(R), Uniframe(R), Governair(R), Mammoth(R), Temtrol(R), Miller(R), Intertherm(R), Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R), Gibson(R), Ventrol(R), and Webco(TM). The Company believes that its rights in these trademarks are adequately protected. Raw Materials The Company purchases raw materials and most components used in its various manufacturing processes. The principal raw materials purchased by the Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate mirror glass, PVC, polypropylene, glass, vinyl extrusions, particle board, fiberboard, lumber, plywood, various chemicals, paints, resins, and plastics. The materials, molds and dyes, subassemblies and components purchased from other manufacturers, and other materials and supplies used in manufacturing processes have generally been available from a variety of sources. Whenever practical, the Company establishes multiple sources for the purchase of raw materials and components to achieve competitive pricing, ensure flexibility and protect against supply disruption. From time to time increases in raw material costs can affect future supply availability due in part to raw material demands by other industries. Working Capital The carrying of inventories to support customers and to permit prompt delivery of finished goods requires substantial working capital. Substantial working capital is also required to carry receivables. The demand for the Company's products is seasonal, particularly in the Northeast and Midwest regions of the United States and in Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction 11 NORTEK, INC. AND SUBSIDIARIES markets. The Ply Gem businesses, acquired in August 1997 and Napco, acquired in October, 1998, have in the past been more seasonal in nature than the Company's businesses owned prior to these acquisitions. 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. Executive Officers of the Registrant Name Age Position Richard L. Bready 54 Chairman, President and Chief Executive Officer Almon C. Hall 52 Vice President, Controller and Chief Accounting Officer Richard J. Harris 62 Vice President and Treasurer Kenneth J. Ortman 63 Senior Vice President - Segment Operations Kevin W. Donnelly 44 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 2003, which term is extended at the end of each year for an additional year until either party gives notice it will not be further extended. The Company's executive officers include only those officers of the Company who perform policy-making functions for the Company as a whole and have managerial responsibility for major aspects of the Company's overall operations. A number of other individuals who serve as officers of the Company's subsidiaries perform policy-making functions and have managerial responsibilities for the subsidiary or division by which they are employed, although not for the Company overall. Certain of these individuals could, depending on earnings of such unit, be more highly compensated than some executive officers of the Company. 12 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 - -------------------------------------------------------------------------------- Union, IL Manufacturing/Warehouse/Administrative 197,000 Hartford, WI Manufacturing/Warehouse/Administrative 477,000 Bensenville, IL Warehouse/Administrative 69,000* Mississauga, ONT Manufacturing/Administrative 110,000 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* St. Leonard d'Aston, QUE Manufacturing/Administrative 94,000 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 Montreal, QUE Manufacturing 66,000* 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 13 NORTEK, INC. AND SUBSIDIARIES Approximate Location Description Square Feet - -------------------------------------------------------------------------------- Sarver, PA Manufacturing 126,000 Valencia, PA Manufacturing 174,000 Commerce, TX Manufacturing/Administrative 86,000 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 Springfield, MO Manufacturing 60,000* 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 1997 and 1998 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 14 NORTEK, INC. AND SUBSIDIARIES 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. 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. 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). 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 March 5, 1999, numbered 2,842 and 2,284, respectively. There were no dividends declared on the Common and Special Common in 1998 or 1997. The high and low sales prices of Nortek's Common Stock traded on the New York Stock Exchange in 15 NORTEK, INC. AND SUBSIDIARIES each quarter of 1998 and 1997 were: 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 1997 Quarter High Low First 27 1/2 19 1/2 Second 25 17 3/4 Third 27 1/4 23 3/16 Fourth 26 15/16 21 13/16 See Note 6 of the Notes to the Consolidated Financial Statements, Item 8 of Part II of this report incorporated herein by reference. 16 NORTEK, INC. AND SUBSIDIARIES ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
For the Five Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 (In thousands except ratios and per share amounts) Consolidated Summary of Operations: Net sales $1,738,343 $1,134,129 $841,557 $656,800 $615,952 Operating earnings 133,128 82,981 60,951 42,973 44,393 Gain (loss) on Businesses sold 4,000 --- --- --- (1,750) Earnings from continuing operations before extraordinary gain (loss) 34,000 26,400 23,700 17,500 15,400 Earnings (loss) from discontinued operations 1,200 (5,200) (1,700) (2,500) 1,800 Extraordinary gain (loss) from debt retirements (200) --- --- --- 200 Cumulative effect of an accounting change --- --- --- --- 400 Net earnings 35,000 21,200 22,000 15,000 17,800 Financial Position: Unrestricted cash, investments and marketable securities $209,633 $161,830 $ 92,093 $103,313 $105,080 Working capital 337,207 341,821 163,133 180,218 194,330 Total assets 1,689,993 1,304,546 590,233 604,950 494,573 Total debt-- Current 17,738 17,739 36,486 41,948 4,452 Long-term 1,007,113 835,840 243,769 240,125 219,241 Current ratio 2.0:1 2.3:1 1.9:1 1.9:1 2.4:1 Debt to equity ratio 4.7:1 6.7:1 2.4:1 2.1:1 1.9:1 Depreciation and amortization including non-cash interest 45,321 28,407 20,995 16,225 15,539 Capital expenditures 41,428 22,464 19,798 15,665 14,375 Stockholders' investment 217,610 128,088 118,795 131,291 117,790 Common and Special Common shares outstanding 11,706 9,500 9,873 12,074 12,550
17 NORTEK, INC. AND SUBSIDIARIES ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
For the Five Years Ended December 31, 1998 1997 1996 1995 1994 (In thousands except ratios and per share amounts) Per Share: Earnings from continuing operations Basic $3.11 $2.75 $2.26 $1.41 $1.23 Diluted $3.06 $2.68 $2.23 $1.39 $1.21 Net earnings Basic $3.20 $2.21 $2.10 $1.21 $1.42 Diluted $3.15 $2.15 $2.07 $1.19 $1.39 Stockholders' investment $18.59 $13.48 $12.03 $10.87 $9.39
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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Effective in 1998, the Company adopted Statement of Financial Accounting Standards No. 131 Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"), and accordingly, the information for all years presented has been reclassified to conform to the presentation for 1998. (See Note 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 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 ("HVAC") Products Segment, and the Windows, Doors and Siding Segment. 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. 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, the do-it-yourself and professional remodeling and renovation markets. 18 NORTEK, INC. AND SUBSIDIARIES 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 including 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 ("HVAC") systems for custom-designed commercial applications and for manufactured and site-built residential housing. The Windows, Doors and Siding Segment manufactures and distributes vinyl and wood windows, doors, vinyl siding, aluminum trim coil, soffit, skirting and shutters for use in the residential construction, DIY and professional renovation markets. The Windows, Doors and Siding 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 Company acquired NuTone, Inc. ("NuTone") on July 31, 1998, Napco, Inc. and an affiliate ("Napco") on October 9, 1998 and Ply Gem Industries, Inc. and its subsidiaries ("Ply Gem") on August 26, 1997. These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the results of 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.) For the full year ended December 31, 1997, Napco had net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $91,100,000, $8,600,000 and $8,000,000, respectively. For the period from January 1, 1998 to the date of acquisition, October 9, 1998, Napco had net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $77,900,000, $9,200,000 and $8,900,000, respectively. 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, 1998. 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.) 19 NORTEK, INC. AND SUBSIDIARIES During 1998, the Company made several dispositions of non-strategic assets. On May 8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley had net sales and an operating loss of approximately $22,000,000 and $6,100,000 for the full year ended December 31, 1997, respectively, and net sales and an operating loss of approximately $7,300,000 and $1,600,000, respectively, for the period January 1, 1998 to May 8, 1998 and was treated as an operation held for sale since the acquisition of Ply Gem. Accordingly, the Company did not recognize any gain or loss on the sale of Studley and Studley's operating results are not included in the Company's consolidated financial results. On May 22, 1998, the Company sold Sagebrush Sales, Inc. ("Sagebrush") for approximately $9,100,000 in cash. Sagebrush had net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $47,600,000, $400,000 and $400,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $19,100,000, $200,000 and $200,000, respectively, for the five months ended May 22, 1998. On July 2, 1998, the Company sold Goldenberg Group, Inc. ("Goldenberg") for approximately $11,100,000 including approximately $2,000,000 in notes. Goldenberg had net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $41,300,000, $500,000 and $500,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $21,500,000, $500,000 and $500,000, respectively, for the six months ended July 2, 1998. On July 31, 1998, the Company sold another Ply Gem business, Ply Gem Manufacturing, which had net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $48,300,000, $2,500,000 and $2,500,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $23,300,000, $700,000 and $700,000, respectively, for the seven months ended July 31, 1998. 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. Allied had net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $84,400,000, $400,000 and $400,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $80,300,000, $800,000 and $800,000, respectively, for the eleven months ended November, 1998. On December 30, 1998, the Company sold its M&S 20 NORTEK, INC. AND SUBSIDIARIES 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. For the year ended December 31, 1997, combined net sales, operating earnings and earnings from continuing operations before provision for income taxes of M&S and MOM were approximately $37,300,000, $3,400,000 and $3,400,000, respectively. For the year ended December 31, 1998, 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, respectively. 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. 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 were 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 2, 9 and 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The Company does not expect the effect of Businesses sold during 1998 to be significant to the Company's future operations. 21 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, 1998, and the dollar amount and percentage change of such results as compared to the prior year. The amounts in the tables for the prior years have been reclassified to conform to the presentation for 1998.
Net Change Year Ended December 31, 1998 to 1997 1997 to 1996 1998 1997 1996 $ % $ % (Dollar amounts in millions) Net Sales: Residential Building Products $475.0 $381.8 $368.7 $93.2 24.4% $13.1 3.6% Air Conditioning and Heating Products 465.2 419.4 423.1 45.8 10.9 (3.7) (0.9) Windows, Doors and Siding 536.8 189.0 --- 347.8 184.0 189.0 --- Other 69.3 21.3 --- 48.0 225.4 21.3 --- -------- -------- ------ ----- ------ ------- ------ 1,546.3 1,011.5 791.8 534.8 52.9 219.7 27.7 Businesses sold 192.0 122.6 49.8 69.4 56.6 72.8 146.2 -------- -------- ------ ------ ------ ------- ------ $1,738.3 $1,134.1 $841.6 $604.2 53.3% $292.5 34.8% ======== ======== ====== ====== ====== ======= ====== Operating Earnings: Residential Building Products $ 53.7 $40.3 $31.2 $13.4 33.3% $ 9.1 29.2% Air Conditioning and Heating Products 55.7 41.3 38.5 14.4 34.9 2.8 7.3 Windows, Doors and Siding 31.5 9.0 --- 22.5 250.0 9.0 --- Other (14.2) (14.5) (14.6) 0.3 2.1 0.1 (0.7) ------- ------ ------ ------ ------ ----- ----- 126.7 76.1 55.1 50.6 66.5 21.0 38.1 Businesses sold 6.4 6.9 5.9 (0.5) (7.2) 1.0 16.9 ------- ------ ------ ------ ------ ----- ----- $133.1 $83.0 $61.0 $50.1 60.4% $22.0 36.1% ======= ====== ====== ====== ====== ===== =====
22 NORTEK, INC. AND SUBSIDIARIES The tables that follow set forth, for the three years ended December 31, 1998, (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 1998 1997 Year Ended December 31, to to 1998 1997 1996 1997 1996 (Dollar amounts in millions) Net sales $1,738.3 $1,134.1 $841.6 53.3% 34.8% Cost of products sold 1,275.3 825.8 596.9 (54.4) (38.3) Selling, general and administrative expense 315.5 219.4 180.3 (43.8) (21.7) Amortization of goodwill and intangible assets 14.4 5.9 3.4 (144.1) (73.5) Operating earnings 133.1 83.0 61.0 60.4 36.1 Gain on Businesses sold 4.0 --- --- --- --- Interest expense (86.3) (50.2) (28.4) (71.9) (76.8) Investment income 10.5 9.9 6.0 6.1 65.0 Earnings from continuing operations before provision for income taxes 61.3 42.7 38.6 43.6 10.6 Provision for income taxes 27.3 16.3 14.9 (67.5) (9.4) Earnings from continuing operations before extraordinary loss 34.0 26.4 23.7 28.8 11.4 Earnings (loss) from discontinued operations 1.2 (5.2) (1.7) --- (205.9) Extraordinary loss from debt retirements (0.2) --- --- --- --- Net earnings 35.0 21.2 22.0 65.1 (3.6)
23 NORTEK, INC. AND SUBSIDIARIES
Percentage Change Percentage of Net Sales 1998 1997 Year Ended December 31, to to 1998 1997 1996 1997 1996 Net sales 100.0% 100.0% 100.0% ---% ---% Cost of products sold 73.4 72.8 70.9 (0.6) (1.9) Selling, general and administrative expense 18.1 19.4 21.4 1.3 2.0 Amortization of goodwill and intangible assets 0.8 0.5 0.4 (0.3) (0.1) Operating earnings 7.7 7.3 7.3 0.4 --- Gain on Businesses sold 0.2 --- --- 0.2 --- Interest expense (5.0) (4.4) (3.4) (0.6) (1.0) Investment income 0.6 0.9 0.7 (0.3) 0.2 Earnings from continuing operations before provision for income taxes 3.5 3.8 4.6 (0.3) (0.8) Provision for income taxes 1.6 1.4 1.8 (0.2) 0.4 Earnings from continuing operations before extraordinary loss 1.9 2.4 2.8 (0.5) (0.4) Earnings (loss) from discontinued operations 0.1 (0.5) (0.2) 0.6 (0.3) Extraordinary loss from debt retirements --- --- --- --- --- Net earnings 2.0 1.9 2.6 0.1 (0.7)
24 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 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 Segment, partially offset by the acquisition of NuTone and the effect of 25 NORTEK, INC. AND SUBSIDIARIES 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 $3,407,000 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. 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 Segment, and $10,300,000 was in the Residential Building Products Segment. Operating earnings increased substantially in 1998 in the Windows, Doors and Siding 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 26 NORTEK, INC. AND SUBSIDIARIES 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 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. 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. 27 NORTEK, INC. AND SUBSIDIARIES 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.)
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. Year Ended December 31, 1997 as Compared to the Year Ended December 31, 1996 - ---------------------------------------------------------------------------- Net sales increased approximately $292,500,000 or approximately 34.8%, as compared to 1996 (or increased approximately 28 NORTEK, INC. AND SUBSIDIARIES $300,500,000 or approximately 35.7%, excluding the effect of changes in foreign exchange rates). Net sales increased principally as a result of the acquisition of Ply Gem on August 26, 1997, which contributed approximately $284,200,000 to net sales of which approximately $189,000,000 is related to the Windows, Doors and Siding Segment and approximately $73,900,000 is related to certain non-strategic assets that were subsequently sold in 1998. Net sales of the Residential Building Products Segment increased by approximately $13,100,000 or 3.6%, as a result of higher sales levels of higher margin built-in ventilation products in North America, partially offset by lower sales levels of lower margin European ventilation (including the effects of changes in foreign exchange rates) and domestic products. Net sales of the Air Conditioning and Heating Products Segment decreased approximately $3,700,000 or .9%, principally as a result of approximately $3,600,000 lower sales resulting from the sale of a residential HVAC product line in 1997 and lower sales levels of commercial HVAC products, partially offset by increased sales levels of HVAC products to residential markets. Cost of products sold as a percentage of net sales increased from approximately 70.9% in 1996 to approximately 72.8% in 1997. Excluding the Ply Gem businesses, (which have a higher level of cost of sales than the overall group of businesses owned prior to the acquisition), cost of products sold as a percentage of net sales decreased from approximately 71.3% to approximately 70.4% in 1997, as compared to 1996. This decrease in the percentage principally resulted from a reduction in the cost of certain raw materials and components compared to 1996 and decreased labor as a percentage of net sales in the Residential Building Products and Air Conditioning and Heating Products Segments due to the increased volume of higher margin products and improved efficiency. Had all year-end inventory values been stated on a FIFO basis, year-end inventory would have been approximately $5,041,000 higher in 1997, approximately $6,015,000 higher in 1996 and approximately $7,873,000 higher in 1995. Overall, changes in the cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors, including changes in the relative mix of products sold, the effect of changes in sales prices, the material cost of products sold and changes in productivity levels. Selling, general and administrative expense as a percentage of net sales decreased from approximately 21.4% in 1996 to approximately 19.4% in 1997. Excluding the Ply Gem businesses, (which have a lower level of selling, general and administrative expense to net sales than the overall group of businesses owned prior to the acquisition), selling, general and administrative 29 NORTEK, INC. AND SUBSIDIARIES expense as a percentage of net sales decreased from approximately 21.4% in 1996 to approximately 21.2% in 1997. This decrease in the percentage was due principally to higher sales levels in the Residential Building Products Segment without a proportionate increase in expense and the effect of the sale of a residential HVAC product line noted above, partially offset by lower sales levels of commercial products by the Air Conditioning and Heating Products Segment without a proportionate decrease in expense. Amortization of goodwill and intangible assets, as a percentage of net sales, increased from approximately .4% of net sales in 1996 to approximately .5% of net sales in 1997, principally as a result of the acquisition of Ply Gem. Operating earnings increased approximately $22,000,000 from approximately $61,000,000 in 1996 to approximately $83,000,000 in 1997 primarily due to the factors previously discussed. The Ply Gem acquisition in late August 1997 contributed approximately $11,300,000 to operating earnings, of which approximately $9,000,000 was in the Windows, Doors and Siding Segment and $2,000,000 related to businesses that were subsequently sold in 1998. Operating earnings have been reduced by depreciation and amortization expense of approximately $26,700,000 and approximately $19,800,000 for 1997 and 1996, respectively. The acquisition of Ply Gem contributed approximately $6,300,000 of the increase in depreciation and amortization expense in 1997. Operating earnings also increased by approximately $9,100,000 or 29.2% in the Residential Building Products Segment and $2,800,000 or 7.3% in the Air Conditioning and Heating Products Segment as a result of increased sales volume without a proportionate increase in expense. Earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries, which manufacture built-in ventilating products, decreased to approximately 9.0% of operating earnings (before corporate overhead) in 1997 from approximately 9.1% of such earnings in 1996. The decrease in the percentage is due to an increase in domestic earnings in 1997, in part as a result of $11,300,000 contributed by Ply Gem, which has primarily domestic operations. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. Interest expense in 1997 increased approximately $21,800,000 or approximately 76.8%, as compared to 1996, primarily as a result of the sale of $175,000,000 principal amount of 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") in March, 1997, the sale of $310,000,000 principal amount of 9 1/8% Senior Notes due 2007 30 NORTEK, INC. AND SUBSIDIARIES ("9 1/8% Notes")in August, 1997 and the existing indebtedness of Ply Gem. This increase was partially offset by the refinancing of certain outstanding indebtedness of the Company's subsidiaries primarily in the second quarter of 1997. (See Notes 2 and 5 of the Notes to the Consolidated Financial statements included elsewhere herein.) Investment income in 1997 increased approximately $3,900,000 or approximately 65.0%, as compared to 1996, principally due to higher average invested balances of short-term investments and marketable securities. The provision for income taxes was approximately $16,300,000 for 1997, as compared to approximately $14,900,000 for 1996. The provision for income taxes was reduced by approximately $1,540,000 in 1997 and $481,000 in 1996 reflecting the reversal of tax reserves no longer required. The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), changes in tax reserves, the effect of foreign income tax on foreign source income and the effect of product development tax credits from foreign operations. (See Note 4 of the Notes to the Consolidated Financial Statements included elsewhere herein.) In the fourth quarter of 1997, the Company adopted a plan of disposition of its Plumbing Products business. Loss from discontinued operations related to the Plumbing Products business increased approximately $3,500,000 from a loss of $1,700,000 in 1996 to a loss of $5,200,000 in 1997. Loss from discontinued operations in 1997 includes a net after tax loss of $1,600,000 for operating losses expected to occur during the disposal period and is net of an income tax benefit of $900,000. Loss from discontinued operations includes net after tax operating losses of $3,600,000 in 1997 and $1,700,000 in 1996 and are net of income tax benefits of $2,100,000 and $900,000 for 1997 and 1996, respectively. Operating results of discontinued operations reflect an allocation of corporate interest expense of approximately $1,900,000 and $1,700,000 in 1997 and 1996, respectively and are net of income tax benefits of $670,000 and $600,000 in 1997 and 1996, respectively. (See Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Liquidity and Capital Resources - ------------------------------- The Company is highly leveraged and expects to continue to be highly leveraged for the foreseeable future. At December 31, 1998, the Company had consolidated debt of approximately 31 NORTEK, INC. AND SUBSIDIARIES $1,024,900,000 consisting of (i) $17,700,000 of short-term borrowings and current maturities of long-term debt, (ii) $112,300,000 of notes, mortgage notes and other indebtedness, (iii) $209,300,000 of the 8 7/8% Notes, (iv) $174,100,000 of the 9 1/4% Notes, (v) $203,800,000 of the 9 7/8% Notes and (vi) $307,700,000 of the 9 1/8% Notes. At December 31, 1998, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $209,600,000 as compared to approximately $161,800,000 at December 31, 1997 and the Company's debt to equity ratio was approximately 4.7:1 at December 31, 1998 as compared to 6.7:1 at December 31, 1997. The Company's ability to pay interest on or to refinance its indebtedness depends on the successful integration of the operations of recent acquisitions and the Company's future performance, which, in part, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. There can be no assurance that the Company will generate sufficient cash flow from the operation of its subsidiaries or that future financings will be available on acceptable terms or in amounts sufficient to enable the Company to service or refinance its indebtedness, or to make necessary capital expenditures. The Company has evaluated and expects to continue to evaluate possible acquisition transactions and the possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. 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 1999 from cash generated from operations, existing cash, cash equivalents and marketable securities, and possible financings, which may include securitization of accounts receivables and mortgage or capital lease financings. In 1998 the Company improved its liquidity and reduced its leverage as a result of the sale of 2,182,500 shares of common stock for net cash proceeds of approximately $64,190,000 (the 32 NORTEK, INC. AND SUBSIDIARIES "Common Stock Offering") and net cash proceeds of approximately $111,700,000 from the sale of certain businesses. Approximately $44,800,000 of the proceeds received from the Common Stock Offering was used for the acquisition of NuTone and approximately $27,700,000 of the net proceeds received from the sale of businesses was used to reduce debt and the balance was used for general corporate purposes. (See Notes 2, 5, 6 and 9 of the Notes to the Consolidated Financial Statements included elsewhere herein.) On October 9, 1998, the Company acquired Napco, a manufacturer of exterior building products, for approximately $80,800,000 in cash (of which approximately $4,100,000 was paid in 1999), approximately $400,000 of forgiveness of Napco employee loans and the assumption of approximately $10,200,000 of debt. The acquisition was funded through the use of unrestricted cash, cash equivalents and marketable securities. On July 31, 1998, the Company acquired NuTone, a manufacturer of exhaust fans, range hoods, and other ventilation products and accessories, for an aggregate purchase price of $242,500,000 in cash plus fees and expenses. In connection with the acquisition, the Company assumed NuTone's operating liabilities (other than intercompany borrowings), including certain liabilities of NuTone concerning post retirement and other benefit obligations. The purchase price was funded from the net proceeds from the sale of the 8 7/8% Notes, which occurred on July 31, 1998, together with a portion of the cash proceeds from the Common Stock Offering. (See Notes 2, 5 and 6 of the Notes to the Consolidated Financial Statements included elsewhere herein.) As the Company begins the process of integrating the 1998 acquisitions into its businesses, it expects to achieve significant synergies, cost savings and reductions during 1999, partially offset by certain costs and expenses. The total expenditures associated with this effort, which are estimated to range between approximately $18,000,000 and $25,000,000, are expected to be funded from the Company's 1999 operating cash flow. The Company expects to finalize its integration plans and determine an estimated cost to complete such integration by the second quarter of 1999. If significant difficulty is encountered during the integration process, or if such 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 the 1998 acquisitions. (See Note 12 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 33 NORTEK, INC. AND SUBSIDIARIES Unrestricted cash and cash equivalents decreased from approximately $125,842,000 at December 31, 1997 to approximately $87,876,000 at December 31, 1998. Marketable securities available for sale increased from approximately $35,988,000 at December 31, 1997 to approximately $121,757,000 at December 31, 1998. The Company's investment in marketable securities at December 31, 1998 consisted primarily of certificates of deposit and bank issued money market instruments. At December 31, 1998, approximately $13,818,000 of the Company's cash and investments were pledged as collateral for insurance and other requirements and were classified as restricted in current assets in the Company's accompanying consolidated balance sheet. Capital expenditures were approximately $41,400,000 in 1998 and are expected to be approximately $40,000,000 in 1999. 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 March 5, 1999, the Company had purchased approximately 460,000 shares of its Common and Special Common Stock under this program for approximately $13,000,000 and accounted for such share purchases as Treasury Stock. At March 5, 1999, approximately $60,800,000 was available for the payment of cash dividends, stock payments or other restricted payments as defined under the terms of the Company's most restrictive Indenture. (See Note 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 34 NORTEK, INC. AND SUBSIDIARIES The Company's working capital and its current ratio decreased from approximately $341,821,000 and 2.3:1, respectively, to approximately $337,207,000 and 2.0:1, respectively, between December 31, 1997 and December 31, 1998, principally as a result of the following:
Increase (decrease) in Working Capital Net proceeds from the Common Stock Offering $ 64,190,000 Net proceeds from theSale of the 8 7/8% Notes 203,492,000 Acquisition of NuTone, net of approximately $15,900,000 of acquired working capital (232,081,000) ------------- 35,601,000 Effect of Businesses sold or discontinued, net of $27,700,000 payment of long-term debt (15,417,000) Acquisition of Napco, net of approximately $16,360,000 of acquired working capital (60,340,000) Other, net 35,542,000 ------------- $ (4,614,000) =============
Accounts receivable increased approximately $24,945,000 or approximately 13.8%, between December 31, 1997 and December 31, 1998, while net sales increased approximately $22,319,000 or approximately 5.4% in the fourth quarter of 1998 as compared to the fourth quarter of 1997. The increase in accounts receivable is primarily attributable to the acquisitions of NuTone and Napco, which contributed approximately $52,000,000 to the increase, partially offset by a decrease of approximately $29,800,000 attributable to Businesses sold. The rate of change in accounts receivable in certain periods may be different than the rate of change in sales in such periods principally due to the timing of net sales. Increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on December 31, 1998 as compared to December 31, 1997. The Company has not experienced any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1998. Inventories decreased approximately $13,546,000 or approximately 7.7%, between December 31, 1997 and December 31, 1998. The decrease is primarily attributable to Businesses sold which accounted for approximately $47,100,000 of the decrease, and is partially offset by an increase of approximately $35,200,000 attributable to the acquisitions of NuTone and Napco. Accounts payable increased approximately $28,613,000 or approximately 31.3%, between December 31, 1997 and December 31, 35 NORTEK, INC. AND SUBSIDIARIES 1998. The increase is primarily attributable to the acquisitions of NuTone and Napco, which contributed approximately $21,900,000 to the increase, partially offset by a decrease of approximately $7,100,000 attributable to Businesses sold. Unrestricted cash and cash equivalents decreased approximately $37,966,000 from December 31, 1997 to December 31, 1998, principally as a result of the following:
Condensed Consolidated Cash Flows Operating Activities-- Cash flow from operations, net $ 92,321,000 Increase in accounts receivable, net (4,554,000) Increase in inventories (979,000) Decrease in prepaids and other current assets 1,581,000 Increase in net assets of discontinued operations (7,426,000) Increase in accounts payable 12,532,000 Increase in accrued expenses and taxes 10,084,000 Investing Activities--- Net cash paid for businesses acquired (324,702,000) Proceeds from Businesses sold or discontinued 111,738,000 Purchase of marketable securities, net (84,439,000) Increase in restricted cash and investments (7,463,000) Capital expenditures (40,863,000) Financing Activities--- Sale of the 8 7/8% Notes 203,492,000 Net proceeds from the Common Stock Offering 64,190,000 Payment of borrowings and purchase of Notes, net (49,199,000) Purchase of Nortek Common and Special Common Stock (7,668,000) Other, net (6,611,000) ------------- $(37,966,000) ============= The impact of changes in foreign currency exchange rates on cash was not material and has been included in other, net.
The Company's debt-to-equity ratio decreased from approximately 6.7:1 at December 31, 1997 to 4.7:1 at December 31, 1998, primarily as a result of the increase in equity due to the Common Stock Offering, net earnings for 1998 and the payment of borrowings, partially offset by the effect of the sale of the 8 7/8% Notes. (See the Consolidated Statement of Stockholders' Investment for the year ended December 31, 1998 and Notes 5 and 6 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 36 NORTEK, INC. AND SUBSIDIARIES At December 31, 1998, the Company had approximately $27,300,000 of net U.S. federal prepaid income tax assets which are expected to be realized through future operating earnings. 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. The Ply Gem businesses, acquired in August 1997 and Napco, acquired in October 1998, have in the past been more seasonal in nature than the Company's businesses owned prior to these acquisitions. 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 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, 1998, 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 183 days. Restricted investments and marketable securities primarily consist of money market accounts and commercial paper with original maturities of 90 days or less. At December 31, 1998, 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, 1998, the Company hedged its exposure on a substantial portion of its variable rate debt by entering into interest rate swap agreements to lock in a fixed rate. At December 31, 1998, approximately 98% of the carrying values of the Company's long-term debt were either at fixed interest rates or covered by interest rate swap agreements that fixed the interest rates. See table D (Long-term Debt) 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 swap agreements. 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 1998, 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 38 NORTEK, INC. AND SUBSIDIARIES 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, 1998 consist entirely of short-term borrowings by certain of the Company's foreign subsidiaries. At December 31, 1998, the Company's net investment in foreign assets was approximately $60,000,000. An overall unfavorable change in foreign exchange rates of 10% would result in an approximate $6,000,000 reduction in 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, 1998, the notional amounts of outstanding foreign currency hedging contracts, all of which expire in 1999, were not material. The Company does not expect the settlement of such contracts to have a material impact on financial condition or results of operations in fiscal 1999. The Company's operations in Europe are not significant and, therefore, the Company does not expect to be materially impacted by the introduction of a European single currency, the Euro. 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, 1998, the Company did not have any outstanding commodity forward contracts. D. Long-term Debt The table that follows sets forth as of December 31, 1998, the Company's long-term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market values. Approximately 1.2% 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, 1998 interest rates. In addition, the table that follows sets forth the outstanding notional amounts by year and weighted average interest rates of 39 NORTEK, INC. AND SUBSIDIARIES the Company's interest rate swap agreements. Long-term Debt:
Scheduled Maturity Average Interest Rate Fixed Variable Fixed Variable Year Ending Rate Rate Total Rate Rate Total (Amounts in thousands) December 31, 1999 $ 5,399 $ 1,377 $ 6,776 7.16% 7.26% 7.18% 2000 3,520 1,367 4,887 7.77 7.26 7.63 2001 2,284 1,368 3,652 7.21 7.26 7.23 2002 1,721 80,387 82,108 6.72 6.86 6.86 2003 1,592 24 1,616 6.65 7.75 6.67 Thereafter (1) 914,821 4,977 919,798 9.19 4.46 9.17 --------- ------- ----------- ----- ----- ----- Total Principal $929,337 $89,500 $1,018,837 9.16% 6.74% 8.95% Unamortized Debt Discount (4,948) --- (4,948) --------- ------- ----------- Total Long-term Debt at December 31, 1998 $924,389 $89,500 $1,013,889 ========= ======= =========== Fair Market Value of Long-term Debt at December 31, 1998 $959,631 $89,500 $1,049,131 ========= ======= ===========
Interest Rate Swaps:
Average Fixed Variable Notional Pay Receive Year Ending Amount Rate Rate (Amounts in thousands) Outstanding at December 31, 1999 $40,000 5.76% (2) 2000 40,000 5.76 (2) 2001 40,000 5.76 (2) 2002 40,000 5.76 (2) Fair Market Value of the liability related to Interest Rate Swaps at December 31, 1998 $1,600 (1) Senior and senior subordinated notes with a total principal of $899,822,000 and a weighted average interest rate of 9.26% mature at various times from 2004 through 2008. (2) The interest rate swap variable receive rate for all periods is the one month LIBOR rate.
40 NORTEK, INC. AND SUBSIDIARIES Year 2000 Disclosure The Year 2000 ("Y2K") issue refers to and arises from deficient computer programs and related products, such as embedded chips, which do not properly distinguish between a year that begins with "20" instead of "19" beginning on January 1, 2000. If not corrected, many businesses and other processes could fail or create erroneous results. The extent of the potential impact of the Y2K problem is not yet known, and if not timely corrected, it could affect the global economy. As required by recent guidance from the SEC applicable to all public companies, the following disclosure provides more detail regarding the Company's Y2K compliance than previous reports filed by the Company. A. The Company's Readiness: To manage its Y2K program, the Company established a corporate-wide initiative and has divided its efforts into five areas: awareness (communication to employees, vendors and suppliers of the Y2K issue), assessment (a complete inventory of all aspects of the business that might be affected), remediation/validation (develop plans to correct all issues identified from the assessment stage), implementation (corrective measures taken to solve the Y2K issues identified) and contingency (alternative actions developed in the event that all corrective measures are not implemented by Y2K). Further, the Company has identified three key areas of concentration: information technology systems, non-IT systems and third parties (suppliers and customers). The Company's subsidiaries are in various stages of completion of this readiness, including the assessment, remediation and implementation stages, for the Y2K issue. Certain of the Company's subsidiaries are simultaneously working on the assessment, remediation and implementation stages of this initiative. During the second and third fiscal quarters of 1999, the Company's subsidiaries expect to make significant progress in the remediation and implementation stages. Overall the Company believes that it is in the remediation stage of addressing the Y2K issue and expects by the end of the second fiscal quarter of 1999 to provide a more definitive assessment of the status of each stage. Although the Company believes that all modifications to information technology ("IT") and non-IT systems, material to the Company's business, will be Y2K compliant on or before December 31, 1999, it cannot predict the outcome or the success of its Y2K program, or that third party systems are or will be Y2K compliant, or that the costs required to address the Y2K initiative, or that the impact of a failure to achieve substantial Y2K compliance, will not have a material adverse effect on the Company's business, financial condition or results of operations. 41 NORTEK, INC. AND SUBSIDIARIES 1. Information Technology (IT) systems: The Company is conducting a comprehensive review of its computer systems to identify those that could be affected by the Y2K issue. The Company's operating systems and database systems are not all Y2K compliant. The Company presently believes that with minor modifications (conversion and testing in progress) to existing software and replacement of others, the Y2K problem will not pose significant operational problems for the Company's computer systems as so modified. 2. Non-IT systems: Non-IT systems are those that typically include "embedded" technology such as microcontrollers and chips. The Company is in the process of evaluating the effect of the Y2K problem on all non-IT systems including all telecommunications equipment, shop-floor controls, alarm systems and any other equipment that can potentially use microcontrollers, chips or other systems affected by the Y2K problem. 3. Third parties: Due to the pervasive use of computers by the Company in its dealings with suppliers, customers, financial institutions, and other third parties, the Y2K problem could have a material impact on the Company if not timely addressed by such third parties. To assess third party readiness, the Company is surveying its principal suppliers and financial institutions and receiving responses that indicate that such parties are in the process of adequately addressing the problem. In cases where key suppliers have not responded or are not adequately addressing the issue, the Company will determine what contingency plans will be necessary to protect the Company's interests. While the Company has not surveyed all its customers, it has received surveys from many of its principal customers that indicate that they are also addressing the problem. The Company operates in a decentralized environment and major computer systems are, therefore, in various states of readiness. The Company has nineteen businesses with various IT systems that support 100% of the Company's net sales for 1998 after excluding net sales of Businesses sold in 1998. The Company estimates that the remediation effort for IT systems Y2K issues of eight business units representing approximately 36% of net sales for 1998 are approximately 80-95% complete. The Company estimates 42 NORTEK, INC. AND SUBSIDIARIES that the remediation effort for the IT systems Y2K issues of seven business units representing approximately 43% of net sales for 1998 are approximately 60-75% complete. The Company estimates that the remediation effort for the IT systems Y2K issues of four business units representing approximately 21% of net sales for 1998 is approximately 30-50% complete. Substantially all of the non-IT systems, including telephone systems and office equipment, have been tested. Those found not to be Y2K compliant are in the process of being replaced or repaired. Machinery and equipment testing and remediation are in process and the Company estimates this phase to be approximately 30% complete overall. B. Cost: The Company's estimate for remediation directly related to fixing Y2K issues is approximately $6,500,000. The total estimated expenditures of approximately $6,500,000 consist of approximately $2,000,000 of IT computer hardware equipment costs, approximately $3,500,000 of IT software and non-IT computer hardware expenditures and approximately $1,000,000 of other non-IT expenditures. The Company has spent approximately $2,200,000 through December 31, 1998. All of the Company's Y2K compliance expenditures have been or are expected to be funded from the Company's operating cash flow. The Company's Y2K 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 Y2K compliance budget has not required the diversion of funds from or the postponement of the implementation of other planned IT projects. Actual costs to be incurred by the Company will depend on a number of factors which cannot be accurately predicted and may therefore deviate from the estimates above including, among others, the extent and difficulty of the remaining remediation and other work to be done, the availability and cost of consultants, and the extent of testing required to demonstrate Y2K compliance. C. Risks: Based on current information, the Company believes that the Y2K problem will not have a material adverse effect on the Company, its business or its financial condition. There can, however, be no assurances that Y2K remediation by the Company or third parties will be properly and timely completed, and failure to do 43 NORTEK, INC. AND SUBSIDIARIES so could have a material adverse effect on the Company, its business and its financial condition. The Company believes that the greatest risk presented by the Y2K problem is from third parties, such as suppliers, financial institutions, utility providers and customers, among others, who may not have adequately addressed the problem. A failure of any such third party's computer or other applicable systems in sufficient magnitude could materially and adversely affect the Company. The Company is not presently able to quantify this risk. The Company is unable to assess a reasonable worst case Y2K scenario given a number of factors outside of the Company's direct or indirect control, including, among others, the Company's current remediation status and the uncertainty of the readiness of vendors and customers. The Company recognizes the risks in its ability to conduct business if other key suppliers in utilities, communications, transportation, banking and government, both domestic (local, state and federal) and foreign, are not Y2K ready. The Company is in the process of surveying vendors and customers about their readiness. Upon completion of this survey, the Company will complete its own internal review of this information to verify the accuracy of the responses. The Company is monitoring news and progress reports pertaining to those critical services to determine the effect on the Company's ability to conduct business as a result of Y2K issues on the economy if those and other key suppliers in utilities, communications, transportation, banking and government, both domestic (local, state and federal) and foreign, cease to function. Once the Company has completed its remediation phase of the Y2K issue, the Company will develop appropriate worst-case scenarios and plans to deal with such contingencies while it develops its contingency plans which are expected to be completed in mid 1999. D. Contingency Plans: The Company is in the process of preparing appropriate contingency plans in the event that a significant internal or external exposure is identified. While the Company is not presently aware of any such significant exposure, there can be no guarantee that the systems of third parties on which the Company relies will be converted in a timely manner, or that a failure to properly convert by another company would not have a material adverse effect on the Company. The Company's contingency plans for IT systems have not been completely developed, but are expected to be complete by mid 1999. The Company expects to complete the preparation of its contingency plans once it evaluates its status after it has 44 NORTEK, INC. AND SUBSIDIARIES completed the remediation phase of the Y2K project for IT systems. In planning for issues not resolved or contemplated for IT systems, the Company plans to allocate internal resources and may retain dedicated consultants and vendor representatives to be available to take corrective action, if necessary. However, the Company will adjust and adopt additional plans if situations arise requiring modifications to existing contingency plans or new contingency plans, as required. The Company's contingency plans for non-IT systems have also not been completed. The Company's subsidiaries do, however, have various business interruption contingency plans in place. These plans are in the process of being evaluated for Y2K scenarios and will be adjusted as appropriate. The Company will develop, if necessary, appropriate contingency plans by mid 1999 upon completion of its remediation efforts in this area. 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 costs, (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, Y2K readiness, currency translation, consumer spending levels, operating in international 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 45 NORTEK, INC. AND SUBSIDIARIES document, as well as the Company's periodic reports on Forms 10-K, 10-Q and 8-K, filed with the Securities and Exchange Commission ("SEC"). 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders, incorporated herein by reference. 46 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, 1998 49 Consolidated Balance Sheet as of December 31, 1998 and 1997 50 Consolidated Statement of Cash Flows for the three years ended December 31, 1998 52 Consolidated Statement of Stockholders' Investment for the three years ended December 31, 1998 54 Notes to Consolidated Financial Statements 57 Report of Independent Public Accountants 90 2. Financial Statement Schedules: Schedule I Condensed Financial Information of Registrant 91 Schedule II Valuation and Qualifying Accounts 97 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. 47 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 29, 1999. NORTEK, INC. By: /s/Richard L. Bready -------------------------- Richard L. Bready Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, as of March 29, 1999. /s/Richard L. Bready /s/J. Peter Lyons - ------------------------------------------------------------------------------- Richard L. Bready, Chairman J. Peter Lyons, Director of the Board and President (principal executive officer) /s/Richard J. Harris /s/William I. Kelly - ------------------------------------------------------------------------------- Richard J. Harris, Vice President William I. Kelly, Director and Treasurer (principal financial officer) and Director /s/Almon C. Hall /s/Phillip L. Cohen - ------------------------------------------------------------------------------- Almon C. Hall, Vice President Phillip L. Cohen, Director and Controller (principal accounting officer) 48 Nortek, Inc. and Subsidiaries Consolidated Statement of Operations
For the Years Ended December 31, 1998 1997 1996 (In thousands except per share amounts) Net Sales $1,738,343 $1,134,129 $841,557 ---------- ---------- -------- Costs and Expenses: Cost of products sold 1,275,350 825,805 596,847 Selling, general and administrative expense 315,449 219,376 180,308 Amortization of goodwill and intangible assets 14,416 5,967 3,451 ---------- ---------- -------- 1,605,215 1,051,148 780,606 ---------- ---------- -------- Operating earnings 133,128 82,981 60,951 Gain on Businesses sold 4,000 --- --- Interest expense (86,298) (50,210) (28,400) Investment income 10,470 9,929 6,049 ---------- ---------- -------- Earnings from continuing operations before provision for income taxes 61,300 42,700 38,600 Provision for income taxes 27,300 16,300 14,900 ---------- ---------- -------- Earnings from continuing operations before extraordinary loss 34,000 26,400 23,700 Earnings (loss) from discontinued operations 1,200 (5,200) (1,700) Extraordinary loss from debt retirements (200) --- --- --------- ---------- -------- Net Earnings $ 35,000 $ 21,200 $ 22,000 ========= ========== ======== Earnings (loss) Per Share: Earnings from continuing operations: Basic $3.11 $2.75 $2.26 Diluted $3.06 $2.68 $2.23 Earnings (loss) from discontinued operations: Basic $ .11 $(.54) $(.16) Diluted $ .11 $(.53) $(.16) Extraordinary loss from debt retirements: Basic $(.02) --- --- Diluted $(.02) --- --- Net Earnings: Basic $3.20 $2.21 $2.10 Diluted $3.15 $2.15 $2.07 Weighted Average Number of Shares: Basic 10,923 9,605 10,485 Diluted 11,113 9,855 10,641 The accompanying notes are an integral part of these consolidated financial statements.
49 Nortek, Inc. and Subsidiaries Consolidated Balance Sheet
December 31, 1998 1997 (Amounts in thousands) Assets Current Assets: Unrestricted Cash and cash equivalents $ 87,876 $ 125,842 Marketable securities available for sale 121,757 35,988 Restricted Investments and marketable securities at cost, which approximates market 13,818 6,348 Accounts receivable, less allowances of $10,657,000 and $11,047,000 205,359 180,414 Inventories Raw materials 69,247 72,693 Work in process 13,010 18,399 Finished goods 80,450 85,161 ---------- ---------- 162,707 176,253 ---------- ---------- Prepaid expenses 10,938 8,391 Other current assets 15,513 12,627 Net assets of a discontinued operation --- 22,386 Prepaid income taxes 54,163 46,800 ---------- ---------- Total current assets 672,131 615,049 ---------- ---------- Property and Equipment, at Cost: Land 12,628 12,081 Buildings and improvements 102,455 96,606 Machinery and equipment 294,551 250,677 ---------- ---------- 409,634 359,364 Less accumulated depreciation 130,010 116,841 ---------- ---------- Total property and equipment, net 279,624 242,523 ---------- ---------- Other Assets: Goodwill, less accumulated amortization of $41,204,000 and $31,773,000 598,823 378,232 Intangible assets, net 73,441 8,752 Deferred income taxes --- 10,022 Deferred debt expense 24,845 21,066 Other 41,129 28,902 ---------- ---------- 738,238 446,974 ---------- ---------- $1,689,993 $1,304,546 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
50 Nortek, Inc. and Subsidiaries Consolidated Balance Sheet
December 31, 1998 1997 (Amounts in thousands) Liabilities and Stockholders' Investment Current Liabilities: Notes payable and other short-term obligations $ 10,962 $ 11,770 Current maturities of long-term debt 6,776 5,969 Accounts payable 120,101 91,488 Accrued expenses and taxes, net 197,085 164,001 ---------- ---------- Total current liabilities 334,924 273,228 ---------- ---------- Other Liabilities: Deferred income taxes 26,040 --- Other 104,306 67,390 ---------- ---------- 130,346 67,390 ---------- ---------- Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 1,007,113 835,840 ---------- ---------- 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; 18,427,595 and 16,050,794 shares issued 18,428 16,051 Special common stock, $1 par value; authorized 5,000,000 shares; 854,935 and 767,287 shares issued 855 767 Additional paid-in capital 201,626 135,345 Retained earnings 93,966 58,966 Accumulated other comprehensive loss (11,596) (5,327) Less --treasury common stock at cost, 7,290,335 and 7,032,497 shares (83,711) (75,779) --treasury special common stock at cost, 286,009 and 285,304 shares (1,958) (1,935) ---------- ---------- Total stockholders' investment 217,610 128,088 ---------- ---------- $1,689,993 $1,304,546 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
51 Nortek, Inc. and Subsidiaries Consolidated Statement of Cash Flows
For the Years Ended December 31, 1998 1997 1996 (Amounts in thousands) Cash Flows from operating activities: Net earnings from continuing operations $34,000 $26,400 $23,700 Earnings (loss) from discontinued operations 1,200 (5,200) (1,700) Extraordinary loss from debt retirements (200) --- --- ------- ------- ------- Net earnings 35,000 21,200 22,000 ------- ------- ------- Adjustments to reconcile net earnings to cash: Depreciation and amortization 42,084 26,696 19,831 Non-cash interest expense 3,237 1,711 1,164 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) (750) Deferred federal income tax provision (benefit) 15,100 4,000 (3,000) Deferred federal income tax (benefit) provision on discontinued operations (3,200) (1,000) 1,200 Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (4,554) 10,259 (3,729) Prepaids and other current assets 1,581 5,699 3,280 Inventories (979) 6,524 11,828 Net assets of discontinued operations (7,426) 4,934 817 Accounts payable 12,532 (16,359) 1,699 Accrued expenses and taxes 10,084 23,468 (7,550) Long-term assets, liabilities and other, net (2,374) (4,317) 583 -------- -------- ------- Total adjustments to net earnings 66,185 63,915 25,373 -------- -------- ------- Net cash provided by operating activities 101,185 85,115 47,373 -------- -------- ------- Cash Flows from investing activities: Capital expenditures (40,863) (22,464) (19,267) Net cash paid for businesses acquired (324,702) (407,419) --- Net cash received from Businesses sold or discontinued 111,738 --- --- Purchase of investments and marketable securities (179,582) (283,918) (66,901) Proceeds from the sale of investments and marketable securities 95,143 298,158 82,435 Change in restricted cash and investments (7,463) (674) (72) Other, net (5,622) (7,064) (1,405) -------- -------- ------- Net cash used in investing activities (351,351) (423,381) (5,210) -------- -------- -------
52 Nortek, Inc. and Subsidiaries Consolidated Statement of Cash Flows (Continued)
For the Years Ended December 31, 1998 1997 1996 (Amounts in thousands) Cash Flows from financing activities: Sale of Notes, net 203,492 466,214 --- Sale of Nortek Common Stock 64,190 --- --- Increase in borrowings --- 612 9,609 Payment of borrowings and purchase of Notes (49,199) (33,966) (13,598) Purchase of Nortek Common and Special Common Stock (7,668) (10,177) (34,822) Other, net 1,385 383 479 ------- -------- ------- Net cash provided by (used in) financing activities 212,200 423,066 (38,332) ------- -------- ------- Net (decrease) increase in unrestricted cash and cash equivalents (37,966) 84,800 3,831 Unrestricted cash and cash equivalents at the beginning of the year 125,842 41,042 37,211 ------- -------- ------- Unrestricted cash and cash equivalents at the end of the year $87,876 $125,842 $41,042 ======= ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
53 Nortek, Inc. and Subsidiaries Consolidated Statement of Stockholders' Investment For the Year Ended December 31, 1996 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (Loss) Income (Loss) Balance, December 31, 1995 $15,883 $ 774 $134,690 $15,766 $(33,080) $(2,742) $ --- Net earnings --- --- --- 22,000 --- --- 22,000 Other comprehensive income (loss): Translation adjustment --- --- --- --- --- 138 138 Minimum pension liability --- --- --- --- --- (127) (127) Unrealized decline in the value of market- able securities --- --- --- --- --- (481) (481) ------- Comprehensive income $21,530 ======= 27,697 shares of special common stock converted into 27,697 shares of common stock 28 (28) --- --- --- --- 54,461 shares of common stock and 37,500 shares of special common stock issued upon exercise of stock options 55 38 338 --- --- --- 2,293,065 shares of treasury stock acquired --- --- --- --- (34,457) --- ------- ----- -------- ------- -------- ------- Balance, December 31, 1996 $15,966 $ 784 $135,028 $37,766 $(67,537) ($3,212) ======= ===== ======== ======= ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
54 Nortek, Inc. and Subsidiaries Consolidated Statement of Stockholders' Investment For the Year Ended December 31, 1997 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (Loss) Income (Loss) 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): 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) ======= ===== ======== ======= ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
55 Nortek, Inc. and Subsidiaries Consolidated Statement of Stockholders' Investment For the Year Ended December 31, 1998 (Dollar Amounts in Thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (Loss) Income (Loss) 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): Translation adjustment --- --- --- --- --- (1,436) (1,436) Minimum pension liabil- ity net of $2,979 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 acquired --- --- --- --- (7,955) --- ------- ----- -------- ------- -------- -------- Balance, December 31, 1998 $18,428 $ 855 $201,626 $93,966 $(85,669) $(11,596) ======= ===== ======== ======= ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
56 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 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. Effective in 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") and, accordingly, the presentation for all years has been reclassified to conform to the presentation for 1998 (see Note 10). 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, 1998. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods. Actual results could vary from the amounts derived from such estimates and assumptions. Cash, Investments and Marketable Securities - ------------------------------------------- Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less which are readily convertible into cash. The Company has classified as restricted (in current assets in the accompanying consolidated balance sheet) certain investments and marketable securities that are not fully available for use in its operations. At December 31, 1998, approximately $13,818,000 of cash, investments and marketable securities have been pledged as collateral for insurance and other requirements. 57 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, 1998, the fair value of investments and marketable securities approximated the amount on the Company's consolidated balance sheet. Long-Term Debt-- At December 31, 1998, the fair value of long-term indebtedness was approximately $30,000,000 higher 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, 1998 and 1997, approximately $91,304,000 and $53,817,000 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 $3,407,000 and $5,041,000 greater at December 31, 1998 and 1997, respectively. All other inventories were valued under the FIFO method. Sales Recognition - ----------------- The Company recognizes sales upon the shipment of its products net of applicable provisions for discounts and allowances. The Company also provides for its estimate of warranty and bad debts at the time of sale as selling, general and administrative expense. Foreign Currency Translation - ---------------------------- The financial statements of subsidiaries outside the United States are generally measured using the local currency as the functional currency. The Company translates the assets and 58 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 income included in stockholders' investment in the accompanying consolidated balance sheet. Transaction gains or losses are recorded in selling, general and administrative expense and have not been material. Depreciation and Amortization - ----------------------------- Depreciation and amortization of property and equipment are provided on a straight-line basis over the estimated useful lives, which are generally as follows: Buildings and improvements 10-35 years Machinery and equipment, including leases 3-15 years Leasehold improvements term of lease Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized. Intangible Assets and Goodwill - ------------------------------ Intangible assets consist principally of patents, trademarks and copyrights and are amortized on a straight-line method over a weighted average estimated useful life of 21 years. Amortization of intangible assets charged to operations amounted to approximately $2,026,000, $648,000 and $511,000 for 1998, 1997 and 1996, 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 charged to operations amounted to approximately $12,390,000, $5,319,000 and $2,940,000 for 1998, 1997 and 1996, respectively. At each balance sheet date, in accordance with SFAS No. 121, "Accounting for Long Lived Assets and for Long Lived Assets to be Disposed of," the Company evaluates the realizability of intangible assets and goodwill based on expectations of non-discounted future cash flows for each subsidiary having a material amount of intangible assets and goodwill. If the sum of the expected non-discounted future cash flows is less than the carrying amount of intangible assets or goodwill, the Company would recognize an impairment loss. Based 59 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) on its most recent analysis, the Company believes that no material impairment of intangible assets or goodwill exists at December 31, 1998. 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, 1998 1997 1996 (In thousands except per share amounts) Earnings from continuing operations $34,000 $26,400 $23,700 Basic EPS: Basic common shares 10,923 9,605 10,485 Basic EPS $3.11 $2.75 $2.26 Diluted EPS: Basic common shares 10,923 9,605 10,485 Plus: Impact of stock options (Note 6) 190 250 156 ------- ------ ------- Diluted common shares 11,113 9,855 10,641 ======= ====== ======= Diluted EPS $3.06 $2.68 $2.23 ======= ====== =======
Comprehensive Income (Loss) - --------------------------- In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") 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, available for sale marketable securities and minimum pension liability adjustments. The components of the Company's comprehensive income (loss) and the effect on earnings, for the three years ended December 31, 60 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 1998, 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, 1998, 1997 and 1996 are as follows:
Total Unrealized Minimum Accumulated Foreign Gains Pension Other Currency (Losses) on Liability Comprehensive Translation Securities Adjustment Loss (Amounts in thousands) Balance December 31, 1996 $(1,278) $(891) $(1,043) $ (3,212) Current period change (3,815) 781 919 (2,115) ------- ----- ------- -------- 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) ======= ===== ======= ========
Derivative Instruments and Hedging Activities - --------------------------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. 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. SFAS 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). 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). 61 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 October 9, 1998, the Company acquired Napco, Inc. and an affiliate ("Napco"), for approximately $80,800,000 in cash (of which approximately $4,100,000 was paid in 1999), approximately $400,000 of forgiveness of Napco employee loans and the assumption of approximately $10,200,000 of debt. The acquisition was funded through the use of unrestricted cash, cash equivalents and marketable securities. On July 31, 1998, the Company, through a wholly-owned subsidiary, purchased all of the issued and outstanding capital stock of NuTone, Inc. ("NuTone"), a wholly-owned subsidiary of Williams plc 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% 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). Consummation of the acquisition of NuTone was subject to a Federal Trade Commission ("FTC") Order under the terms of which the Company was required to divest prior to December 31, 1998, all of the assets, properties, business and goodwill of its M&S Systems LP ("M&S") subsidiary. On December 30, 1998, the Company sold M&S and Moore-O-Matic, Inc. ("MOM") - after obtaining the required FTC approval. 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 62 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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") 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 loss excluded from the Company's consolidated results of operations from the acquisition date to December 31, 1997 and from 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 which management expects will result from the acquisition. These unaudited estimated pre-tax cost savings total approximately $18,000,000 for the period January 1, 1997 to the date of acquisition for the year ended December 31, 1997. The actual cost savings achieved since the acquisition of Ply 63 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 year ended December 31, 1998. At the date of the NuTone acquisition, the Company achieved cost reductions directly attributable to the acquisition from the elimination of fees and charges paid by NuTone to Williams and related entities. 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 expects to realize approximately $15,000,000 in unaudited estimated annual cost reductions ("NuTone Cost Reductions") that can be achieved as a result of integrating NuTone into the Company's operations. Pro Forma earnings have not been increased for the NuTone Cost Reductions for either 1998 or 1997, except for NuTone Cost Reductions actually achieved since the date of acquisition (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. 64 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following Pro Forma results do not give pro forma effect to the dispositions of businesses that occurred in 1998 or the acquisition of Napco.
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
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 M&S and MOM for approximately $27,500,000 in cash and recorded a pre-tax gain of approximately $4,000,000. 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. 65 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) During 1998, the Company made several dispositions of certain non-strategic businesses acquired in connection with the 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. Sagebrush had unaudited net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $47,600,000, $400,000 and $400,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $19,100,000, $200,000 and $200,000, respectively, for the five months ended May 22, 1998. On July 2, 1998, the Company sold Goldenberg Group, Inc. ("Goldenberg") for approximately $11,100,000 including approximately $2,000,000 in notes. Goldenberg had unaudited net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $41,300,000, $500,000 and $500,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $21,500,000, $500,000 and $500,000, respectively, for the six months ended July 2, 1998. On July 31, 1998, the Company sold another Ply Gem business, Ply Gem Manufacturing, which had unaudited net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $48,300,000, $2,500,000 and $2,500,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $23,300,000, $700,000 and $700,000, respectively, for the seven months ended July 31, 1998. 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. Allied had unaudited net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $84,400,000, $400,000 and $400,000, respectively, for the full year ended December 31, 1997 and net sales, operating earnings and earnings from continuing operations before provision for income taxes of approximately $80,300,000, $800,000 and $800,000, respectively for the eleven months ended November, 1998. 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. 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 66 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) the sale of the plumbing products business, Studley, M&S and MOM) of approximately $84,000,000 were used for general corporate purposes (see Note 9). 3. Cash Flows Interest paid was $78,988,000, $35,921,000 and $30,568,000 in 1998, 1997 and 1996, respectively. Fair value of assets acquired was $436,074,000 and $672,311,000 in 1998 and 1997, respectively. Liabilities assumed or created of businesses acquired was $111,372,000 and $264,892,000 in 1998 and 1997, respectively. Cash paid for acquisitions was $324,702,000 and $407,419,000 in 1998 and 1997, respectively. Significant non-cash financing and investing activities excluded from the accompanying consolidated statement of cash flows include capitalized lease additions of approximately $565,000 in 1998 and $500,000 in 1996 and an increase of approximately $65,000, an increase of approximately $781,000 and a decline of approximately $481,000 in the fair market value of marketable securities available for sale for 1998, 1997 and 1996, respectively. 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, 1998 1997 1996 (Amounts in thousands) Domestic $54,600 $37,000 $35,100 Foreign 6,700 5,700 3,500 ------- ------- ------- $61,300 $42,700 $38,600 ======= ======= =======
67 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following is a summary of the provision (benefit) for income taxes from continuing operations included in the accompanying consolidated statement of operations:
For the Years Ended December 31, 1998 1997 1996 (Amounts in thousands) Federal income taxes-- Current $ 6,900 $ 9,000 $15,050 Deferred 15,100 4,000 (3,000) ------- ------- ------- 22,000 13,000 12,050 Foreign 2,000 1,000 1,300 State 3,300 2,300 1,550 ------- ------- ------- $27,300 $16,300 $14,900 ======= ======= =======
Income tax payments, net of refunds, were approximately $4,568,000, $7,977,000 and $18,611,000 in 1998, 1997 and 1996, respectively. The current provision does not reflect tax benefits of approximately $2,000,000 for the exercise of non-qualified stock options. These benefits have been recorded as an increase in additional paid-in capital. The table that follows reconciles the federal statutory income tax rate of continuing operations to the effective tax rate of such earnings of approximately 44.5%, 38.2% and 38.6% in 1998, 1997 and 1996, respectively.
For the Years Ended December 31, 1998 1997 1996 (Amounts in thousands) Income tax provision from continuing operations at the federal statutory rate $21,455 $14,945 $13,510 Net change from statutory rate: Amortization not deductible for income tax purposes 4,200 1,827 1,040 State income taxes, net of federal tax effect 2,145 1,520 1,008 Change in tax reserves, net (713) (1,540) (481) Product development income tax credit from foreign operations (309) (264) (478) Effect of change in foreign tax law --- (766) --- Other, net 522 578 301 ------- ------- ------- $27,300 $16,300 $14,900 ======= ======= =======
68 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, 1998 and December 31, 1997 are as follows:
December 31, 1998 1997 (Amounts in thousands) Prepaid Income Tax Assets (classified current) Arising From: Accounts receivable $ 135 $ 4,038 Inventory 3,884 7,201 Insurance reserves 11,698 9,624 Warranty accrual 10,511 6,273 Net operating losses of Ply Gem --- 6,000 Other reserves and assets, net 27,935 13,664 -------- -------- $ 54,163 $ 46,800 ======== ======== Deferred Income Tax Assets (Liabilities) (classified non-current) Arising From: Property and equipment, net $(40,767) $(30,032) Intangible assets, net (21,997) 4,580 Capital loss carryforward 6,326 7,771 Net operating losses of Ply Gem 21,457 21,580 Valuation allowances (6,326) (7,771) Other reserves and assets, net 15,267 13,894 -------- -------- $(26,040) $ 10,022 ======== ========
At December 31, 1998, the Company has approximately $27,300,000 of net U.S. federal prepaid income tax assets which are expected to be realized through future operating earnings. At December 31, 1998, the Company's wholly owned subsidiary, Ply Gem, has a net operating loss carry-forward of approximately $61,300,000 that expires in 2011 and is subject to certain limitations imposed by the Internal Revenue Code. These losses may only be utilized against future income of the Ply Gem Group and the utilization of these losses is limited to approximately $17,500,000 per year. 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. 69 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 5. Notes, Mortgage Notes and Obligations Payable Short-term bank obligations at December 31, 1998 and 1997 consist of the following:
December 31, 1998 1997 (Amounts in thousands) Secured lines of credit and bank advances of the Company's European subsidiaries $10,589 $11,318 Other obligations 373 452 ------- ------- Short-term bank obligations $10,962 $11,770 ======= =======
These short term bank obligations are secured by approximately $29,500,000 of accounts receivable and inventory. These borrowings have an average weighted interest rate of approximately 4.3% at December 31, 1998. Notes, mortgage notes and obligations payable in the accompanying consolidated balance sheet at December 31, 1998 and 1997 consist of the following:
December 31, 1998 1997 (Amounts in thousands) 8 7/8% Senior Notes due 2008, net of unamortized original issue discount of $735,000 $ 209,265 $ --- 9 1/4% Senior Notes due 2007, net of unamortized original issue discount of $892,000 and $961,000 174,108 174,039 9 1/8% Senior Notes due 2007, net of unamortized original issue discount of $2,286,000 and $2,451,000 307,714 307,549 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"), net of unamortized original issue discount of $1,035,000 and $1,259,000 203,787 217,241 Ply Gem term loan 78,440 103,940 Mortgage notes payable 22,184 16,882 Other 18,391 22,158 ---------- -------- $1,013,889 $841,809 Less amounts included in current liabilities 6,776 5,969 ---------- -------- $1,007,113 $835,840 ========== ========
70 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 indenture governing the 8 7/8% Notes, the Company's most restrictive indenture, restricts, among other things, the payment of cash dividends, repurchase of the Company's capital stock and the making of certain other restricted payments, the incurrence of additional indebtedness, the making of certain investments, mergers, consolidations and sale of assets (all as defined in the indenture). Upon certain asset sales (as defined in the indenture), the Company will be required to offer to purchase, at 100% principal amount plus accrued interest to the date of purchase, 8 7/8% Notes in a principal amount equal to any net cash proceeds (as defined in the indenture) that are not invested in properties and assets used primarily in the same or related business to those owned and operated by the Company at the issue date of the 8 7/8% Notes or at the date of such asset sale and such net cash proceeds were not applied to permanently reduce Senior Indebtedness (as defined in the indenture). The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at 104.438% on August 1, 2003, declining to 100% on August 1, 2006 and thereafter. At March 5, 1999 approximately $60,800,000 was available for the payment of cash dividends or stock payments under the terms of the Company's indenture governing the 8 7/8% Notes. (See Note 6.) The Company's Ply Gem subsidiary has a credit facility with a syndicate of banks, which provides Ply Gem with a term loan and a letter of credit facility. Interest on borrowings is at varying rates based, at Ply Gem's option, on (a) the London Interbank Offered Rate (LIBOR) plus a spread or (b) the higher of (i) .5% above the federal funds rate or (ii) the bank's prime rate. Ply Gem pays a facility fee quarterly which fluctuates between .20% and .30% of the aggregate principal amount available under the facility. The average weighted interest rate on the credit facility for the year ended December 31, 1998 was 6.7%. 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. 71 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Ply Gem has $35,000,000 of interest rate swap agreements that terminate on December 3, 1999, whereby Ply Gem will pay the counterparties interest at a fixed rate of 5.525% and the counterparties will pay Ply Gem interest at a floating rate equal to the one month LIBOR interest rate. Ply Gem also has $40,000,000 of interest rate swaps that terminate on December 3,2003, whereby Ply Gem will pay the counterparties interest at a fixed rate of 5.76% and the counterparties will pay Ply Gem interest at a floating rate equal to the one month LIBOR interest rate. Amounts to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to interest expense. The Company's Ply Gem subsidiary also has $75,000,000 of interest rate cap agreements which entitles Ply Gem to receive from the counterparties on a monthly basis an amount by which the LIBOR interest rate on $75,000,000 of its floating rate debt exceeds 7% during the period December 5, 1998 to December 5, 1999. The cost of interest rate cap agreements are amortized to interest expense over the life of the cap. Payments received as a result of the cap agreements reduce interest expense. The unamortized costs of the cap agreements are included in other current assets in the Company's accompanying consolidated balance sheet. The impact of these arrangements has not been material to the Company's consolidated operating results. Mortgage notes payable of approximately $22,184,000 outstanding at December 31, 1998 include various mortgage notes and other related indebtedness payable in installments through 2014. These notes bear interest at rates ranging from 2.0% to 9.3% and are collateralized by property and equipment with an aggregate net book value of approximately $32,100,000 at December 31, 1998. Other obligations of approximately $18,391,000 outstanding at December 31, 1998 include borrowings relating to equipment purchases and other borrowings bearing interest at rates primarily ranging between 3.5% to 15.0% and maturing at various dates through 2017. Approximately $15,338,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $20,400,000 at December 31, 1998. 72 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, 1999: (Amounts in thousands) 2000 $ 4,887 2001 3,652 2002 82,108 2003 1,616 Thereafter 919,798 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 $62,005,000 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 will permit each rights 73 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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, 1998, a total of 1,914,857 shares of Common Stock were reserved as follows: Stock option plans 1,160,913 Conversion of Special Common Stock 753,944 --------- 1,914,857 ========= At December 31, 1998, 1,120,516 shares of Special Common Stock were reserved for stock option plans. The Company has several stock option plans which provide for the granting of options to certain officers, employees and non-employee directors of the Company. Options granted under the plans vest over periods ranging up to five years and expire ten years from the date of grant. At December 31, 1998, 153,767 additional options are available for grant under these plans. At December 31, 1998, 1997 and 1996, approximately 652,702, 709,762 and 353,800, respectively, of options to acquire shares of Common and Special Common stock were exercisable. 74 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, 1998:
Weighted Average Number Option Price Exercise of Shares Per Share Price Options outstanding at December 31, 1995 451,500 $ 2.25-$15.69 $ 7.36 Granted 275,000 14.75 14.75 Exercised (95,200) 2.25-7.938 5.07 Canceled (2,500) 8.75 8.75 --------- -------------- ------ Options outstanding at December 31, 1996 628,800 $ 2.875-$15.69 $10.93 Granted 435,600 19.50-27.00 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) 22.69 22.69 --------- -------------- ------ Options outstanding at December 31, 1998 1,007,146 $2.875-$31.875 $21.03 ========= ============== ======
13,250 of the 1,007,146 options outstanding at December 31, 1998 have an exercise price of $2.875, with a weighted average contractual life of 2 years. All of these options are exercisable. 27,147 options have an exercise price of $8.75 and a weighted average remaining contractual life of 5 years. All of these options are exercisable. 173,849 options, all of which are exercisable, have an exercise price of $14.750 and a remaining contractual life of 8 years. 778,600 options, 433,898 of which are exercisable, have exercise prices between $19.50 and $27.00 with a weighted average exercise price of $22.98 and a remaining contractual life of 9.47 years. The remaining 14,300 options, 4,558 of which are exercisable, have exercise prices between $30.375 and $31.875, with a weighted average exercise price of $30.70 and a remaining contractual life of 10 years. The Company accounts for stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized since options are granted with exercise prices equal to the fair market value of the Common Stock at the date of grant. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's earnings from continuing operations and diluted earnings per share from continuing operations would have been approximately $31,700,000 and $2.86 for 1998, approximately $24,100,000 and $2.45 75 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) for 1997 and approximately $23,300,000 and $2.19 for 1996, respectively, and net earnings and diluted net earnings per share would have been approximately $32,700,000 and $2.95 for 1998, approximately $19,000,000 and $1.92 for 1997 and approximately $21,600,000 and $2.03 for 1996, respectively. The weighted average grant date fair value of options granted was $9.40, $9.82 and $6.15 in 1998, 1997 and 1996, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used: 1998 1997 1996 Risk-free interest rate Between Between 4.50% and 5.66% 5.75% and 6.73% 7% Expected life 5 years 5 years 5 years Expected volatility 37% 37% 33% Expected dividend yield 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 March 5, 1999, the Company had purchased approximately 460,000 shares of its Common and Special Common Stock for approximately $13,000,000 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. The information presented in the tables that follow has been presented in accordance with SFAS No. 132, "Employer's Disclosures About Pension and Other Postretirement Benefits," and revises the Company's disclosures but does not change the measurement of recognition of pension benefits. 76 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Pension and profit sharing expense charged to operations aggregated approximately $9,800,000 in 1998, approximately $6,624,000 in 1997 and approximately $4,310,000 in 1996. The Company's policy is to fund currently the actuarially determined annual contribution. 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, 1998 and 1997:
Non-pension Post Retirement Health Pension Benefits Benefits 1998 1997 1998 (Amounts in thousands) Change in benefit obligation: Benefit obligation at October 1, $ 56,884 $52,592 $ --- Service cost 2,329 597 155 Interest cost 5,594 2,979 800 Amendments 851 1,454 --- Actuarial (gain) loss 12,421 1,627 (384) Obligations from an acquisition 81,822 --- 29,022 Benefits and expenses paid (5,051) (2,365) (32) -------- ------- -------- Benefit obligation at September 30, $154,850 $56,884 $ 29,561 ======== ======= ======== Change in plan assets: Fair value of plan assets at October 1, $ 56,842 $48,651 $ --- Actual return on plan assets (2,980) 10,059 --- Plan assets from an acquisition 63,118 --- --- Employer contribution 2,407 497 32 Benefits and expenses paid (5,051) (2,365) (32) -------- ------- -------- Fair value of plan assets at September 30, $114,336 $56,842 $ --- ======== ======= ========
77 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)
Non-pension Post Retirement Health Pension Benefits Benefits 1998 1997 1998 (Amounts in thousands) Funded status and statement of financial position: Fair value of plan assets at September 30, $114,336 $ 56,842 $ --- Benefit obligation at September 30, (154,850) (56,884) (29,561) -------- -------- -------- Funded status (40,514) (42) (29,561) Amount contributed during fourth quarter 335 203 339 Unrecognized actuarial loss (gain) 15,896 (5,113) (384) Unrecognized prior service cost 7,224 7,154 --- -------- -------- -------- Prepaid (accrued) benefit cost $(17,059) $ 2,202 $(29,606) ======== ======== ======== Amount recognized in the statement of financial position consists of: (a) Prepaid benefit cost $ 6,130 $ 5,567 $ --- (b) Accrued benefit liability (38,111) (8,369) (29,606) (c) Intangible asset 6,907 4,708 --- (d) Accumulated other comprehensive loss 8,015 296 --- -------- -------- -------- Net prepaid (accrued) benefit cost $(17,059) $ 2,202 $(29,606) ======== ======== ========
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 $109,588,000, $102,880,000 and $66,365,000, respectively, as of December 31, 1998 and $19,948,000, $16,286,000 and $8,170,000, respectively as of December 31, 1997. Plan assets include commingled funds, marketable securities, insurance contracts and cash and short-term investments. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows:
Years ended December 31, 1998 1997 1996 Discount rate 6.75% 7.50% 7.50% Expected return on plan assets 8.50 8.50 8.50 Rate of compensation increase 5.00 5.00 5.00
78 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company's net periodic benefit cost for its defined benefit plans for 1998, 1997 and 1996 consists of the following components:
Years ended December 31, 1998 1997 1996 (Amounts in thousands) Service cost $2,329 $ 597 $ 358 Interest cost 5,594 2,979 2,226 Expected return on plan assets (5,135) (2,819) (3,944) Amortization of prior service cost 217 636 2,218 Recognized actuarial loss 311 93 --- ------ ------ ------ Net periodic benefit cost $3,316 $1,486 $ 858 ====== ====== ======
For purposes of calculating the post retirement benefit cost, a medical inflation rate of 6.75% was assumed for 1998. The rate was assumed to decrease gradually to an ultimate rate of 4.25% by 2003. The net periodic post retirement benefit cost of approximately $955,000 for the year ended December 31, 1998 consisted of approximately $155,000 of service cost and approximately $800,000 of interest cost. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care 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 $ (47) $ 57 Effect on the post retirement benefit obligation $(3,101) $3,719
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 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) At December 31, 1998, 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 $76,675,000 at December 31, 1998. The obligations are payable as follows: 1999 $13,265,000 2000 9,276,000 2001 6,671,000 2002 5,043,000 2003 4,532,000 Thereafter 37,888,000
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 $15,000,000, $8,700,000 and $6,725,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Under certain of these lease agreements, the Company and its subsidiaries are also obligated to pay insurance and taxes. The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers' compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. 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 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 $10,168,000 at December 31, 1998 for the estimated costs to resolve these outstanding matters. The Company has also recorded receivables at December 31, 1998 of approximately $8,378,000 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 three years ended December 31, 1998:
Years Ended December 31, 1998 1997 1996 (Amounts in thousands) Net sales $50,110 $104,467 $128,241 ======= ======== ======== Loss before income taxes $(3,800) $ (5,700) $ (2,600) Income tax benefit 5,000 2,100 900 ------- -------- -------- Earnings (loss) from discontinued operations 1,200 (3,600) (1,700) Reserve for future operating expenses, net of income tax benefit of $900,000 --- (1,600) --- ------- -------- -------- Earnings (loss) from discontinued operations $ 1,200 $ (5,200) $ (1,700) ======= ======== ========
81 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, $1,900,000 and $1,700,000 in 1998, 1997 and 1996, 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 Effective in 1998, the Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." This statement introduced a new model for segment reporting, called the "management approach". The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. The presentation for 1997 and 1996 has been reclassified to conform to the presentation in 1998. 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 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. Each of the three operating segments is a reportable segment under the provisions of SFAS 131. 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 consists of entities sold during 1998 that were previously included in the Company's former Specialty Products and Distribution Group as well as other businesses 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 including kitchen range hoods, bath fans, combination units (fan, heater and light combinations). The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating and air 82 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) conditioning ("HVAC") systems for custom-designed commercial applications and for manufactured and site-built residential housing. The Windows, Doors and Siding Segment manufactures and distributes vinyl and wood windows, doors, vinyl siding, aluminum trim coil, soffit, skirting and shutters for use in the residential construction, DIY and professional renovation markets. The Windows, Doors and Siding 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 included 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 and 1996), prepaid and deferred income taxes, goodwill, intangible assets and deferred debt expense. The tables that follow exclude the results of operations for the plumbing products business which was sold in 1998 and has been accounted for as a discontinued operation. 83 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, 1998.
Years ended December 31, 1998 1997 1996 (Amounts in thousands) Net Sales: Residential Building Products $ 475,029 $ 381,750 $368,660 Air Conditioning and Heating Products 465,164 419,368 423,112 Windows, Doors and Siding 536,781 189,027 --- Other 69,322 21,322 --- ---------- ---------- -------- 1,546,296 1,011,467 791,772 Businesses sold 192,047 122,662 49,785 ---------- ---------- -------- Consolidated net sales $1,738,343 $1,134,129 $841,557 ========== ========== ======== Operating Earnings (Loss): Residential Building Products $ 53,674 $40,287 $31,232 Air Conditioning and Heating Products 55,729 41,267 38,531 Windows, Doors and Siding 31,492 8,991 --- Other, net (14,157) (14,428) (14,674) ---------- --------- -------- 126,738 76,117 55,089 Businesses sold 6,390 6,864 5,862 ---------- --------- -------- Consolidated operating earnings 133,128 82,981 60,951 ========== ========= ======== Unallocated: Gain on Businesses sold 4,000 --- --- Interest expense (86,298) (50,210) (28,400) Investment income 10,470 9,929 6,049 ---------- --------- -------- Earnings from continuing operations before provision for income taxes $61,300 $42,700 $38,600 ========== ========= ========
84 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)
December 31, 1998 1997 1996 (Amounts in thousands) Segment Assets: Residential Building Products $252,533 $172,686 $182,783 Air Conditioning and Heating Products 164,710 132,772 126,904 Windows, Doors and Siding 242,014 203,902 --- Other 17,029 27,546 4,186 ---------- ---------- -------- 676,286 536,906 313,873 Businesses sold --- 86,205 20,993 ---------- ---------- -------- Total Segment Assets 676,286 623,111 334,866 Unallocated: Cash, cash equivalents and marketable securities 223,451 168,178 97,774 Goodwill and intangible assets 672,264 386,984 94,942 Prepaid and deferred income taxes 54,163 56,822 20,000 Other assets 63,829 69,451 42,651 ---------- ---------- -------- Consolidated assets $1,689,993 $1,304,546 $590,233 ========== ========== ========
Years ended December 31, 1998 1997 1996 (Amounts in thousands) Depreciation and Amortization: Residential Building Products $14,641 $10,980 $11,189 Air Conditioning and Heating Products 8,920 8,412 7,452 Windows, Doors and Siding 15,614 5,414 --- Other 1,222 525 322 ------- ------- ------- 40,397 25,331 18,963 Businesses sold 1,687 1,365 868 ------- ------- ------- Consolidated depreciation and amortization $42,084 $26,696 $19,831 ======= ======= ======= Capital Expenditures: Residential Building Products $ 8,638 $6,361 $7,732 Air Conditioning and Heating Products 20,665 10,724 9,986 Windows, Doors and Siding 9,809 3,244 --- Other 536 314 127 ------- ------- ------- 39,648 20,643 17,845 Businesses sold 1,215 1,821 1,422 ------- ------- ------- Consolidated capital expenditures $40,863 $22,464 $19,267 ======= ======= =======
85 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Foreign net sales were approximately 8%, 11% and 15% of consolidated net sales for the years ended December 31, 1998, 1997 and 1996, respectively. Foreign long-lived assets were approximately 6%, 9% and 31% of consolidated long-lived assets for the years ended December 31, 1998, 1997 and 1996, respectively. Foreign net sales are attributed based on the location of the Company's subsidiary responsible for the sale. As required by SFAS 131, 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, 1998, the Company had no significant concentrations of credit risk. 11.Net Gain (Loss) on Marketable Securities At December 31, 1998, 1997, and 1996 the reduction in the Company's stockholders' investment for gross unrealized losses was approximately $45,000, $110,000 and $891,000 respectively. At December 31, 1998, there were no gross unrealized gains on the Company's marketable securities. The Company's unrestricted marketable securities at December 31, 1998 consist of certificates of deposit and bank issued money market instruments of which approximately $121,757,000 mature within one year. 86 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, 1998 and 1997:
December 31, 1998 1997 (Amounts in thousands) Insurance $ 28,658 $ 23,880 Employee compensation and benefits 48,094 37,600 Interest 29,231 22,049 Product warranty 13,962 9,471 Sales and marketing 19,435 12,377 Employee termination and other costs 2,666 10,179 Other, net 55,039 48,445 -------- -------- $197,085 $164,001 ======== ========
The Company has recorded liabilities, in connection with the 1997 and 1998 acquisitions, 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 in 1997 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. Management's plans for eliminating certain activities of the 1998 acquisitions were not finalized as of December 31, 1998. Accordingly, the Company has recorded liabilities of approximately $1,900,000 for the portions of the 1998 acquisitions' plans that were complete as of December 31, 1998, which principally related to termination of certain corporate employees of the 1998 acquired businesses. The Company expects to finalize its plans with respect to the 1998 acquisitions within one year of the respective acquisition dates and, accordingly, additional liabilities will be recorded as adjustments to the purchase price allocation for each acquired business. Management's estimates of the additional liabilities associated with their plans for the 1998 acquisitions are in the range of approximately $18,000,000 to $25,000,000 and relate principally to additional employee terminations and other exit costs related to the elimination or consolidation of certain functions and operations at each acquired business. 87 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 $5,300,000 and $1,700,000 for the years ended December 31, 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 and $400,000 for the years ended December 31, 1998 and 1997, respectively. 13. Summarized Quarterly Financial Data (Unaudited) The tables that follow summarize unaudited quarterly financial data for the years ended December 31, 1998 and December 31, 1997:
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
88 Nortek, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued)
For the Quarters Ended March 29 June 28 September 27 December 31 (In thousands except per share amounts) 1997 Net sales $194,238 $223,795 $300,380 $415,716 Gross profit 57,380 65,200 80,465 105,279 Earnings from continuing operations 4,700 7,700 8,400 5,600 Earnings per share from continuing operations: Basic .48 .80 .88 .59 Diluted .47 .78 .86 .57 Net earnings $ 3,700 $ 6,700 $ 7,700 $ 3,100 Net earnings per share: Basic .38 .70 .80 .33 Diluted .37 .68 .78 .32 See Notes 2 and 9 regarding certain other quarterly transactions included in the operating results in the above table.
89 Report of Independent Public Accountants for Annual Report 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 10K as of December 31, 1998 and 1997, and the related statements of operations, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nortek, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange 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 22, 1999 90 NORTEK, INC.(Parent Company) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Balance Sheet December 31, 1998 1997 (Amounts in thousands) Assets Current Assets: Unrestricted Cash and investments at cost which approximates market $ 60,238 $ 91,644 Marketable securities at cost which approximates market 86,736 35,988 Restricted Cash and investments at cost which approximates market 10,801 3,548 Marketable securities at cost which approximates market 2,796 2,800 Notes and accounts receivable, net 3,435 4,283 Prepaid expenses and other current assets 197 239 Net assets of discontinued operations --- 22,386 Prepaid income taxes 6,200 4,200 ---------- -------- Total Current Assets 170,403 165,088 ---------- -------- Property and equipment, at cost 1,708 1,588 Less-accumulated depreciation 1,350 1,211 ---------- -------- Total property and equipment, net 358 377 ---------- -------- Investments and Other Assets: Net intercompany balance and investment in subsidiaries 953,887 700,202 Deferred debt expense, net 23,843 20,139 Other 25,787 23,113 ---------- -------- 1,003,517 743,454 ---------- -------- $1,174,278 $908,919 ========== ======== The accompanying notes are an integral part of these financial statements.
91 NORTEK, INC. (Parent Company) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Balance Sheet (Continued) December 31, 1998 1997 (Amounts in thousands) Liabilities and Stockholders' Investment Current Liabilities: Accounts payable $ 1,340 $ 557 Accrued expenses and taxes 45,319 49,311 ---------- --------- Total Current Liabilities 46,659 49,868 ---------- --------- Other Liabilities: Deferred income taxes 1,400 5,300 Other 13,735 26,834 ---------- --------- 15,135 32,134 ---------- --------- Senior notes 691,087 481,588 ---------- --------- Senior subordinated notes 203,787 217,241 ---------- --------- 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, 18,427,595 and 16,050,794 shares issued 18,428 16,051 Special common stock, $1 par value; authorized 5,000,000 shares, 854,935 and 767,287 shares issued 855 767 Additional paid-in Capital 201,626 135,345 Retained earnings 93,966 58,966 Accumulated other comprehensive loss (11,596) (5,327) Less--treasury common stock at cost, 7,290,335 and 7,032,497 shares (83,711) (75,779) --treasury special common stock at cost, 286,009 and 285,304 shares (1,958) (1,935) ---------- -------- Total Stockholders' Investment 217,610 128,088 ---------- -------- $1,174,278 $908,919 ========== ======== The accompanying notes are an integral part of these financial statements.
92 NORTEK, INC. (Parent Company) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Statement of Operations For the Years Ended December 31, ----------------------------------- 1998 1997 1996 (In thousands except per share amounts) Revenues: Charges and allocations to subsidiaries $75,208 $34,498 $33,829 Gain on sale of businesses 4,000 --- --- Interest and dividend income 8,777 9,073 4,956 Net gain on investment securities --- 200 750 Other income 556 518 664 ------- ------- ------- Total revenues 88,541 44,289 40,199 ------- ------- ------- Expenses: Selling, general and administrative expense 15,030 13,605 11,503 Interest expense 75,922 43,921 20,912 Other expense 679 784 731 ------- ------- ------- Total expenses 91,631 58,310 33,146 ------- ------- ------- Earnings (loss) from continuing operations, before equity in subsidiaries' earnings (3,090) (14,021) 7,053 Equity in subsidiaries earnings before provision for income taxes 64,390 56,721 31,547 ------- ------- ------- Earnings from continuing operations before provision for income taxes 61,300 42,700 38,600 Provision for income taxes 27,300 16,300 14,900 ------- ------- ------- Earnings from continuing operations before extraordinary loss 34,000 26,400 23,700 Earnings (loss) from discontinued operations 1,200 (5,200) (1,700) Extraordinary loss from debt retirements (200) --- --- ------- ------- ------- Net earnings $35,000 $21,200 $22,000 ======= ======= ======= Earnings (loss) per share: Earnings per share from continuing operations: Basic $3.11 $2.75 $2.26 Diluted $3.06 $2.68 $2.23 Earnings (loss) from discontinued operations: Basic $ .11 $(0.54) $(0.16) Diluted $ .11 $(0.53) $(0.16) Extraordinary loss from debt retirements: Basic $(.02) $--- $--- Diluted $(.02) $--- $--- Net earnings: Basic $3.20 $2.21 $2.10 Diluted $3.15 $2.15 $2.07 Weighted average number of shares: Basic 10,923 9,605 10,485 Diluted 11,113 9,855 10,641 The accompanying notes are an integral part of these financial statements.
93 NORTEK, INC. (Parent Company) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Statement of Cash Flows For the Years Ended December 31, ---------------------------------- 1998 1997 1996 (Amounts in thousands) Cash flows from operating activities: Earnings from continuing operations $ 34,000 $ 26,400 $ 23,700 Net earnings (loss) from discontinued operations 1,200 (5,200) (1,700) Extraordinary loss from debt retirements (200) --- --- -------- -------- -------- Net earnings 35,000 21,200 22,000 -------- -------- -------- Adjustments to reconcile net earnings to cash: Depreciation and amortization 117 139 320 Non-cash interest expense 2,856 1,421 802 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 (64,390) (56,721) (31,547) Charges and allocations to subsidiaries (75,208) (34,498) (33,829) Net transfers from subsidiaries, principally cash 97,905 57,034 69,616 Gain on sale of investments and marketable securities --- (200) (750) Deferred federal income tax provision (benefit) 15,100 4,000 (3,000) Deferred federal income tax (benefit) provision on discontinued operations (3,200) (1,000) 1,200 Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Notes and accounts receivable and other current assets (2,672) (994) (1,730) Other assets (1,034) (2,877) (570) Net assets of discontinued operations (7,426) 4,934 817 Accrued expenses and taxes 13,558 4,491 (2,704) Long-term liabilities (1,243) 4,832 903 Other, net 948 277 482 -------- -------- -------- Total adjustments to net earnings (24,589) (16,662) 10 -------- -------- -------- Net cash provided by operating activities 10,411 4,538 22,010 -------- -------- --------
94 NORTEK, INC. (Parent Company) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Statement of Cash Flows (Continued) For the Years Ended December 31, 1998 1997 1996 (Amounts in thousands) Cash flows from investing activities: Capital expenditures (65) (70) (123) Purchases of investments and marketable securities (124,986) (283,918) (66,901) Proceeds from the sale of investments and marketable securities 75,255 297,133 82,242 Proceeds either received directly or from subsidiaries relating to Businesses sold or discontinued 61,162 --- --- Cash paid for businesses acquired (46,040) --- --- Cash contributed to subsidiaries for businesses acquired (248,000) (407,419) --- Change in restricted cash, investments and marketable securities (7,234) (828) (96) Other, net (56) (4,188) (1,662) -------- -------- ------- Net cash (used in) provided by investing activities (289,964) (399,290) 13,460 -------- -------- ------- Cash flows from financing activities: Sale of Notes, net 203,492 466,213 --- Purchase of Notes (13,678) --- --- Sale of Nortek Common Stock 64,190 --- --- Purchase of Nortek Common and Special Common Stock (7,668) (10,177) (34,822) Other, net 1,811 386 356 -------- -------- ------- Net cash provided by (used in) financing activities 248,147 456,422 (34,466) -------- -------- ------- Net (decrease) increase in unrestricted cash and investments (31,406) 61,670 1,004 Unrestricted cash and investments at the beginning of the year 91,644 29,974 28,970 -------- -------- ------- Unrestricted cash and investments at the end of the year $ 60,238 $ 91,644 $29,974 ======== ======== ======= Interest paid on indebtedness $ 65,599 $ 29,581 $21,662 ======== ======== ======= Net income taxes paid, including those paid by subsidiaries $ 4,568 $ 7,977 $18,611 ======== ======== ======= The accompanying notes are an integral part of these financial statements.
95 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 1997 and 1996 amounts have been reclassified to conform to the 1998 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, 1998: (Amounts in thousands) 1999 $ --- 2000 --- 2001 --- 2002 --- 2003 --- Thereafter $899,822 3. The Registrant's net investment in subsidiaries is net of the cumulative amount of intercompany cash transfers and other transactions. 4. In 1998, the Registrant made capital contributions of $46,040,000 to Ply Gem Corporation ("Ply Gem") to provide funding for certain business acquisitions made by Ply Gem in 1998. 5. Included in the Registrants condensed statement of cash flows for the year ended December 31, 1997 (in net transfers from subsidiaries, principally cash) are dividends (declared by subsidiaries' Board of Directors) from subsidiaries of $70,000,000. There were no dividends declared in 1998 or 1996. 6. 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, 1998, approximately $380,176,000 (of which approximately $327,076,000 is goodwill) of subsidiary net assets, principally Ply Gem and its subsidiaries, were restricted and approximately $89,756,000 principal amount of subsidiary indebtedness was outstanding under these financing agreements. 96 NORTEK, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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 For the year ended December 31, 1996: Allowance for doubtful accounts and sales allowances $ 3,439 $ --- $1,951 $ 119(c) $(1,853)(a) $ 3,656 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) (a) Amounts written off, net of recoveries (b) Businesses sold (c) Other
97 NORTEK, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibits marked with an asterisk are filed herewith. The remainder of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference. Exhibits marked with a double asterisk identify each management contract or compensatory plan or arrangement. 3.1 Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 2 to Form 8-K filed April 23, 1987, File No. 1-6112). 3.2 Amendment to Restated Certificate of Incorporation of Nortek, Inc. effective May 10, 1989 (Exhibit 3.2 to Form 10-K filed March 30, 1990, File No. 1-6112). 3.3 By-laws of Nortek, Inc. (as amended through September 19, 1996) (Exhibit 3.3 to Form 10-Q filed November 5, 1996, File No. 1-6112). 4.1 Second Amended and Restated Rights Agreement dated as of April 1, 1996 between the Company and State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed April 2, 1996, File No. 1-6112). 4.2 Indenture dated as of February 14, 1994 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9 7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K filed March 25, 1994, File No. 1-6112). 4.3 Indenture dated as of March 17, 1997 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9.25% Series A and Series B Senior Notes due March 15, 2007 (Exhibit 4.2 to Registration Statement No. 333-25505 filed April 18, 1997). 4.4 Indenture dated as of August 26, 1997 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9 1/8% Series A and Series B Senior Notes due September 1, 2007 (Exhibit 4.1 to Registration Statement No. 333-36711 filed September 30, 1997). 98 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 Deferred Compensation Agreement dated March 7, 1983 between Richard L. Bready and the Company (Exhibit 10.4 to Registration Statement No. 33-69778 filed February 9, 1994). **10.7 Deferred Compensation Agreement dated March 7, 1983 between Almon C. Hall and the Company (Exhibit 10.5 to Registration Statement No. 33-69778 filed February 9, 1994). **10.8 Deferred Compensation Agreement dated March 7, 1983 between Richard J. Harris and the Company (Exhibit 10.6 to Registration Statement No. 33-69778 filed February 9, 1994). 99 **10.9 1984 Stock Option Plan, as amended through May 27, 1987 (Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15, 1988). **10.10 Change in Control Severance Benefit Plan for Key Employees adopted February 10, 1986, and form of agreement with employees (Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112). **10.11 Change in Control Severance Benefit Plan for Key Employees as Amended and Restated June 12, 1997, and form of agreement with employees (Exhibit 10.1 to Form 10-Q filed August 8, 1997, file No. 1-6112). **10.12 1987 Stock Option Plan (Exhibit 28.3 to Registration Statement No. 33-22527 filed June 15, 1988). **10.13 1997 Equity and Cash Incentive Plan (Exhibit 10.1 to Form 10-Q filed May 12, 1997, File No. 1-6112). **10.14 1997 Stock Option Plan for Directors (Exhibit 10.2 to Form 10-Q filed May 12, 1997, File No. 1-6112). **10.15 Nortek, Inc. Supplemental Executive Retirement Plan dated July 1, 1997 (Exhibit 10.3 to Form 10-Q filed August 8, 1997, File No. 1-6112). **10.16 First Amendment dated July 1, 1997 to Nortek, Inc. Supplemental Executive Retirement Plan dated July 1, 1997 (Exhibit 10.4 to Form 10-Q filed August 8, 1997, File No. 1-6112). **10.17 Form of Indemnification Agreement between the Company and its directors and certain officers (Appendix C to Proxy Statement dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File No. 1-6112). 10.18 Stock Purchase and Sale Agreement dated March 9, 1998 between Williams Y&N Holdings, Inc. and NTK Sub, Inc. (Exhibit 2 to Form 8-K/A filed March 18, 1998, File No. 1-6112). *10.19 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. 100 *21.1 List of subsidiaries. *23.1 Consent of Independent Public Accountants. *27.1 Financial Data Schedule. 101 EX-21 2 Exhibit 21.1 LIST OF SUBSIDIARIES Set forth below is a list of all subsidiaries of the Company as of December 31, 1998 the assets and operations of which are included in the Consolidated Financial Statements of Nortek, Inc., except subsidiaries that, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary: STATE OF NAME OF SUBSIDIARY INCORPORATION Broan-NuTone Canada, Inc. ........................ Ontario Venmar Ventilation Inc ........................ Quebec Conservation Energy Systems, Inc. ........ Quebec Venmar Ventilation Inc. .................. Quebec Aston Industries, Inc. ................... Quebec Broan Mfg. Co., Inc. ............................. Wisconsin Aubrey Manufacturing, Inc. .................... Delaware Jensen Industries, Inc. .......................... Delaware LaCornue SA ...................................... France Linear Corporation ............................... California Linear H.K. Manufacturing Limited ............. Hong Kong We Monitor America Incorporated ............... Colorado Nordyne Inc. ..................................... Delaware Commercial Environmental Systems Group, Inc. ................................... Delaware Mammoth, Inc. ............................ Delaware Governair Corporation .................... Oklahoma Temtrol, Inc. ............................ Oklahoma Nortek (UK) Limited .............................. United Kingdom Best S.p.A .................................... Italy Best Deutschland GmbH .................... Germany Elektromec S.p.A .............................. Italy NuTone, Inc. ..................................... Delaware Ply Gem Industries, Inc. ......................... Delaware Currier Lumber Co., Inc. ...................... Michigan Continental Wood Preservers, Inc. ........ Michigan Great Lakes Window, Inc. ...................... Ohio Hoover Treated Wood Products .................. Delaware Napco, Inc. ................................... Delaware Richwood Building Products, Inc. .............. Delaware SNE Enterprises, Inc. ......................... Delaware Variform, Inc. ................................ Missouri Rangaire LP ...................................... Delaware EX-23 3 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 22, 1999, included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-22527, 33-47897 and 333-39293). /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts, March 30, 1999 EX-27 4
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 87,876 135,575 216,016 10,657 162,707 672,131 409,634 130,010 1,689,993 334,924 1,007,113 0 0 19,283 198,327 1,689,993 1,738,343 1,738,343 1,275,350 1,275,350 0 0 86,298 61,300 27,300 34,000 1,200 (200) 0 35,000 3.20 3.15
EX-10 5 Exhibit 10.19 PLY GEM INDUSTRIES, INC. ------------------------------------------------ SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of August 26, 1997 and Amended and Restated as of December 30, 1998 ------------------------------------------------ FLEET NATIONAL BANK, as Agent, and THE BANKS SIGNATORY HERETO TABLE OF CONTENTS Page SECTION 1. DEFINITIONS............................................2 1.1 Defined Terms..........................................2 1.2 Other Definitional Provisions.........................28 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS......................29 2.1 Commitments...........................................29 2.2 Notes.................................................32 2.3 Procedure for Loan Borrowings.........................32 2.4 Intentionally Omitted.................................33 2.5 Intentionally Omitted.................................33 2.6 Termination or Reduction of Commitments...............33 2.7 Fees..................................................34 2.8 Optional and Mandatory Prepayments....................34 2.9 Repayment of Loans....................................36 2.10 Interest Rates and Payment Dates......................37 2.11 Computation of Interest and Fees......................38 2.12 Inability to Determine Interest Rate..................39 2.13 Taxes.................................................39 2.14 Illegality............................................41 2.15 Increased Costs.......................................41 2.16 Indemnity.............................................43 2.17 Maximum Number of Tranches............................43 2.18 Use of Proceeds.......................................43 2.19 Pro Rata Treatment and Payments; L/C Participation....43 2.20 Guaranties............................................46 2.21 Security..............................................46 2.22 Additional L/C Provisions.............................47 2.23 Several Obligations...................................50 SECTION 3. REPRESENTATIONS AND WARRANTIES........................50 3.1 Financial Condition...................................50 3.2 No Change.............................................50 3.3 Corporate Existence; Compliance with the Law..........51 3.4 Corporate Power;Authorization;Enforceable Obligations.51 3.5 No Legal Bar..........................................52 3.6 No Litigation.........................................52 3.7 Federal Regulations...................................52 3.8 Investment Company Act................................52 3.9 Disclosure............................................52 3.10 No Default............................................52 3.11 Taxes.................................................53 3.12 Subsidiaries..........................................53 3.13 Ownership of Property; Liens..........................53 3.14 ERISA.................................................53 3.15 Nortek Indentures.....................................55 3.16 SEC Reports...........................................55 3.17 Intangible Assets.....................................55 3.18 Name Changes, Mergers, Acquisitions...................55 3.19 Licenses and Approvals................................56 3.20 Labor Disputes; Collective Bargaining Agreements; Employee Grievances...................................56 3.21 Solvency..............................................56 3.22 Outstanding Indebtedness for Borrowed Money...........56 3.23 Hazardous Materials...................................56 SECTION 4. CONDITIONS PRECEDENT..................................57 4.1 Conditions to Initial L/Cs............................57 (a) Napco Merger.....................................57 (b) Corporate Structure..............................57 (c) No Material Adverse Change.......................57 (d) Pre-Commitment Information.......................57 (e) Capital Structure................................57 (f) Compliance; No Litigation........................57 (g) Insurance........................................58 (h) Fees and Expenses................................58 (i) Consents and Approvals...........................58 (j) Agreement........................................58 (k) Notes............................................58 (l) Loan Party Consents..............................58 (m) Intentionally Omitted............................58 (n) Borrowing Certificates...........................59 (o) Intentionally Omitted............................59 (p) Legal Opinions...................................59 (q) Related Agreements...............................59 (r) Corporate Proceedings............................59 (s) Related Documents and Nortek Indentures..........59 (t) Consents.........................................60 (u) Other Fees.......................................60 (v) Good Standings...................................60 (w) Incumbency Certificates..........................60 (x) Solvency Certificate.............................60 (y) Ownership, Liens.................................60 (z) Projections......................................61 (aa) Other Documentation..............................60 4.2 Conditions to Loans and L/Cs..........................61 (a) Representations and Warranties...................61 (b) No Default or Event of Default...................61 (c) No Violations of Law.............................61 (d) Other............................................61 4.3 Conditions to Company Loans to New Designated Subsidiaries..........................................61 SECTION 5. AFFIRMATIVE COVENANTS.................................62 5.1 Financial Statements..................................62 5.2 Certificates; Other Information.......................63 5.3 Payment of Obligations................................64 5.4 Material Operating Subsidiaries.......................64 5.5 Conduct of Business and Maintenance of Existence......64 5.6 Maintenance of Property; Insurance....................64 5.7 Inspection of Property; Books and Records; Discussions65 5.8 Notices...............................................65 5.9 Copies of Corporate Documents.........................66 5.10 Intentionally Omitted.................................66 5.11 Hazardous Material....................................66 5.12 Further Assurances....................................67 5.13 Compliance with Terms of Leaseholds...................67 5.14 Performance of Related Documents......................67 5.15 Hedge Agreements......................................68 5.16 Conditions Subsequent to Second Closing Date..........68 SECTION 6. NEGATIVE COVENANTS....................................68 6.1 Limitation on Indebtedness............................68 6.2 Limitation on Liens...................................70 6.3 Limitation on Contingent Obligations..................72 6.4 Limitation on Fundamental Changes.....................72 6.5 Distributions.........................................74 6.6 Limitation on Dividend Restrictions Regarding Subsidiaries..........................................74 6.7 Prohibition on Investments, Acquisitions, Loans and Advances..............................................74 6.8 Prohibition on Optional Prepayments...................76 6.9 Consolidated Net Worth................................77 6.10 Leverage Ratio........................................77 6.11 Interest Coverage Ratio...............................77 6.12 Current Ratio.........................................77 6.13 Nortek Administrative Fee.............................77 6.14 Amendment, etc. of Related Documents..................78 6.15 Fiscal Year...........................................78 6.16 Transactions with Affiliates..........................78 6.17 Ownership of Designated Subsidiaries..................78 6.18 Limitation on Capital Expenditures....................79 6.19 Financing Leases......................................79 6.20 Change in Nature of Business..........................79 6.21 Charter Amendments....................................79 6.22 Accounting Changes....................................79 6.23 Intentionally Omitted.................................79 6.24 Negative Pledge.......................................79 6.25 Formation of Subsidiaries.............................79 SECTION 7. EVENTS OF DEFAULT....................................79 SECTION 8. THE AGENT.............................................83 8.1 Appointment...........................................83 8.2 Delegation of Duties..................................83 8.3 Exculpatory Provisions................................84 8.4 Reliance by Agent.....................................84 8.5 Notice of Default.....................................84 8.6 Non-Reliance on Agent and Other Banks.................85 8.7 Indemnification.......................................85 8.8 Agent in Its Individual Capacity......................86 8.9 Successor Agent.......................................86 8.10 Failure to Act........................................86 SECTION 9. MISCELLANEOUS.........................................86 9.1 Amendments and Waivers................................86 9.2 Notices...............................................87 9.3 No Waiver; Cumulative Remedies........................88 9.4 Survival of Representations and Warranties............89 9.5 Payment of Expenses, Etc..............................89 9.6 Binding Effect; No Assignment or Delegation by Company or any Designated Subsidiary..........................90 9.7 Assignments and Participations by Banks; Pledge to Federal Reserve Bank..................................90 9.8 Further Assurances....................................94 9.9 Adjustments; Set-off..................................94 9.10 Severability..........................................95 9.11 Confidentiality.......................................95 9.12 Counterparts..........................................95 9.13 Second Closing Date Assignments; Etc..................96 9.14 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY...............................................97 SCHEDULES I Initial Commitments and Loans II Existing Napco Debt 2.1 Existing Letters of Credit 2.20 Material Operating Subsidiaries 3.11 Taxes 3.12 Subsidiaries, including Non-Core Subsidiaries 3.14 Contingent Liability relating to Post-Retirement Benefit 3.18 Name Changes, Mergers, Acquisitions 3.20 Labor Disputes; Collective Bargaining Agreements; Employee Grievances 3.22(a) Company Indebtedness 3.22(b) Napco Indebtedness 6.2 Liens 6.3 Contingent Obligations 9.13 Closing Date Assignments EXHIBITS A Form of Note B Form of Application C Form of Notice of Borrowing/Conversion D-1 Form of Borrowing Certificate for the Company D-2 Form of Borrowing Certificate for Subsidiaries E Form of Assignment and Acceptance F Form of Legal Opinion of Ropes & Gray G Forms of Solvency Certificate SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of August 26, 1997 and amended and restated as of December 30, 1998, among PLY GEM INDUSTRIES, INC., a Delaware corporation (the "Company"); the Designated Subsidiaries from time to time party hereto; the Banks from time to time party hereto; and FLEET NATIONAL BANK ("Fleet"), as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"). W I T N E S S E T H : WHEREAS, the Company and the Designated Subsidiaries (the "Existing Designated Subsidiaries") are borrowers under an Amended and Restated Credit Agreement, dated as of August 26, 1997 (as heretofore amended, the "Existing Credit Agreement"), with the lenders party thereto (the "Existing Banks") and Fleet, as agent for the Existing Banks, which provides, among other things, for the making of a single term loan to the Company and the Existing Designated Subsidiaries and for the maintenance of existing, and issuance of new, letters of credit for the account of the Company and the Existing Designated Subsidiaries; WHEREAS, on October 9, 1998, Napco Target I and Napco Target II (each as hereinafter defined) were merged with and into the Napco Purchaser pursuant to the Napco Merger Agreement (each as hereinafter defined), with Napco (as hereinafter defined) as the surviving corporation. Immediately upon the consummation of the Napco Merger, the Napco Purchaser (i) acquired all of the shares of common stock of each of Napco Target I and Napco Target II and all of the options to purchase shares of such common stock from the holders of such shares and options for the Napco Cash Purchase Price (as hereinafter defined) and (ii) assumed certain indebtedness of each of Napco Target I and Napco Target II in an aggregate principal amount of approximately $9,900,000 consisting of certain existing term loans, capitalized leases and stand-by letters of credit. In order to facilitate the consummation of the foregoing transactions, Nortek (as hereinafter defined) contributed to the Company $46,040,000 in common equity, and the Company, in turn, lent to the Napco Purchaser an aggregate amount equal to the Napco Cash Purchase Price; WHEREAS, the Company has requested that the Existing Credit Agreement be amended and restated in connection with the closing of the Napco Transaction to provide, among other things, additional financing to the Company in the form of a stand-by letter of credit; 1 WHEREAS, such stand-by letter of credit will be used to refinance the Existing Napco L/C (as hereinafter defined); WHEREAS, the Banks have agreed to amend and restate the Existing 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 this Agreement; and WHEREAS, this Agreement shall constitute the "Ply Gem Credit Facility" for purposes of that certain Nortek Indenture described in clause (c) of the definition thereof in subsection 1.1. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties to this Agreement hereby agree as follows: SECTION 1.DEFINITIONS1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following respective meanings (such definitions to be equally applicable to the singular and plural forms thereof): "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 and (ii) the Napco L/C, the Company. "Additional Subsidiary Grantors" shall mean each of (a) Continental Wood Preservers, Inc., a Michigan corporation, (b) SNE Enterprises Texas, Inc., a Delaware corporation, (c) SNE Special Services, Inc., a Delaware corporation, and (d) SNE Transportation Company, Inc., a Wisconsin corporation. "Affiliate" of any Person shall mean (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, or (b) any other Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agent" shall have the meaning ascribed thereto in the preamble hereto. 2 "Agreement" shall mean this Second Amended and Restated Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Allied Sale" shall mean the sale by the Company of all of its interests in and to the capital stock of Allied Plywood Corporation, a Delaware corporation and wholly-owned Subsidiary of the Company, which occurred on December 10, 1998, the Net Proceeds from such sale being approximately $15,900,000. "Applicable Margin" shall mean, for any day for any Type of Loan, the relevant rate per annum for such Type of Loan as determined by reference to the applicable ratio of Senior Funded Debt to Consolidated EBITDA set forth in the table below: Ratio Prime Rate Loans Eurodollar Loans Level I 3.25:1.00 or 0.0% 1.075% greater Level II 3.00:1.00 or 0.0% 0.850% greater but less than 3.25:1.00 Level III 2.50:1.00 or 0.0% 0.750% greater but less than 3.00:1.00 Level IV 2.00:1.00 or 0.0% 0.525% greater but less than 2.50:1.00 Level V 1.50:1.00 or 0.0% 0.400% greater but less than 2.00:1.00 Level VI less than 0.0% 0.300% 1.50:1.00 The determination of the Applicable Margin pursuant to the table set forth above shall be made on a quarterly basis based on an examination of the consolidated financial statements of the Company and its Subsidiaries delivered pursuant to and in compliance with subsection 5.1(a) or (b); provided, however, that the initial Applicable Margin shall be at Level IV in such table from the Second Closing Date until such time as consolidated financial statements of the Company and its Subsidiaries indicating an Applicable Margin at a different Level in such table are first delivered to the Agent and the Banks pursuant to and in compliance with subsection 5.1(a) or (b). Each change in the Applicable Margin shall be effective as of the first day of the calendar month following the date of the Company's financial statements reflecting any change in the ratio of Senior Funded Debt to Consolidated EBITDA. In the event that financial statements for the four fiscal quarters most recently completed prior to such date of determination either: (a) have not been delivered to the Agent in 3 compliance with subsection 5.1(a) or (b), or (b) if delivered, do not comply in form or substance with subsection 5.1(a) or (b), then the Agent may determine, in its reasonable judgment, the ratio of Senior Funded Debt to Consolidated EBITDA referred to above that would have been in effect as at such date, and, consequently, the Applicable Margin in effect for the period commencing on such date. "Application" shall mean any agreement, substantially in the form of Exhibit B hereto, between Fleet, as issuing bank, and any Account Party in respect of the issuance of an L/C. "Asset Sale" shall mean any sale or other disposition by the Company or any of the Subsidiaries (whether in one sale or a series of related sales) of any business unit or units (including, without limitation, any Non-Core Subsidiary) or any product line or group of product lines (whether pursuant to a sale of stock or sale of assets). "Assignment and Acceptance" shall mean an agreement in the form of Exhibit E hereto. "Available Company Commitment" shall mean, as to each Bank, at a particular time, an amount equal to the difference between (a) the amount of such Bank's Company Commitment at such time and (b) the aggregate unpaid principal amount at such time of (i) all Company Loans made by such Bank pursuant to subsection 2.3 and (ii) such Bank's Commitment Percentage of Bank L/C Obligations to the extent arising solely from the issuance or deemed issuance of Company L/Cs. "Available Company L/C Commitment" at any date shall mean the lesser of (a) the difference between the Company L/C Sublimit and the Specified Company L/C Obligations at such date and (b) the Available Company Commitments. "Available Napco Commitment" shall mean, as to each Bank, at a particular time, an amount equal to the difference between (a) the amount of such Bank's Napco 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 Napco L/C. "Banks" shall mean the Initial Banks and each Person that shall become a Bank hereunder pursuant to subsection 9.7. "Bank L/C Obligations" at any date shall mean the sum of (a) the aggregate undrawn amount at such date of all L/Cs issued or deemed issued by Fleet pursuant to this Agreement, plus (b) the amount of all Unpaid Drawings relating to such L/Cs. 4 "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts are authorized or required by law to close. "Business of the Company" shall mean (a) the businesses described in the Company's Form 10-K for the year ended December 31, 1996 and the Company's 1996 Annual Report to Stockholders and (b) other businesses related to, or growing out of, such businesses. "Capital Expenditures" shall mean, during any period, the amount of additions to property, plant and equipment for such period as shown on the consolidated financial statements of the Company and its Subsidiaries for such period prepared in accordance with GAAP, net of Financing Leases. "Cash Equivalents" shall mean (a) securities with maturities of one year or less from the date of acquisition issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof, (b) certificates of deposit, acceptances and Eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight or demand bank deposits of any Bank and certificates of deposit with maturities of one year or less from the date of acquisition and overnight or demand bank deposits of any other commercial bank having capital and surplus in excess of $500,000,000, the holding company of which has a commercial paper rating meeting the requirements specified in clause (d) below, (c) repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clauses (a) and (b) entered into with any bank meeting the qualifications specified in clause (b) above, and (d) commercial paper of a domestic issuer rated at least A-2 or the equivalent thereof by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. or P-2 or the equivalent thereof by Moody's Investors Service, Inc. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. ' 9601, et seq., as amended from time to time. "Change of Control" shall occur when (a) any person or group of related persons, excluding Permitted Shareholders, gains beneficial ownership of a majority in voting interest of the outstanding voting stock of the Company or has caused to be elected a majority of the Board of Directors of the Company against the wishes of a majority of the voting interest held by Permitted Shareholders; or (b) all or substantially all of the assets of the Company are sold or liquidated. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 5 "Collateral Grantor" shall have the meaning ascribed thereto in subsection 2.21. "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 and the Napco L/C, in an aggregate amount not to exceed at any time outstanding the Company L/C Sublimit and the Napco Commitment, respectively, as such amounts may be reduced from time to time pursuant to subsection 2.6. "Commitment Percentage" as to any Bank, shall mean the percentage set forth on Schedule I under the heading "Commitment Percentage" as such percentage may increase or decrease from time to time pursuant to subsection 9.7. "Commonly Controlled Entity" shall mean an entity, whether or not incorporated, which is under common control with the Company or any Subsidiary within the meaning of Section 4001(a)(14) of ERISA or Code Section 414(m) or 414(o). "Company" shall have the meaning ascribed thereto in the preamble hereto. "Company Commitment" shall mean, as to any Bank, that portion of its Commitment set forth on Schedule I under the heading "Company Commitment" as such amount may be adjusted from time to time pursuant to subsection 2.6, 2.8 or 9.7. "Company Facility" shall mean, at any time, the aggregate amount of the Banks' Company Commitments. "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. "Company L/C Sublimit" shall mean $12,788,225, as such amount may be permanently reduced from time to time pursuant to subsection 2.6. "Company Loans" shall have the meaning specified in subsection 2.1(a)(i). "Company Security Agreement" shall have the meaning ascribed thereto in subsection 2.21. 6 "Consolidated Current Assets" shall mean, at any date, the amount which, in conformity with GAAP, would be set forth opposite the caption "total current assets" (or any like caption) on a consolidated balance sheet of the Company and its consolidated Subsidiaries as at such date. "Consolidated Current Liabilities" shall mean, at any date, the amount which, in conformity with GAAP, would be set forth opposite the caption "total current liabilities" (or any like caption) on a consolidated balance sheet of the Company and its consolidated Subsidiaries as at such date; provided, however, that the Company Loans, the L/Cs and any current liabilities resulting from the transactions contemplated by the Merger Agreement or the Napco Merger Agreement shall at all times be excluded from the definition of Consolidated Current Liabilities. "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 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. "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 7 on a pro forma basis giving effect to the Napco Acquisition as though the Napco Acquisition had occurred at the beginning of such period. "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. "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 provided, further, that the Nortek Administrative Fee shall not be deducted from the income of the Company and such Subsidiaries for the purpose of determining "net income". "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, 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). "Contingent Obligation" as to any Person shall mean any obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other contractual obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make 8 payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. "Contractual Obligation" of any Person shall mean any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound (including, without limitation, in the case of each of the Loan Parties and their respective Subsidiaries, the Nortek Indentures). "Debt Discount" shall mean debt discount with respect to Subordinated Indebtedness permitted by the provisions hereof. "Default" shall mean any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Designated Subsidiary" shall mean, initially, each of the following Subsidiaries: SNE Enterprises, Inc., a Delaware corporation; Variform, Inc., a Missouri corporation; and Great Lakes Window, Inc., an Ohio corporation. Subject to the reasonable approval of the Agent and all of the Banks with respect to the financial condition and maximum borrowing limit of a Subsidiary, the Company may at any time designate as a Designated Subsidiary any wholly-owned Material Operating Subsidiary which is not then a Designated Subsidiary by notice to the Agent, provided that the Company contemporaneously delivers to the Agent a Solvency Certificate with respect to such Subsidiary and causes such Subsidiary to deliver to the Agent duly executed Notes payable to the order of the Banks, a duly executed Guaranty and a duly executed Company Security Agreement supplement, each in form and substance satisfactory to the Agent, and provided further that each Designated Subsidiary shall be a wholly-owned Subsidiary of the Company so long as it is a Designated Subsidiary. The Company may at any time remove any Subsidiary from the list of Designated Subsidiaries by notice to the Agent, effective, however, only upon (a) payment in full of any Obligations owed to the Agent and the Banks hereunder by such Designated Subsidiary and the expiration or other termination of any Company L/C with respect to which such Designated Subsidiary is the Account Party or (b) subject to the consent of the Agent and the Required Banks (such consent not to be unreasonably withheld), the 9 assumption, in a writing satisfactory in form and substance to the Agent, by the Company or another Designated Subsidiary of any obligations not so paid, so long as such assumption shall not violate any provision of the Nortek Indentures or any other indenture or agreement binding upon the Company or any of its Subsidiaries, provided that, concurrently with such assumption, the Company shall certify, and shall furnish an opinion of counsel, in each case to the Agent and the Banks, to the effect that such assumption does not violate the Nortek Indentures or any other indenture or agreement binding on the Company or any of its Subsidiaries and otherwise in form and substance satisfactory to the Agent. Any representation, warranty or covenant in this Agreement applicable at any time to the Designated Subsidiaries shall be deemed applicable to those Subsidiaries which, at such time, are Designated Subsidiaries as defined herein. "Designated Subsidiary Borrowing Limit" shall mean, initially, the following amounts for the indicated Subsidiaries: Designated Subsidiaries Borrowing Limit SNE Enterprises, Inc. $45,000,000 Variform, Inc. $49,000,000 Great Lakes Window, Inc. $30,000,000 The Designated Subsidiary Borrowing Limit for any Designated Subsidiary may be increased from time to time up to an amount not to exceed the aggregate amount of the Company Commitments at such time, subject to the consent of the Company and the Agent and so long as such increase shall not violate any provision of the Nortek Indentures or any other indenture or agreement binding upon the Company or any of its Subsidiaries, provided that, concurrently with such increase, the Company shall certify, and shall furnish an opinion of counsel, in each case to the Agent and the Banks, to the effect that such increase does not violate the Nortek Indentures or any other indenture or agreement binding on the Company or any of its Subsidiaries and otherwise in form and substance satisfactory to the Agent. "Disposal" shall mean the discharge, deposit, injection, dumping, spilling, leaking or placing of any hazardous materials into or on any land or water so that such hazardous materials or constituent thereof may enter the environment or be emitted into the air or discharged into any waters, including ground waters. "Dollars" and "$" shall mean dollars in lawful currency of the United States of America. "Domestic Lending Office," shall mean, initially, the office of each Bank designated as such on Schedule I under the heading "Domestic Lending Office and Address for Notices"; thereafter, such other office of such Bank, if any, which shall be making or maintaining Company Loans. 10 "Drawing Fee" shall have the meaning ascribed thereto in subsection 2.1(c)(v). "Eligible Assignee" shall mean (a) any Bank and any entity controlled by or under common control with such Bank and (b) a commercial bank having a combined capital and surplus of at least $500,000,000, in either case which does not, either directly or indirectly, engage in business competitive with the business of the Company or any of its Subsidiaries and to which the Company and the Agent shall have consented, such consent not to be unreasonably withheld. "Eligible Participant" shall mean (a) any entity controlled by or under common control with any Bank and (b) a commercial bank having a combined capital and surplus of at least $200,000,000, in either case, which does not, either directly or indirectly, engage in business competitive with the business of the Company or any of its Subsidiaries. "Environmental Laws and Regulations" shall mean all federal, state and local, environmental, health and safety laws, regulations, ordinances, orders, judgments and decrees applicable to the Company or any Subsidiary, or any of their respective assets or properties. "Environmental Liability" shall mean any liability under any applicable Environmental Laws and Regulations for any Disposal, Release or threatened Release of a Hazardous Substance, pollutant or contaminant as those terms are defined under CERCLA and any liability which would require a removal, remedial or response action, as those terms are defined under CERCLA, by any Person or any environmental regulatory body having jurisdiction over the Company or any other Subsidiary, and/or any liability arising under any Environmental Laws and Regulations for the Company's or any other Subsidiary's failure to comply with such laws and regulations including, without limitation, the failure to comply with or obtain any applicable environmental permit. "Environmental Proceeding" shall mean any judgment, action or proceeding pending before any court or other Governmental Authority or any notice, demand or order, with respect to the Company or any Subsidiary and arising under or relating to any Environmental Laws and Regulations. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Reserve Requirements" for any day after the First Closing Date as applied to a Eurodollar Loan shall mean the aggregate (without duplication) of the rates (expressed as a decimal) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with 11 respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D) maintained by a member bank of such System. The Banks confirm to the Company and the Designated Subsidiaries that no Eurocurrency Reserve Requirements exist as of the Second Closing Date. "Eurodollar Lending Office" shall mean, with respect to each Bank, initially, the office of such Bank designated as such on Schedule I under the heading "Eurodollar Lending Office"; thereafter, such other office of such Bank, if any, which shall be making or maintaining Eurodollar Loans. "Eurodollar Loans" shall mean Company Loans hereunder at such time as they bear interest based upon the Eurodollar Rate. "Eurodollar Rate" shall mean, for any day during the Interest Period for any Eurodollar Loan under the applicable Facility, an interest rate per annum equal to the rate per annum (rounded upward, if necessary, to the nearest l/100 of one percent) obtained by dividing (a) the rate per annum at which deposits in U.S. dollars are offered in London, England to prime banks in the London interbank market, as set forth on the "LIBO" page on the Reuters Monitor Money Rates Service screen, at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to Fleet's Eurodollar Loan under the applicable Facility to be outstanding during such Interest Period (or, if Fleet shall not have such a Eurodollar Loan, $1,000,000) and for a period equal to such Interest Period by (b) a percentage equal to one minus the Eurocurrency Reserve Requirements for such day. "Event of Default" shall mean any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Existing Banks" shall have the meaning ascribed thereto in the preamble hereto. "Existing Commitment" shall mean, for each Existing Bank, all of such Existing Bank's rights in and to, and all of its obligations under, the Commitment (as defined in the Existing Credit Agreement) held by it under the Existing Credit Agreement immediately prior to giving effect hereto, the aggregate amount of which for each Existing Bank is set forth opposite its name on Schedule 9.13 hereto. "Existing Company L/Cs" shall have the meaning ascribed thereto in subsection 2.1(c)(i)(A). 12 "Existing Credit Agreement" shall have the meaning ascribed thereto in the preamble hereto. "Existing Designated Subsidiaries" shall have the meaning ascribed thereto in the preamble hereto. "Existing Napco Debt" shall mean the Indebtedness of each of Napco Target I and Napco Target II set forth on Schedule II hereto. "Existing Napco L/C" shall mean the stand-by letter of credit issued by Mellon Bank, N.A. to Integra Trust Company, National Association, as trustee for certain bondholders, originally for the account of Napco Target I in the amount of $4,997,082. "Existing Outstandings" shall mean, for each Existing Bank, all of such Existing Bank's rights in and to, and all of its obligations with respect to, the Loans and Bank L/C Obligations (each, as defined in the Existing Credit Agreement) owing to it or in which it has a participation interest under the Existing Credit Agreement, the aggregate amount of which for each Existing Bank is set forth opposite its name on Schedule 9.13 hereto and represents the sum of (i) such Existing Bank's share of such Loans and (ii) such Existing Bank's Commitment Percentage (as defined in the Existing Credit Agreement) of such Bank L/C Obligations. "Facilities" shall mean the Company Facility and the Napco Facility. "Facility Fee" shall mean at any time of determination a fee equal to the relevant annual fee percentage determined by reference to the applicable ratio of Senior Funded Debt to Consolidated EBITDA set forth in the table below multiplied by the aggregate amount of the Commitments at such time (whether used or unused): 13 Ratio Annual Percentage Fee Level I 3.25:1.00 or greater 0.300% Level II 3.00:1.00 or 0.275% greater but less than 3.25:1.00 Level III 2.50:1.00 or 0.250% greater but less than 3.00:1.00 Level IV 2.00:1.00 or 0.225% greater but less than 2.50:1.00 Level V 1.50:1.00 or 0.225% greater but less than 2.00:1.00 Level VI less than 1.50:1.00 0.200% The determination of the applicable fee pursuant to the table set forth above shall be made on a quarterly basis based on an examination of the consolidated financial statements of the Company and its Subsidiaries delivered pursuant to and in compliance with subsection 5.1(a) or (b); provided, however, that the initial Facility Fee shall be at Level IV in such table from the Second Closing Date until such time as consolidated financial statements of the Company and its Subsidiaries indicating a Facility Fee at a different Level in such table are first delivered to the Agent and the Banks pursuant to and in compliance with subsection 5.1(a) or (b). Each change in the Facility Fee shall be effective as of the first day of the calendar month following the date of the Company's financial statements reflecting any change in the ratio of Senior Funded Debt to Consolidated EBITDA. In the event that financial statements for the four fiscal quarters most recently completed prior to such date of determination either: (a) have not been delivered to the Agent in compliance with subsection 5.1(a) or (b), or (b) if delivered, do not comply in form or substance with subsection 5.1(a) or (b), then the Agent may determine, in its reasonable judgment, the ratio of Senior Funded Debt to Consolidated EBITDA referred to above that would have been in effect as at such date, and, consequently, the Facility Fee in effect for the period commencing on such date. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such 14 transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the letter agreement between the Agent and Nortek (on its behalf and on behalf of the Company) dated August 14, 1997. "Fifth Third Letters of Credit" shall mean the existing letters of credit issued by Fifth Third Bank as to which the Company or Great Lakes Window, Inc. is the account party. "Financing Lease" shall mean (a) any lease of property, real or personal, the then present value of the minimum rental commitment of which should, in accordance with GAAP, be capitalized on a balance sheet of the lessee, and (b) any other such lease the obligations under which are capitalized on a consolidated balance sheet of the Company and its Subsidiaries. "First American Letter of Credit" shall mean the existing letter of credit issued by M&I First American Bank as to which SNE Transportation Company, Inc. is the account party. "First Closing Date" means August 26, 1997. "Fleet" shall have the meaning ascribed thereto in the preamble hereto. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect and applied in the Company's certified financial statements as at December 31, 1997. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" shall have the meaning ascribed thereto in subsection 2.20 hereof. "Guaranty" shall have the meaning ascribed thereto in subsection 2.20 hereof. "Hazardous Materials" shall mean any Toxic Chemical, Hazardous Substances, contaminants or pollutants, medical wastes, infectious wastes or Hazardous Wastes. "Hazardous Substance" shall have the same meaning as set forth in Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ' 9601(14) or state or local law. 15 "Hazardous Waste" shall have the same meaning as set forth by the Resource Conservation and Recovery Act, 42 U.S.C. ' 6903(5), and the Environmental Protection Agency's implementing regulations, or state or local law. "Hedge Agreement" shall mean any interest rate swap, cap or collar agreement, interest rate future or option contract and any or other similar agreement. "Hedge Bank" shall mean any Bank or any of its Affiliates or any other financial institution acceptable to the Required Banks that has become a party to the Company Security Agreement and has appointed Fleet as its custodian thereunder, in each case, in its capacity as a party to a Hedge Agreement with a Loan Party. "Indebtedness" of a Person, at a particular date, shall mean the sum (without duplication) at such date of (a) indebtedness of such Person for borrowed money or evidenced by notes, bonds, debentures or like instruments, (b) indebtedness of such Person for the deferred purchase price of property or services, except (i) accounts payable and accrued expenses arising in the ordinary course of business, (ii) obligations incurred in connection with additions to property, plant or equipment which are deferred for no more than 100 days after the later of the acquisition or completion of installation of such additions, (iii) other obligations (not including taxes) which are deferred for no more than 100 days after the date on which they would first be reflected as liabilities on a balance sheet of such Person, (iv) obligations to pay for services of officers, directors or employees of the Company or any Subsidiary and (v) the Nortek Administrative Fee, (c) obligations of such Person under any Financing Lease and (d) indebtedness of such Person arising under acceptance facilities. Without limitation, Indebtedness shall include undrawn letters of credit and unreimbursed draws on letters of credit. "Initial Banks" shall mean the financial institutions that have executed the signature pages hereto. "Insolvency" or "Insolvent", as to any Multiemployer Plan, shall have the respective meanings assigned to such terms in Section 4245 of ERISA. "Interest Payment Date" shall mean (a) as to any Prime Rate Loan, each of (i) the date on which such Prime Rate Loan is paid, refinanced or converted and (ii) the last day of each March, June, September and December after the date such Prime Rate Loan is made and (b) as to any Eurodollar Loan, each of (i) the date on which such Eurodollar Loan is paid, refinanced or converted and (ii) in the case of any Eurodollar Loan in respect of which the Company or any Designated Subsidiary (as applicable) has selected an Interest Period of one, two or three months, the last day of such Interest Period, and, in the case of any Eurodollar Loan in respect of which the Company or any Designated Subsidiary 16 (as applicable) has selected an Interest Period of duration of more than three months, each date which is three months from the first day of such Interest Period. "Interest Period" shall mean, with respect to any Eurodollar Loan, the period commencing on the date of the making of such Eurodollar Loan or the date of the conversion of any Prime Rate Loan into such Eurodollar Loan, and ending one, two, three or six months (or, to the extent permitted by subsection 2.3(c), one week) thereafter as selected by the Company or a Designated Subsidiary, as applicable, in its notice of borrowing delivered in connection with the occurrence of the First Closing Date and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Company or a Designated Subsidiary, as applicable, in its notice of conversion as provided in subsection 2.3; provided, however, that the foregoing provision relating to Interest Periods is subject to the following: (a) if the Interest Period in respect of any Eurodollar Loan would otherwise end on a day which is not a Working Day, that Interest Period shall be extended to the next succeeding Working Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Working Day; (b) any Interest Period pertaining to a Eurodollar Loan that would otherwise extend beyond the Termination Date shall end on the Termination Date; (c) any Interest Period in respect of a Eurodollar Loan that begins on the last Working Day of a calendar month (or on a day for which there is no numerically corresponding day in the succeeding calendar month at the end of such Interest Period) shall end on the last Working Day of such succeeding calendar month; and (d) the number of Eurodollar Loan Tranches in effect at the same time shall not be in excess of the Tranche Limit. In the event that the Company or the Designated Subsidiary, as applicable, fails to select the duration of an Interest Period for any Eurodollar Loan within the time period and otherwise as provided in subsection 2.3, such Eurodollar Loan will be automatically converted into a Prime Rate Loan on the last day of the current Interest Period for such Eurodollar Loan. "investments" shall have the meaning ascribed thereto in subsection 6.7. "Issuance Fee" shall mean at any time of determination a fee at an annual rate determined by reference to the applicable ratio of Senior Funded Debt to 17 Consolidated EBITDA set forth in the table below payable on the undrawn amount of each Stand-by L/C issued or deemed issued by Fleet: Ratio Annual Fee Level I 3.25:1.00 or greater 1.075% Level II 3.00:1.00 or 0.850% greater but less than 3.25:1.00 Level III 2.50:1.00 or 0.750% greater but less than 3.00:1.00 Level IV 2.00:1.00 or 0.525% greater but less than 2.50:1.00 Level V 1.50:1.00 or 0.400% greater but less than 2.00:1.00 Level VI less than 1.50:1.00 0.300% The determination of the applicable fee pursuant to the table set forth above shall be made on a quarterly basis based on an examination of the consolidated financial statements of the Company and its Subsidiaries delivered pursuant to and in compliance with subsection 5.1(a) or (b); provided, however, that the initial Issuance Fee shall be at Level IV in such table from the Second Closing Date until such time as consolidated financial statements of the Company and its Subsidiaries indicating an Issuance Fee at a different Level in such table are first delivered to the Agent and the Banks pursuant to and in compliance with subsection 5.1(a) or (b). Each change in the Issuance Fee shall be effective as of the first day of the calendar month following the date of the Company's financial statements reflecting any change in the ratio of Senior Funded Debt to Consolidated EBITDA. In the event that financial statements for the four fiscal quarters most recently completed prior to such date of determination either: (a) have not been delivered to the Agent in compliance with subsection 5.1(a) or (b) or (b) if delivered, do not comply in form or substance with subsection 5.1(a) or (b), then the Agent may determine, in its reasonable judgment, the ratio of Senior Funded Debt to Consolidated EBITDA referred to above that would have been in effect as at such date, and, consequently, the Issuance Fee in effect for the period commencing on such date. "L/C Participant" shall have the meaning ascribed thereto in subsection 2.19(c). "L/Cs" shall mean the Company L/Cs and the Napco L/C. "Leverage Ratio" shall have the meaning ascribed thereto in subsection 6.10. 18 "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment or deposit by way of security, encumbrance, lien (statutory or other), or preference, priority or other security interest or security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). "Loan Documents" shall mean (a) for purposes of this Agreement and the Notes and any amendment, supplement or modification hereof or thereof and for all other purposes (other than for purposes of the Guaranties and the Security Documents), (i) this Agreement, (ii) the Notes, (iii) the Guaranties, (iv) the Security Documents and (v) each Application and (b) for purposes of the Guaranties and the Security Documents, (i) this Agreement, (ii) the Notes, (iii) the Guaranties, (iv) the Security Documents, (v) each Application and (vi) each Hedge Agreement to which a Hedge Bank is a party, in each case as amended, supplemented or otherwise modified from time to time. "Loan Parties" shall mean the Company, the Designated Subsidiaries, the Guarantors and the Collateral Grantors. "Material Adverse Effect" shall mean a material adverse effect on (i) the business, condition (financial or otherwise), operations, performance or properties of Company and its Subsidiaries, taken as a whole, (ii) the ability of the Company, individually, or the Company and the other Loan Parties, taken as a whole, to perform its or their respective obligations in any material respect under any Loan Document or Related Document to which the Company or such other Loan Party is a party or (iii) the rights and remedies of the Agent and the Banks under any Loan Document or Related Document. "Material Operating Subsidiaries" shall mean (a) each Designated Subsidiary; (b) any Subsidiary of the Company other than Napco 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. "Merger" shall mean the merger of the Company with and into the Purchaser pursuant to the Merger Agreement. "Merger Agreement" shall mean the Agreement and Plan of Merger dated as of July 24, 1997, as amended, supplemented or otherwise modified from time to time in accordance with its terms, to the extent permitted by the Loan Documents, among Nortek, the Purchaser and the Company, which Agreement provides for the 19 consummation of the Tender Offer and the merger of the Purchaser with and into the Company, with the Company being the Surviving Corporation. "Multiemployer Plan" shall mean a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Napco" shall mean Napco, Inc., a Delaware corporation and a wholly-owned Subsidiary of the Company. "Napco Acquisition" shall mean the acquisition by the Napco Purchaser of all of the shares of common stock of each of Napco Target I and Napco Target II and of all of the options to purchase such shares of common stock from the holders (other than the Napco Purchaser) of such shares and options upon the consummation of the Napco Merger for cash consideration in an aggregate amount equal to the Napco Cash Purchase Price. "Napco Cash Purchase Price" shall mean the sum of (i) $75,300,000, plus (ii) the aggregate amount, if any, payable by or on behalf of the Napco Purchaser pursuant to and in accordance with Section 2.6 of the Napco Merger Agreement (regarding post-closing adjustments), plus (iii) a contingent payment in the amount of $1,500,000, plus (iv) the aggregate amount of the adjustment, if any, to such contingent payment pursuant to and in accordance with Section 2.4 of the Napco Merger Agreement (regarding the contingent payment) or such Section 2.6, as the case may be. "Napco Commitment" shall mean, as to any Bank, that portion of its Commitment set forth on Schedule I under the heading "Napco Commitment" as such amount may be adjusted from time to time pursuant to subsection 2.6, 2.8 or 9.7. "Napco Facility" shall mean, at any time, the aggregate amount of the Banks' Napco Commitments. "Napco L/C" shall mean the Stand-by L/C issued under this Agreement for the account of the Company in substitution for the Existing Napco L/C. "Napco Merger" shall mean the merger pursuant to the Napco Merger Agreement of Napco Target I and Napco Target II with and into the Napco Purchaser, the surviving corporation of such merger being Napco. "Napco Merger Agreement" shall mean the Merger Agreement dated September 1, 1998, as amended by the Amendment dated as of October 9, 1998, among Napco Target I, Napco Target II, the Napco Purchaser and Nortek, as amended, 20 supplemented or otherwise modified from time to time in accordance with its terms, but solely to the extent permitted under the Loan Documents. "Napco Payment Amount" shall have the meaning ascribed thereto in subsection 2.8(d). "Napco Purchaser" shall mean 2001 Investments, Inc., a Delaware corporation and a wholly-owned Subsidiary of the Company. "Napco Subordinated Note" shall mean the promissory note dated October 9, 1998 from the Napco Purchaser to the Company in the amount of the Napco Cash Purchase Price, as amended, supplemented or otherwise modified from time to time in accordance with its terms, but solely to the extent permitted under the Loan Documents. "Napco Target I" shall mean Napco, Inc., a Pennsylvania corporation. "Napco Target II" shall mean NVP, Inc., a Pennsylvania corporation. "Napco Transaction" shall mean, collectively, (i) the Napco Merger, (ii) the Napco Acquisition and (iii) the assumption by the Napco Purchaser of certain indebtedness of Napco Target I and Napco Target II in an aggregate principal amount not to exceed $9,900,000 consisting of term loans, capital leases and a stand-by letter of credit. "Net Proceeds" shall mean the aggregate cash proceeds received from time to time (whether as initial consideration or through payment or disposition of any deferred payment obligation) by the Company or any Subsidiary in respect of any sale or other disposition of its assets (whether at the time of any such sale or disposition or at any time thereafter), in each case net of (a) the reasonable expenses (including legal fees and brokers' and underwriters' commissions paid to third parties) incurred in effecting such asset sale or other disposition, (b) any taxes reasonably attributable to such asset sale or other disposition, (c) the amount of any Indebtedness (other than the Obligations) secured by a Lien on any such asset that, by the terms of the instrument evidencing such Indebtedness, is required to be repaid upon such sale or other disposition and (d) to the extent the Company or such Subsidiary is required to maintain reserves for liabilities resulting from such asset sale or other disposition, reasonable reserves so long as such reserves are required to be so maintained; provided, however, that (i) the amount of any liabilities existing at the time of an asset sale or disposition which relate to the assets sold, which are not assumed by the purchaser and which the seller remains obligated to pay, shall be deducted from the aggregate cash proceeds of such sale or disposition; (ii) if any deferred payment obligation is evidenced by any note or other obligation of the purchaser or any third party, then any document or instrument evidencing such obligation shall be pledged by the Company or the Subsidiary involved to 21 the Agent for the benefit of the Banks pursuant to the Company Security Agreement or a security agreement similar to the Company Security Agreement but only as collateral for the obligation to prepay pursuant to subsection 2.8(d) with respect to the asset sale or disposition to which such document or instrument relates (but subject to release if any such document is sold by the Company or the Subsidiary involved so long as the proceeds are applied in accordance with such subsection 2.8(d)), provided that the Company or such Subsidiary shall not be required to pledge any such document or instrument if the aggregate amount of Indebtedness evidenced by all such documents and instruments which are not pledged in accordance with the terms of this definition does not exceed $15,000,000 at any time outstanding; and provided further that the Company will be entitled, except after the occurrence and during the continuance of an Event of Default, to receive all payments with respect to such instruments, subject to the prepayment obligations in subsection 2.8(d); and (iii) Net Proceeds shall not include cash proceeds of (A) asset sales permitted by subsections 6.4(a), (c) and (g) and (B) mergers permitted by subsections 6.4(b) and (f). "Non-Core Subsidiaries" shall mean each Subsidiary of the Company identified as such on Schedule 3.12. "Nortek" shall have the meaning ascribed thereto in the preamble hereto. "Nortek Administrative Fee" shall mean an annual fee charged by Nortek commencing with the fiscal year ending December 31, 1998 in an amount not to exceed 4% of the annual net sales of the Company and its consolidated Subsidiaries. "Nortek Indentures" shall mean (a) the Indenture dated as of February 14, 1994 between Nortek and State Street Bank and Trust Company (the "Trustee") pursuant to which Nortek's 9-7/8% Senior Subordinated Notes due March 1, 2004 were issued, (b) the Indenture dated as of March 17, 1997 between Nortek and the Trustee pursuant to which Nortek's 9-1/4% Senior Notes due March 15, 2007 were issued, (c) the Indenture dated as of August 26, 1997 between Nortek and the Trustee pursuant to which Nortek's 9-1/8% Senior Notes due September 1, 2007 were issued and (d) the Indenture dated as of July 31, 1998 between Nortek and the Trustee pursuant to which Nortek's 8-7/8% Senior Notes were issued, in each case as amended, supplemented or otherwise modified from time to time in accordance with its terms. "Notes" shall have the meaning ascribed thereto in subsection 2.2. "Notice of Borrowing/Conversion" shall have the meaning ascribed to such term in subsection 2.3. "Obligations" shall mean the unpaid principal of and interest on the Notes and all other obligations and liabilities of the Company and the other Loan 22 Parties to the Agent or to the Banks, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the other Loan Documents and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation: (a) any interest accruing thereon after the date of filing any petition by or against the Company or any Subsidiary in connection with any bankruptcy or other proceeding, whether or not a claim by the Agent or any of the Banks is enforceable in such proceeding; and (b) all fees and disbursements of counsel to the Agent or to the Banks that are required to be paid by the Company pursuant to the terms of this Agreement) or otherwise. "Participant" shall have the meaning ascribed thereto in subsection 9.7(d). "Participating Interest" shall have the meaning ascribed thereto in subsection 9.7(d). "Patent Rights" shall have the meaning ascribed thereto in subsection 3.17. "PBGC" shall mean the Pension Benefit Guaranty Corporation (or any successor) established pursuant to Subtitle A of Title IV of ERISA. "Permitted Shareholders" means Nortek and the Purchaser, so long as it is a wholly-owned Subsidiary of Nortek. "Person" shall mean an individual, a partnership, a corporation, a limited liability company, a business trust, a joint stock company, a trust, an unincorporated association, a joint venture, a Governmental Authority or any other entity of whatever nature. "Plan" shall mean at any particular time, any employee benefit plan which is covered by ERISA and in respect of which the Company, any Subsidiary or a Commonly Controlled Entity is (or, if such Plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Post-Default Rate" shall have the meaning ascribed thereto in subsection 2.10(d). "Pre-Commitment Information" shall mean all of the information relating to (a) Nortek, the Company or any of their respective Subsidiaries (other than Napco and its Subsidiaries) furnished to the Agent by Nortek or the Company on or before August 14, 1997 and (b) Nortek, the Company, Napco or any of their respective Subsidiaries furnished to the Agent by Nortek or the Company on or 23 before the Second Closing Date in connection with, or otherwise relating to, the Napco Transaction. "Prime Rate" shall mean a fluctuating interest rate per annum in effect from time to time, which rate shall at all times be equal to the higher of (a) the rate of interest publicly announced by Fleet in Boston, Massachusetts from time to time as its prime rate and (b) one half of one percent (1/2%) per annum above the Federal Funds Rate. The Prime Rate is not intended to be the lowest rate of interest charged by Fleet in connection with extensions of credit to debtors. Each change in any interest rate provided for herein based upon the Prime Rate shall take effect at the time of such change in the Prime Rate. "Prime Rate Loans" shall mean Company Loans hereunder at such time as they bear interest based upon the Prime Rate. "Purchaser" shall mean NTK Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Nortek, formed by Nortek for the sole purpose of acquiring the Company. "Regulation A", "Regulation D", "Regulation G", "Regulation U" and "Regulation X" shall mean, respectively, Regulation A, Regulation D, Regulation G, Regulation U and Regulation X of the Board of Governors of the Federal Reserve System, as from time to time in effect. "Regulatory Change" shall mean the introduction of, or any change in, United States federal, state or local laws or regulations (including Regulation D) or treaties or foreign laws or regulations after the First Closing Date or the adoption or making after such date of any interpretations, directives, guidelines or requests applying generally to a class of banks of or under any United States federal, state or local laws or regulations or any treaties or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Related Documents" shall mean the Merger Agreement, the Napco Merger Agreement, the Napco Subordinated Note and each of the documents evidencing Subordinated Indebtedness. "Release" shall have the same meaning as set forth in Section 101(22) of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. '9601(22), or state or local law. "Reorganization", as to any Multiemployer Plan, shall have the meaning assigned to such term in Section 4241 of ERISA. 24 "Reportable Event" shall mean any of the events set forth in Section 4043(c) of ERISA other than those events as to which the 30-day notice period is waived. "Required Banks" shall mean, at any date, Banks having at least 51% of the aggregate amount of the Commitments, and, if the Commitments are terminated and Company Loans and/or Bank L/C Obligations are outstanding, Banks holding at least 51% of the aggregate principal amount of outstanding Company Loans and/or Commitment Percentages relating to Bank L/C Obligations, as the case may be. "Requirement of Law" for any Person shall mean the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or guideline, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer" of any Person shall mean the chief executive officer, president, chief financial officer, chairman, chief accounting officer or treasurer, or any executive vice president, of such Person. "Scheduled Payment Date" shall have the meaning ascribed thereto in subsection 2.8(d). "SEC Reports" shall mean the Company's annual report on Form 10-K for the fiscal year ended December 31, 1996 and other documents filed by the Company with the Securities and Exchange Commission during 1996. "Second Closing Date" shall mean the date on which each of the conditions precedent in Section 4 shall have been satisfied or duly waived. "Secured Parties" shall mean the Agent, the Banks, Fleet in its capacity as issuer of L/Cs hereunder and the Hedge Banks. "Security Documents" shall mean, collectively, the Company Security Agreement and any other agreement that creates or purports to create a Lien in favor of the Agent for the benefit of the Secured Parties. "Senior Funded Debt" shall mean, at any time of determination, the average (calculated for the two most recent consecutive full fiscal quarters of the Company for which consolidated financial statements of the Company and its Subsidiaries have been delivered to the Agent and the Banks pursuant to and in compliance with subsection 5.1(a) or (b)), (a) aggregate Indebtedness of the Company and its Subsidiaries less (b) the aggregate Subordinated Indebtedness of 25 the Company and its Subsidiaries, in each case calculated on a consolidated basis in accordance with GAAP, provided that with respect to any fiscal quarter ending on or before December 31, 1998, such average amount for any period ending on or before October 9, 1998 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. "Single Employer Plan" shall mean any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Solvency Certificate" shall mean a certificate substantially in the form of Exhibit G hereto. "Solvent" and "Solvency" shall mean with respect to any Person at the time of determination: (a) the then fair market value of its assets is greater than its probable liability on its existing debts (including contingent debts) as such debts become absolute and matured; (b) the then present fair saleable value of its assets is not less than the amount that will be required to pay its probable liability on its existing debts (including contingent debts) as such debts become absolute and matured; (c) it is then able and expects to be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature; and (d) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. The amount of contingent debts and other commitments at any time shall be computed as that amount that represents the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. "Special Subsidiary Loans" shall mean loans by the Company and/or any of its Subsidiaries to Subsidiaries which are not, directly or indirectly, wholly-owned Subsidiaries. "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 and the Napco L/C, and 26 (ii) any renewals, extensions and replacements of any of the Fifth Third Letters of Credit, the First American Letter of Credit or the Napco L/C), plus (b) the amount of all Unpaid Drawings in respect of Company L/Cs. "Subordinated Indebtedness" shall mean the Indebtedness permitted pursuant to subsection 6.1(f). "Stand-by L/C" means each letter of credit that was originally issued or deemed issued under the Existing Credit Agreement or is issued under this Agreement that is not a Trade L/C. "Subsidiary" of any Person shall mean a corporation or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned, directly or indirectly, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries", in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Target I" and "Target II" shall have the respective meanings ascribed thereto in the preamble hereto. "Taxes" shall have the meaning ascribed thereto in subsection 2.13. "Tender Offer" shall mean the tender offer by the Purchaser for the acquisition of the common stock of the Company for $19.50 per share. "Termination Date" shall mean August 26, 2002 or, if such day is not a Business Day, the Business Day next preceding such day. "Toxic Chemical" shall mean any substance on the list described in Section 313(c) of the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. '11023(c). "Trade L/C" means any letter of credit that was originally issued or deemed issued under the Existing Credit Agreement or is issued under this Agreement for the benefit of a supplier of Inventory (as defined in the Company Security Agreement) for the account of the Company or any of the Designated Subsidiaries to effect payment for such Inventory, the conditions to drawing under which include the presentation to Fleet, as issuer of such letter of credit, of negotiable bills of lading, invoices and related documents sufficient, in the 27 judgment of Fleet, to create a valid and perfected lien on or security interest in such Inventory, bills of lading, invoices and related documents in favor of Fleet. "Tranche" shall mean all Eurodollar Loans of the same borrower with the same Interest Period, which Interest Period ends on the same day. "Tranche Limit" at any time shall mean a number equal to the sum of the number of Designated Subsidiaries at such time plus six; provided that the Tranche Limit shall not be less than nine. "Type" shall mean, as to any Company Loan, its nature as a Prime Rate Loan or Eurodollar Loan, as the case may be. "Unpaid Drawings" shall mean any amount paid or disbursed by Fleet in respect of any drawing under any L/C for which Fleet has not received prior payment from the applicable Account Party in accordance with subsection 2.1(c)(i)(D), provided that such amount shall cease to be an "Unpaid Drawing" upon Fleet's receipt of such amount from the applicable Account Party. "Working Day" shall mean any Business Day on which dealings in foreign currency and exchange between banks may be carried on in London, England and Boston, Massachusetts. 1.2 Other Definitional Provisions. (a) All terms defined in this Agreement shall have such defined meanings when used in the Loan Documents or any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (b) As used herein, in the Loan Documents and in any certificate or other document made or delivered pursuant hereto, accounting terms not defined in subsection 1.1, and accounting terms partly defined in subsection 1.1 to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and Section, subsection, Schedule and Exhibit references contained in this Agreement are references to Sections, subsections, Schedules and Exhibits in or to this Agreement unless otherwise specified. (d) In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". 28 SECTION 2.AMOUNTS AND TERMS OF COMMITMENTS 2.1 Commitments. (a) (i) Company Loans. Each Bank has made a single term loan to the Company and the Designated Subsidiaries, or has been assigned an interest in such a term loan made by a Bank (as defined in the Existing Credit Agreement), pursuant to the Existing Credit Agreement (each such term loan will be deemed to be a term loan hereunder and shall be referred to as a "Company Loan" and, together with such other term loans, the "Company Loans") in an aggregate principal amount which, as of the Second Closing Date and after giving effect to all prepayments and scheduled payments under the Existing Credit Agreement, is set forth on Schedule I, as such amount may be reduced from time to time as provided herein. Any portion of any Company Loan repaid or prepaid may not be reborrowed, provided that the consummation of the transaction described in subsection 2.1(a)(ii) shall not constitute a repayment or prepayment for the purposes hereof. (ii) Effective as of the Second Closing Date, each Existing Bank hereby sells and assigns all of its rights in and to, and all of its obligations under, each Existing Outstanding owing to it and the Existing Commitment held by it to the Banks and each Bank hereby purchases and assumes, pro rata based on such Bank's Company Commitment, all of the Existing Banks' rights in and to, and obligations under, the Existing Outstandings and the Existing Commitments, the amounts of which are set forth opposite its name on Schedule 9.13 hereto. (b) The Company Loans may be made as (i) Eurodollar Loans, (ii) Prime Rate Loans or (iii) subject to the other provisions hereof, any combination thereof, as determined by the Company and notified to the Agent in accordance with subsection 2.3. (c) (i) (A) Existing Company L/Cs. Effective as of the Second Closing Date, (I) the "L/Cs" issued for the account of any Account Party by Fleet pursuant to the Existing Credit Agreement (such "L/Cs" as are outstanding thereunder on the Second Closing Date and set forth on Schedule 2.1 being, collectively, the "Existing Company L/Cs", and individually, an "Existing Company L/C"), will be deemed to be Company L/Cs hereunder for the account of such Account Party, (II) the Existing Company L/Cs will no longer be Obligations outstanding under the Existing Credit Agreement and (III) Fleet will be deemed to have sold and transferred an undivided interest and participation in respect of each Existing Company L/C issued by it and each Bank hereunder will be deemed to have purchased and received as provided in subsection 2.1(a)(ii), without further action on the part of any party, an undivided interest and participation in such Existing Company L/C, based on such Bank's Commitment Percentage of such Existing Company L/C. (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 or the Napco L/C, and upon payment by the Company to Fleet of the standard charges 29 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, 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, 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. (C) Intentionally omitted. (D) Fleet shall notify the Company of any payment or disbursement to be made by Fleet under any L/C not later than one Business Day prior to the date on which such payment or disbursement is to be made by Fleet. The applicable Account Party shall pay Fleet in advance of any drawing in immediately available funds at its office indicated on Schedule I on the earlier of the day of demand therefor by Fleet and the day on which Fleet delivers notice in accordance with the immediately preceding sentence. (ii) Upon the presentation and payment of a draft pursuant to any Company L/C and the payment in full to Fleet by the applicable Account Party in respect thereof or upon the expiration or termination of any Company L/C without any drawing under such Company L/C, in each case in accordance with the terms and conditions thereof, the face amount of such Company L/C shall be added to the Available Company L/C Commitment against which Company L/Cs can be issued hereunder. (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 30 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, except that Fleet's Commitment shall terminate on the Termination Date. (iv) Intentionally omitted. (v) Upon the presentation for payment of any draft to be drawn under a Trade L/C, the Company shall pay to Fleet for the ratable benefit of the Banks a payment commission or fee (each a "Drawing Fee") equal to one quarter of one percent (1/4%) of the face amount of the draft. (vi) The Company shall pay to the Agent for the ratable benefit of the Banks an Issuance Fee with respect to each Stand-by L/C on the undrawn amount of such Stand-by L/C, at an annual rate equal to the percentage set forth in the definition of Issuance Fee, and payable on the date of issuance and thereafter in advance on the first day of each January, April, July and October so long as such Stand-by L/C is outstanding; provided, however, that such Issuance Fee shall be pro rated for the portion of any quarter during which the undrawn amount of such Stand-by L/C is reduced or such Stand-by L/C is terminated and the Agent and the Banks shall refund to the Company any unearned portion of such Issuance Fee. (vii) Each Unpaid Drawing shall be due and payable immediately and shall bear interest until paid in full at the Post-Default Rate regardless of whether or not there are funds in any account of the applicable Account Party with Fleet in an amount equal to or exceeding such Unpaid Drawing, sufficient Available Company Commitments to permit creation of a Company Loan sufficient to fund payment of such Unpaid Drawing or Fleet advances any funds in payment thereof. In the event of any conflict, discrepancy or any omission of terms provided herein between the terms established by Fleet in its Application or otherwise and this Agreement, the terms provided herein shall prevail. (viii) The obligations of each Account Party under this subsection 2.1(c) to pay Fleet in advance the amount of any payment or disbursement to be made by Fleet under any L/C or to reimburse Fleet with respect to Unpaid Drawings (including interest thereon) shall, subject to the other provisions of this Agreement, including without limitation subsection 2.22, be absolute and unconditional under any and all circumstances and (but as so subject) irrespective of any setoff, counterclaim or defense to payment which the Company or any Designated Subsidiary may have or have had against Fleet, including (without limitation, but as so subject) any defense based on the failure of any drawing under the L/C to conform to the terms of such L/C or any non-application or misapplication by the beneficiary of the L/C of the proceeds of such drawing. 31 2.2 Notes. The Company Loans made by each Bank and such Bank's participation in each L/C in accordance with subsection 2.19(c) shall be evidenced by promissory notes, substantially in the form of Exhibit A (individually, a "Note" and, collectively, the "Notes"), in each case with appropriate insertions as to date, name of Bank and principal amount, payable to the order of such Bank and evidencing the obligation of the Company or the applicable Designated Subsidiary, as the case may be, to pay the outstanding principal amount thereof with interest on the unpaid principal amount from time to time outstanding of such Note as prescribed in subsection 2.10. Each Bank is hereby authorized to record the date, Type and amount of each Company Loan, the maturity date therefor and the date and amount of each repayment of principal thereof, and, in the case of Eurodollar Loans, the interest rate with respect thereto, either on its own books and records or on the schedule (or any continuations thereof) annexed to and constituting a part of its Note and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided that the failure to make any such recordation shall not in any way affect the obligation of the Company and the Designated Subsidiaries to repay the Company Loans. Each Note shall (a) be dated the Second Closing Date, (b) be 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. Interest on the Notes shall be payable on the dates specified in subsection 2.10. 2.3 Procedure for Loan Borrowings. (a) The Company may from time to time request for itself or on behalf of any Designated Subsidiary that all or any portion of the Company Loans of one Type be converted into Company Loans of the other Type by giving irrevocable notice to the Agent, three Working Days prior to the requested conversion date, in the case of Eurodollar Loans, and one Business Day prior to the requested conversion date, in the case of Prime Rate Loans, provided that (i) in the case of any conversion from a Prime Rate Loan to a Eurodollar Loan, (A) the Interest Period available for such Eurodollar Loan shall be subject to subsection 2.3(c), (B) the obligation of the Banks to make Eurodollar Loans shall not then be suspended pursuant to subsection 2.12 or 2.14 and (C) the number of Eurodollar Loan Tranches in effect after giving effect to such conversion shall not exceed the Tranche Limit then in effect and (ii) in the case of any conversion from a Eurodollar Loan to a Prime Rate Loan, (A) such conversion shall only be made on the last day of an Interest Period for such Eurodollar Loan and (B) after giving effect to such conversion, the aggregate amount of all Eurodollar Loans having the same Interest Period ending on the same date is at least $1,000,000. Each such notice of borrowing or conversion (a "Notice of Borrowing/Conversion") shall be substantially in the form of Exhibit C hereto, and shall specify: (1) the borrower and the amount to be borrowed or 32 converted, (2) the requested borrowing or conversion date, (3) whether the Type of Company Loan to be borrowed, or into which a Company Loan shall be converted, is to be a Eurodollar Loan, Prime Rate Loan or a combination thereof and, if a combination, the respective amount of each Type of borrowing and (4) in the case of Eurodollar Loans, the length of the Interest Period with respect thereto. The aggregate amount of Company Loans to any Designated Subsidiary at any time outstanding shall not exceed the Designated Subsidiary Borrowing Limit for such Designated Subsidiary in effect at such time. (b) The provisions of subsection 2.3(a) notwithstanding, if the Company or any Designated Subsidiary, as applicable, shall not have given a timely notice of the next Interest Period for any outstanding Eurodollar Loan, then unless the Agent shall have received notice that the Company or such Designated Subsidiary, respectively, elects not to continue such Eurodollar Loan on the last day of such Interest Period as a Eurodollar Loan (such notice to have been received at least one Business Day prior to the last day of such Interest Period) the Company or such Designated Subsidiary, as the case may be, shall be deemed irrevocably to have requested that Prime Rate Loans be made by the Banks on the last day of such Interest Period in the same aggregate amount as the Eurodollar Loans the last day of the Interest Period of which is on such day (subject, however, to the requirement that the aggregate amount of the Company Loans outstanding at any time pursuant to subsection 2.1 may not exceed the amounts of the Available Company Commitments then in effect). 2.4 Intentionally Omitted. 2.5 Intentionally Omitted. 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 or the Napco Commitments or, from time to time, to reduce the amount of the Company Commitments or the Napco 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 or the Napco 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 or the Napco L/C, as the case may be, would exceed the amount of the Company Commitments or Napco 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 Commitments or Napco 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 or 33 Napco Commitments then in effect. The Commitments once terminated or reduced may not be reinstated. (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, upon each repayment or prepayment of the Company Loans, upon each drawing under the Napco 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, the aggregate Company Commitments or Napco 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 or Napco 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 the outstanding principal amount, if any, of any Unpaid Drawings in respect of the Napco 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. 2.7 Fees. (a) The Company agrees to pay to the Agent for the account of each Bank the Facility Fee for the period commencing on the Second Closing Date extending to but not including the earlier of (i) the date the Commitments are terminated or (ii) the Termination Date. The accrued Facility Fee shall be payable on the last day of each March, June, September or December and on the Termination Date or such earlier date as the Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the Second Closing Date. (b) The Company agrees to pay to the Agent the additional fees in the amounts and upon the terms set forth in the Fee Letter. (c) The Company agrees to pay to the Agent on the Second Closing Date for the account of each Bank an amendment and restatement fee in the amount of 1/8 of 1% of such Bank's Commitment. 2.8 Optional and Mandatory Prepayments. (a) The Company and each Designated Subsidiary may at any time and from time to time prepay the Company Loans then outstanding, in whole or in part, without premium or penalty, provided, however, that if the Company or any Designated Subsidiary prepays any Eurodollar Loans on any day other than the last day the Interest Period therefor, the Company or such Designated Subsidiary shall concurrently pay any amounts due under subsection 2.16 incurred in connection therewith. Optional prepayments pursuant to this subsection 2.8(a) shall be made upon at least three Working Days' prior irrevocable notice to the Agent in the case of Eurodollar Loans, and one 34 Business Day's prior irrevocable notice to the Agent in the case of Prime Rate Loans, specifying (i) the date and amount of such prepayment, (ii) the Facility or Facilities under which the prepayment will be made, (iii) whether the prepayment is of Eurodollar Loans, Prime Rate Loans or a combination thereof, and, if of a combination thereof, the amount of prepayment allocable to each Type and (iv) in the case of Eurodollar Loans, the Interest Periods affected. If any such notice is given, the Company or the Designated Subsidiary involved, as applicable, will make the prepayment specified therein, and such prepayment shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. The aggregate amount of all prepayments of the Company Loans specified in the same notice delivered pursuant to this paragraph (a) shall be in an amount equal to $5,000,000 or any whole multiple of $1,000,000 in excess thereof or the amount of all Company Loans then outstanding, provided that prepayments of Eurodollar Loans pursuant to this paragraph (a) shall be made in such a manner that, after giving effect to such prepayments, no Eurodollar Loans having the same Interest Period shall be maintained in an amount less than $1,000,000. (b) Intentionally omitted. (c) Intentionally omitted. (d) The Company shall prepay the Company Loans then outstanding and reduce the Company Commitments as set forth in subsection 2.6(b) upon the receipt by the Company or any Subsidiary of Net Proceeds of any sale or other disposition of any of its assets, in each case to the extent set forth below: (i) during such time as the Leverage Ratio (calculated based on the financial statements most recently delivered to the Agent and the Banks pursuant to and in compliance with subsection 5.1(a) or (b)) is greater than or equal to 2.50:1.00, 75% of all such Net Proceeds shall be applied to prepay the installments required to be made on the Company Loans pursuant to subsection 2.9 in direct order of the maturity thereof; and (ii) during such time as the Leverage Ratio (calculated based on the financial statements most recently delivered to the Agent and the Banks pursuant to and in compliance with subsection 5.1(a) or (b)) is less than 2.50:1.00, 50% of all such Net Proceeds shall be applied to prepay the installments required to be made on the Company Loans pursuant to subsection 2.9 in direct order of the maturity thereof; Notwithstanding the foregoing provisions of this subsection 2.8(d), (A) subject to the final sentence of this subsection 2.8(d), the Company may deduct from the aggregate amount of the Net Proceeds arising from the Allied Sale otherwise payable under clauses (i) and (ii) of the subsection 2.8(d) an amount (the 35 "Napco Payment Amount") not to exceed $2,500,000, but only to the extent that the portion of such Net Proceeds representing the Napco Payment Amount is used solely to repay or prepay the Existing Napco Debt or any other Indebtedness incurred by the Napco Purchaser or Napco in substitution for, or otherwise in replacement of, all or any portion of the Existing Napco Debt and (B) solely with respect to payments due under any document or instrument which is not required to be pledged by the Company or any of its Subsidiaries to the Agent as set forth in the definition of "Net Proceeds", the Company shall prepay the Company Loans then outstanding and reduce the Commitments as set forth in subsection 2.6(b) on the following dates (each a "Scheduled Prepayment Date"), in each case in an aggregate amount equal to the applicable percentage on the March 31 immediately preceding such Scheduled Prepayment Date as set forth in clause (i) or (ii) of this subsection 2.8(d) of that amount which is equal to the aggregate amount of Net Proceeds received by the Company or the applicable Subsidiary under such document or instrument during the one-year period immediately preceding such Scheduled Prepayment Date less the aggregate amount of Net Proceeds with respect to which the Company has made prepayments prior to such Scheduled Prepayment Date in accordance with this subsection 2.8(d): Scheduled Prepayment Dates June 1, 1999 June 1, 2000 and each subsequent June 1 until the Termination Date Prior to any application of the Net Proceeds of the Allied Sale in accordance with clause (A) of this subsection 2.8(d), the Company shall deliver to the Agent a certificate of a Responsible Officer of the Company in form and substance satisfactory to the Agent setting forth (i) the amount of Net Proceeds received or to be received by the Company from the Allied Sale, (ii) the Napco Payment Amount and (iii) the manner of application of the Napco Payment Amount to the repayment or prepayment of the Existing Napco Debt or any other Indebtedness referred to in such clause (A). (e) Any payment of the Company Loans pursuant to this subsection 2.8 or to subsection 2.9 shall be applied first to the Prime Rate Loans of the Company and the Designated Subsidiaries then outstanding, and the balance of any payment shall be applied to the Eurodollar Loans of the Company and the Designated Subsidiaries in chronological order of the respective maturities thereof (or as the Company may otherwise specify in writing to the Agent), together with any payments required by subsection 2.16. 2.9 Repayment of Loans. The Company shall, and shall cause each Designated Subsidiary to, repay to the Agent for the ratable account of the Banks the aggregate outstanding principal amount of the Company Loans owing by the Company or such Designated Subsidiary, as the case may be, on the following dates in the aggregate amounts indicated for all such Company Loans being repaid on such date 36 (which amounts shall be reduced as a result of the application of prepayments in accordance with the order of priority set forth in subsection 2.8(d)): Date Amount March 31, 1998 ....................................... $ 1,000,000 June 30, 1998 ........................................ $ 1,000,000 September 30, 1998 ................................... $ 1,000,000 December 31, 1998 .................................... $ 1,000,000 March 31, 1999 ....................................... $ 1,000,000 June 30, 1999 ........................................ $ 1,000,000 September 30, 1999 ................................... $ 1,000,000 December 31, 1999 .................................... $ 1,000,000 March 31, 2000 ....................................... $ 1,250,000 June 30, 2000 ........................................ $ 1,250,000 September 30, 2000 ................................... $ 1,250,000 December 31, 2000 .................................... $ 1,250,000 March 31, 2001 ....................................... $ 1,500,000 June 30, 2001 ........................................ $ 1,500,000 September 30, 2001 ................................... $ 1,500,000 December 31, 2001 .................................... $ 1,500,000 March 31, 2002 ....................................... $ 3,000,000 June 30, 2002 ........................................ $ 3,000,000 August 26, 2002 ...................................... $96,728,225 provided, however, that the final principal installment shall be repaid on the earlier of the Termination Date and the date of the termination in full of the Company Commitments pursuant to subsection 2.6 or Section 7 and in any event shall be in an amount equal to the aggregate principal amount of the Company Loans, Company L/Cs and Unpaid Drawings in respect of Company L/Cs outstanding on such date. 2.10 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall bear interest for the Interest Period with respect thereto on the unpaid principal amount thereof at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect from time to time. (b) Each Prime Rate Loan shall bear interest on the aggregate unpaid principal amount thereof at a rate per annum equal to the Prime Rate in effect from time to time plus the Applicable Margin in effect from time to time. (c) Each Unpaid Drawing shall bear interest on the aggregate unpaid principal amount thereof at the Post-Default Rate in accordance with subsection 2.1(c)(vii). 37 (d) If all or a portion of the principal amount of any of the Company Loans shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue principal amount shall, without limiting the rights of the Banks under Section 7, bear interest at a rate per annum which is two percent (2%) above the otherwise applicable rate (the "Post-Default Rate"), from the date of such non-payment until paid in full (before, as well as after, judgment); provided that if such overdue principal amount is of Eurodollar Loans, then, at the end of the Interest Period relating thereto, such Eurodollar Loans may be continued only as Prime Rate Loans and shall bear interest at a rate per annum which is two percent (2%) above the rate required to be paid on Prime Rate Loans pursuant to subsection 2.10(b) until paid in full (before as well as after judgment). (e) Interest on each Company Loan shall be payable in arrears on each Interest Payment Date applicable thereto. (f) Anything herein to the contrary notwithstanding, the obligation of the Company and each Designated Subsidiary to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to any Bank to the extent that such Bank's receipt thereof would not be permissible under the law or laws applicable to such Bank limiting rates of interest which may be charged or collected by such Bank; provided that nothing in this subsection 2.10(f) shall release the Company or any Designated Subsidiary, as applicable, from paying any portion of interest then payable to the extent that such Bank's receipt thereof would be permissible under such law or laws. Any such payments of interest which are not made to any Bank as a result of the limitation referred to in the preceding sentence shall be made by the Company and each Designated Subsidiary to such Bank on the earliest Interest Payment Date or Dates on which the receipt thereof would be permissible under the laws applicable to such Bank limiting rates of interest which may be charged or collected by the Agent. 2.11 Computation of Interest and Fees. (a) The Facility Fee and interest in respect of Prime Rate Loans shall be calculated on the basis of a 365 (or 366, as the case may be) day year for the actual days elapsed. Interest on all Eurodollar Loans and Issuance Fees and the fees payable pursuant to subsection 2.7(b) shall be calculated on the basis of a 360-day year for the actual days elapsed. The Agent shall as soon as practicable, but not later than the close of business on the date of determination, notify the Company and the Designated Subsidiaries and the Banks of each determination of a Eurodollar Rate. Any change in the interest rate on the Company Loans resulting from a change in the Prime Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change in the Prime Rate is announced, or such change in the Eurocurrency Reserve Requirements shall become effective, as the case may be. The Agent shall as soon as practicable, but not later than three Business Days before the close of business on the effective 38 date, notify the Company and the Designated Subsidiaries and the Banks of the effective date and the amount of each such change. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be prima facie evidence of the accuracy of the facts so determined. 2.12 Inability to Determine Interest Rate. Notwithstanding any other provision of this Agreement, in the event that the Required Banks shall reasonably have determined (which determination shall be prima facie evidence of the facts so determined) that the rates quoted by Fleet for the purpose of computing the Eurodollar Rate do not adequately and fairly reflect the cost to the Banks of funding any Company Loans that the Company or any Designated Subsidiary has requested be converted into Eurodollar Loans, such Banks shall notify the Agent thereof and the Agent shall promptly give telecopier or telephonic notice of such determination, confirmed in writing to the Company or such Designated Subsidiary and the Banks at least one Business Day prior to the requested conversion date for such Eurodollar Loans. Unless the Company or such Designated Subsidiary shall have notified the Agent promptly after receipt of such telecopier or telephonic notice that it wishes to rescind or modify its request regarding such Eurodollar Loans, any requested Eurodollar Loans shall be made as Prime Rate Loans. Until any such notice has been withdrawn by the Agent, no further Eurodollar Loans shall be made. The Agent shall withdraw such notice promptly after it determines that the circumstances giving rise to the delivery of such notice no longer exist. 2.13 Taxes. (a) All payments made by the Company and each Designated Subsidiary under this Agreement shall be made free and clear of, and without reduction for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority excluding, in the case of the Agent and each Bank, net income and franchise taxes imposed on the Agent and such Bank by the jurisdiction under the laws of which such Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or by any jurisdiction in which such Bank's Domestic Lending Office or Eurodollar Lending Office, as the case may be, is located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to any Bank hereunder or under the Notes, the amounts so payable to such Bank shall be increased to the extent necessary to yield to such Bank (after payment of all Taxes, including Taxes on such increased amount) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes. Whenever any Taxes are payable by the Company or any Designated Subsidiary, as promptly as possible thereafter, the Company or such Designated Subsidiary shall send to the Agent for the account of such Bank a certified copy 39 of an original official receipt received by the Company or such Designated Subsidiary showing payment thereof. If the Company or any Designated Subsidiary fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Company or such Designated Subsidiary shall indemnify the Agent and the Banks for any incremental taxes, interest or penalties that may become payable by the Agent or any Bank as a result of any such failure. Each Bank confirms to the Company and the Designated Subsidiaries that tax withholding requirements do not currently apply to payments to be made to it hereunder. (b) If the Company or any Designated Subsidiary shall at any time be required to withhold any Taxes in respect of any amount payable to any Bank hereunder or under the Notes, the Company or such Designated Subsidiary shall be entitled to prepay the Company Loans allocable to such Bank, and the Company or such Designated Subsidiary shall be entitled to terminate the Commitment of such Bank (such prepayment to be made together with all other amounts due to such Bank hereunder and under the Notes, including, without limitation, interest, fees and any amounts payable pursuant to subsection 2.16). (c) Each Bank agrees to use reasonable efforts (including reasonable efforts to change its Domestic Lending Office or Eurodollar Lending Office, as the case may be) to avoid the imposition of any Taxes on payments hereunder or to minimize any amounts which might otherwise be payable pursuant to this subsection 2.13; provided, however, that such efforts shall not cause the imposition on such Bank of any additional costs or legal or regulatory burden deemed by such Bank to be material. (d) If the Company or any Designated Subsidiary makes any additional payment to the Agent or any Bank pursuant to this subsection 2.13 in respect of any Taxes, and the Agent or such Bank determines that it has received (i) a refund of such Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge solely as a result of any deduction or credit for any Taxes with respect to which it has received payments under this subsection 2.13, the Agent and such Bank shall, to the extent that they can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Company or such Designated Subsidiary such amount as the Agent and such Bank shall have determined to be attributable to the deduction or withholding of such Taxes. If the Agent or such Bank later determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this subsection 2.13(d), the Company or such Designated Subsidiary shall upon demand of the Agent or such Bank promptly repay the amount of such overpayment. Any determination made by the Agent or such Bank pursuant to this subsection 2.13(d) shall constitute prima facie evidence of the accuracy thereof, and nothing in this subsection 2.13(d) shall be construed as requiring the Agent or any Bank to conduct its respective business or to arrange or alter in any respect its respective tax or financial affairs so that it is 40 entitled to receive such a refund, credit or reduction or as allowing any person to inspect any records, including tax returns, of the Agent or any Bank. 2.14 Illegality. Notwithstanding any other provision herein, if any Regulatory Change shall make it unlawful for any Bank to make or maintain Eurodollar Loans as contemplated by this Agreement or to accept deposits in order to make or maintain such Eurodollar Loans, (a) the agreements of such Bank hereunder to make Eurodollar Loans shall forthwith be suspended for the duration of such illegality and (b) each Eurodollar Loan then outstanding, if any, shall be converted into a Prime Rate Loan on the last day of the Interest Period therefor or within such earlier period as required by law for the duration of such illegality. If any such conversion of a Eurodollar Loan is made on a day which is not the last day of the Interest Period therefor, the Company and each Designated Subsidiary hereby agrees to pay promptly to any Bank, upon its demand, any amounts required to be paid by the Company and such Designated Subsidiary pursuant to subsection 2.16 (such Bank's reasonable notice of such costs and the manner in which they were calculated, as certified to the Company or such Designated Subsidiary, as applicable, shall constitute prima facie evidence of the accuracy of the amounts set forth therein). This agreement shall survive termination of this Agreement and the payment of the outstanding Notes. Each Bank shall use its reasonable efforts to promptly notify the Company and each Designated Subsidiary as soon as practicable as to any Regulatory Change described in this subsection 2.14. 2.15 Increased Costs. (a) In the event that any Regulatory Change: (i) subjects any Bank to any tax of any kind whatsoever with respect to this Agreement, its Notes or any Company Loans made by it, or changes the basis of taxation of payments to such Bank of principal, interest, fees or any other amount payable hereunder (except for changes in Taxes and except for taxes measured by the net income of such Bank); (ii) imposes, modifies or holds applicable to such Bank any reserve, Federal Deposit Insurance Corporation premium or assessment, special deposit, compulsory loan or similar requirement against any Eurodollar Loans made, or assets held by, or credit extended by, or deposits or other liabilities in or for the account of, or acquisition of funds by or for the account of, any office of such Bank (or any Person controlling such Bank) (but only to the extent not otherwise included in the determination of the Eurodollar Rate); or (iii)imposes on such Bank any other condition affecting this Agreement or any Company Loans made hereunder; 41 and the result of any of the foregoing is to increase the cost to such Bank of making or maintaining Company Loans or Commitments or to reduce any amount receivable by it in respect of Company Loans or Commitments, then, in any such case, the Company or the applicable Designated Subsidiary shall promptly pay the Bank, upon its demand pursuant to subsection 2.15(c), any additional amounts necessary to compensate such Bank (or any Person controlling such Bank) for such additional cost or reduced amount receivable plus interest thereon at the Prime Rate, for five (5) Business Days from the date demanded and thereafter, at the Post-Default Rate, in each case until payment in full thereof. (b) In the event that any Bank (or any Person controlling such Bank) shall have reasonably determined that any Regulatory Change does or shall have the effect of reducing the rate of return on such Bank's (or such Person's) capital as a consequence of its obligations hereunder to a level below that which such Bank (or such Person) could have achieved on the Second Closing Date but for such Regulatory Change (taking into consideration such Bank's policies with respect to capital adequacy) by any amount reasonably deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank pursuant to subsection 2.15(c), the Company or the applicable Designated Subsidiary shall promptly pay the Bank such additional amount or amounts as will compensate such Bank (or such Person) for such reduction. (c) If any Bank (or any Person controlling such Bank) becomes entitled to claim any additional amounts pursuant to this subsection 2.15, it shall promptly after becoming aware thereof notify the Company or the applicable Designated Subsidiary of the event by reason of which it has become so entitled. Any such claim for additional amounts by such Bank shall be accompanied by a certificate setting forth in reasonable detail the calculation thereof (provided, however, that such Bank shall not be required to disclose proprietary or confidential information in such certificate), submitted by such Bank to the Company or the applicable Designated Subsidiary, and such certificate shall constitute prima facie evidence of the accuracy of the amount of such claim. This agreement shall survive termination of the Commitments and the payment in full of the outstanding Notes for 180 days (but not longer). (d) If the Company or any Designated Subsidiary shall at any time be required to pay amounts pursuant to this subsection 2.15 to any Bank (or any Person controlling such Bank), the Company or such Designated Subsidiary shall be entitled to prepay the Company Loans allocable to such Bank, and thereupon the Company or such Designated Subsidiary shall be entitled to terminate the Commitment of such Bank (such prepayment to be made together with all other amounts due to such Bank hereunder and under the Notes, including, without limitation, interest, fees and any amounts payable pursuant to subsection 2.16). 42 2.16 Indemnity. Each of the Company and each Designated Subsidiary agrees to indemnify each Bank for, and to hold such Bank harmless from, any loss or expense (but not including loss of Applicable Margin) which such Bank may sustain or incur as a consequence of (a) any default by the Company or any Designated Subsidiary in borrowing or failure to borrow for any reason such Eurodollar Loans after the Company or such Designated Subsidiary has given a notice in respect thereof in accordance with subsection 2.3, (b) receipt by such Bank of any prepayment (whether optional or mandatory) of any Eurodollar Loan on a day which is not the last day of an Interest Period applicable to such Eurodollar Loan, (c) default by the Company or any Designated Subsidiary in making any prepayment of a Eurodollar Loan after it has given a notice in accordance with subsection 2.8(a) or (d) acceleration of any Eurodollar Loans, and each Bank shall use reasonable efforts to minimize any amounts due to such Bank pursuant to this subsection 2.16. The Company and each Designated Subsidiary shall promptly pay to each Bank, upon its demand (accompanied by the certificate described below), any amounts necessary to compensate such Bank for such losses or expenses incurred by such Bank in making or maintaining any Company Loans in accordance with this subsection 2.16, including, without limitation, any interest or fees payable by such Bank to lenders of funds obtained by it in order to make or maintain its Eurodollar Loans. Any claim for additional amounts pursuant to the foregoing sentence by such Bank shall be accompanied by a certificate setting forth in reasonable detail the calculation thereof (provided, however, that such Bank shall not be required to disclose proprietary or confidential information in such certificate), submitted by such Bank to the Company or such Designated Subsidiary, and such certificate shall constitute prima facie evidence of the accuracy of the amount of such claim, provided that the determination of such amount is made on a reasonable basis. This subsection 2.16 shall survive termination of the Commitments and the payment in full of the outstanding Notes for 180 days (but not longer). 2.17 Maximum Number of Tranches. Notwithstanding any other provision hereof, there shall not at any time be outstanding hereunder Tranches in excess of the Tranche Limit. 2.18 Use of Proceeds. The proceeds of the Company Loans may only be used to refinance certain Indebtedness of the Company and/or its Subsidiaries outstanding on the First Closing Date. 2.19 Pro Rata Treatment and Payments; L/C Participation. (a) Each borrowing of Company Loans by the Company or any Designated Subsidiary from the Banks, each payment by the Company on account of any fees hereunder (including, without limitation, any Issuance Fees and Drawing Fees in respect of L/Cs (but excluding fees payable pursuant to subsection 2.7(b))), and any reduction of the Commitments of the Banks hereunder shall be made pro rata according to the respective Commitment Percentages of the Banks. Each payment (including each prepayment) by the Company or any Designated Subsidiary on account of principal of and interest on the Company Loans and other amounts due hereunder (other than payments made pursuant to subsection 2.13, 2.14, 2.15 or 2.16) shall be made pro rata according to the respective outstanding principal amounts of the Company Loans held by each Bank. All payments (including prepayments) to be made by the Company or any Designated Subsidiary on account of principal and interest on the 43 Notes or on account of any fees or other amounts due hereunder shall be made without set-off or counterclaim and shall be made to the Agent, for the account of the Banks, at the Agent's office in Boston, Massachusetts as set forth in subsection 9.2, in lawful money of the United States of America and in immediately available funds not later than 11:00 a.m. Boston, Massachusetts time, on the date on which such payment shall become due. The Agent shall distribute such payments to the Banks promptly upon receipt in like funds as received. If any payment hereunder (other than payments on Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Working Day, the maturity thereof shall be extended to the next succeeding Working Day unless the result of such extension would be to extend such payment into another calendar month in which event such payment shall be made on the immediately preceding Working Day and with respect to payments of principal interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Agent shall have been notified in writing by any Bank prior to a borrowing date that such Bank will not make the amount which would constitute its Commitment Percentage of the Company Loans on such date available to the Agent, the Agent may assume that such Bank has made such amount available to the Agent on such borrowing date, and the Agent may, in reliance upon such assumption, make available to the Company or a Designated Subsidiary, as applicable, a corresponding amount. If such amount is made available to the Agent on a date after such borrowing date, such Bank shall pay to the Agent on demand an amount equal to the product of (i) the daily Federal Funds Rate during such period, times (ii) the amount of such Bank's Commitment Percentage of such borrowing, times (iii) a fraction the numerator of which is the number of days that elapse from and including such borrowing date to the date on which such Bank's Commitment Percentage of such borrowing shall have become immediately available to the Agent and the denominator of which is 365. A certificate of the Agent submitted to any Bank with respect to any amounts owing under this subsection 2.19(b) shall be conclusive, absent manifest error. If such Bank's Commitment Percentage of such borrowing is not in fact made available to the Agent by such Bank within three Business Days of such borrowing date, the Agent shall be entitled to recover such amount with interest thereon at the rate per annum applicable to the Company Loans hereunder, on demand, from the Company or a Designated Subsidiary, as applicable. Except as set forth in the immediately preceding sentence, neither the Company nor the Subsidiaries shall have any liability to any Person under this subsection 2.19(b). 44 (c) (i) Fleet, as the issuing bank with respect to each L/C, irrevocably agrees to grant and hereby grants to each Bank (each Bank, in such capacity, an "L/C Participant") and, to induce Fleet to issue and maintain L/Cs hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from Fleet, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Commitment Percentage in Fleet's obligations and rights under each L/C issued or deemed issued by it hereunder and the amount of Unpaid Drawings with respect to any draft paid by Fleet thereunder, effective, in the case of each L/C issued (but not deemed issued) hereunder, on the date of issuance thereof and, in the case of each Existing Company L/C issued by Fleet, on the Second Closing Date. Each L/C Participant unconditionally and irrevocably agrees with Fleet with respect to any L/C that, if a draft is paid under such L/C for which Fleet is not reimbursed in full by the relevant Account Party on the date required by subsection 2.1(c)(vii), such L/C Participant shall pay to Fleet upon notification or demand at Fleet's address for notices specified herein an amount equal to such L/C Participant's Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (ii) If any amount required to be paid by any L/C Participant to Fleet with respect to any L/C pursuant to subsection 2.19(c)(i) in respect of any unreimbursed portion of any payment made by Fleet under such L/C is paid to Fleet within three Business Days after the date such payment is due by such L/C Participant, such L/C Participant shall pay to Fleet on demand an amount equal to the product of (A) such amount, times (B) the daily average Federal Funds Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to Fleet, times (C) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 365. If any such amount required to be paid by any L/C Participant pursuant to subsection 2.19(c)(i) is not in fact made available to Fleet by such L/C Participant within three Business Days after the date such payment is due by such L/C Participant, Fleet shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to Prime Rate Loans hereunder. A certificate of Fleet submitted to any L/C Participant with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. (iii)Whenever, at any time after Fleet has made payment under any L/C and has received from any L/C Participant its pro rata share of such payment in accordance with subsection 2.19(c)(i), Fleet receives any payment related to such L/C (whether directly from the Company, a Designated Subsidiary or otherwise, including by means of set-off or the proceeds of collateral applied thereto by Fleet), or any payment of interest on account thereof, Fleet will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by Fleet shall be required to be returned by it, such L/C Participant shall return to Fleet the portion thereof previously distributed by Fleet to it. Neither the Company nor 45 any Subsidiary shall have any liability or obligation to any person under this subsection 2.19(c). 2.20 Guaranties. The due payment and performance of the Obligations of the Loan Parties shall be guaranteed to the Banks and the Agent by the Company and each of the Material Operating Subsidiaries listed on Schedule 2.20 hereto (hereinafter, together with any other Material Operating Subsidiary that executes and delivers a Guaranty, referred to, individually, as a "Guarantor" and, collectively, as the "Guarantors"), by the execution and delivery to the Agent by each Guarantor of a Guaranty in form and substance satisfactory to the Agent (as amended, supplemented or otherwise modified from time to time with its terms, individually, a "Guaranty" and, collectively, as to all the Guarantors, the "Guaranties"). In addition, each Material Operating Subsidiary that becomes a Material Operating Subsidiary after the First Closing Date shall, concurrently with becoming a Material Operating Subsidiary, execute and deliver to the Agent a Guaranty, in form and substance satisfactory to the Agent, and upon such execution and delivery, such Material Operating Subsidiary shall become a Guarantor under the Loan Documents. 2.21 Security. In order to secure, among other things, the due payment and performance by the Company, each Designated Subsidiary and each Guarantor of its respective Obligations, each of the Company, each other Guarantor and each Additional Subsidiary Grantor (collectively, together with any other Subsidiary that executes and delivers a Company Security Agreement or otherwise becomes a party to a Company Security Agreement, being referred to herein as "Collateral Grantors" and, individually, a "Collateral Grantor") has, pursuant to an amended and restated security agreement in form and substance satisfactory to the Agent and the Banks dated February 24, 1994 and amended and restated on the First Closing Date (as amended, supplemented or otherwise modified from time to time in accordance with its terms, the "Company Security Agreement"), granted to the Agent for the ratable benefit of the Secured Parties a first priority lien on and security interest in the following: (a) all of the issued and outstanding shares of capital stock of each Guarantor (other than the Company); (b) all present and future accounts receivable and inventory of such Collateral Grantor; and (c) all proceeds and products of the property and assets described in clauses (a) and (b) above. Each Collateral Grantor shall execute and deliver or cause to be executed and delivered such other agreements, instruments and documents as the Agent may 46 reasonably require in order to effect the purposes of the Company Security Agreement, this subsection 2.21 and this Agreement. In addition, each Material Operating Subsidiary that becomes a Material Operating Subsidiary after the First Closing Date shall, concurrently with becoming a Material Operating Subsidiary, execute and deliver a Company Security Agreement supplement, in form and substance satisfactory to the Agent, pursuant to which such Material Operating Subsidiary will grant to the Agent for the ratable benefit of the Secured Parties a first priority lien on and security interest in the assets described in clause (b) of subsection 2.21 above and, to the extent it relates to such clause (b), clause (c) of such subsection 2.21 above, and upon such execution and delivery, such Material Operating Subsidiary shall become a Collateral Grantor under the Loan Documents. 2.22 Additional L/C Provisions. (a) Without limiting the generality of subsection 2.15, if: (i) any Regulatory Change shall (A) impose, modify or deem applicable any reserve, special deposit, capital maintenance, deposit insurance premium or assessment, or similar requirement against letters of credit issued or deemed issued by, or assets held by, or deposits made with or for the account of, Fleet, (B) impose on Fleet any other condition regarding the L/Cs or (C) subject Fleet to any tax, charge, fee, deduction or withholding of any kind whatsoever (except for changes in Taxes and except for taxes measured by the net income of Fleet); and (ii) the result of any such event shall be to increase the cost to Fleet of the issuance or maintenance of the L/Cs, or reduce the amount of principal, interest, or any fee or compensation receivable by Fleet in respect of the L/Cs; then, upon demand of Fleet, the Company or the applicable Designated Subsidiary, as applicable, shall pay to Fleet, from time to time as specified by Fleet, all additional amounts which are necessary to compensate Fleet for such increased cost or reduction incurred by Fleet, accruing from and after the date initially demanded by Fleet. All payments of compensation for such increased cost or reduction shall be accompanied by interest thereon, at the Prime Rate from the date demanded for five (5) Business Days, and thereafter, at the Post-Default Rate, in each case until payment in full thereof. A certificate as to such increased cost incurred by Fleet showing in reasonable detail the calculation thereof shall be submitted by Fleet to the Company and shall constitute prima facie evidence of the accuracy of the amounts set forth therein. For purposes of this subsection 2.22, all references to L/Cs shall be deemed to refer to participations in L/Cs, and all references to "Fleet" shall be deemed to include any L/C Participant, except that amounts payable by the Company and the Designated Subsidiaries shall only be paid to Fleet and then delivered to any L/C Participant having such cost. In the event of any inconsistency between the terms of this subsection 2.22 and subsection 2.15, the provisions of subsection 47 2.15 shall govern. This Agreement shall survive termination of the Commitments and payment of the outstanding Notes for 180 days (but not longer). (b) The obligations of the Company and each Designated Subsidiary under this Agreement with respect to the L/Cs shall, absent gross negligence or willful misconduct by Fleet, (x) be absolute, unconditional and irrevocable and (y) be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, without limitation, the following circumstances: (i) the L/Cs, the Notes, this Agreement or any other Loan Documents or agreements, instruments or documents relating thereto proving to be forged, fraudulent, invalid, unenforceable or insufficient in any respect; (ii) any amendment or waiver of, or any consent to the departure from, all or any of the Security Documents and any subsequent such agreements; (iii)the existence of any claim, setoff, defense or other rights which the Company or any Designated Subsidiary may have at any time against any beneficiary or any transferee of any beneficiary (or any Persons or entities for whom any beneficiary or any such transferee may be acting); (iv) any demand presented under any L/C (or any endorsement thereon) proving to be forged, fraudulent, invalid, unenforceable or insufficient in any respect or any statement therein being inaccurate in any respect whatsoever; (v) the failure of any document to bear reference, or to bear adequate reference, to the applicable L/C; (vi) the use to which the L/Cs may be put or any acts or omissions of the Company or any Designated Subsidiary or beneficiaries in connection therewith; or (vii)any other similar circumstances, provided that such circumstances or happening shall not have constituted gross negligence or willful misconduct of Fleet. (c) Fleet shall not be responsible: (i) for the validity or insufficiency of any instrument transferring or assigning or purporting to transfer or assign the L/Cs or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (ii) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable telegraph, telex or otherwise, whether or not they be 48 in cipher; (iii) for any loss or delay in the transmission or otherwise of any document or draft required in order to make a draw under the L/Cs or of proceeds thereof; and (iv) for any consequence arising from causes beyond the control of Fleet provided that this paragraph (c) shall not apply to the gross negligence or willful misconduct of Fleet. None of the above shall affect, impair or prevent the vesting of any of Fleet's rights or powers hereunder. (d) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by Fleet under or in connection with the L/Cs or the related drafts or documents, unless constituting gross negligence or willful misconduct, shall be binding upon the Company and the Designated Subsidiaries and shall not put Fleet under any resulting liability to the Company and the Designated Subsidiaries. (e) The Company and each Designated Subsidiary shall at all times protect, indemnify and save harmless Fleet and each Bank from and against any and all claims, actions, suits and other legal proceedings, and from and against any and all losses, claims, demands, liabilities, damages, costs, charges, counsel fees and other expenses which Fleet or any Bank may, at any time, sustain or incur by reason of or in consequence of or arising out of the issuance of the L/Cs; it being the intention of the parties that this Agreement shall be construed and applied to protect and indemnify Fleet and each Bank against any and all risk involved in the issuance of the L/Cs, all of which risks are hereby assumed by the Company and each Designated Subsidiary, including, without limitation, any and all risks of the acts or omissions, whether rightful or wrongful, of any present or future Governmental Authority (all such acts and omissions, herein called the "Governmental Acts") or any risk of default under any Contractual Obligation resulting from the failure of the Company or the relevant Designated Subsidiary to make payments in respect of L/Cs in accordance with subsection 2.1(c)(i)(D); provided, however, that the Company and each Designated Subsidiary shall not be required to indemnify Fleet or any Bank for (i) any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by the willful misconduct or gross negligence of Fleet (with respect to which, however, Fleet shall be liable to the other Banks) or (ii) any breach of obligations of Fleet to other Banks. Notwithstanding any other provision contained in this Agreement, the obligations of the Company and each Designated Subsidiary under this subsection 2.22 shall survive the termination of this Agreement. (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 bank, 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 49 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, shall have the effect of terminating the Available Napco Commitment in full. 2.23 Several Obligations. The failure of any Bank to make any Company Loan or fund the L/C participation to be made or funded by it on the date specified therefor shall not relieve the other Banks of their respective obligations to make their Company Loans or fund their L/C participations on such date, but no Bank shall be responsible for the failure of the other Banks to make the Company Loans or fund the L/C participations to be made by such other Banks. SECTION 3.REPRESENTATIONS AND WARRANTIES To induce (a) each Bank to enter into this Agreement and to make or maintain the Company Loans and (b) Fleet to issue or maintain L/Cs hereunder, the Company and each Designated Subsidiary, as applicable, hereby represents and warrants to such Bank that, except as disclosed in the SEC Reports: 3.1 Financial Condition. The consolidated balance sheet of the Company and its consolidated Subsidiaries as at December 31, 1997 and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year ended on such date, certified by Grant Thornton, copies of which have heretofore been furnished to each Bank, and the unaudited consolidated balance sheet and related consolidated statements of income, stockholders equity and cash flow of the Company and its consolidated Subsidiaries for the ending quarter September 30, 1998 present fairly, in conformity with GAAP, the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and cash flows for the period then ended (subject to normal year-end adjustments as to such September 30, 1998 financial statements). All such financial statements have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants and as disclosed therein). Neither the Company nor any of its consolidated Subsidiaries had, at the dates of the balance sheets referred to above, any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment, required to be reflected under GAAP which is not reflected in the foregoing statements or in the notes thereto and which was material to the Company and its consolidated Subsidiaries taken as a whole (including, without limitation, any Environmental Liability). 3.2 No Change. Since December 31, 1997 there has been no material adverse change in the business, operations, property, performance or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole. 50 3.3 Corporate Existence; Compliance with the Law. Each of the Company and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where qualification is required by the nature of its business or the character and location of its property or business and in which the failure to so qualify could have a Material Adverse Effect and (d) is in compliance with all Requirements of Law, including, without limitation, all applicable Environmental Laws and Regulations, except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 Corporate Power; Authorization; Enforceable Obligations. Each of the Company and its Subsidiaries has the corporate power and authority to make, deliver and perform each of this Agreement, the Notes, the other Loan Documents, the Related Documents and the other documents contemplated hereby to which it is a party and to consummate (a) the transactions contemplated by the Loan Documents and Related Documents to which it is a party, (b) in the case of the Company, the Merger and the other transactions contemplated thereby and (c) in the case of Napco, the Napco Transaction and the other transactions contemplated thereby. Each of the Company and its Subsidiaries has taken all necessary corporate action to authorize the execution, delivery and performance of each of this Agreement, the Notes, the other Loan Documents and the other documents contemplated hereby to which it is a party. No consent or authorization of, or filing with, any Person (including, without limitation, any Governmental Authority), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement, the Notes, the other Loan Documents or the other documents contemplated hereby or with the consummation of the Tender Offer or Merger, the Napco Transaction or the other transactions contemplated hereby or thereby, other than (i) the Certificate of Ownership and Merger merging the Purchaser with and into the Company, (ii) the Certificate of Merger merging Napco Target I and Napco Target II with and into the Napco Purchaser and (iii) those consents, authorizations and filings which the failure to obtain, take, give or make could not, either individually or in the aggregate, be reasonably likely to (A) have a Material Adverse Effect, (B) affect the enforceability, validity or binding effect of any of the Loan Documents or (C) expose the Agent or any Bank to personal liability. This Agreement has been duly executed and delivered on behalf of the Company and each Designated Subsidiary, and this Agreement, the Notes, the other Loan Documents, the Related Documents and the other documents contemplated hereby constitute, legal, valid and binding obligations of the Company and each Subsidiary party thereto, enforceable against the Company and each Subsidiary party thereto in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). 51 3.5 No Legal Bar. The execution, delivery and performance of this Agreement, the Notes, the other Loan Documents, the Related Documents and the other documents contemplated hereby, the borrowings hereunder and the use of the proceeds thereof, and the consummation of the Merger, the Napco Transaction and the other transactions contemplated hereby and thereby, will not violate any Requirement of Law or any Contractual Obligation of the Company or any of its Subsidiaries, and will not result in or require the creation or imposition of any Lien on any of its or their respective properties pursuant to any Requirement of Law or any Contractual Obligation, except, with respect to the foregoing other than with respect to the Loan Documents, such violations as could not, either individually or in the aggregate, be reasonably likely to (i) have a Material Adverse Effect, (ii) subject any Loan Party or any of its Subsidiaries to any criminal penalties or (iii) subject the Agent or any Bank to any civil or criminal penalties. 3.6 No Litigation. No action, suit, litigation, investigation or proceeding, including, without limitation, any Environmental Proceeding, of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened, by or against the Company or any of its Subsidiaries or against any of their respective properties or revenues that could reasonably be expected to have a Material Adverse Effect. 3.7 Federal Regulations. No part of the proceeds of any Company Loans hereunder will be used in violation of the provisions of the Regulations of the Board of Governors of the Federal Reserve System, including, without limitation, Regulations G, U and X. 3.8 Investment Company Act. Neither the Company nor any Subsidiary is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.9 Disclosure. The financial statements, certificates, opinions, and other statements furnished in writing to the Agent or the Banks by or on behalf of the Company or any Subsidiary in connection with this Agreement or the transactions contemplated hereby do not, taken as a whole, contain any untrue statement of a fact, or omit to state any fact necessary in order to make the statements contained therein or herein not misleading, except for matters that could not reasonably be expected to have a Material Adverse Effect. 3.10 No Default. Neither the Company nor any of its Subsidiaries is in default under or with respect to any Contractual Obligation in any respect which could reasonably be expected to have a Material Adverse Effect. After giving effect to the amendment and restatement of the Existing Credit Agreement as this Agreement, no Default or Event of Default has occurred and is continuing. 52 3.11 Taxes. Except as set forth on Schedule 3.11 hereto, each of the Company and its Subsidiaries has filed or caused to be filed all material tax returns which to its knowledge are required to be filed, and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other material taxes, fees or other charges which to its knowledge have been imposed on it or any of its property by any Governmental Authority (other than those the amount or validity of which is currently being contested in good faith by appropriate proceedings diligently pursued and with respect to which reserves in conformity with GAAP have been provided in its books); no material tax liens have been filed and, to the knowledge of the Company, no claims are being asserted with respect to any such taxes, fees or other charges, except for claims not material to the Company and its Subsidiaries taken as a whole. 3.12 Subsidiaries. At the Second Closing Date, the Company has no Subsidiaries except those listed on Part I of Schedule 3.12, and the Company owns directly or indirectly 100% of the outstanding voting shares of each such Subsidiary except as disclosed therein. Part II of Schedule 3.12 lists those Subsidiaries which were Non-Core Subsidiaries on the First Closing Date for the purposes of subsection 6.9. 3.13 Ownership of Property; Liens. Except as permitted in subsection 6.2, each of the Company and its Subsidiaries has good title in fee simple to, or valid leasehold interest in, all its real property, and good title to all its other property, and none of such owned property is subject to any Lien, except for the security interest granted pursuant to the Security Documents. 3.14 ERISA. Except as described on Schedule 3.14, as it may be updated from time to time by the Company pursuant to subsection 5.8(c), neither the Company, nor any Commonly Controlled Entity, is a participating employer in any Plan in which more than one employer makes contributions as described in Sections 4063 and 4064 of ERISA, which, together with all other liabilities described in this subsection, could give rise to a liability which is material. For purposes of this subsection, a liability is material if it, together with all other liabilities described in this subsection, could subject the Company or any of its Subsidiaries to any tax, penalty, or other liabilities that could reasonably be expected to have a Material Adverse Effect. Except as described on Schedule 3.14, as it may be updated from time to time, neither the Company or any Subsidiary nor any Commonly Controlled Entity has any contingent liability with respect to any post-retirement benefit under any employee welfare benefit plan (as defined in Section 3(l) of ERISA) other than (a) liability for health plan continuation coverage as described in Part 6 of Title 1 of ERISA, (b) liability under any severance plan, (c) liability under plans or programs required by law, and (d) disability benefits under any tax-qualified pension plans in an amount 53 which together with all other liabilities described in this subsection, could give rise to a liability which is material. Neither the Company or any Subsidiary nor any Commonly Controlled Entity has received any notice from the PBGC that any of the Single Employer Plans is being involuntary terminated and no event shall have occurred, and there exists no condition or set of circumstances, which present a material risk of the distress termination (within the meaning of Section 4041(c) of ERISA) or the involuntary termination of any of the Single Employer Plans. Neither the Company or any Subsidiary nor any Commonly Controlled Entity has incurred any liability to the PBGC which remains outstanding other than the payment of premiums, and there are no premiums which have become due which are unpaid. Each Single Employer Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified and each trust related to such plan has been determined to be exempt under Section 501(a) of the Code, or the period for obtaining such a determination letter has not expired; and no event has occurred and no condition currently exists which might reasonably be expected to give rise to a liability that is material as a result of the failure of any plan that is intended to be qualified under Section 401(a) of the Code to be so qualified. No Plan is being audited or investigated by any government agency or subject to any pending or threatened claim or suit, which audit, investigation, pending claim or suit could reasonably be expected to give rise to a liability, which together with all other liabilities described in this subsection would be material. Each Single Employer Plan currently meets and during the preceding six years has met the minimum funding standard of Section 302 of ERISA and Section 412 of the Code (without regard to any funding waiver). With respect to each Multiemployer Plan, the Company, each Subsidiary and each Commonly Controlled Entity have paid or accrued to the extent required by GAAP all contributions pursuant to the terms of each applicable collective bargaining agreement. No Reportable Event has occurred during the six-year period prior to the date on which this representation is made or deemed made with respect to any Single Employer Plan which Reportable Event, together with all other liabilities described in this subsection, could give rise to a liability which is material, and each Single Employer Plan has complied in all material respects with the applicable provisions of ERISA and the Code. The present value of all benefit liabilities (within the meaning of Title IV of ERISA) under each Single Employer Plan maintained by the Company, any Subsidiary or any Commonly Controlled Entity (based on those assumptions used to fund the respective Single Employer Plans) did not, as of the last annual valuation date, exceed the value of the assets of such Single Employer Plan allocable to such benefit liabilities by more than $2,500,000. Except as described on Schedule 3.14, neither the Company or any Subsidiary nor any Commonly Controlled Entity has any unsatisfied liability with respect to a complete or partial withdrawal from any Multiemployer Plan, which together with all other liabilities described in this subsection would be material, and, to the best of the Company's knowledge, the liability to which the Company, any Subsidiary or any Commonly Controlled Entity would become subject under ERISA if the Company, any Subsidiary or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the Second Closing Date would not, 54 together with all other liabilities described in this subsection, be material. Neither the Company or any Subsidiary nor any Commonly Controlled Entity has failed to make any payment when due with respect to any complete or partial withdrawal from any Multiemployer Plan. No such Multiemployer Plan is in Reorganization or Insolvent, where the liability which could reasonably be expected to result is in an amount which, taken together with all the liabilities described in this subsection, is material. Neither the Company or any Subsidiary nor any Commonly Controlled Entity is required to provide security to a Single Employer Plan pursuant to Section 307 of ERISA or Section 401(a)(29) of the Code. Neither the Company or any Subsidiary nor any Commonly Controlled Entity has engaged in a transaction which could reasonably be expected to subject it to liability under Section 4069 or 4212(c) of ERISA which liability together with all other liabilities described in this subsection is material. Except as disclosed in Schedule 3.14, as it may be updated from time to time there are no agreements which will provide payments to any officer, employee, shareholder or highly compensated individual which will be parachute payments under Section 280G of the Code that are nondeductible to the Company or any Subsidiary and which will be subject to the tax under Section 4999 of the Code for which the Company or any Subsidiary would have a material withholding liability. 3.15 Nortek Indentures. There have been delivered to the Agent and each Bank a true and correct copy of each of the Nortek Indentures, including all amendments, waivers and supplements thereto. To the knowledge of the Company, the Nortek Indentures and all such other documents have been duly executed and delivered by the parties thereto and are in full force and effect at the Second Closing Date. 3.16 SEC Reports. The Company has furnished the Agent with true copies of the SEC Reports. 3.17 Intangible Assets. Each of the Company and the Subsidiaries possesses all patents, trademarks, service marks, trade names, and copyrights and rights with respect to the foregoing (collectively, "Patent Rights"), necessary to conduct its business as now conducted and as proposed to be conducted, except for technology not material to the operations of the Company and its Subsidiaries taken as a whole. To the best knowledge of the Company, the Patent Rights do not conflict with the patents, trademarks, service marks, trade names, copyrights and other rights with respect to the foregoing of any other Person, except for conflicts which are not material to the operations of the Company and its Subsidiaries taken as a whole. 3.18 Name Changes, Mergers, Acquisitions. Except as a result of the Merger and the Napco Transaction and except as set forth on Schedule 3.18, none of the Company, Napco or any of the Material Operating Subsidiaries has within the 55 six-year period immediately preceding the Second Closing Date changed its name, been the surviving entity of a merger or consolidation, or acquired all or substantially all of the assets of any Person. 3.19 Licenses and Approvals. The Company and each of the Subsidiaries has all necessary licenses, permits and governmental authorizations, including, without limitation, licenses, permits and authorizations required to comply with all Environmental Laws and Regulations, to own and operate its properties and to carry on its business as now conducted, except for licenses, permits and authorizations, which the failure to have does not materially adversely affect the operations of the Company and its Subsidiaries taken as a whole. 3.20 Labor Disputes; Collective Bargaining Agreements; Employee Grievances. Except as set forth on Schedule 3.20, there is no pending strike, work stoppage, material unfair labor practice claim or charge, arbitration or other material labor dispute against or affecting the Company or any Subsidiary or their representative employees. 3.21 Solvency. To the best of the knowledge of the Company, each Loan Party is Solvent, individually and together with its Subsidiaries and, after giving effect to the receipt and application of the Company Loans and the issuance or deemed issuance of L/Cs in accordance with the terms of this Agreement, each Loan Party, individually and together with its Subsidiaries, shall continue to be Solvent. 3.22 Outstanding Indebtedness for Borrowed Money. Schedule 3.22(a) sets forth a complete and accurate list of all Indebtedness of the Company and its Subsidiaries (other than Napco and its Subsidiaries) for borrowed money, and all available committed credit lines, outstanding on the First Closing Date. Schedule 3.22(b) sets forth a complete and accurate list of all Indebtedness of Napco and its Subsidiaries for borrowed money, and all available committed credit lines, outstanding on the Second Closing Date, including, without limitation, the Existing Napco Debt and the Existing Napco L/C. 3.23 Hazardous Materials. Except as described in the Phase I Environmental Assessments & Transaction Screens of Ply Gem Industries, Inc. and its Subsidiaries across the United States draft dated June 20, 1997 prepared by Dames & Moore, Hazardous Materials have not been released, discharged or disposed of at, or transported to or from, any of the real property currently owned, leased or occupied by the Company or its Subsidiaries so as to give rise to any liability under Environmental Laws and Regulations, except in such case where the liability would not have a Material Adverse Effect. 56 SECTION 4.CONDITIONS PRECEDENT 4.1 Conditions to Effectiveness of Section 2.14.1 Conditions to Effectiveness of Section 2.1. The effectiveness of Section 2.1 shall be subject to the satisfaction of each of the following conditions precedent: (a) Napco Merger. The Napco Merger shall have been consummated in accordance with the Napco Merger Agreement without any waiver or amendment of any term or condition therein not consented to by the Banks and in compliance with all applicable laws and necessary approvals. The Banks shall be satisfied that the restrictions in any applicable state takeover law and any supermajority charter provisions are not applicable to the Napco Merger or that any conditions for avoiding the restrictions set forth therein have been satisfied. (b) Corporate Structure. The Agent and the Banks shall be satisfied with the corporate and legal structure and capitalization of the Company and each of the other Loan Parties, including, without limitation, the terms and conditions of the charter, bylaws and each class of capital stock of the Company and each other Loan Party and each agreement or instrument relating to such structure or capitalization. (c) No Material Adverse Change. Since December 31, 1997, there shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance or properties of the Company and its Subsidiaries, taken as a whole. (d) Pre-Commitment Information. All of the Pre-Commitment Information shall be true and correct in all material aspects; and no additional information shall have come to the attention of the Agent or any of the Banks that is inconsistent in any material respect with the Pre-Commitment Information or that could reasonably be expected to have a Material Adverse Effect. (e) Capital Structure. The Banks shall be satisfied with the terms and conditions of the $46,040,000 in common equity contributed by Nortek to the Company and the subordinated loan in the amount of the Napco Cash Purchase Price by the Company to the Napco Purchaser in connection with the Napco Merger, including, without limitation, the payment terms, covenants and events of default thereof. The Napco Purchaser shall have received at least $76,800,000 in net cash proceeds from the loan described in the immediately preceding sentence and all such proceeds shall have been used prior to the occurrence of the Second Closing Date under this Agreement in accordance with the terms of the Napco Merger Agreement. (f) Compliance; No Litigation. The Agent and the Banks shall be satisfied that the Company and its Subsidiaries are, and will be after giving effect to the occurrence of the Second Closing Date, in compliance with all applicable laws, including, without limitation, ERISA and all Environmental Laws and 57 Regulations, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. There shall exist no action, suit, investigation, litigation or proceeding affecting the Company or any of its Subsidiaries pending or threatened before any court, governmental agency or arbitrator that (i) could be reasonably expected to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of the Tender Offer, the Merger, the Napco Merger, this Agreement, any Note, any other Loan Document, any Related Document or the consummation of the transactions contemplated hereby or thereby. (g) Insurance. The Agent and the Banks shall be satisfied with the amount, types and terms and conditions of all insurance maintained by the Company and its Subsidiaries. (h) Fees and Expenses. All accrued fees and expenses of the Agent and the Banks (including the fees and expenses of counsel for the Agent and the Banks) for which statements have been rendered on or prior to the Second Closing Date shall have been paid. (i) Consents and Approvals. All governmental and third party consents and approvals necessary in connection with this Agreement, the other Loan Documents, the Related Documents and the Nortek Indentures and the transactions contemplated hereby and thereby shall have been obtained (without the imposition of any conditions that are not acceptable to the Banks) and shall remain in full force and effect; all applicable waiting periods in connection with the transactions contemplated hereby shall have expired without any action having been taken by any competent authority restraining, preventing or imposing materially adverse conditions upon the rights of the Company or its Subsidiaries freely to transfer or otherwise dispose of, or to create any Lien on, any properties now owned or hereafter acquired by any of them. (j) Agreement. The Agent and each Bank shall have received this Agreement, duly executed and delivered by the Company and each Designated Subsidiary. (k) Notes. The Agent shall have received, for the account of each Bank, Notes in substitution for the "Notes" issued to such Bank under the Existing Credit Agreement, in each case conforming to the requirements hereof and executed and delivered by a duly authorized officer of the Company and each Designated Subsidiary, respectively. (l) Intentionally Omitted. (m) Amendment to Security Agreement. The Agent and each Bank shall have received Amendment No. 1 to the Amended and Restated Security Agreement, in form and substance satisfactory to the Agent, duly executed and delivered by the parties thereto. 58 (n) Borrowing Certificates. The Agent and each Bank shall have received (i) a certificate of the Company in substantially the form of Exhibit D-1 dated the Second Closing Date and executed and delivered by a duly authorized officer of the Company and (ii) a certificate of each other Loan Party in substantially the form of Exhibit D-2 dated the Second Closing Date and executed and delivered by a duly authorized officer of each other Loan Party. (o) Intentionally Omitted. (p) Legal Opinions. The Agent and each Bank shall have received the executed legal opinion of Ropes & Gray, counsel to Nortek, the Company and its Subsidiaries, dated the Second Closing Date, in substantially the form of Exhibit F, together with copies of the legal opinions, if any, upon which such counsel relies and, if any such legal opinion is not addressed to the Agent and the Banks, a reliance letter authorizing the Agent and the Banks to rely on such legal opinion, with such changes thereto as may be approved by, and otherwise in form and substance satisfactory to the Agent and its counsel and covering such matters incident to the transactions contemplated by this Agreement, the Notes, the other Loan Documents, the Related Documents and the Nortek Indentures and otherwise by the Napco Transaction as the Agent may reasonably require. (q) Related Agreements. The Agent and each Bank shall have received true and correct copies, certified as to authenticity by the Company and each Subsidiary, of the Certificate of Incorporation and By-laws of the Company and each such Subsidiary and such other documents or instruments to which the Company or any of its Subsidiaries is a party or by which any of them is bound as may be reasonably requested by the Agent. (r) Corporate Proceedings. The Agent and each Bank shall have received a copy of the resolutions, in form and substance reasonably satisfactory to the Agent, of the Board of Directors of the Company, each other Loan Party and each Subsidiary authorizing the execution, delivery and performance of this Agreement, the Notes, the other Loan Documents, the Related Documents and all documents and instruments to be delivered in connection herewith, in each case to which it is a party, and the consummation of the Napco Transaction and the other transactions contemplated hereby and thereby, certified by the Secretary or an Assistant Secretary of the Company or such other Loan Party (as applicable), as of the Second Closing Date; and each such certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate. (s) Related Documents and Nortek Indentures. The Agent shall have received, with a copy for each Bank, a certified copy of each Related Document and each Nortek Indenture which became effective after the First Closing Date, together with all amendments, waivers or supplements thereto, and each amendment, waiver 59 or supplement to any other Related Document or Nortek Indenture to the extent such amendment, waiver or supplement became effective after the First Closing Date. (t) Consents. The Agent, with a copy for each Bank, shall have received true copies (in each case certified as to authenticity on such date by a duly authorized officer of the Company or by such other Person as may be appropriate or may be required by the Agent) of all documents and instruments, including all consents, authorizations, filings and orders, required under any Requirement of Law or by Contractual Obligations of the Company or any Subsidiary, in connection with the execution, delivery, performance, validity and enforceability of this Agreement, the Notes, the other Loan Documents and the Related Documents and such consents, authorizations, filings and orders shall be satisfactory in form and substance to the Agent and shall be in full force and effect. (u) Other Fees. The Agent shall have received for itself or for the account of each Bank, as appropriate, the fees payable on the Second Closing Date pursuant to subsection 2.7. (v) Good Standings. The Agent and each Bank shall have received good standing certificates as of dates not more than forty-five (45) days prior to the Second Closing Date with respect to the Company and each Designated Subsidiary from the Secretary of State of the jurisdiction of its incorporation and from the Secretary of State of each state in which the Company or such Designated Subsidiary is qualified to do business. (w) Incumbency Certificates. The Agent and each Bank shall have received an incumbency certificate (with specimen signatures) with respect to the Company and each other Loan Party. (x) Solvency Certificate. The Agent and each Bank shall have received from the Company a Solvency Certificate, in form and substance satisfactory to the Banks, attesting to the Solvency of the Company individually and together with its Subsidiaries, taken as a whole, immediately before and immediately after giving effect to the Loan Documents, from the treasurer of the Company. (y) Ownership, Liens. A majority of the capital stock of the Company shall be directly or indirectly owned by Nortek free and clear of any lien, charge or encumbrance. (z) Projections. The Agent and the Banks shall have received a copy of the Company's four year projections (including, without limitation, a balance sheet, an income statement and a statement of cash flows, as well as management assumptions with respect thereto) with respect to the Company, all in form and substance reasonably satisfactory to the Agent. 60 (aa) Other Documentation. Such other documentation as the Agent or the Banks shall reasonably request. 4.2 Conditions to Loans and L/Cs. The agreement of Fleet to issue or maintain L/Cs requested to be made or issued or deemed issued hereunder is subject to the satisfaction, immediately prior to or concurrently with the issuance of any such L/C, of the following additional conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Company and each other Loan Party in or pursuant to this Agreement (other than subsections 3.21 and 3.22) and the other Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date (except any such representations and warranties that, by their terms, refer to a specific date other than the date of the relevant L/C, in which case as of such specific date). (b) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the L/Cs requested to be made or issued or deemed issued on such date. (c) No Violations of Law. Such L/C and the use of proceeds thereof or any drawing thereon shall not contravene, violate or conflict with, nor involve any Bank in a violation of, any law, rule, injunction, or regulation, or determination of any court of law or other Governmental Authority (including, without limitation, Regulation U). (d) Other. All corporate or other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement, the Notes and the other Loan Documents shall be reasonably satisfactory in form and substance to the Agent and its counsel. Each borrowing hereunder or issuance or deemed issuance of an L/C hereunder shall constitute a representation and warranty by the Company and each borrowing Designated Subsidiary as of the date of such borrowing or issuance or deemed issuance that the conditions to such or issuance or deemed issuance contained in subsections 4.2(a), (b) and (c) have been satisfied. 4.3 Conditions to Company Loans to New Designated Subsidiaries. The agreement of each Bank to make any Company Loan to any new Designated Subsidiary shall be subject to the receipt by each Bank, as appropriate, of (a) a Note issued by such Designated Subsidiary, (b) corporate documents of such new Designated Subsidiary, (c) a copy of an opinion of counsel to the Company in substantially the form provided with respect to Designated Subsidiaries on the First Closing Date (including, without limitation, an opinion to the effect that 61 the execution, delivery and performance of the Loan Documents by such Designated Subsidiary, including without limitation any borrowing made by it thereunder, do not violate the requirements of the Nortek Indentures or any indentures or other agreements binding upon such Designated Subsidiary) and (d) any other documents reasonably requested by the Agent or any of the Banks in connection therewith. SECTION 5.AFFIRMATIVE COVENANTS The Company and each Designated Subsidiary hereby covenant and agree with the Agent and the Banks that, from and after the Second Closing Date until the Obligations are paid in full and the Commitments are terminated and all L/Cs have expired or been duly terminated, the Company shall, and, in the case of the agreements set forth in subsections 5.3, 5.5, 5.6, 5.7, 5.11, 5.13, 5.14 and 5.16 (as applicable), such Designated Subsidiary shall (and each of the Company and such Designated Subsidiary shall cause each of its respective Subsidiaries to): 5.1 Financial Statements. Furnish to the Agent and each Bank: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Company, copies of (i) the consolidated balance sheets of the Company and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for such fiscal year, in each case setting forth in comparative form the figures for the previous year, certified, without qualification, by Arthur Andersen, L.L.P. or another independent certified public accountant of recognized standing reasonably acceptable to the Banks; provided, however, that the Company shall not be required to provide such comparative figures in the certified financial statements to be furnished pursuant to this subsection in respect of the fiscal year ending December 31, 1998, and (ii) the consolidating balance sheet of the Company and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidating statement of income for such fiscal year, in each case showing intercompany eliminations, certified by a Responsible Officer of the Company as being, to the best of such officer's knowledge, fairly stated in all material respects when considered in relation to the consolidated financial statements of the Company and its consolidated Subsidiaries; and (b) as soon as available, but in any event within 45 days after the end of each of the first three fiscal quarters of the Company, copies of (i) the unaudited consolidated balance sheets of the Company and its consolidated Subsidiaries as at the end of such fiscal quarter and the related unaudited consolidated statements of income and cash flows for such fiscal quarter and for the portion of the fiscal year through such fiscal quarter, certified by a Responsible Officer of the Company as presenting fairly, to the best of 62 such officer's knowledge, the financial condition and results of operations of the Company and its consolidated Subsidiaries (subject to normal year-end audit adjustments) and (ii) the unaudited consolidating balance sheet of the Company and its consolidated Subsidiaries as at the end of such fiscal quarter and the related unaudited consolidating statement of income for the portion of the fiscal year through such fiscal quarter, in each case showing intercompany eliminations, certified by a Responsible Officer of the Company as being, to the best of such officer's knowledge, fairly stated in all material respects when considered in relation to the consolidated financial statements of the Company and its consolidated Subsidiaries; all such financial statements to be prepared in reasonable detail and (in the case of such consolidated financial statements) in accordance with GAAP applied consistently throughout the periods reflected therein (except as approved by the Company's accountants or such Responsible Officer, as the case may be, and disclosed therein and subject to year-end adjustments). 5.2 Certificates; Other Information. Furnish to the Agent and each Bank: (a) concurrently with the delivery of each set of the financial statements referred to in clause (i) of paragraph (a) of subsection 5.1, a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of each set of the financial statements referred to in paragraphs (a) and (b) of subsection 5.1, a certificate of a Responsible Officer of the Company (i) stating that, to the best of such officer's knowledge, during such fiscal quarter the Company has observed or performed in all material respects all of its covenants and other agreements, and satisfied every condition contained in this Agreement to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, and (ii) showing in reasonable detail the calculations supporting such statement in respect of subsections 6.9, 6.10, 6.11, 6.12 and 6.18; (c) within five days after the same are filed, copies of all financial statements and reports which the Company may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (d) not later than 90 days after the end of each fiscal year of the Company, a copy of the projections by the Company of the operating budget and cash flow of the Company and its Subsidiaries for the next succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer of the Company to the effect that such projections have 63 been prepared on a basis consistent with the Company's past practice (or otherwise stating the basis on which such projections have been prepared); and (e) promptly, such additional financial and other information as the Agent or any Bank may from time to time reasonably request. 5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all (a) lawful taxes, assessments and governmental charges or levies upon it or its property or assets, and (b) claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, in any such case, if unpaid would by law give rise to a Lien upon any of its property or assets, except when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Company or its Subsidiaries, as the case may be. 5.4 Material Operating Subsidiaries. Give notice to the Agent (which upon receipt shall give a copy thereof to the Banks) of the occurrence of any Subsidiary becoming a Material Operating Subsidiary concurrently with such occurrence. 5.5 Conduct of Business and Maintenance of Existence. Except as permitted by subsection 6.4, continue to engage in the Business of the Company, and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply with all Contractual Obligations and Requirements of Law including, without limitation, ERISA and all Environmental Laws and Regulations except to the extent that the failure to comply therewith would not, in the aggregate, have a Material Adverse Effect. 5.6 Maintenance of Property; Insurance. Keep all property useful and reasonably necessary in its business in good working order and condition except to the extent that breach of this clause would not materially adversely affect the operations of the Company and its Subsidiaries taken as a whole; maintain with reputable insurance companies believed by the Company to be financially sound insurance on all its property in at least such amounts and with only such deductibles and self insurance as are usually maintained by, and against at least such risks (but including in any event product liability) as are usually insured against in the same general area by, companies engaged in the same or a similar business; and, furnish to the Agent and each Bank, upon written request, full information as to the insurance carried. 64 5.7 Inspection of Property; Books and Records; Discussions. Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all material Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of the Agent or any Bank as the representative of the Agent to visit and inspect any of its properties and examine and make abstracts from such of its books and records as the Agent or such Bank may reasonably request at any reasonable time and as often as may reasonably be desired, and to discuss the aspects of the business, operations, properties and financial and other condition of the Company and its Subsidiaries as the Agent or such Bank may reasonably request with officers and employees of the Company and its Subsidiaries and with its independent certified public accountants, provided that mutually satisfactory advance arrangements for any such visit or inspection shall be made with appropriate representatives of the Company. 5.8 Notices. Give notice to the Agent (which upon receipt shall give a copy thereof to each of the Banks) promptly after a Responsible Officer of the Company has actual knowledge thereof, but in any event within five (or 30, in the case of any event described in clause (c)(i) below) Business Days after such officer shall have obtained such actual knowledge: (a) of the occurrence of any Default or Event of Default; (b) of any (i) default or event of default under any Contractual Obligation of the Company or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority, which, in either case, if not cured or if adversely determined, would have a Material Adverse Effect; (c) of the following events: (i) the occurrence of any Reportable Event with respect to any Single Employer Plan, which Reportable Event, together with all other Reportable Events, if any, could subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities that in the aggregate could reasonably be expected to have a Material Adverse Effect, or any withdrawal from, or the receipt by the Company, any Subsidiary or any Commonly Controlled Entity of any notice regarding the termination, Reorganization or Insolvency of, any Multiemployer Plan; (ii) the receipt or filing by the Company, any Subsidiary or any Commonly Controlled Entity of any notice regarding the institution of proceedings or the taking of any other action by PBGC, the Company, any Subsidiary or any Commonly Controlled Entity or Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan subject to Title IV of ERISA; or (iii) that a prohibited transaction has occurred (as defined in Section 406 of ERISA or Section 4975 of the Code), which could subject the Company or any Subsidiary to tax or 65 penalty which could reasonably be expected to have a Material Adverse Effect; and the Company shall update the schedules referred to in subsection 3.14 as of the date any representations set forth therein is deemed to be made; (d) of any litigation or proceeding affecting the Company or any of its Subsidiaries in which the amount involved is $10,000,000 or more and not covered by insurance or in which material injunctive or similar relief is sought; (e) of a material adverse change in the business, operations, property, performance or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole from that reflected in the financial statements most recently delivered to the Banks pursuant to subsection 5.1 (a) or (b); and (f) (i) any notice of any violation or administrative or judicial complaint or order having been filed against the Company or such other Subsidiary alleging violations of any Environmental Laws and Regulations, or (ii) any notice from any governmental body alleging that the Company or such other Subsidiary is or may be subject to any Environmental Liability; and promptly upon receipt thereof, provide the Agent with a copy of such notice. Upon the request of the Agent or any Bank, the Company will reasonably consult with the Agent as to the subject matter of notices pursuant to this subsection 5.8. 5.9 Copies of Corporate Documents. Promptly deliver to the Agent copies of any amendments or modifications to the certificate of incorporation or by-laws of the Company or any Subsidiary, certified with respect to the certificate of incorporation by the Secretary of State of the state of incorporation of such Person and, with respect to the by-laws, by the secretary or assistant secretary of such Person. 5.10 Intentionally Omitted. 5.11 Hazardous Material. Operate all property owned, operated or leased by it in such a manner that (a) no Hazardous Material shall be placed, held, located or disposed of, on, under or at the real property owned, operated or leased by the Company or any Subsidiary or any part thereof, except for such Hazardous Materials which are necessary for the Company's operation of its business thereon and which shall be used, stored, treated and disposed of in compliance with all applicable Environmental Laws and Regulations or (b) such real property owned, operated or leased by the Company or any Subsidiary or any part thereof shall not be used as a collection, storage, treatment or disposal site for any Hazardous Material, except, (i) in the case of clause (b) above, in compliance with all Environmental Laws or Regulations and (ii) in each case to the extent failure to comply with this subsection 5.11, in the aggregate, would 66 not have a material adverse effect on the business, operations, property or financial condition of the Company and its Subsidiaries taken as a whole. 5.12 Further Assurances. (a) Promptly upon request by the Agent, or any Bank through the Agent, correct, and cause each of its Subsidiaries promptly to correct, any material defect or error that may be discovered in any Loan Document or in the execution, acknowledgment, filing or recordation thereof. (b) Promptly upon request by the Agent, or any Bank through the Agent, do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, and cause each of its Subsidiaries promptly to do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, pledge agreements, assignments, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments as the Agent, or any Bank through the Agent, may reasonably require from time to time in order to (i) carry out more effectively the purposes of this Agreement, the Notes or any other Loan Document, (ii) to the fullest extent permitted by applicable law, subject any of the Company's or any of its Subsidiaries' properties, assets, rights or interests to the Liens now or hereafter intended to be covered by any of the Security Documents, (iii) perfect and maintain the validity, effectiveness and priority of any of the Security Documents and any of the Liens intended to be created thereunder and (iv) assure, convey, grant, assign, transfer, preserve, protect and confirm more effectively unto the Agent and the Banks the rights granted or now or hereafter intended to be granted to the Agent and the Banks under any Loan Document or under any other instrument executed in connection with any Loan Document to which the Company or any of its Subsidiaries is or is to be a party; provided, however, that in any event this subsection 5.12 shall not require Liens on, and the execution and delivery of Security Documents covering, any property to the extent not otherwise required by the terms of the Loan Documents. 5.13 Compliance with Terms of Leaseholds. Make all payments and otherwise perform all obligations in respect of all leases of real property to which the Company or any of its Subsidiaries is a party, keep such leases in full force and effect and not allow such leases to lapse or be terminated or any rights to renew such leases to be forfeited or cancelled, notify the Agent of any default by any party with respect to such leases and cooperate with the Agent in all respects to cure any such default, except, in any case, where the failure to do so, either individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 5.14 Performance of Related Documents. Perform and observe all of the terms and provisions of each Related Document to be performed or observed by it, maintain each such Related Document in full force and effect, enforce such Related Document in accordance with its terms, take all such action to such end 67 as may be from time to time reasonably requested by the Agent and, upon request of the Agent, make to each other party to each such Related Document such demands and requests for information and reports or for action as the Company or other Loan Party (as applicable) is entitled to make under such Related Document, except, in any case, where the failure to do so, either individually or in the aggregate, could not be reasonably expected to have a Material Adverse Effect. 5.15 Hedge Agreements. Maintain at all times Hedge Agreements with Persons acceptable to the Agent, covering a notional amount of not less than 40% of the Company Commitments and providing for such Persons to make payments thereunder for a period of no less than two years to the extent of increases in interest rates greater than 3% above the weighted average Eurodollar Rate on the First Closing Date. 5.16 Conditions Subsequent to Second Closing Date. (a) Use its best efforts to deliver to the Agent, in form and substance satisfactory to the Agent and in sufficient copies for each Bank, as soon as possible and in any event within 45 days after the Second Closing Date (or such later date as may be agreed by the Company and the Agent) evidence that all action as the Agent may deem necessary or desirable in order to perfect and protect the first priority liens and security interests created under the Company Security Agreement has been taken (including, without limitation, obtaining landlord's letters, bailee's letters or warehouseman's letters, each in form and substance reasonably satisfactory to the Agent); and (b) Deliver to the Agent, in form and substance satisfactory to the Agent and in sufficient copies for each Bank, by January 7, 1999 (or such later date as may be agreed by the Company and the Agent), a favorable opinion of Ropes & Gray, counsel to Nortek, the Company and its Subsidiaries, regarding perfection matters. SECTION 6.NEGATIVE COVENANTS Each of the Company and each Designated Subsidiary hereby covenants and agrees with the Agent and the Banks that, from and after the Second Closing Date until the Obligations are paid in full and the Commitments are terminated and all L/Cs have expired or been duly terminated, none of the Company or any Designated Subsidiary shall, or shall permit any of its Subsidiaries to, directly or indirectly: 6.1 Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) the Company Loans and the L/Cs; 68 (b) 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; (c) Indebtedness of the Company and any of its Subsidiaries under Financing Leases, or Indebtedness incurred upon refinancing or replacement of such Financing Leases, or Indebtedness incurred in connection with (and not later than 180 days following, in the case of the acquisition of land or improvements; or 45 days following, in the case of the acquisition of other property) the acquisition of property, or Indebtedness incurred to renew, extend, refund, refinance or replace the foregoing, in an aggregate principal amount not exceeding as to the Company and its Subsidiaries $35,000,000 at any one time outstanding; (d) certain Indebtedness listed on Schedule 3.22 and outstanding on the First Closing Date, and extensions, renewals, refundings, refinancings and replacements thereof, provided that Indebtedness under that certain Credit Agreement dated February 24, 1994 (as amended prior to August 26, 1997) among the Company, certain of its Subsidiaries, the lenders party thereto and Fleet, as successor to National Westminster Bank USA, as agent, may not be outstanding after August 26, 1997; and Indebtedness incurred to finance property currently subject to existing operating leases existing on the First Closing Date, to the extent that (i) the corresponding operating lease is terminated, and (ii) the aggregate debt service under such Indebtedness does not exceed the aggregate rental payments saved as a consequence of the termination of such lease; (e) Indebtedness of a corporation which becomes a Subsidiary after the First Closing Date, provided that such Indebtedness existed at the time such corporation became a Subsidiary and was not created in anticipation thereof; (f) 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; (g) Indebtedness of the Company and its Subsidiaries evidenced by promissory notes or other contractual obligations of the Company given to the sellers as part of the consideration for acquisitions permitted by subsection 6.7; and (h) other Indebtedness of the Company and its Subsidiaries not to exceed $10,000,000 in the aggregate at any one time outstanding; provided, however, that the aggregate Indebtedness of the Company under this clause (h), when added to the Indebtedness under clauses (e) (other than 69 Indebtedness constituting Existing Napco Debt or the Existing Napco L/C) and (g) of this subsection 6.1, shall not exceed, in the years indicated, the amounts set forth below: Year Amount 1997 $20,000,000 1998 $25,000,000 1999 $30,000,000 2000 $35,000,000 2001 (and each year thereafter) $40,000,000 provided, however, that such Indebtedness shall not be owed to Nortek or any of its Subsidiaries (other than Subsidiaries consisting of the Company or any of its Subsidiaries, to the extent permitted above). 6.2 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than: (a) Liens for taxes, assessments, fees or other governmental charges not yet due or which are being contested in good faith by appropriate proceedings or other appropriate actions, provided that adequate reserves with respect thereto are maintained on the books of the Company or its Subsidiaries, as the case may be, in conformity with GAAP; (b) statutory liens of landlords, carriers', warehouseman's, mechanics', materialmen's, repairmen's, or other like Liens arising in the ordinary course of business and not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings or other appropriate actions; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of tenders, bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business or deposits incurred in connection with other obligations to the extent such other obligations are covered by insurance; 70 (e) easements, (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, minor defects or irregularities in title, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting real or personal property, which individually or in the aggregate do not or are not reasonably likely to have a material adverse effect on the conduct by the Company and its Subsidiaries of their businesses taken as a whole; (f) Liens in existence on the First Closing Date listed on Schedule 6.2 securing Indebtedness permitted by subsection 6.1, provided that no such Lien is spread to cover any additional property (other than the proceeds thereof) after the First Closing Date and that the principal amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Company and its Subsidiaries permitted by subsection 6.1(c) in respect of the deferred acquisition price of property, provided that (i) such Liens shall be created not later than (A) 180 days after the acquisition of such property in the case of land or improvements, and (B) 45 days after the acquisition of other property, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness and the proceeds of such property so financed, (iii) the principal amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed the original acquisition price of such property; (h) Liens on the property or assets of a corporation which becomes a Subsidiary after the First Closing Date securing Indebtedness permitted by subsection 6.1(e), provided that (i) such Liens existed at the time such corporation became a Subsidiary and were not created in anticipation thereof, (ii) no such Lien is spread to cover any property or assets of such corporation after the time such corporation becomes a Subsidiary (other than proceeds of the property or assets which were the original subjects of such Lien), and (iii) the principal amount of Indebtedness secured thereby is not increased after such time; (i) Liens existing on property or assets prior to the acquisition thereof by the Company or any Subsidiary, provided that (i) such Liens were not created in anticipation thereof, (ii) no such Lien is spread to cover any additional property (other than the proceeds of the property or assets which were the original subject of such Lien) and (iii) the principal amount of Indebtedness secured thereby is not increased; (j) Liens arising out of the refinancing, extension, renewal, refunding or replacement of any Indebtedness secured by any Lien permitted by any of the other clauses of this subsection, provided that (i) no such Lien is spread to cover any additional property (other than the proceeds of 71 the property which was the original subject of such Lien) and (ii) the principal amount of Indebtedness secured thereby is not increased; (k) Liens arising pursuant to any order of attachment, distraint or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings or other appropriate action; (l) Liens securing reimbursement obligations in connection with trade letters of credit issued on behalf of the Company or any Subsidiary in the ordinary course of its business, provided that such Liens attach solely to the goods the acquisition of which is financed by such letter of credit and to the proceeds thereof; (m) Intentionally omitted; (n) Liens arising under the Security Documents; (o) Financing Leases permitted under subsection 6.1; and (p) Other Liens securing obligations which do not constitute Indebtedness, the aggregate amount of which obligations does not exceed $2,500,000 at any time outstanding. 6.3 Limitation on Contingent Obligations. Create, incur, assume or suffer to exist any Contingent Obligation, except (a) Contingent Obligations in existence on the First Closing Date listed on Schedule 6.3, (b) Contingent Obligations of the Company in respect of obligations of any Material Operating Subsidiary or of any Subsidiary in respect of Obligations of the Company or any Material Operating Subsidiary, (c) Contingent Obligations of the Company and its Subsidiaries supporting primary obligations of other Persons the aggregate amount of which does not exceed $4,000,000 at any time and (d) guarantees by the Company or any Material Operating Subsidiary of leases of tractors and/or trailers entered into in the ordinary course of business from time to time by a wholly-owned Subsidiary of the Company or such Material Operating Subsidiary which provides transportation services exclusively to such Material Operating Subsidiary (and which conducts no other business activities). 6.4 Limitation on Fundamental Changes. Enter into any merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of its property, business or assets except the following: 72 (a) The Company and any of its Subsidiaries may sell or otherwise dispose of (i) inventory and Cash Equivalents in the ordinary course of business, (ii) tangible assets to be replaced in the ordinary course of business within 12 months by other tangible assets of equal or greater value and (iii) tangible assets that are no longer used or useful in the business of the Company or the applicable Subsidiary, the fair market value of which shall not exceed $2,000,000 in any fiscal year of the Company. (b) Mergers constituting investments permitted by subsection 6.7. (c) Licensing of products and intangible assets for fair value in the ordinary course of business. (d) So long as immediately before and after giving effect thereto no Default or Event of Default exists, the Company and its Subsidiaries may sell assets having a fair market value not exceeding $25,000,000 in any fiscal year of the Company so long as the Net Proceeds thereof are applied to repay the Company Loans as required by subsection 2.8(d). (e) Asset Sales; provided, however, that (i) the Net Proceeds from all such sales or dispositions shall not exceed $150,000,000 in the aggregate from the First Closing Date through the term of this Agreement; (ii) the consideration received by the Company or its Subsidiaries from each such sale or disposition is at least equal to the fair market value of the assets sold or disposed of in such sale or disposition; (iii)the Net Proceeds from such sale or disposition in each case shall be applied in accordance with subsection 2.8(d); and (iv) any evidence of indebtedness referred to in the definition of Net Proceeds shall be pledged in accordance with the provisions of such definition. (f) Any Subsidiaries of the Company may be merged or consolidated with or into the Company (provided that the continuing or surviving corporation shall be the Company) or with or into any one or more wholly-owned Subsidiaries of the Company (provided that a wholly-owned Subsidiary shall be the continuing or surviving corporation and that any such wholly-owned Subsidiary shall be organized under a state of the United States). 73 (g) Any wholly-owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or a wholly-owned Subsidiary of the Company. (h) The Company may merge with the Purchaser pursuant to, and in accordance with, the Merger Agreement, and Napco Target I and Napco Target II may merge with the Napco Purchaser pursuant to, and in accordance with, the Napco Merger Agreement. 6.5 Distributions. During such time as a Default or an Event of Default shall have occurred and be continuing, or if a Default or Event of Default would result therefrom, (a) declare or pay any dividends, (b) purchase, redeem, retire, defease or otherwise acquire for value any of its capital stock or any warrants, rights or options to acquire such capital stock, now or hereafter outstanding, (c) return any capital to its stockholders as such, (d) make any distribution of assets, capital stock, warrants, rights, options, obligations or securities to its stockholders as such, (e) issue or sell any capital stock or any warrants, rights or options to acquire such capital stock or (f) permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of the Company or any warrants, rights or options to acquire such capital stock or to issue or sell any capital stock or any warrants, rights or options to acquire such capital stock; provided, however, that notwithstanding the foregoing provisions of this subsection 6.5, but in any event subject to the other provisions of this Agreement, during such time as a Default or an Event of Default shall have occurred and be continuing, or if a Default or Event of Default would result therefrom, the Company (i) may make any dividend payable solely in shares of its common stock and (ii) may pay dividends in an aggregate amount during any calendar year not to exceed the lesser of: (A) twenty ($.20) cents per share of outstanding common stock and (B) $4,000,000. 6.6 Limitation on Dividend Restrictions Regarding Subsidiaries. Except for any limitation or restriction pursuant to any applicable law or pursuant to this Agreement, permit any limitation or restriction to exist upon the ability of any Subsidiary to declare or pay dividends in respect of the capital stock of such Subsidiary, whether such limitation or restriction is imposed through a covenant limiting dividends, through financial covenants or otherwise. 6.7 Prohibition on Investments, Acquisitions, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of, or make any other investment in, or purchase any assets constituting a going concern business from, any Persons (all of the foregoing being herein called "investments"), except: (a) extensions of trade credit in the ordinary course of business; 74 (b) investments in Cash Equivalents; (c) loans and advances to employees of the Company or its Subsidiaries for travel, entertainment, relocation and similar expenses or otherwise, in the ordinary course of business; (d) investments by the Company in its Subsidiaries and investments by such Subsidiaries in the Company and in other Subsidiaries; provided that there shall not be outstanding at any time Special Subsidiary Loans in an aggregate principal amount in excess of $15,000,000; (e) (i) investments by the Napco Purchaser in order to consummate the Napco Transaction so long as the aggregate amount invested in connection therewith (whether cash, equity, assumption of debt or otherwise) shall not exceed the sum of the Napco Cash Purchase Price plus $9,900,000 and (ii) other investments by the Company and its Subsidiaries not to exceed (A) $50,000,000 in the aggregate during any fiscal year of the Company and (B) $100,000,000 in the aggregate from the First Closing Date through the term of this Agreement (the amount of any such investment to be determined at cost, which cost shall include the aggregate amount of any Indebtedness assumed or given in connection therewith) in connection with the acquisition of the stock of any corporation or of the assets of any Person, provided that, in the case of clauses (i) and (ii), (w) any such investment shall have been approved or otherwise endorsed by the board of directors of the applicable target (if any) or not contested (if no board approval is required), (x) such corporation or assets are, prior to such acquisition, engaged or used, as the case may be, in a business of the type described in subsection 5.5, (y) the Company shall be in pro forma compliance with the covenants contained in subsections 6.9, 6.10, 6.11 and 6.12, calculated based on the most recent financial statements delivered to the Agent and the Bank pursuant to subsection 5.1(a) or (b), as though such acquisition had occurred at the beginning of the four-quarter period ending on the last day of the most recently completed fiscal quarter of the Company for which results are available, and (z) immediately before and after giving effect to such acquisition, no Default shall have occurred and be continuing or would result therefrom; (f) investments made with capital stock of the Company in connection with the acquisition of the stock of any corporation which becomes a Subsidiary, which thereupon shall be deemed to be a Material Operating Subsidiary, or of the assets of any Person, provided that (i) such acquisition shall have been approved or otherwise endorsed by the board of directors of such Person or not contested (if no board approval is required) and (ii) such corporation or assets are, prior to such acquisition, engaged or 75 used, as the case may be, in a business of the type described in subsection 5.5; (g) investments made with common stock of the Company in connection with the acquisition of the stock of any corporation which does not become a Subsidiary as a result of such acquisition, provided that the aggregate amount of such investments shall not exceed $10,000,000 from the First Closing Date through the term of this Agreement (the amount of the investment, in the case of each such acquisition, being the market value, on the date of such acquisition, of the common stock of the Company delivered as consideration in such acquisition); (h) other investments (but not a Special Subsidiary Loan) not to exceed $20,000,000 in the aggregate (valued at cost) at any one time outstanding and (except in the case of United States government securities) not to exceed $4,000,000 in the securities of any one issuer; and (i) so long as no Default or Event of Default has occurred and is continuing and so long as no Default or Event of Default would result therefrom, investments by the Company and its Subsidiaries in Nortek; provided that, notwithstanding the foregoing, during the occurrence and continuance of a Default or Event of Default, or if a Default or Event of Default would result therefrom, the Company and its Subsidiaries may make investments in Nortek to the extent that the Company and its Subsidiaries are otherwise permitted to make investments under this subsection 6.7. 6.8 Prohibition on Optional Prepayments. Prepay, purchase, redeem, retire, defease or otherwise acquire, or make any optional payment on account of any principal of, interest on, or premium payable in connection with the optional prepayment, redemption or retirement of any of its Subordinated Indebtedness, provided, however, that in each other case nothing in this subsection 6.8 shall be deemed to prevent the Company from: (a) making a commitment to prepay, redeem or otherwise acquire or pay any Subordinated Indebtedness which by its terms is convertible into common stock of the Company for the purpose of inducing the holders of such Indebtedness to so convert such Indebtedness; and (b) in connection with any induced conversions of convertible subordinated Indebtedness, acquiring or paying any such Indebtedness which is not converted into common stock of the Company as a result of such inducement, provided that the aggregate amount of money expended by the Company and its Subsidiaries in connection with such acquisition and payment does not exceed the sum of (i) the net cash proceeds to the Company of any substantially contemporaneous sale of its common stock, 76 (ii) an amount equal to 2% of the aggregate principal amount of the issue of convertible subordinated Indebtedness being so acquired or paid outstanding immediately prior to the public announcement by the Company of such acquisition or payment and (iii) the fees and expenses incurred in connection with such acquisition or payment. 6.9 Consolidated Net Worth. Permit Consolidated Net Worth, at any time, to be less than an amount equal to the amount by which $375,000,000 exceeds the lesser of (a) losses on the sale of Non-Core Subsidiaries after the First Closing Date and (b) $25,000,000. 6.10 Leverage Ratio. Permit the ratio (the "Leverage Ratio") of (a) consolidated Indebtedness of the Company and its Subsidiaries to (b) Consolidated EBITDA for the four most recent consecutive full fiscal quarters of the Company at any time within any period set forth below to exceed the ratio set forth below for such period: Quarter Ending On Maximum Leverage Ratio September 30, 1997 ..................................... 3.50:1.00 December 31, 1997 ...................................... 3.50:1.00 March 31, 1998 ......................................... 3.50:1.00 June 30, 1998 .......................................... 3.50:1.00 September 30, 1998 ..................................... 3.50:1.00 December 31, 1998 ...................................... 3.00:1.00 March 31, 1999 ......................................... 2.75:1.00 June 30, 1999 .......................................... 2.50:1.00 September 30, 1999 ..................................... 2.50:1.00 December 31, 1999 ...................................... 2.50:1.00 March 31, 2000 ......................................... 2.50:1.00 June 30, 2000 and thereafter........................... 2.00:1.00 6.11 Interest Coverage Ratio. Permit the ratio of (a) Consolidated EBITDA to (b) Interest Expense for the four most recent consecutive full fiscal quarters of the Company at any time to be less than 3.50 to 1.00. 6.12 Current Ratio. Permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities at any time to be less than 2.0 to 1.0. 6.13 Nortek Administrative Fee. Pay or otherwise discharge any Nortek Administrative Fee at any time prior to the Termination Date, except that the Company may pay such Nortek Administrative Fee from time to time to the extent 77 that it would otherwise be permitted to declare or pay dividends at such time in the amount of such Nortek Administrative Fee in accordance with subsection 6.5. 6.14 Amendment, etc. of Related Documents. Cancel or terminate any Related Document or consent to or accept any cancellation or termination thereof, amend, modify or change in any manner any term or condition of any Related Document or give any consent, waiver or approval thereunder, waive any default under or any breach of any term or condition of any Related Document, agree in any manner to any other amendment, modification or change of any term or condition of any Related Document or take any other action in connection with any Related Document, in each case, that would materially adversely affect the interest or rights of the Company or any Subsidiary thereunder or that would materially adversely affect the rights or interests of the Agent or any Bank under the Loan Documents. 6.15 Fiscal Year. Change its fiscal year, except (a) to conform to the fiscal year of Nortek following the Merger or the Napco Merger (b) with the consent of the Agent, which will not be unreasonably withheld. 6.16 Transactions with Affiliates. Except as otherwise permitted by this Agreement, directly or indirectly: (a) make any investment in an Affiliate except that any investments permitted under subsection 6.7 shall be permitted hereunder; (b) transfer, sell, lease, assign or otherwise dispose of any assets to an Affiliate; (c) merge into or consolidate with or purchase or acquire assets from an Affiliate; or (d) enter into any other transaction directly or indirectly with any Affiliate; provided, however, that: (i) payments on investments permitted by subsection 6.7 shall be permitted hereunder, (ii) any Affiliate who is a natural person may serve as an employee or director of the Company, any Subsidiary, Nortek or any of its Subsidiaries and receive such compensation and benefits for his services in such capacity as the Board of Directors of the Company or such Subsidiary shall in good faith determine, (iii) any merger permitted under subsection 6.4 shall be permitted hereunder, (iv) any dividend or other distribution permitted under subsection 6.5 shall be permitted hereunder, (v) accrual of, or to the extent permitted by subsection 6.13, payment or discharge of, any Nortek Administrative Fee shall be permitted hereunder and (vi) the Company or any Subsidiary may enter into any transaction with an Affiliate if the monetary or business consideration arising therefrom would be substantially as advantageous to the Company or a Subsidiary as the monetary or business consideration that would reasonably be expected by the Company or such Subsidiary to be obtained in a comparable arm's length transaction with a Person not an Affiliate. 6.17 Ownership of Designated Subsidiaries. Cease to own all of the issued and outstanding capital stock of any Designated Subsidiary so long as any such Subsidiary continues to be a Designated Subsidiary. 78 6.18 Limitation on Capital Expenditures. Make Capital Expenditures (i) in excess of $125,000,000 during the five-year period ending with the Termination Date, (ii) in excess of $37,500,000 during any fiscal year which follows the 1996 fiscal year, or (iii) in excess of $56,250,000 during any period of two consecutive fiscal years following the 1996 fiscal year. 6.19 Financing Leases. Create, incur, assume or suffer to exist any Financing Leases obligations that would cause the direct and contingent liabilities of the Company and its Subsidiaries, on a consolidated basis, in respect of all such Financing Leases to exceed $35,000,000 at any time outstanding. 6.20 Change in Nature of Business. Engage in any business other than the Business of the Company. 6.21 Charter Amendments. Amend its certificate of incorporation or bylaws in any manner that would materially adversely affect the rights of the Agent and the Banks under the Loan Documents. 6.22 Accounting Changes. Make or permit any change in accounting policies or reporting practices, except as required by generally accepted accounting principles and except for the purpose of conforming such policies and practices of the Company or Napco with those of Nortek following the Merger or the Napco Merger, respectively. 6.23 Intentionally Omitted. 6.24 Negative Pledge. Enter into or suffer to exist any agreement prohibiting or conditioning the creation or assumption of any Lien upon any of its property or assets other than (i) in favor of the Secured Parties or (ii) in connection with the Nortek Indentures. 6.25 Formation of Subsidiaries. Organize or invest in any new Material Operating Subsidiary or permit any existing Subsidiary to become a Material Operating Subsidiary unless such Subsidiary shall have executed and delivered a Guaranty and a Company Security Agreement supplement, each in form and substance satisfactory to the Agent, and shall have become a Guarantor and a Collateral Grantor under the Loan Documents. SECTION 7. EVENTS OF DEFAULT Upon the occurrence and during the continuance of any of the following events: 79 (a) (i) The Company or any Designated Subsidiary shall fail to pay any principal of any Note when due in accordance with the terms of the Loan Documents or the applicable Account Party shall fail to make any payment in respect of L/Cs when due in accordance with subsection 2.1(c)(i)(D) or (ii) the Company or any other Loan Party shall fail to pay any interest, any fee or any other payment under any Loan Document, the amount of which is provided for herein, in the Fee Letter or in such Loan Document, within five (5) Business Days after any such amount becomes due in accordance with the terms hereof or thereof; or (b) Any representation or warranty made or deemed made by the Company or any of its Subsidiaries in this Agreement, any other Loan Document or in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith shall prove to have been incorrect in any material respect on or as of the date made, deemed made or confirmed; or (c) The Company or any of its Subsidiaries shall default in the observance or performance of any covenant or agreement contained in subsection 5.8(a) or Section 6 of this Agreement; or (d) The Company or any of its Subsidiaries shall default in the observance or performance of any other covenant or agreement contained in this Agreement, or contained in any of the other Loan Documents (other than as set forth in clauses (a) through (c) of this Section 7) and such default shall continue unremedied for a period of 30 days after the earlier of the date on which (A) a Responsible Officer of the Company becomes aware of such failure or (B) written notice thereof shall have been given to the Company by the Agent or any Bank; or (e) The Company or any of its Subsidiaries shall (i) default in the payment of principal of or interest on any Indebtedness (other than the Notes) which Indebtedness is in an aggregate principal amount equal to or greater than $10,000,000 or in the payment of any Contingent Obligation (other than any Guaranty) relating to any primary obligation the aggregate principal amount of which is equal to or greater than $10,000,000, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Contingent Obligation was created or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness (other than the Notes) or Contingent Obligation (other than any Guaranty) or contained in any instrument or agreement evidencing, securing or relating thereto, or contained in any Nortek Indenture, or any other event shall occur or condition exist, the effect of which default or other event or condition described in either clause (i) or (ii) of this paragraph is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Contingent Obligation (or a trustee or 80 agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to become due prior to its stated maturity or such Contingent Obligation to become payable; or (f) (i) The Company or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, wind-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Company or any of its Subsidiaries any such case, proceeding or other action referred to in clause (i) which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, unstayed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Company or any of its Subsidiaries shall take any action authorizing, or in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth above in clause (i), (ii) or (iii) above; or (v) the Company or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) One or more judgments or decrees shall be entered against the Company or any of its Subsidiaries involving in the aggregate a liability (to the extent not paid or fully covered by insurance) of $5,000,000 or more and all such judgments or decrees shall not have been vacated, satisfied, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (h) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan or engage in a transaction which could subject such person to liability under Section 502(l) of ERISA, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Single Employer Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to 81 terminate, any Single Employer Plan, which Reportable Event or institution of proceedings or appointment of a trustee is, in the reasonable opinion of the Agent, likely to result in the termination of any Single Employer Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall, other than in a standard termination, terminate for purposes of Title IV of ERISA, or the Company, any Subsidiary or any Commonly Controlled Entity shall file a notice of intent to terminate a Single Employer Plan in a distress termination under Section 4041(c) of ERISA, or (v) the Company or any Commonly Controlled Entity shall, or is, in the reasonable opinion of the Agent, likely to, incur any liability in connection with its failure to meet any obligation arising out of a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan and in each case in clauses (i) through (v) above, such event or condition, together with all other such events or conditions, if any, which have occurred or exist could reasonably be expected to subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities that in the aggregate could reasonably be expected to have a Material Adverse Effect; or (i) A Change of Control shall occur; or (j) any non-monetary judgment or decree shall be rendered against the Company or any of its Subsidiaries that could reasonably be likely to have a Material Adverse Effect, and such judgment or decree shall not have been vacated, satisfied, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (k) (i) any provision of any Loan Document after delivery thereof pursuant to subsection 4.1 shall for any reason (other than pursuant to the terms thereof) cease to be valid and binding on, or enforceable against, any of the Company or its Subsidiaries which are party thereto; or (ii) any Security Document after delivery thereof shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority (subject during the first 45 days after the Second Closing Date (or such later date as agreed by the Agent and the Company as specified in subsection 5.16) only to the completion of the actions required under subsection 5.16) lien on and security interest in the Collateral purported to be covered thereby; or (iii) in the case of clause (i) or (ii) above, the Company or any Subsidiary shall so state in writing; then, and in any such event, (x) if such event is an Event of Default specified in paragraph (f) above with respect to the Company, automatically the Commitments shall immediately terminate and the Company Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes shall immediately become due and payable, and (y) if such event is any other Event of Default, either or both of the following actions may be taken: (1) with the consent of the Required Banks, the Agent may, or upon the request 82 of the Required Banks, the Agent shall, by notice to the Company, declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (2) with the consent of the Required Banks, the Agent may, or upon the request of the Required Banks, the Agent shall, declare the Company Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. In addition, after the occurrence and during the continuance of an Event of Default, the Company and each Subsidiary shall, promptly upon demand by the Agent, deliver to the Agent cash collateral in such form as reasonably requested by the Agent, for deposit in a cash collateral account, in a maximum amount equal to the undrawn amount of all L/Cs then outstanding, to be maintained by the Agent as an interest-bearing deposit account under the sole dominion and control of the Agent as pledgee, and shall execute and deliver such documents and instruments (including a pledge agreement) as the Agent may reasonably request in order to perfect or protect the Agent's lien and security interest in such collateral account to secure payment of the Reimbursement Obligations with respect to L/Cs then outstanding. Such deposit shall be held by the Agent as such security for the ratable benefit of the Banks. Upon cure of the Event of Default, all such cash collateral (and interest accrued thereon) shall promptly be returned to the Company and its Subsidiaries). Except as expressly provided above in this Section 7, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 8.THE AGENT 8.1 Appointment. Each Bank (in its capacity as a Bank and a potential Hedge Bank) hereby irrevocably designates and appoints Fleet as the Agent for such Bank under this Agreement and the other Loan Documents and each such Bank irrevocably authorizes Fleet, as Agent for such Bank, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Agent. 8.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 83 8.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any of the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (b) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Company, or any Subsidiary or any officer thereof contained in this Agreement or any of the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any of the other Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any of the other Loan Documents or for any failure of the Company or any Subsidiary to perform its obligations hereunder or thereunder. The Agent shall be under no obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any of the other Loan Documents, or to inspect the properties, books or records of the Company or any Subsidiary. 8.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company and any Subsidiary), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks and all future holders of the Notes. 8.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Bank, the Company or any Subsidiary referring to this Agreement, describing such Default or Event of Default and stating that the notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Banks. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks; provided that unless and until the 84 Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 8.6 Non-Reliance on Agent and Other Banks. Each Bank expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Company or any Subsidiary, shall be deemed to constitute any representation or warranty by the Agent to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, performance and other condition (financial or otherwise) and creditworthiness of the Company and each Subsidiary and made its own decision to make and maintain its Company Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, performance and other condition (financial or otherwise) and creditworthiness of the Company and each Subsidiary. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall have no duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, performance and other condition (financial or otherwise) or creditworthiness of the Company and its Subsidiaries which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 Indemnification. The Banks agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), ratably according to the respective amounts of their Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any of the other Loan Documents or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the 85 Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Notes and all other amounts payable hereunder. 8.8 Agent in Its Individual Capacity. The Agent and its Affiliates may make loans to, accept deposits from, issue or maintain L/Cs on account of and generally engage in any kind of business with the Company and its Subsidiaries as though the Agent were not the Agent hereunder. With respect to its Company Loans made or renewed by it and any Note issued to it, the Agent shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" shall include the Agent in its individual capacity. 8.9 Successor Agent. The Agent may resign as an Agent upon 20 days' notice to the Banks. If the Agent shall resign as the Agent under this Agreement, then the Required Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company, whereupon such successor agent shall succeed to the rights, powers and duties of the Agent which resigned, and the term "Agent", shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as the Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes; provided, however, that upon the occurrence and during the continuance of an Event of Default the approval of the Company of the successor agent shall not be required hereunder. Upon its resignation hereunder, each Agent shall execute and deliver any documents relating to its actions as Agent which may be necessary to permit the successor agent to act as Agent hereunder. After any retiring Agent's resignation hereunder as the Agent, the provisions of this subsection 8.9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement. 8.10 Failure to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Banks against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. SECTION 9.MISCELLANEOUS 9.1 Amendments and Waivers. With the written consent of the Required Banks, the Agent, the Company and the Designated Subsidiaries may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Banks or the Company and the Designated Subsidiaries hereunder, and the Agent may execute and deliver to the Company and the Designated Subsidiaries a written instrument waiving, on such terms and conditions as the Agent may specify in such instrument, any of the 86 requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (a) extend the maturity of any Company Loan, or reduce the principal amount thereof, or change the amount or termination date of any Bank's Commitment, or release, amend or modify any Guaranty or any collateral covered by any of the Security Documents, or reduce the interest rate or Facility Fee, Issuance Fee or Drawing Fee payable hereunder or extend the time of payment of interest and any fees hereunder or the time of payment or reimbursement of any amounts drawn or to be drawn under L/Cs or amend the definition of "Required Banks" or increase the Company L/C Sublimit, or amend, modify or waive any provision of subsection 4.1, 4.2 or 5.16 or this subsection 9.1, or consent to the assignment or transfer by the Company and each Designated Subsidiary of any of its rights and obligations under this Agreement, in each case without the written consent of all of the Banks, or (b) amend, modify or waive any provision of Section 8 or otherwise affect the rights and obligations of the Agent under the Loan Documents without the written consent of the then Agent (with any such change in any provision of Section 8 to be effective prospectively only). Any such waiver and any such amendment, supplement or modification shall be binding upon the parties to this Agreement and all holders of the Notes. In the case of any waiver, the parties to this Agreement shall be restored to their former position and rights hereunder and under the outstanding Notes, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 9.2 Notices. All notices, consents, requests and demands to or upon the respective parties hereto to be effective shall be in writing or by telegraph or telecopy and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or four (4) Business Days after deposit in the mail, registered mail, return receipt requested, postage prepaid, or, in the case of telegraphic or telecopy notice, when received, addressed as follows in the case of the Company and the Designated Subsidiaries and the Agent, and as set forth on Schedule I in the case of the other parties hereto, or to such address or other address as may be hereafter notified by any of the respective parties hereto or any future holders of the Notes: 87 The Company or any Designated Subsidiary: Ply Gem Industries, Inc. c/o Nortek, Inc. 50 Kennedy Plaza Providence, Rhode Island 02903 Attention:Richard J. Harris Vice President Telephone:(401) 751-1600 Telecopy: (401) 751-4610 With a copy to:Ropes & Gray One International Place Boston, Massachusetts 02110 Attention:Douglass N. Ellis, Jr., Esq. Telephone:(617) 951-7000 Telecopy: (617) 951-7050 The Agent: Fleet National Bank One Federal Street Boston, Massachusetts 02211 Attention:John Mann, Agency Services Telephone:(617) 346-0429 Telecopy: (617) 346-4682 and Fleet National Bank 111 Westminster Street Providence, Rhode Island 02903 Attention:John Webb Vice President Telephone:401-278-6486 Telecopy: 401-278-5726 with a copy to:Shearman & Sterling 599 Lexington Avenue New York, New York 10022 Attention:Pamela Borgeson, Esq. Telephone:(212) 848-7649 Telecopy: (212) 848-7179 provided that any notice, request or demand to or upon the Agent or the Banks pursuant to subsection 2.3, 2.6 or 2.8 shall not be effective until received. 88 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes and the making of the Company Loans and the issuance of L/Cs. 9.5 Payment of Expenses, Etc. The Company agrees (a) to pay or reimburse the Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, execution and delivery of, and any amendment, supplement or modification to, this Agreement, the other Loan Documents and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent in connection therewith, all reasonable and customary syndication expenses, including without limitation travel expenses incurred by the Agent in connection with due diligence and syndication member and prospective member meetings and typesetting duplication and binding expenses with respect to materials for syndicate members, (b) to pay or reimburse each Bank and the Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the enforcement or preservation of any rights against the Company or any of its Subsidiaries under this Agreement, the other Loan Documents and any such other documents, (c) to pay, indemnify, and to hold each Bank and the Agent and each of their Affiliates and their officers, directors, employees, agents and advisors (each an "Indemnified Party") harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, if legal, which may be payable or reasonably determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Indemnified Party harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to, or arising out of, the Commitments, Company Loans and L/Cs, the actual or proposed use of proceeds thereof, the execution, delivery, enforcement and performance of this Agreement, the other Loan Documents or the consummation of the transactions contemplated thereby (including without limitation; the Tender Offer, the Merger and the Napco 89 Transaction) or related to any Environmental Liability or Environmental Proceeding (other than costs, expenses and disbursements incurred by Banks other than the Agent in negotiating and closing the transactions contemplated hereby) (all the foregoing, collectively, the "indemnified liabilities"); provided that the Company shall have no obligation hereunder to any Indemnified Party with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of such Indemnified Party, (ii) legal proceedings commenced against such Indemnified Party by any security holder or creditor of such Indemnified Party arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such, (iii) any breach of obligations of any Bank (including, without limitation, the Agent in its capacity as such) to any other Bank or (iv) a successful claim by the Company or any of its Subsidiaries against such Indemnified Party as determined in a final, non-appealable judgment by a court of competent jurisdiction. The Company acknowledges that the Agent and the Banks shall, prior to foreclosure of, or exercise by them of proxy rights with respect to, any of the shares of Subsidiaries securing the Company Loans, have no liability or responsibility for either: (A) damage, loss or injury to human health, the environment or natural resources caused by the presence, disposal, release or threatened release of Hazardous Materials on any part of the real property owned, operated or leased by the Company or its Subsidiaries; or (B) abatement and/or clean-up required under any applicable Environmental Laws and Regulations for a release, threatened release or disposal of any Hazardous Materials located at the real property owned, operated or leased by the Company or its Subsidiaries or used by or in connection with the Company's or any Subsidiary's business. The agreements in this subsection shall survive repayment of the Notes and all other amounts payable hereunder; provided, however, that nothing herein shall affect the provisions relating to 180-day periods contained in subsections 2.15, 2.16 and 2.22. 9.6 Binding Effect; No Assignment or Delegation by Company or any Designated Subsidiary. This Agreement shall be binding upon and inure to the benefit of the Company and each Designated Subsidiary and their successors and to the benefit of the Banks and the Agent and their respective successors and assigns. The rights and obligations of the Company and each Designated Subsidiary under this Agreement shall not be assigned or delegated without the prior written consent of the Agent, and each Bank, and any purported assignment or delegation without such consent shall be void. 9.7 Assignments and Participations by Banks; Pledge to Federal Reserve Bank. (a) Each Bank may assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Company Loans owing to it, and the Note or Notes held by it); provided, however, that: (i) each such assignment shall be of a constant, and not a varying, percentage of all of the 90 assigning Bank's rights and obligations under this Agreement in respect of both of the Facilities, (ii) except in connection with the assignment by any Bank of its entire Commitment, the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 in the aggregate under both Facilities and shall be an integral multiple of $1,000,000, and (iii) each such assignment shall be to an Eligible Assignee. Upon the execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof: (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder, and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto); and provided further that the Company shall not be required to pay any amount under this Agreement that is greater than the amount which it would otherwise have been required to pay had such assignment not been made. (b) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company and each Designated Subsidiary or the performance or observance by the Company and each Designated Subsidiary of any of their respective obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of such financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that 91 it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. Neither the Company nor any Subsidiary shall have any liability or obligation under this subsection 9.7(b). (c) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee representing that it is an Eligible Assignee, together with any original Note subject to such assignment, the Agent shall accept such Assignment and Acceptance, and give prompt notice thereof to the Company. Within five Business Days after its receipt of such notice, each of the Company and each Designated Subsidiary (as applicable), at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Note a new Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount equal to the Commitment retained by it hereunder. Such new Note(s) shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially in the form of Exhibit A. (d) Each of the Company and each Designated Subsidiary acknowledges that any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time: (i) sell to one or more Eligible Participants participating interests in any Company Loan owing to such Bank, any Note held by such Bank, any Commitment of such Bank or any other interest of such Bank hereunder (each a "Participating Interest"), without in any such case the need for any approval by the Company, and (ii) subject to the Company's prior approval in each instance (but only when no Event of Default shall have occurred and is continuing), which approval shall not be unreasonably withheld, sell to one or more banks or other entities that do not, directly or indirectly, engage in business competitive with the business of the Company and its Subsidiaries (each such participant and each Eligible Participant is hereinafter referred to individually as a "Participant" and collectively as the "Participants") a Participating Interest, provided that no Participant (other than an Affiliate of such Bank which is a Subsidiary of such Bank or the parent holding company of such Bank or a Subsidiary of such holding company) shall be entitled under the relevant participation agreement or any associated agreement to require such Bank to take or omit to take any action hereunder, except, to the extent that any Participant has any interest directly affected thereby, action that extends the final maturity of any Company Loan, reduces the rate or extends the time of payment of interest on any Company Loan, extends the time for payment or reduces any fee payable to such Bank hereunder, reduces the principal amount of any Company Loan or releases all or substantially all of the Collateral described in the Company Security Agreement. In the event of any such sale by such Bank of participating interests to a Participant, such Bank's obligations under this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank shall remain the 92 holder of any such Note for all purposes under this Agreement, and the Company shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Each of the Company and each Designated Subsidiary also agrees that each Participant shall be entitled to the benefits of subsections 2.13, 2.15, 2.16 and 2.22 with respect to its participation in the Commitments, and the Eurodollar Loans outstanding from time to time; provided that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred by such transferor Bank to such Participant had no such transfer occurred. (e) Each of the Company and each Designated Subsidiary authorizes each Bank to disclose to any Eligible Assignee or Participant or potential Eligible Assignee or Participant any and all financial information in its possession concerning the Company and each Designated Subsidiary which has been delivered to it by the Company and each Designated Subsidiary pursuant to this Agreement or which has been delivered to it by the Company and each Designated Subsidiary in connection with its credit evaluation of the Company prior to entering into this Agreement; provided that the intended recipient first delivers confidentiality undertakings for the benefit of the Company to the effect of subsection 9.11 with respect to non-public information. (f) If, pursuant to subsection 9.7(a) or (b), any interest in this Agreement, a participation agreement or any Note is transferred to any Participant or Eligible Assignee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Bank shall cause such Participant or Eligible Assignee concurrently with the effectiveness of such transfer, (i) to represent to the transferor Bank for the benefit of the Company and its Subsidiaries that under applicable law and treaties no taxes will be required to be withheld by the transferor Bank or the Company or any Designated Subsidiary with respect to any Company Loans, (ii) to furnish to the Bank and the Company either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 (wherein such Participant claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree to provide the transferor Bank a new Form 4224 or Form 1001 upon the obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Participant, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (g) No person to whom a participation has been granted or who has received an assignment hereunder may grant any participation or make any assignment unless such participation or assignment would be permitted under this subsection 9.7 if made by a Bank. 93 (h) Notwithstanding anything to the contrary herein, no assignment or participation will be permitted if, after giving effect thereto, the aggregate Commitment of the transferee (if other than the Agent in its capacity as a Bank), together with such transferee's participating interest in the Commitments, would exceed 25% of the aggregate Commitments. (i) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Company Loans owing to it and the Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A. No such assignment shall release the transferor Bank from its obligations hereunder. 9.8 Further Assurances. At any time and from time to time, upon the request of the Agent, the Company and each Designated Subsidiary shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Agent may reasonably request in order to fully effect the purposes of this Agreement and the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with the Company Loans or the L/Cs. 9.9 Adjustments; Set-off. (a) If any Bank (a "Benefited Bank") shall at any time receive any payment of all or part of any of its Company Loans or interest thereon, or receive any collateral in respect thereof or any payment under any Guaranty (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in paragraph (f) of Section 7, or otherwise) in a greater proportion than any such payment to and collateral received by any other Bank, if any, in respect of such other Bank's Company Loans, or interest on any of the foregoing, such Benefited Bank shall purchase for cash from each other Bank such portion of each such other Bank's Company Loans, or shall provide each such other Bank with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefited Bank to share the excess payment or benefits of such collateral or proceeds ratably with the other Banks; provided, however, that if all or any portion of such excess payment or benefits is hereafter recovered from such Benefited Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Each of the Company and each Designated Subsidiary agrees that each Bank so purchasing a portion of any other Bank's Company Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Bank were the direct holder of such portion. Any payments received after the Banks have taken action pursuant to this subsection 9.9 shall be allocated ratably among the Company Loans and participations in L/Cs of all the Banks. (b) In addition to any rights and remedies of each Bank provided by law, upon the occurrence and during the continuation of an Event of Default, each 94 Bank shall have the right, without prior notice to the Company or any Designated Subsidiary, any such notice being expressly waived to the extent permitted by applicable law, to set off and apply against any indebtedness, whether matured or unmatured, of the Company or any of its Subsidiaries to such Bank under this Agreement or any of the other Loan Documents, any amount owing from such Bank to the Company or any such Subsidiary at, or at any time after, the happening of any of the above-mentioned events, and such right of set-off may be exercised by such Bank against the Company or any such Subsidiary or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver, custodian or execution, judgment or attachment creditor of the Company or any such Subsidiary or against anyone else claiming through or against the Company or any such Subsidiary or such trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receivers, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Bank prior to the making, filing or issuance, or service upon such Bank of, or of notice of, any such petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Each Bank agrees promptly to notify the Company, any such Subsidiary, the Agent and each other Bank after any such set-off and application made by such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. 9.10 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.11 Confidentiality. Each Bank agrees to maintain the confidentiality of information designated as confidential and provided to it by the Company, or any Subsidiary in connection with this Agreement or the other Loan Documents; provided, however, that any Bank may disclose such information (a) at the request of any bank regulatory authority or in connection with an examination of such Bank by any such authority, (b) pursuant to subpoena or other court process, (c) when required to do so in accordance with the provisions of any applicable law, (d) as required by any other Governmental Authority, (e) to such Bank's independent auditors, attorneys or other professional advisors upon receipt of a confidentiality undertaking for the benefit of the Company in conformity with this subsection 9.11 as to non-public information or (f) to any Eligible Assignee or Participant or potential Eligible Assignee or Participant; provided that such Eligible Assignee or Participant, as the case may be, agrees in writing to maintain the confidentiality of such information in conformity with this subsection 9.11. 9.12 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts and all of said 95 counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Company, the Designated Subsidiaries and the Agent. 9.13 Second Closing Date Assignments; Etc. (a) As of the Second Closing Date, prior to giving effect to any assignment under this Agreement as of such date, each Existing Bank represents and warrants, as to the assignment effected by such Existing Bank by this Agreement that as of the Second Closing Date (i) its Existing Commitment is in the dollar amount specified as its Existing Commitment on Schedule 9.13 hereto and the aggregate outstanding principal amount of Existing Advances Outstanding constituting "Loans" owing to it under the Existing Credit Agreement and the aggregate amount of Existing Outstandings constituting its "Bank L/C Obligations" under the Existing Credit Agreement are each in the dollar amount specified as such on Schedule 9.13 hereto; and (ii) that such Existing Bank is the legal and beneficial owner of such interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by such Existing Bank. (b) Each Existing Bank and Bank confirms to, and agrees with, each of the other Banks as to the assignment effected by this Agreement by such Existing Bank or Bank, as the case may be, as follows: (i) each such Existing Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Existing Credit Agreement or this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Existing Credit Agreement or this Agreement or any other instrument or document furnished pursuant thereto or hereto; (ii) each such Existing Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or any of the other Loan Parties or the performance of observance by the Company or any of the other Loan Parties of any of its obligations under the Existing Credit Agreement or this Agreement or any other instrument or document furnished pursuant thereto or hereto; (iii) each Bank confirms that it has received such documents and information as it has deemed appropriate to make its own credit analysis and decision to execute and deliver this Agreement and agrees that it shall have no recourse against the Agent, any Existing Bank or any other Bank with respect to any matters relating to the Existing Credit Agreement or this Agreement; and (iv) each Bank will, independently and without reliance upon the Agent, any Existing Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, the Notes held by it and the other documents executed in connection herewith. (c) As of the Second Closing Date, (i) each Bank shall be a party to this Agreement and, to the extent provided herein, have the rights and obligations of a Bank hereunder and (ii) each Existing Bank shall, to the extent provided herein, relinquish its rights and be released from its obligations under this Agreement as to any assignment effected herein. 96 (d) From and after the Second Closing Date, the Agent shall make all payments under this Agreement in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Banks hereunder. (e) On or before the Second Closing Date, the Company shall have paid all accrued interest, fees and other amounts which are due and payable to the Existing Banks and the Agent (as defined in the Existing Credit Agreement) as of the Second Closing Date in connection with the Existing Credit Agreement. Without prejudice to the survival of any other agreement of the Company under the Existing Credit Agreement, all amounts that would be payable under subsections 2.13, 2.15, 2.16 and 9.5 of the Existing Credit Agreement shall be payable under this Agreement to the extent that such amounts have not been paid as of the Second Closing Date. (f) As of the Second Closing Date, (i) the Existing Credit Agreement is amended and restated in full as set forth in this Agreement, (ii) the Existing Commitments are terminated, (iii) the Notes (as defined in the Existing Credit Agreement) are cancelled and replaced by the Notes, and (iv) all obligations which, by the terms of the Existing Credit Agreement, are evidenced by the Notes (as defined in the Existing Credit Agreement) are evidenced by the Notes and by this Agreement. 9.14 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY.1GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY. (a) THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND ALL OTHER DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH AND THEREWITH, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. (b) EACH OF THE COMPANY AND EACH DESIGNATED SUBSIDIARY IRREVOCABLY CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT UNDER, ARISING OUT OF OR IN ANY MANNER RELATING TO THIS AGREEMENT, AND THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN ANY COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. EACH OF THE COMPANY AND EACH DESIGNATED SUBSIDIARY, BY THE EXECUTION AND DELIVERY OF THIS AGREEMENT, EXPRESSLY AND IRREVOCABLY ASSENTS AND SUBMITS TO THE PERSONAL NON-EXCLUSIVE JURISDICTION OF ANY OF SUCH COURTS IN ANY SUCH ACTION OR PROCEEDING. EACH OF THE COMPANY AND EACH DESIGNATED SUBSIDIARY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY COMPLAINT, SUMMONS, NOTICE OR OTHER PROCESS RELATING TO ANY SUCH 97 ACTION OR PROCEEDING BY DELIVERY THEREOF IN ACCORDANCE WITH APPLICABLE LAW. EACH OF THE COMPANY AND EACH DESIGNATED SUBSIDIARY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS OR ANY SIMILAR BASIS. EACH OF THE COMPANY AND EACH DESIGNATED SUBSIDIARY SHALL NOT BE ENTITLED IN ANY SUCH ACTION OR PROCEEDING TO ASSERT ANY DEFENSE GIVEN OR ALLOWED UNDER THE LAWS OF ANY STATE OTHER THAN THE STATE OF NEW YORK UNLESS SUCH DEFENSE IS ALSO GIVEN OR ALLOWED BY THE LAWS OF THE STATE OF NEW YORK. NOTHING IN THIS SUBSECTION SHALL AFFECT OR IMPAIR IN ANY MANNER OR TO ANY EXTENT THE RIGHT OF ANY BANK TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY OR ANY DESIGNATED SUBSIDIARY IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK] 98 (c) EACH OF THE COMPANY, THE DESIGNATED SUBSIDIARIES, THE BANKS AND THE AGENT WAIVES TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF, THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PLY GEM INDUSTRIES, INC. By /s/ Richard J. Harris ------------------------ Title: Vice President ACKNOWLEDGED AND AGREED AS TO EACH PROVISION RELATING TO ANY DESIGNATED SUBSIDIARY: SNE ENTERPRISES, INC. By Title: VARIFORM, INC. By Title: GREAT LAKES WINDOW, INC. By Title: FLEET NATIONAL BANK, as Agent and as a Bank By _________________________________ Title 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 -----END PRIVACY-ENHANCED MESSAGE-----