-----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, H1IM3NDD01kKqLqYiShRzekeSe1r+0yI1XMEUaD7YsuguYCcRRiIyKiyl5mmsStp lJfFXfpNExsyD7kpa5t6QQ== 0000072423-00-000017.txt : 20000310 0000072423-00-000017.hdr.sgml : 20000310 ACCESSION NUMBER: 0000072423-00-000017 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000309 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: 564583 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 1999 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ____________ Commission file number: 1-6112 ------------------------ 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 February 25, 2000 was $216,942,255. (See Item 12.) The number of shares of Common Stock outstanding asof February 25, 2000 was 10,947,164. The number of shares of Special Common Stock outstanding as of February 25, 2000 was 549,780 Documents Incorporated byReferencePortions of the registrant's Proxy Statement for use at its 2000 Annual Meeting of Shareholders are incorporated by reference into Part III. 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 Products Segment; and the Windows, Doors and Siding Products Segment. Through these segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. (As used in this report, the terms "Company" and "Nortek" refer to Nortek, Inc., together with its subsidiaries, unless the context indicates otherwise. Such terms as "Company" and "Nortek" are used for convenience only and are not intended as a precise description of any of the separate corporations, each of which manages its own affairs.) The Company's performance is dependent to a significant extent upon the levels of residential replacement and remodeling, new residential construction and non-residential construction, which are affected by such factors as interest rates, inflation seasonality, consumer spending habits and unemployment. Additional information concerning the Company's business is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 7 of Part II of this report, incorporated herein by reference. Information on foreign and domestic operations is set forth in Note 10 of the Notes to Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference. Residential Building Products Segment - -------------------------------- The Residential Building Products Segment manufactures and distributes built-in products primarily for the residential new construction, do-it-yourself and professional remodeling and renovation markets. The principal products sold by the Segment are kitchen range hoods, built-in exhaust fans (such as bath fans and fan, heater and light combination units), indoor air quality products, bath cabinets, radio intercoms and central vacuum systems. The Segment is the largest supplier in North America of range hoods, bath fans and combination units, indoor air quality products (such as continuous-ventilation systems and energy-recovery ventilators) 3 NORTEK, INC. AND SUBSIDIARIES and one of the leading suppliers in Western Europe, South America and the Middle East of luxury "Eurostyle" range hoods. Products are sold under the Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R) and Best(R) brand names, among others, to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and original equipment manufacturers (OEMs). Customers for the Segment's products include residential and electrical contractors, professional remodelers and do-it-yourself homeowners. Other products sold by this Segment include, among others, wireless security products, audio speakers, door chimes, ceiling fans, multi-room video distribution equipment and infrared control equipment. The Company's sales of kitchen range hoods and exhaust fans accounted for approximately 10.2% and 10.5%, respectively, of the Company's consolidated net sales in 1999. A key component of the Segment's operating strategy is the introduction of new products which capitalize on the strong Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R) and Best(R) brand names and the extensive distribution system of the Segment's businesses. Products sold under these brand names include the Broan Allure(TM) and Rangemaster(R) range hoods, Sensaire(R), Solitaire(R) and Solitaire Ultra Silent(R) fans and fan lights, LoSone(R) and Select(TM) fans, the Best by Broan(R) "Eurostyle" luxury range hoods, the Venmar(R) and vanEE(R) Super Compact line of indoor air quality systems, NuTone SenSonic(TM) stereo speakers and Whispaire(TM) range hoods and the Broan 12" wide trash compactor. With respect to certain product lines, several private label customers account for a substantial portion of net sales. In 1999, approximately 7.6% of the total sales of the Segment were made to private label customers. Production generally consists of fabrication from coil and sheet steel and formed metal utilizing stamping, pressing and welding methods, assembly with components and subassemblies purchased from outside sources (motors, fan blades, heating elements, wiring harnesses, controlling devices, glass, mirrors, lighting fixtures, lumber, wood and polyethylene components, speakers, grilles and similar electronic components, and compact disc and tape player mechanisms) and painting, finishing and packaging. The Segment offers a broad array of products with various features and styles across a range of price points. The Company believes that the Segment's variety of product offerings helps the Segment maintain and improve its market position for its principal products. At the same time, the Company believes that the Segment's status as a low-cost producer, in large part as a result of advanced manufacturing processes, provides the Segment with a competitive advantage. 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 other suppliers of the Segment's products, certain of these suppliers have greater financial and marketing resources than the Segment. The Segment had 18 manufacturing plants and employed approximately 3,750 full-time people as of December 31, 1999, 180 of whom are covered by collective bargaining agreements which expire in 2000 and 2001 and 729 of whom are covered by collective bargaining agreements which expire in 2004 and 2005. The Company believes that the Segment's relationships with its employees are satisfactory. Air Conditioning and Heating Products Segment - --------------------------------------------- The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating and air conditioning systems ("HVAC") for custom-designed commercial applications and for manufactured and site-built residential housing. Commercial Products The Segment's commercial products consist of HVAC systems which are custom-designed to meet customer specifications for commercial offices, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. Such systems are primarily designed to operate on building rooftops (including large self-contained walk-in-units) or on individual floors within a building, and range from 40 to 600 tons of cooling capacity. The Segment markets its commercial products under the Governair(R), Mammoth(R), Temtrol(TM), Aston, Venmar(R), Ventrol(R) and Webco(TM) brand names. The market for commercial HVAC equipment is segmented between standard and custom-designed equipment. Standard equipment can be manufactured at a lower cost and therefore offered at substantially lower initial prices than custom-designed equipment. As a result, suppliers of standard equipment generally have a larger share of the overall commercial HVAC market than suppliers of custom-designed equipment, including the Segment. However, because of certain building designs, shapes or other characteristics, the Company believes there are many applications for which custom-designed equipment is required or is more cost effective over the life of the building. 5 NORTEK, INC. AND SUBSIDIARIES Unlike standard equipment, the Segment's commercial HVAC equipment can be designed to match the exact space, capacity and performance requirements of the customer. The Segment's packaged rooftop and self-contained walk-in equipment rooms maximize a building's rentable floor space because they are located outside the building. In addition, factors relating to the manner of construction and timing of installation of commercial HVAC equipment can often favor custom-designed rather than standard systems. As compared with site-built and factory built HVAC systems, the Segment's systems are factory assembled according to customer specifications and then installed by the customer or third parties, rather than assembled on site, permitting extensive testing prior to shipment. As a result, the Segment's commercial systems can be installed later in the construction process than site-built systems, thereby saving the owner or developer construction and labor costs. The Segment sells its commercial products primarily to contractors, owners and developers of commercial office buildings, manufacturing and educational facilities, hospitals, retail stores and governmental buildings. The Segment seeks to maintain strong relationships nationwide with design engineers, owners and developers, and the persons who are most likely to value the benefits and long-term cost efficiencies of the Segment's custom-designed equipment. The Company estimates that about half of the Segment's commercial sales in 1999 were attributable to replacement and retrofit activity, which typically is less cyclical than new construction activity and generally commands higher margins. The Segment continues to develop product and marketing programs to increase penetration in the growing replacement and retrofit market. The Segment's commercial products are marketed through independently-owned manufacturers' representatives and an in-house sales, marketing and engineering group of approximately 185 persons as of December 31, 1999. The independent representatives are typically HVAC engineers, a factor which is significant in marketing the Segment's commercial products because of the design intensive nature of the market segment in which the Segment competes. The Company believes that the Segment is among the largest suppliers of custom-designed commercial HVAC products in the United States. The Segment's three largest competitors in the commercial HVAC market are York International Corporation (which sells under the "Pace" and "Miller-Picking" trade names), McQuay International (a subsidiary of OYL Corporation), and The Trane Company (a subsidiary of American Standard Inc.). The Segment 6 NORTEK, INC. AND SUBSIDIARIES competes primarily on the basis of engineering support, quality, flexibility in design and construction and total installed system cost. Although the Company believes that the Segment competes favorably with respect to certain of these factors, most of the Segment's competitors have greater financial and marketing resources than the Segment and enjoy greater brand awareness. However, the Company believes that the Segment's ability to produce equipment that meets the performance characteristics required by the particular product application provides it with advantages not enjoyed by certain of these competitors. Residential Products The Segment manufactures air conditioners, heat pumps and furnaces for the residential and light commercial markets. For site-built homes and light commercial structures, the Segment markets its products under the licensed names, Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R) and Gibson(R) names. Within the residential market the Segment is one of the largest suppliers of these products for manufactured homes in the United States and Canada. In the manufactured housing market, the Segment markets its products under the Intertherm(R) and Miller(R) brand names. The principal factors affecting the market for the Segment's residential HVAC products are the demand for replacement and modernization of existing equipment and the levels of manufactured housing shipments and housing starts. The Company anticipates that the replacement market will continue to expand as a large number of previously installed heating and cooling products become outdated or reach the end of their useful lives. This growth may be accelerated by a tendency among consumers to replace older heating and cooling products with higher efficiency models prior to the end of such equipment's useful life. The market for residential cooling products, including those sold by the Segment, is affected by spring and summer temperatures. The Segment does not sell window air conditioners, a segment of the market which is highly seasonal and especially affected by spring and summer temperatures. The Company believes that the Segment's ability to offer both heating and cooling products helps offset the effects of seasonality of the Segment's sales. The Segment sells its manufactured housing products to builders of manufactured housing and through distributors, to manufactured housing retailers and owners of such housing. The majority of sales to builders of manufactured housing consist of furnaces designed and engineered to meet or exceed certain standards 7 NORTEK, INC. AND SUBSIDIARIES mandated by federal agencies, including HUD. These standards differ in several important respects from the standards for furnaces used in site-built residential homes. The after market channel of distribution includes sales of both new and replacement air conditioning units and heat pumps and replacement furnaces. The Company believes that the Segment has one major competitor in the furnace segment of this market, Evcon Industries, a subsidiary of York International Corporation, which markets its products primarily under the Coleman name. The Segment competes with most major industry manufacturers for the air conditioning segment of the market. Residential HVAC products for use in site-built homes are sold through independently-owned distributors who sell to HVAC contractors. The site-built residential HVAC market is very competitive. In this market, the Segment competes with, among others, Carrier Corporation, Rheem Manufacturing Company, Lennox Industries, The Trane Company, York International Corporation, and Goodman Manufacturing. The Segment competes in both the manufactured housing and site-built markets on the basis of breadth and quality of its product line, distribution, product availability and price. The Segment believes that the Segment competes favorably with respect to these factors. The Company estimates that more than half of the Segment's sales of residential HVAC products in 1999 were attributable to the replacement market, which tends to be less cyclical than the new construction market. The Segment had 14 manufacturing plants and employed approximately 2,700 full-time people as of December 31, 1999, 245 of whom are covered by a collective bargaining agreement which expires in 2001. The Company believes that the Segment's relationships with its employees are satisfactory. Windows, Doors and Siding Products Segment - ------------------------------------------ The Windows, Doors and Siding Products Segment is a manufacturer and distributor of vinyl, wood and composite windows, vinyl, wood, steel and composite patio and entry doors, vinyl siding, skirting, soffit and accessories, aluminum trim coil, siding, soffit and accessories, blocks, vents, shutters, sunrooms and vinyl fencing, railings and decking for use in the residential construction, do-it-yourself and professional renovation markets. The Company's sales of windows accounted for approximately 16.2% of the Company's consolidated net sales in 1999. The Company's sales of siding and skirting products accounted for approximately 11.3% of the Company's consolidated net sales in 1999. The Segment competes with many other manufacturers in the sale of its products. 8 NORTEK, INC. AND SUBSIDIARIES Windows and Doors The Segment manufactures and sells wood, clad, composition (wood and vinyl) and vinyl windows and patio doors, steel and composite entry doors, glass and polycarbonate skylights, and wooden interior bifold doors and sunrooms under the Crestline(R), Vetter(R), Kenergy(R), AWC(R), Great Lakes Gold(R), PLY GEM(R), Uniframe(R), Monitor(TM), Napco(R), Napco Premium(TM), Napco Prime(TM), Peachtree(R), Vintage(TM), Image(TM), Thermal-Gard(R), CWD(TM), Ambassador(TM), Regency(TM), Diplomat(TM), Envoy(TM) and Consul(TM) brand names. The products are marketed to both the home improvement and new construction markets through wholesale, millwork and specialty distributors, large contractors, home centers and lumber yards. The Segment differentiates itself from its competition with a multiple brand strategy, multiple channels of distribution, an established distribution network utilizing custom design and manufacturing capabilities, and a trained field sales and service support network. Its ability to sell in full truckload and less than truckload quantities is tailored to the desires of large home center chains which prefer to purchase windows directly from the manufacturer. The Segment's ability to offer a broad product line is also important to the Segment's sales and marketing strategy together with the Segment's focus on one of the fastest growing segments in the industry - home centers. Siding and Exterior Products The Segment is also a manufacturer of vinyl siding, skirting, soffit and accessories, aluminum trim coil, siding, soffit and accessories and vinyl fencing, railing and decking. These products are available in a variety of colors and/or woodgrains. Aluminum trim coil is a product that is used to cover wood products on the exterior areas of a home in which there is no vinyl substitute available. The Segment's products are used in both remodeling and new construction applications, including manufactured housing and light commercial. Vinyl siding's share of the overall exterior market continues to grow due to its low maintenance, durability, high performance and ease of installation compared to alternative siding materials (including wood, metal and masonry). The Segment's products are marketed under the Variform(R), Timber Oak(R), Varigrain Preferred(R), Camden Pointe(TM), Duragrain(R), Hampton III(R), Contractors Choice(R), Nostalgia Series(TM), Varitek(TM), Varibest(R), Proguard(TM), Georgia-Pacific(R), Chateau(R), Chateau Legacy(R), Chateau Nobility(R), Napco(R), American Splendor(TM), American Herald(R), American 76 Collection(R), Sunnybrook(R), Olde Providence(TM), Richwood(R), Kroy(R), Timberlast(TM), Classic Manor(TM) and Finyl Rail(TM) brand names. 9 NORTEK, INC. AND SUBSIDIARIES Vinyl siding and accessories are sold to specialty distributors (one-step distribution) who, in turn, sell directly to remodeling contractors and builders, or to wholesale distributors of building materials (two-step distribution), who sell to home centers and lumberyards who, in turn, sell to remodeling contractors, builders and consumers. The Company believes that it is able to compete on favorable terms as a result of its distribution coverage, high quality, innovative products and production efficiency. The Segment also manufactures a line of injection molded siding components for the remodeling and new construction markets. Siding components include blocks, which allow for the flush mounting of items like light fixtures to the exterior of a home, and gable vents that provide attic ventilation. These products are sold to home centers, lumberyards and wholesale distributors of building materials. The Segment operates 16 manufacturing plants in the United States and employed approximately 5,400 full-time people as of December 31, 1999, 1,528 of whom are covered by collective bargaining agreements which expire in 2000 and 2001. The Company believes that the Segment's relationships with its employees are satisfactory. Other Operations The Company manufactures and distributes preservative and fire retardant treated lumber and plywood products. These products are marketed to cooperative buying groups, lumberyards and independent wholesale distributors for use generally in residential decking, roofing, siding and landscaping as well as various commercial construction applications. GENERAL CONSIDERATIONS Employees The Company employed approximately 12,100 persons at December 31, 1999. 10 NORTEK, INC. AND SUBSIDIARIES Backlog Backlog expected to be filled during 2000 was approximately $168,415,000 at December 31, 1999 ($148,213,000 at December 31, 1998). Backlog is not regarded as a significant factor for operations where orders are generally for prompt delivery. While backlog stated for December 31, 1999 is believed to be firm, the possibility of cancellations makes it difficult to assess the firmness of backlog with certainty. Research and Development The Company's research and development activities are principally new product development and represent approximately .9% of net sales. Patents and Trademarks The Company holds numerous design and process patents that it considers important, but no single patent is material to the overall conduct of its business. It is the Company's policy to obtain and protect patents whenever such action would be beneficial to the Company. The Company owns or licenses numerous trademarks that it considers material to the marketing of its products, including Broan(R), NuTone(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R), Best(R), Crestline(R), Vetter(R), AWC(R), Kenergy(R), Variform(R), Timber Oak(R), Varigrain Preferred(R), Camden Pointe(TM), Duragrain(R), Hampton III(R), Contractors Choice(R), Nostalgia Series(TM), Varitek(TM), Varibest(R), Proguard(TM), Georgia-Pacific(R), Chateau(R), Chateau Legacy(R), Chateau Nobility(R), Napco(R), American Splendor(TM), American Herald(R), American 76 Collection(R), Sunnybrook(R), Olde Providence(TM), Richwood(R), Kroy(R), Timberlast(TM), Classic Manor(TM), Finyl Rail(TM), Great Lakes Gold(R), PLY GEM(R), Uniframe(R), Monitor(TM), Napco Premium(TM), Napco Prime(TM), Peachtree(R), Vintage(TM), Image(TM), Thermal-Gard(R), CWD(TM), Ambassador(TM), Regency(TM), Diplomat(TM), Envoy(TM), Consul(TM), Governair(R), Mammoth(R), Temtrol(R), Miller(R), Intertherm(R), Frigidaire(R), Tappan(R), Philco(R), Kelvinator(R), Gibson(R), Ventrol(R), Webco(TM), Linear(R), Channel Plus(R), Multi-Code(R) and Xantech(R). The Company believes that its rights in these trademarks are adequately protected. Raw Materials The Company purchases raw materials and most components used in its various manufacturing processes. The principal raw materials purchased by the Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate mirror glass, PVC, polypropylene, glass, vinyl extrusions, particle board, fiberboard, lumber, plywood, various chemicals, paints, resins, and plastics. 11 NORTEK, INC. AND SUBSIDIARIES The materials, molds and dyes, subassemblies and components purchased from other manufacturers, and other materials and supplies used in manufacturing processes have generally been available from a variety of sources. Whenever practical, the Company establishes multiple sources for the purchase of raw materials and components to achieve competitive pricing, ensure flexibility and protect against supply disruption. From time to time increases in raw material costs can affect future supply availability due in part to raw material demands by other industries. Working Capital The carrying of inventories to support customers and to permit prompt delivery of finished goods requires substantial working capital. Substantial working capital is also required to carry receivables. During 1999, the Company experienced an increase in the level of working capital in the Air Conditioning and Heating Products Segment as a result of an expansion of distribution of HVAC residential site-built products. The Company expects further increases in working capital levels in the year 2000 as its distribution of these products continues to expand. The demand for the Company's products is seasonal, particularly in the Northeast and Midwest regions of the United States and in Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. Many of the businesses in the Company's Windows, Doors and Siding Products Segment have in the past been more seasonal in nature than the Company's other businesses. As a result, the demand for working capital of the Company's subsidiaries is greater from late in the first quarter until early in the fourth quarter. See "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference. 12 NORTEK, INC. AND SUBSIDIARIES Executive Officers of the Registrant Name Age Position Richard L. Bready 55 Chairman, President and Chief Executive Officer Almon C. Hall 53 Vice President, Controller and Chief Accounting Officer Richard J. Harris 63 Vice President and Treasurer Kenneth J. Ortman 64 Senior Vice President - Segment Operations Kevin W. Donnelly 45 Vice President, General Counsel and Secretary The Executive Officers have served in the same or substantially similar executive positions with the Company for at least the past five years. Executive Officers are elected annually by the Board of Directors of the Company and serve until their successors are chosen and qualified. Mr. Bready has an employment agreement with the Company providing for his employment as Chief Executive Officer through January 1, 2003, and at the end of each year during the term of his employment the agreement will be extended for an additional year until either party gives notice it will not be further extended. The Company's executive officers include only those officers of the Company who perform policy-making functions for the Company as a whole and have managerial responsibility for major aspects of the Company's overall operations. A number of other individuals who serve as officers of the Company's subsidiaries perform policy-making functions and have managerial responsibilities for the subsidiary or division by which they are employed, although not for the Company overall. Certain of these individuals could, depending on earnings of such unit, be more highly compensated than some executive officers of the Company. 13 NORTEK, INC. AND SUBSIDIARIES ITEM 2. PROPERTIES Set forth below is a brief description of the location and general character of the principal administrative and manufacturing facilities and other material real properties of the Company, all of which the Company considers to be in satisfactory repair. All properties are owned, except for those indicated by an asterisk, which are leased. Approximate Location Description Square Feet Residential Building Products Segment: - -------------------------------------- Union, IL Manufacturing/Warehouse/Administrative 197,000 Hartford, WI Manufacturing/Warehouse/Administrative 477,000 Mississauga, ONT Manufacturing/Administrative 110,000 Brea, CA Manufacturing/Administrative 34,000* Sylmar, CA Manufacturing/Administrative 35,000* Carlsbad, CA Administrative 30,000 Xiang, Boaon, PRC Manufacturing 106,000* Fabriano, Italy Manufacturing/Administrative 97,500* Cerreto D'Esi, Italy Manufacturing/Administrative 56,000 Montefano, Italy Manufacturing/Administrative 140,000 Cleburne, TX Manufacturing/Administrative 210,000 Los Angeles, CA Manufacturing/Administrative 177,000 Drummondville, QUE Manufacturing/Administrative 76,000 Cincinnati, OH Manufacturing 836,000 Coppell, TX Manufacturing 144,000* Saint-Ouen l'Aumone, France Manufacturing/Administrative 43,000* Air Conditioning and Heating Products Segment: - --------------------------------------------- St. Leonard d'Aston, QUE Manufacturing/Administrative 86,000 St. Peters, MO Warehouse/Administrative 250,000* St. Louis, MO Manufacturing 214,000 St. Louis, MO Manufacturing 103,000* Boonsville, MO Manufacturing 250,000 Tipton, MO Manufacturing 50,000 Chaska, MN Manufacturing/Administrative 230,000* Oklahoma City, OK Manufacturing/Administrative 127,000 Okarche, OK Manufacturing/Administrative 203,000 Saskatoon, Canada Manufacturing 49,000 Springfield, MO Manufacturing 47,000* Montreal, QUE Manufacturing 66,000* 14 NORTEK, INC. AND SUBSIDIARIES Approximate Location Description Square Feet Windows, Doors and Siding Products Segment: - ------------------------------------------- Calgary, Alberta Manufacturing/Administrative 282,000 Toledo, OH Manufacturing/Warehouse/Administrative 258,000 Kearney, MO Manufacturing/Administrative 145,000 Martinsburg, WV Manufacturing 162,000 Jasper, TN Manufacturing 110,000 Mosinee, WI Manufacturing/Warehouse/Administrative 825,000* Stevens Point, WI Manufacturing 107,000 Huntington, WV Manufacturing/Warehouse 286,000* Butler, PA Manufacturing 110,000 York, NE Manufacturing/Administrative 94,000 Sarver, PA Manufacturing 126,000 Valencia, PA Manufacturing 174,000 Gainsville, GA Manufacturing/Administrative 430,000 Punxsutawney, PA Manufacturing/Administrative 133,000 Commerce, TX Manufacturing/Administrative 86,000 Other: - ------ Pine Bluff, AR Manufacturing 35 Acres Thomson, GA Manufacturing 29 Acres Milford, VA Manufacturing 45 Acres Detroit, MI Manufacturing 10 Acres Providence, RI Administrative 23,900* 15 NORTEK, INC. AND SUBSIDIARIES ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company and its subsidiaries are subject to numerous federal, state and local laws and regulations, including environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with the material laws and regulations applicable to it. The Company is involved in current, and may become involved in future, remedial actions under federal and state environmental laws and regulations which impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which their hazardous wastes or materials were disposed of or released. Such claims may relate to properties or business lines acquired by the Company after a release has occurred. In other instances, the Company may be partially liable under law or contract to other parties that have acquired businesses or assets from the Company for past practices relating to hazardous substances management. The Company believes that all such claims asserted against it, or such obligations incurred by it, will not have a material adverse effect upon the Company's financial condition or results of operations. Expenditures in 1998 and 1999 to evaluate and remediate such sites were not material. However, the Company is presently unable to estimate accurately its ultimate financial exposure in connection with identified or yet to be identified remedial actions due among other reasons to: (i) uncertainties surrounding the nature and application of environmental regulations, (ii) the Company's lack of information about additional sites to which it may be listed as a potentially responsible party ("PRP"), (iii) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions and (iv) the time periods over which remediation may occur. Furthermore, since liability for site remediation is joint and several, each PRP is potentially wholly liable for other PRPs that become insolvent or bankrupt. Thus, the solvency of other PRPs could directly affect the Company's ultimate aggregate clean-up costs. In certain circumstances, the Company's liability for clean-up costs may be covered in whole or in part by insurance or indemnification obligations of third parties. In addition to the legal matters described above, the Company and its subsidiaries are parties to various legal proceedings incident to the conduct of their businesses. None of these proceedings is expected to have a material adverse effect, either individually or in the aggregate, on the Company's financial position or results of operations (See Note 8 of the Notes to the Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference). 16 NORTEK, INC. AND SUBSIDIARIES A subsidiary of the Company is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products. Many of the suits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other third party recoveries. The subsidiary continues to vigorously defend the remaining suits. Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products. The subsidiary has engaged in coverage litigation with certain insurers and has settled coverage claims with several of the insurers. The Company believes that the remaining coverage disputes will be resolved on a satisfactory basis and additional coverage will be available. In reaching this belief, the Company analyzed insurance coverage and the status of the coverage litigation, considered the history of settlements with primary and excess insurers and consulted with counsel. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- Stockholders of record of Nortek Common and Special Common Stock at February 25, 2000, numbered 2,666 and 2,162, respectively. There were no dividends declared on the Common and Special Common Stock in 1999 or 1998. The high and low sales prices of Nortek's Common Stock traded on the New York Stock Exchange in each quarter of 1999 and 1998 were: 1999 Quarter High Low First 31 1/8 24 1/8 Second 32 25 Third 41 31 1/8 Fourth 35 22 1/4 1998 Quarter High Low First 34 1/2 25 Second 33 1/4 28 3/4 Third 36 1/16 22 13/16 Fourth 30 3/8 20 See Note 6 of the Notes to the Consolidated Financial Statements, Item 8 of Part II of this report, incorporated herein by reference. 17 NORTEK, INC. AND SUBSIDIARIES ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA For the Five Years Ended December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Consolidated Summary of (In millions except ratios and per share amounts) Operations: Net sales $1,992.8 $1,738.3 $1,134.1 $841.6 $656.8 Operating earnings 178.5 133.1 83.0 61.0 43.0 Gain on Businesses sold --- 4.0 --- --- --- Earnings from continuing operations before extraordinary loss 49.3 34.0 26.4 23.7 17.5 Earnings (loss) from discontinued operations --- 1.2 (5.2) (1.7) (2.5) Extraordinary loss from debt retirements --- (.2) --- --- --- Net earnings 49.3 35.0 21.2 22.0 15.0 Financial Position: Unrestricted cash, investments and marketable securities $ 115.1 $209.6 $161.8 $ 92.1 $103.3 Working capital 324.5 337.2 341.8 163.1 180.2 Total assets 1,809.7 1,690.0 1,304.6 590.2 605.0 Total debt-- Current 14.0 17.7 17.7 36.5 41.9 Long-term 1,023.6 1,007.1 835.8 243.8 240.1 Current ratio 1.9:1 2.0:1 2.3:1 1.9:1 1.9:1 Debt to equity ratio 4.0:1 4.7:1 6.7:1 2.4:1 2.1:1 Depreciation and amorti- tion expense including non-cash interest 59.2 45.3 28.4 21.0 16.2 Capital expenditures 42.5 41.4 22.5 19.8 15.7 Stockholders' investment 259.8 217.6 128.1 118.8 131.3 Common and Special Common shares outstanding 11.5 11.7 9.5 9.9 12.1 Per Share: Earnings from continuing operations Basic $ 4.19 $ 3.11 $ 2.75 $ 2.26 $ 1.41 Diluted $ 4.11 $ 3.06 $ 2.68 $ 2.23 $ 1.39 Net earnings Basic $ 4.19 $ 3.20 $ 2.21 $ 2.10 $ 1.21 Diluted $ 4.11 $ 3.15 $ 2.15 $ 2.07 $ 1.19 Stockholders' investment $22.60 $18.59 $13.48 $12.03 $10.87 See Notes 2, 9 to 11 and 13 of the Notes to the Consolidated Financial Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein, regarding the effect on operating results of acquisitions, discontinued operations, Businesses sold and other matters. There have not been any cash dividends declared or paid on the Company's Common or Special Common Stock during the past five years. 18 NORTEK, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The Company is a diversified manufacturer of residential and commercial building products, operating within three principal segments: the Residential Building Products Segment, the Air Conditioning and Heating Products Segment, and the Windows, Doors and Siding Products Segment. In the results of operations presented below, Other includes corporate related items, results of insignificant operations and certain income and expense not allocable to reportable segments. The results of operations and other data relating to Businesses sold have been presented separately. (See Notes 2 and 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Through its principal segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, the do-it-yourself ("DIY") and professional remodeling and renovation markets. The Residential Building Products Segment manufactures and distributes built-in products primarily for the residential new construction, DIY and professional remodeling and renovation markets. The principal products sold by the Segment include, kitchen range hoods, bath fans and combination units (fan, heater and light combinations). The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating, and air conditioning systems ("HVAC") for custom-designed commercial applications and for manufactured and site-built residential housing. The Windows, Doors and Siding Products Segment principally manufactures and distributes vinyl, wood and composite windows, vinyl, wood, steel and composite patio and entry doors, vinyl siding, skirting, soffit and accessories, aluminum trim coil, siding, soffit and accessories, blocks, vents, shutters, sunrooms, fencing, railing and decking for use in the residential construction, DIY and professional renovation markets. 19 NORTEK, INC. AND SUBSIDIARIES The Company acquired Webco, Inc. ("Webco") on March 8, 1999. On April 23, 1999, the Company acquired three businesses from Caradon plc of the United Kingdom: Peachtree Windows and Doors, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired Companies"). Other 1999 acquisitions included Multiplex Technologies, Inc. ("Multiplex") on May 28, 1999, Kroy Building Products, Inc. ("Kroy") on September 9, 1999 and Xantech Corporation ("Xantech") on December 3, 1999. During 1998 the Company acquired NuTone, Inc. ("NuTone") on July 31, 1998 and Napco, Inc. and an affiliate ("Napco") on October 9, 1998. The Company acquired Ply Gem Industries, Inc. ("Ply Gem") and its subsidiaries on August 26, 1997. These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the results of Webco, the Caradon Acquired Companies, Multiplex, Kroy, Xantech, NuTone, Napco and Ply Gem are included in the Company's consolidated results since the date of their acquisition. (See "Liquidity and Capital Resources" and Note 2 of the Notes to the Consolidated Financial Statements included elsewhere herein). In the fourth quarter of 1997, the Company adopted a plan to discontinue its plumbing products business. Accordingly, the results of the plumbing products business have been excluded from earnings from continuing operations and classified separately as discontinued operations for each of the three years ended December 31, 1999. On July 10, 1998, the Company sold its plumbing products business for approximately $33,700,000 in cash. (See Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein). 20 NORTEK, INC. AND SUBSIDIARIES During 1998, the Company made several dispositions of non-strategic assets acquired in the 1997 acquisition of Ply Gem. On May 8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley was treated as an operation held for sale since the acquisition of Ply Gem and accordingly Studley's operating results are not included in the Company's consolidated financial results. Four additional Ply Gem subsidiaries were sold during 1998: on May 22, 1998, the Company sold Sagebrush Sales Inc.; on July 2, 1998, the Company sold Goldenberg Group Inc.; on July 31, 1998 the Company sold the Ply Gem Manufacturing division of Ply Gem; and on December 10, 1998, the Company sold Allied Plywood Corporation. Additionally, on December 30, 1998 the Company sold its M&S Systems LP and Moore-O-Matic, Inc. subsidiaries. The operating results of these 1998 dispositions are included in the Company's 1998 consolidated results to the date of sale. The combined net sales, operating earnings and earnings before provision for income taxes of these dispositions for the period from January 1, 1998 to the date of sale were approximately $192,000,000, $6,400,000 and $6,400,000, respectively. (See Notes 2, 9 and 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 21 NORTEK, INC. AND SUBSIDIARIES Results of Operations - --------------------- The tables that follow present the net sales and operating earnings for the Company's principal segments for the three years ended December 31, 1999, and the dollar amount and percentage change of such results as compared to the prior year. Net Change Year Ended December 31, 1999 to 1998 1998 to 1997 ----------------------- ------------ ------------ 1999 1998 1997 $ % $ % ---- ---- ---- ----- ------ ----- ----- (Dollar amounts in millions) Net Sales: Residential Building Products $ 637.8 $ 475.0 $ 381.8 $162.8 34.3% $ 93.2 24.4% Air Conditioning and Heating Products 540.6 465.2 419.4 75.4 16.2 45.8 10.9 Windows, Doors and Siding Products 738.4 536.8 189.0 201.6 37.6 347.8 184.0 Other 76.0 69.3 21.3 6.7 9.7 48.0 225.4 ------ -------- -------- ------ ------ 1,992.8 1,546.3 1,011.5 446.5 28.9 534.8 52.9 Businesses sold --- 192.0 122.6 (192.0) (100.0) 69.4 56.6 ------- -------- -------- ------ ------ $1,992.8 $1,738.3 $1,134.1 $254.5 14.6% $604.2 53.3% ======== ======== ======== ====== ====== Operating Earnings: Residential Building Products $94.7 $ 53.7 $ 40.3 $41.0 76.4% $13.4 33.3% Air Conditioning and Heating Products 67.0 55.7 41.3 11.3 20.3 14.4 34.9 Windows, Doors and Siding Products 37.2 31.5 9.0 5.7 18.1 22.5 250.0 Other (20.4) (14.2) (14.5) (6.2) (43.7) 0.3 2.1 ------ ------ ------- ----- ----- 178.5 126.7 76.1 51.8 40.9 50.6 66.5 Businesses sold --- 6.4 6.9 (6.4) (100.0) (0.5) (7.2) ------ ------ ------- ---- ----- $178.5 $133.1 $ 83.0 $45.4 34.1% $50.1 60.4% ====== ====== ======== ===== ===== 22 NORTEK, INC. AND SUBSIDIARIES The tables that follow set forth, for the three years ended December 31, 1999, (a) certain consolidated operating results, (b) the percentage change of such results as compared to the prior year, (c) the percentage which such results bear to net sales and (d) the change of such percentages as compared to the prior year: Percentage Change 1999 1998 Year Ended December 31, To to 1999 1998 1997 1998 1997 ------ ------ ------ ------- ------- (Dollar amounts in millions) Net sales $1,992.8 $1,738.3 $1,134.1 14.6% 53.3% Cost of products sold 1,433.1 1,275.3 825.8 (12.4) (54.4) Selling, general and administrative expense 360.7 315.5 219.4 (14.3) (43.8) Amortization of goodwill and intangible assets 20.5 14.4 5.9 (42.4) (144.1) Operating earnings 178.5 133.1 83.0 34.1 60.4 Gain on Businesses sold --- 4.0 --- (100.0) --- Interest expense (96.5) (86.3) (50.2) (11.8) (71.9) Investment income 8.0 10.5 9.9 (23.8) 6.1 Earnings from continuing operations before provision for income taxes 90.0 61.3 42.7 46.8 43.6 Provision for income taxes 40.7 27.3 16.3 (49.1) (67.5) Earnings from continuing operations before extraordinary loss 49.3 34.0 26.4 45.0 28.8 Earnings (loss) from discontinued operations --- 1.2 (5.2)(100.0) 123.1 Extraordinary loss from debt retirements --- (0.2) --- 100.0 --- Net earnings $49.3 $35.0 $21.2 40.9% 65.1% 23 NORTEK, INC. AND SUBSIDIARIES Percentage Change Percentage of Net Sales 1999 1998 Year Ended December 31, to to 1999 1998 1997 1998 1997 ------ ------ ------ ---- ---- Net sales 100.0% 100.0% 100.0% ---% ---% Cost of products sold 71.9 73.4 72.8 1.5 (0.6) Selling, general and administrative expense 18.1 18.1 19.4 --- 1.3 Amortization of goodwill and intangible assets 1.0 0.8 0.5 (0.2) (0.3) Operating earnings 9.0 7.7 7.3 1.3 0.4 Gain on Businesses sold --- 0.2 --- (0.2) 0.2 Interest expense (4.9) (5.0) (4.4) 0.1 (0.6) Investment income 0.4 0.6 0.9 (0.2) (0.3) Earnings from continuing operations before provision for income taxes 4.5 3.5 3.8 1.0 (0.3) Provision for income taxes 2.0 1.6 1.4 (0.4) (0.2) Earnings from continuing operations before extraordinary loss 2.5 1.9 2.4 0.6 (0.5) Earnings (loss) from discontinued operations --- 0.1 (0.5) (0.1) 0.6 Extraordinary loss from debt retirements --- --- --- --- --- Net earnings 2.5 2.0 1.9 0.5 0.1 24 NORTEK, INC. AND SUBSIDIARIES Year Ended December 31, 1999 as Compared to the Year Ended December 31, 1998 - ------------------------------------------------------------------------------ Net sales increased approximately $254,500,000 or approximately 14.6%(or increased approximately $257,400,000 or approximately 14.8% excluding the effect of changes in foreign exchange rates) as compared to 1998. Net sales increased in 1999, principally as a result of acquisitions and higher sales volume, partially offset by the effect of Businesses sold. Acquisitions contributed approximately $127,400,000 of the total increase in net sales of approximately $162,800,000 ($165,700,000 increase excluding the effect of changes in foreign exchange rates) in the Residential Building Products Segment in 1999. Increased domestic sales volume, partially offset by the effects of changes in foreign exchange rates accounted for the balance of the increase in this segment. Net sales in the Air Conditioning and Heating Products Segment increased approximately $75,400,000 or 16.2% in 1999. The increase in net sales in this segment is principally as a result of higher sales volume of products sold to customers serving the residential site built and commercial markets partially offset by lower sales of products to customers serving the manufactured housing market in this segment. In the second half of 1999, this segment began to feel the impact of a slowdown in the manufactured housing industry. It is anticipated that the weakness in the manufactured housing industry will continue into the year 2000 and will have an adverse effect on this segment's sales during the next several quarters. This segment's sales of air conditioning and heating products sold to manufactured housing customers should improve as the manufactured housing industry takes steps to reduce its retail inventories of manufactured homes. Approximately $12,100,000 of the increase in net sales in this segment in 1999 was from an acquisition. Net sales of the Windows, Doors and Siding Products Segment increased approximately $201,600,000 in 1999. The increase arose primarily from net sales of acquired companies which contributed approximately $215,900,000 in 1999. The increase in net sales in this segment was partially offset by the effect of lower sales volume of certain lower margin vinyl window products which were relocated to a lower cost manufacturing facility as this operation closely controlled its sales as it continues to implement cost control measures and improve operating systems. These overall net increases in net sales in the Company's three principal segments were partially offset by the effect of approximately $192,000,000 of net sales attributable to Businesses sold in 1998. As a result of the acquisitions in the second and third quarters of 1999 in the Windows, Doors and Siding Products Segment, the performance of this segment will be more seasonal than in prior years due to the effect of winter weather conditions normally experienced in the fourth and first quarters in the U.S. and Canada. The Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB No. 101), on December 3, 1999. This SAB provides additional guidance on the accounting for revenue recognition including both broad conceptual discussions as well as certain industry-specific guidance. The Company is in the process of accumulating the information necessary to quantify the potential impact, if any, of this new guidance. 25 NORTEK, INC. AND SUBSIDIARIES Cost of products sold as a percentage of net sales decreased from approximately 73.4% in 1998 to approximately 71.9% in 1999. Changes in the percentages were, in large part, as a result of acquisitions and Businesses sold in 1998. Excluding the effect of Businesses sold, cost of products sold as a percentage of net sales decreased from approximately 72.9% in 1998 to approximately 71.9% in 1999. The decrease in the percentage principally resulted from acquisitions in the Residential Building Products Segment partially offset by acquisitions in the Windows, Doors and Siding Products Segment (which, on a combined basis had a net lower level of cost of sales than the overall group of businesses owned prior to such acquisitions). To a lesser extent, the effect of higher sales levels in the Residential Building Products Segment without a proportionate increase in costs also contributed to the decrease in the percentage. These decreases in the percentages were partially offset by the effect of higher vinyl resin cost, due to higher oil prices, without a proportionate increase in sales prices, in the Windows, Doors and Siding Products Segment. In the year 2000, the rising cost of vinyl resin is also expected to adversely impact cost of sales percentages. This situation should be mitigated as price increases for this segment's vinyl products are implemented over the next several quarters. Had all year-end inventory values been stated on a FIFO basis, year-end inventory would have been approximately $2,252,000 higher in 1999, $3,640,000 higher in 1998 and $5,041,000 higher in 1997. Overall, changes in the cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors, including changes in the relative mix of products sold, the effect of changes in sales prices, material costs and changes in productivity levels. Selling, general and administrative expense as a percentage of net sales remained unchanged at approximately 18.1% in 1998 and 1999. Excluding the effect of Businesses sold, selling, general and administrative expense as a percentage of net sales increased slightly from approximately 18.0% in 1998 to approximately 18.1% in 1999. This increase in the percentage is principally as a result of acquisitions in the Residential Building Products Segment (which have a higher level of expense as a percentage of net sales then the overall group of businesses owned prior to such acquisitions) partially offset by an increase in net sales in the Air Conditioning and Heating Products Segment without a proportionate increase in expense, a reduction in the level of expense in the Windows, Doors and Siding Products Segment, including the effect of acquisitions (which, for the most part, had a lower level of expense as a percentage of net sales than the overall group of businesses owned prior to such acquisitions). Amortization of goodwill and intangible assets, as a percentage of net sales, increased from approximately .8% of net sales in 1998 to approximately 1.0% of net sales in 1999, principally as a result of acquisitions. 26 NORTEK, INC. AND SUBSIDIARIES Consolidated operating earnings increased approximately $45,400,000 from approximately $133,100,000 in 1998 to approximately $178,500,000 in 1999. Businesses acquired in 1999 contributed approximately $30,900,000 of the increase, of which approximately $18,500,000 was in the Residential Building Products Segment, $900,000 was in the Air Conditioning and Heating Products Segment and $11,500,000 was in the Windows, Doors and Siding Products Segment. The increase in operating earnings for 1999 includes approximately $14,000,000 of estimated synergies and cost reductions realized from the integration of NuTone into the Company's Residential Building Products Segment, net of approximately $3,400,000 of costs and expenses. Consolidated operating earnings have been reduced by depreciation and amortization expense (other than amortization of deferred debt expense and debt discount) of approximately $55,500,000 and $42,100,000 for 1999 and 1998, respectively. Businesses acquired contributed approximately $10,500,000 of the increase in depreciation and amortization expense in 1999, of which approximately $5,300,000 was in the Residential Building Products Segment, $300,000 was in the Air Conditioning and Heating Products Segment and $4,900,000 was in the Windows, Doors and Siding Products Segment. Depreciation and amortization expense relating to the operating results of Businesses sold in 1998 was approximately $1,700,000 for 1998. (See Note 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The increase in operating earnings was also due, in part, to increased sales volume without a proportionate increase in costs and expenses in the Residential Building Products Segment of approximately $22,600,000 excluding the contribution from acquisitions; and increased sales volume without a proportionate increase in costs and expenses in the Air Conditioning and Heating Products Segment of approximately $10,300,000 excluding the contribution from acquisitions. The increase in operating earnings in the Air Conditioning and Heating Products Segment arose from higher sales levels of commercial and site-built residential products, partially offset in the second half of 1999, by lower operating earnings of air conditioning and heating products sold to the manufactured housing market as compared to the prior year due to a slowdown in the manufactured housing industry as noted above. The slowdown in the manufactured housing industry is expected to adversely effect this segment's operating earnings during the next several quarters. It is anticipated that this segment's operating earnings will begin to improve from increased sales of air conditioning and heating products once the manufactured housing industry takes steps to reduce its retail inventories of manufactured homes. It is also expected, that over the next several quarters, the effect of this slowdown will continue to be somewhat offset by increased earnings from higher sales levels of site-built residential air conditioning products. Operating earnings in 1999 in the Windows, Doors and Siding Products Segment decreased approximately $5,800,000 excluding the contribution from acquisitions, principally as a result of higher vinyl resin costs and lower sales volume of certain vinyl windows as noted above. The overall increase in the Company's operating earnings was partially offset by the effect of approximately $6,400,000 of operating earnings of Businesses sold in 1998. The integration of 27 NORTEK, INC. AND SUBSIDIARIES the recently acquired Caradon Acquired Companies is taking longer than expected and resulted in a lower contribution to earnings in 1999 than anticipated. The Company anticipates lower earnings levels during the next several quarters in the Windows, Doors and Siding Products Segment due to the seasonality of this segment's 1999 acquisitions and as the effects of the integration of the Caradon Acquired Companies and the lower sales levels of certain vinyl windows, noted above, continue to be felt. The Company also expects future operating earnings in this segment to be adversely affected by higher vinyl resin costs until increases in sales prices to customers can be implemented. Operating earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries which manufacture built-in ventilation products and windows and doors, were approximately 7.4% and 6.5% of operating earnings (before corporate overhead) in 1999 and 1998, respectively. The increase in foreign operating earnings as a percentage of operating earnings in 1999 as compared to 1998 is principally a result of the increased operating earnings from foreign acquisitions. Sales and earnings derived from the international market are subject to the risks of, among other factors, currency fluctuations. Interest expense in 1999 increased approximately $10,200,000 or approximately 11.8% as compared to 1998, primarily as a result of the sale of the 8 7/8% Senior Notes due 2008 ("8 7/8% Notes") on July 31, 1998. This increase was partially offset by the paydown of approximately $27,700,000 of debt with a portion of the proceeds from the sale of businesses in 1998. Investment income decreased approximately $2,500,000 or approximately 23.8% in 1999 as compared 1998. The decrease in 1999 is principally due to lower average invested balances as a result of funds used for acquisitions and lower yields earned on short-term investments and marketable securities. The provision for income taxes was approximately $40,700,000 for 1999, as compared to $27,300,000 for 1998. The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), the effect of foreign income tax on foreign source income, changes in tax reserves and the effect of product development tax credits from foreign operations. (See Note 4 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 28 NORTEK, INC. AND SUBSIDIARIES Year Ended December 31, 1998 as Compared to the Year Ended December 31, 1997 - ---------------------------------------------------------------------------- Net sales increased approximately $604,200,000 or approximately 53.3%, as compared to 1997 (or increased approximately $610,400,000 or approximately 53.8% excluding the effect of changes in foreign exchange rates). Net sales increased in 1998 principally as a result of acquisitions. The acquisition of NuTone on July 31, 1998 contributed approximately $82,200,000 of the $93,200,000 increase ($99,400,000 increase excluding the effect of changes in foreign exchange rates) in net sales in the Residential Building Products Segment in 1998. The balance of the increase in net sales in this segment is as a result of higher sales levels of higher margin built-in ventilation products in North America, partially offset by lower sales levels of certain lower margin products. The increase in net sales in the Air Conditioning and Heating Products Segment of approximately $45,800,000 or 10.9%, is principally as a result of higher sales volume related to products sold to the residential and manufactured housing markets, partially offset by slightly lower sales of commercial HVAC products, in part, as a result of a seven week strike in 1998 at one of this segment's manufacturing facilities. The increase in net sales in the Windows, Doors and Siding Products Segment principally arose in connection with the August 26, 1997 acquisition of Ply Gem (a full twelve months of operating results in 1998 as compared to four months in 1997). The acquisition of Napco on October 9, 1998 contributed approximately $21,000,000 to this segment's increase in net sales in 1998. The net sales of Businesses sold increased approximately $69,400,000 principally as a result of certain non-strategic businesses, acquired in connection with the August 26, 1997 acquisition of Ply Gem, which were sold in 1998. Cost of products sold as a percentage of net sales increased from approximately 72.8% in 1997 to approximately 73.4% in 1998. Changes in the percentages were, in large part, affected by acquisitions and will be affected in the future by the effect of Businesses sold in 1998. The Ply Gem businesses have a higher level of cost of sales as a percentage of net sales than the overall group of businesses owned prior to the Ply Gem acquisition while NuTone's level of cost of sales as a percentage of net sales is lower. Excluding the effect of Businesses sold, cost of products sold as a percentage of net sales increased from approximately 72.4% in 1997 to approximately 72.9% in 1998. This increase in the percentage principally resulted from the acquisitions of Ply Gem and, to a lesser extent, Napco in the Windows, Doors and Siding Products Segment, partially offset by the acquisition of NuTone and the effect of higher sales levels in the Residential Building Products and Air Conditioning and Heating Product Segments without a proportionate increase in costs. Had all year-end inventory values been stated on a FIFO basis, year-end inventory would have been approximately $3,640,000 higher in 1998, approximately $5,041,000 higher in 1997 and approximately $6,015,000 higher in 1996. Overall, changes in the cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors including changes in the relative mix of products sold, the effect of changes in sales prices, the material cost of products sold and changes in productivity levels. 29 NORTEK, INC. AND SUBSIDIARIES Selling, general and administrative expense as a percentage of net sales decreased from approximately 19.4% in 1997 to approximately 18.1% in 1998. This decrease in the percentage was principally affected as a result of acquisitions and will be affected in the future by the effect of Businesses sold in 1998. Ply Gem and Napco have a lower level of selling, general and administrative expense as a percentage of net sales than the overall group of businesses owned prior to the acquisitions and NuTone has a higher level of expense as a percentage of net sales. Excluding the effect of Businesses sold, selling, general and administrative expense as a percentage of net sales decreased from approximately 19.5% in 1997 to approximately 18.0% in 1998. The Air Conditioning and Heating Products Segment, and to a lesser extent the Residential Building Products Segment, contributed to the decrease in the percentage as a result of the increases in sales noted above without a proportionate increase in expense. This was partially offset by increased corporate overhead, principally as a result of the acquisition of Ply Gem. Amortization of goodwill and intangible assets, as a percentage of net sales, increased from approximately .5% of net sales in 1997 to approximately .8% of net sales in 1998, principally as a result of the acquisitions of Ply Gem and NuTone. Consolidated operating earnings increased approximately $50,100,000 from approximately $83,000,000 in 1997 as compared to approximately $133,100,000 in 1998. Businesses acquired in 1998 contributed approximately $12,600,000 of the increase, of which approximately $2,300,000 was in the Windows, Doors and Siding Products Segment, and $10,300,000 was in the Residential Building Products Segment. Operating earnings increased substantially in 1998 in the Windows, Doors and Siding Products Segment, principally due to the effect of the August 26, 1997 acquisition of Ply Gem (a full twelve months of operating results in 1998 as compared to four months in 1997). Consolidated operating earnings have been reduced by depreciation and amortization expense of approximately $42,100,000 and approximately $26,700,000 for 1998 and 1997, respectively. Businesses acquired in 1998 contributed approximately $4,300,000 of the increase in depreciation and amortization expense in 1998, of which approximately $500,000 was in the Windows, Doors and Siding Products Segment and $3,800,000 was in the Residential Building Products Segment. Depreciation and amortization expense for the year ended December 31, 1998 related to the operating results of Businesses sold in 1998 was approximately $1,700,000. (See Note 10 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The increase in operating earnings was also due to increased sales volume without a proportionate increase in cost and expense in the Air Conditioning and Heating Products Segment (approximately $14,400,000 or 34.9%) and, to a lesser extent, the Residential Building Products Segment (approximately $3,100,000 excluding the contribution from NuTone), as noted above, partially offset by increased other expense principally as a result of increased corporate overhead as a result of the acquisition of Ply Gem. 30 NORTEK, INC. AND SUBSIDIARIES Operating earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries which manufacture built-in ventilating products, were approximately 6.5% and 9.0% of operating earnings (before corporate overhead) in 1998 and 1997, respectively. The decline in foreign operating earnings as a percentage of net sales is principally as a result of the increased domestic sales and operating earnings from the Ply Gem acquisition. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. The gain on Businesses sold before provision for income taxes in 1998 of approximately $4,000,000 arose in connection with the sale of M&S and MOM. Interest expense in 1998 increased approximately $36,100,000 or approximately 71.9% as compared to 1997, primarily as a result of the sale of the 9 1/4% Notes on March 17, 1997, the sale of the 9 1/8% Notes on August 26, 1997, indebtedness of Ply Gem existing at the date of acquisition and the sale of the 8 7/8% Notes on July 31, 1998. This increase was partially offset by the refinancing of certain outstanding indebtedness of the Company's subsidiaries in 1997. (See Notes 2 and 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Investment income in 1998 increased approximately $600,000 or approximately 6.1% as compared to 1997, principally due to higher average invested balances partially offset by slightly lower yields earned on short-term investments and marketable securities. The provision for income taxes was approximately $27,300,000 for 1998, as compared to approximately $16,300,000 for 1997. The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), changes in tax reserves, the effect of foreign income tax on foreign source income and the effect of product development tax credits from foreign operations. (See Note 4 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Earnings from discontinued operations were approximately $1,200,000 in 1998 as compared to a loss of approximately $5,200,000 in 1997. In the fourth quarter of 1997, the Company adopted a plan of disposition of the plumbing products business and on July 10, 1998, this business was sold. The following is a comparison of the operating results of discontinued operations for the two years ended December 31, 1998. (See Note 9 of the Notes to the Consolidated Financial Statements included elsewhere herein.) 31 NORTEK, INC. AND SUBSIDIARIES For the years ended December 31, 1998 1997 -------- -------- (Amounts in thousands) Loss before income taxes $(2,800) $(3,800) Allocated corporate interest expense (1,000) (1,900) ------- ------- (3,800) (5,700) Income tax benefit 5,000 2,100 ------- ------- 1,200 (3,600) Reserve for future operating expenses net of tax benefit of $900,000 --- (1,600) ------- ------- Earnings (loss) from discontinued operations $ 1,200 $(5,200) ======= ======= The income tax benefit in 1998 includes approximately $800,000 recorded as a result of the realization of a portion of the tax capital loss arising from the sale of the plumbing products business. Liquidity and Capital Resources - ------------------------------- The Company is highly leveraged and expects to continue to be highly leveraged for the foreseeable future. At December 31, 1999, the Company had consolidated debt of approximately $1,037,600,000 consisting of (i) $14,000,000 of short-term borrowings and current maturities of long-term debt, (ii) $128,300,000 of notes, mortgage notes and other indebtedness, (iii) $209,300,000 of the 8 7/8% Notes, (iv) $307,900,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes") (v) $174,200,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") and (vi) $203,900,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"). At December 31, 1999, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $115,100,000 as compared to approximately $209,600,000 at December 31, 1998 and the Company's debt to equity ratio was approximately 4.0:1 at December 31, 1999 as compared to 4.7:1 at December 31, 1998. The Company's ability to pay interest on or to refinance its indebtedness depends on the successful integration of the operations of recent acquisitions and the Company's future performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. There can be no assurance that the Company will generate sufficient cash flow from the operation of its subsidiaries or that future financings will be available on acceptable terms or in amounts sufficient to enable the Company to service or refinance its indebtedness, or to make necessary capital expenditures. 32 NORTEK, INC. AND SUBSIDIARIES The Company has evaluated and expects to continue to evaluate possible acquisition transactions and possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. The indentures and other agreements governing the Company and its subsidiaries' indebtedness (including the indentures for the 8 7/8% Notes, the 9 7/8% Notes, the 9 1/4% Notes and the 9 1/8% Notes and the credit agreement for the Ply Gem credit facility) contain restrictive financial and operating covenants including covenants that restrict the ability of the Company and its subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The Company expects to meet its cash flow requirements through fiscal 2000 from cash generated from operations, existing cash, cash equivalents and marketable securities, and financings, which may include securitization of accounts receivable and mortgage or capital lease financings. On March 8, 1999 the Company acquired Webco, a designer and manufacturer of custom air handling equipment. For the year ended October 31, 1998, Webco had net sales of approximately $13,900,000. On April 23, 1999, the Company acquired the Caradon Acquired Companies from Caradon America Inc. and Caradon Limited, which are wholly owned subsidiaries of Caradon plc, a United Kingdom company. The Caradon Acquired Companies manufacture and sell residential windows, entry doors and patio doors to both the new construction and replacement markets. For the year ended December 31, 1998, the Caradon Acquired Companies had combined net sales of approximately $169,700,000. On May 28, 1999, the Company acquired Multiplex, a manufacturer and designer of high-performance, multi-room video distribution equipment for home automation and home entertainment. Multiplex had net sales of approximately $10,000,000 for the year ended December 31, 1998. On September 9, 1999 the Company acquired Kroy, a manufacturer of vinyl fencing, railing profiles and vinyl decking systems for residential and light commercial applications. Kroy had net sales of approximately $26,000,000 during the twelve months ended June 30, 1999. On December 3, 1999 the Company acquired Xantech, a designer and manufacturer of residential infrared remote control systems for extending control of VCR, cable, satellite and stereo systems to multiple rooms throughout an entire household. Xantech had net sales of approximately $13,000,000 for the twelve months ended November 30, 1999. 33 NORTEK, INC. AND SUBSIDIARIES Acquisitions in 1999 were principally funded through the use of unrestricted cash, investments, the issuance of notes payable to sellers and the issuance of common stock. As the Company integrates its recent acquisitions into its businesses, it expects to achieve incremental synergies, cost savings and reductions during 2000, partially offset by certain costs and expenses. As of December 31, 1999, plans for eliminating certain activities have been finalized for all significant acquisitions with the exception of certain severence arrangements which the Company estimates will be approximately $1,000,000 and will be finalized in the first half of 2000. Acquisition integration liabilities and adjustments relate principally to additional employee terminations and other exit costs of certain products and the consolidation of certain functions and operations at the acquired businesses. The total future expenditures associated with exit costs related to the integration effort at December 31, 1999 are expected to be funded from the Company's operating cash flow. The integration of the acquisitions within the Windows, Doors and Siding Products Segment is taking longer than originally planned. If significant difficulty is encountered with the integration of acquisitions within the Windows, Doors and Siding Products Segment or acquisitions within other segments, or if synergies and cost savings are not realized, the results of operations, cash flow and financial condition of the Company likely will be adversely affected. There can be no assurance that the Company will be able to successfully manage and integrate recent acquisitions. (See Note 2 and 12 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Unrestricted cash and cash equivalents decreased from approximately $87,876,000 at December 31, 1998 to approximately $80,893,000 at December 31, 1999. Marketable securities available for sale decreased from approximately $121,757,000 at December 31, 1998 to approximately $34,219,000 at December 31, 1999. The Company's investment in marketable securities at December 31, 1999 consisted primarily of certificates of deposit, commercial paper and bank issued money market instruments. At December 31, 1999, approximately $26,917,000 (of which approximately $11,240,000 is included in current assets) of the Company's cash, investments and marketable securities were pledged as collateral for insurance, employee benefits and other requirements and are classified as restricted in the Company's accompanying consolidated balance sheet. Capital expenditures were approximately $42,000,000 in 1999 and are expected to range between $50,000,000 and $55,000,000 in 2000. The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock. The most recent of these programs was announced on May 20, 1999, and allows the Company to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of February 25, 2000, the Company has purchased approximately 377,300 shares of its Common and Special Common Stock under this program for approximately $10,800,000 and accounted for such share purchases as Treasury Stock. 34 NORTEK, INC. AND SUBSIDIARIES At February 25, 2000, approximately $87,700,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive Indenture. (See Note 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) The Company's working capital and current ratio decreased slightly from approximately $337,207,000 and 2.0:1, respectively, at December 31, 1998 to approximately $324,492,000 and 1.9:1, respectively, at December 31, 1999, principally as a result of payments related to acquisitions partially offset by working capital acquired from such acquisitions and net of the factors described below. Accounts receivable increased approximately $38,404,000 or approximately 18.7%, between December 31, 1998 and December 31, 1999, while net sales increased approximately $50,504,000 or approximately 11.5% in the fourth quarter of 1999 as compared to the fourth quarter of 1998. These increases are a result of the 1999 acquisitions, which contributed approximately $54,941,000 to net sales in the fourth quarter of 1999 and approximately $29,124,000 to accounts receivable in 1999. The rate of change in accounts receivable in certain periods may be different than the rate of change in sales in such periods principally due to the timing of net sales. Increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on December 31, 1999 as compared to December 31, 1998. The Company did not experience any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1999. Inventories increased approximately $49,971,000 or approximately 30.7%, between December 31, 1998 and December 31, 1999. Acquisitions contributed approximately $28,693,000 to the increase in inventory for 1999. A substantial portion of the balance of the increase in inventories is as a result of expanded distribution of HVAC residential site-built products by the Company's Air Conditioning and Heating Products Segment. Accounts payable increased approximately $29,671,000 or approximately 24.7%, between December 31, 1998 and December 31, 1999. Acquisitions contributed approximately $16,322,000 to the increase in accounts payable. A substantial portion of the balance of the increase in accounts payable occurred in the Company's Air Conditioning and Heating Products Segment as a result of increased distribution of residential site-built products. The Company expects further increases in working capital levels in the year 2000 as its distribution of HVAC residential site-built products by the Company's Air Conditioning and Heating Products Segment continues to expand. 35 NORTEK, INC. AND SUBSIDIARIES Unrestricted cash and cash equivalents decreased approximately $6,983,000 from December 31, 1998 to December 31, 1999, principallyas a result of the following: Condensed Consolidated Cash Flows(*) -------------- Operating Activities-- Cash flow from operations, net.............. $125,617,000 Increase in accounts receivable, net........ (7,899,000) Increase in inventories ..................... (21,434,000) Increase in prepaids and other current assets. (2,072,000) Increase in accounts payable ............... 20,760,000 Decrease in accrued expenses and taxes...... (12,399,000) Investing Activities--- Net cash paid for businesses acquired........ (125,788,000) Proceeds from the sale of marketable securities, net............................ 88,349,000 Capital expenditures......................... (42,013,000) Increase in restricted cash and investments.. (7,952,000) Financing Activities--- Payment of borrowings, net.................... (1,713,000) Purchase of Nortek Common and Special Common Stock .............................. (14,524,000) Other, net ................................... (5,915,000) ------------ $(6,983,000) ============ (*) Prepared from the Company's Consolidated Statement of Cash Flows for the year ended December 31, 1999. (See Nortek, Inc. and Subsidiaries Consolidated Financial Statements for 1999 included elsewhere herein.) The impact of changes in foreign currency exchange rates on cash was not material and has been included in other, net. The Company's debt-to-equity ratio decreased from approximately 4.7:1 at December 31, 1998 to 4.0:1 at December 31, 1999, primarily as a result of the increase in equity due to net earnings for 1999 and the issuance of Common Stock as partial consideration for an acquisition. This was partially offset by the effect of the purchase of Nortek Common and Special Common Stock, changes in currency translation and the net increase in borrowings. (See the Consolidated Statement of Stockholders' Investment included elsewhere herein.) 36 NORTEK, INC. AND SUBSIDIARIES As a result of changes in the U.S. Federal income tax regulations in 1999, the Company will utilize approximately $40,000,000 of net operating losses in its 1999 federal tax return, which resulted in approximately $14,000,000 lower than expected federal income tax payments for 1999. At December 31, 1999, the Company's wholly owned subsidiary, Ply Gem, had a net operating loss carry forward of approximately $21,300,000 that expires in 2011 and is subject to certain limitations imposed by the Internal Revenue Code. To the extent that the Company has consolidated federal taxable income beginning in the year 2000, the Company will be able to utilize this remaining net operating loss. Utilization of this net operating loss is limited to approximately $17,500,000 annually. Inflation, Trends and General Considerations - -------------------------------------------- The Company has evaluated and expects to continue to evaluate possible acquisition transactions and the possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity. However, increases in interest rates could have a negative impact on the level of housing construction and remodeling activity. The demand for the Company's products is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. The Company's lower sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. As a result of the recent acquisitions in the Windows, Doors and Siding Products Segment, the performance of this Segment will be more seasonal than in prior years due to the number of businesses that are affected by winter weather conditions. In addition, the demand for cash to fund the working capital of the Company's subsidiaries is greater from late in the first quarter until early in the fourth quarter. Market Risk - ----------- As discussed more specifically below, the Company is exposed to market risks related to changes in interest rates, foreign currencies and commodity pricing. The Company uses derivative financial instruments on a limited basis to hedge economic exposures. The Company does not enter into derivative financial instruments or other financial instruments for trading purposes. 37 NORTEK, INC. AND SUBSIDIARIES A. Interest Rate Risk The Company is exposed to market risk from changes in interest rates primarily through its investing and borrowing activities. In addition, the Company's ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates. The Company's investing strategy, to manage interest rate exposure, is to invest in short-term, highly liquid investments and marketable securities. Short-term investments primarily consist of money market accounts and corporate commercial paper with original maturities of 90 days or less. At December 31, 1999, the fair value of the Company's short-term investments approximated market value. Marketable securities primarily consist of certificates of deposit and bank issued money market instruments, all with original maturities of between 91 and 180 days. Restricted investments and marketable securities primarily consist of money market accounts, certificates of deposit and commercial paper with original maturities of 90 days or less. At December 31, 1999, the fair value of the Company's unrestricted and restricted investments and marketable securities approximated market value. The Company manages its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. In addition, as of December 31, 1999, the Company through its Ply Gem subsidiary hedged its exposure on a substantial portion of its variable rate debt by entering into an interest rate collar transaction to lock in the interest rate between a floor of 5.76% and a cap of 7%. At December 31, 1999, approximately 95% of the carrying values of the Company's long-term debt were either at fixed interest rates or covered by the interest rate collar agreement. See the table set forth in item D (Long-term Debt) below and Notes 1 and 5 of the Notes to the Consolidated Financial Statements included elsewhere herein for further disclosure of the terms of the Company's debt and interest rate collar agreement. B. Foreign Currency Risk The Company's results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of currencies in foreign markets primarily related to changes in the Italian Lira and the Canadian Dollar. In 1999, the net impact of foreign currency changes was not material to the Company's financial condition or results of operations. The Company manages its exposure to foreign currency exchange risk principally by trying to minimize the Company's net investment in foreign assets through the use of strategic short and long-term borrowings at the foreign subsidiary level. Consistent with this strategy, notes payable and other short-term obligations at December 31, 1999 consist primarily of short-term borrowings by certain of the Company's foreign subsidiaries. At December 31, 1999, the Company's net investment in foreign assets was approximately $83,300,000. An overall unfavorable change in foreign exchange rates of 10% would result in an approximate $7,600,000 reduction in 38 NORTEK, INC. AND SUBSIDIARIES equity as a result of the impact on the cumulative translation adjustment. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. At December 31, 1999, the Company did not have any outstanding foreign currency hedging contracts. C. Commodity Pricing Risk The Company is subject to significant market risk with respect to the pricing of its principal raw materials, which include, among others, steel, copper, packaging material, plastics, resins, glass, wood and aluminum. If prices of these raw materials were to increase dramatically, the Company may not be able to pass such increases on to its customers and, as a result, gross margins could decline significantly. The Company manages its exposure to commodity pricing risk by continuing to diversify its product mix, strategic buying programs and vendor partnering. The Company generally does not enter into derivative financial instruments to manage commodity-pricing exposure. At December 31, 1999, the Company did not have any outstanding commodity forward contracts. See the discussion elsewhere herein under Management's Discussion and Analysis of Financial Condition and Results of Operations, with respect to the increase in the cost of resin material over the second half of 1999. D. Long-term Debt The table that follows sets forth as of December 31, 1999, the Company's long-term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market values. Approximately 1.5% of the Company's total indebtedness is denominated in foreign currencies. The weighted average interest rates for variable rate debt are based on December 31, 1999 interest rates. In addition, the table that follows sets forth the outstanding notional amounts by year and floor and cap interest rates of the Company's interest rate collar agreement. 39 NORTEK, INC. AND SUBSIDIARIES Long-term Debt: Scheduled Maturity Average Interest Rate Fixed Variable Fixed Variable Year Ending Rate Rate Total Rate Rate Total - ----------- ---- ---- ----- ---- ---- ----- (Dollar amounts in millions) December 31, 2000 $ 3.0 $ 2.6 $ 5.6 6.51% 5.90% 6.23% 2001 6.9 2.9 9.8 8.07 6.25 7.53 2002 1.7 80.7 82.4 5.90 6.44 6.43 2003 1.5 2.2 3.7 5.78 7.84 6.98 2004 210.0 2.2 212.2 9.83 8.12 9.81 Thereafter (1) 709.4 10.6 720.0 9.00 5.91 8.95 ------ ------ -------- ---- ---- ---- Total Principal 932.5 101.2 1,033.7 9.16 6.43 8.89 Unamortized Debt Discount (4.5) --- (4.5) ------ ------ -------- Total Long-term Debt at December 31, 1999 $928.0 $101.2 $1,029.2 ====== ====== ======== Fair Market Value of Long-term Debt at December 31, 1999 $908.3 $101.2 $1,009.5 ====== ====== ======== 1) Senior notes with a total principal of $695,000,000 and a weighted average interest rate of 9.08% mature at various times from 2007 through 2008. (See Note 5 of the Notes to the Consolidated Financial Statements included elsewhere herein.) Interest Rate Collar: Notional Floor Cap Outstanding at Amount Rate Rate ---------- -------- ------- (Dollar amounts in millions) December 31, 2000 $45.0 5.76% (2) 7% (3) 2001 45.0 5.76% (2) 7% (3) Fair Market Value of the asset related to Interest Rate Collar at December 31, 1999 $.3 2) If the interest rate is below 5.76% then the Company will pay the difference. 3) If the interest rate is above 7% then the Company is entitled to receive the difference. 40 NORTEK, INC. AND SUBSIDIARIES Year 2000 Disclosure - -------------------- The following Year 2000 statements constitute a Year 2000 Readiness Disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. As of March 3, 2000, none of the Company's subsidiaries had experienced any significant Year 2000 related problems. There have been no instances where mission-critical and non-mission-critical systems have failed to perform correctly. However, the Year 2000 issue still poses several potential risks to the Company and its subsidiaries. A number of the Company's customers and suppliers (third parties) utilize computers and computer software to varying degrees in conjunction with the operation of their businesses. The customers and suppliers of those businesses may utilize computers as well. Should the Company's customers and suppliers, or the businesses on which they depend experience any Year 2000 related computer problems, such third parties' cash flow could be disrupted, adversely affecting their ability to pay the Company, if a customer, or, if a supplier, their ability to pay their suppliers for goods needed to supply the Company. Such disruptions could have adverse affects on the Company and its subsidiaries. The Company assessed its Year 2000 third party exposure through the use of questionnaires and personal interviews during 1999. As of March 3, 2000, the Company was not aware of any supply or credit problems related to the Year 2000 issue. Should Year 2000 related problems occur which cause any of the systems of certain third parties upon which the Company and its subsidiaries depends become inoperative, increased personnel costs could be incurred if additional staff is required to perform functions that the inoperative systems would have otherwise performed. As of March 3, 2000, the Company had not experienced any disruptions of third party services related to the Year 2000 issue. The Company's expenditures for remediation directly related to correcting Year 2000 issues were approximately $6,000,000, including businesses acquired in 1999. The total expenditures of approximately $6,000,000 consisted of approximately $2,000,000 of IT computer hardware equipment costs, approximately $3,000,000 of IT software and non-IT computer hardware expenditures and approximately $1,000,000 of other non-IT expenditures. All of the Company's Year 2000 compliance expenditures have been funded from the Company's operating cash flow. 41 NORTEK, INC. AND SUBSIDIARIES The Company's Year 2000 compliance budget does not include significant amounts for hardware replacement because the Company has historically employed a strategy to continually upgrade its computer systems. Consequently, the Company's Year 2000 compliance budget has not required the diversion of funds from or the postponement of the implementation of other planned IT projects. The Company believes it is not possible to estimate the potential lost revenue due to the remaining potential Year 2000 problems discussed above as the occurrence, extent and longevity of such potential problems cannot be predicted. As of March 3, 2000 the Company believes that it has not experienced any lost revenue related to the Year 2000 issue. Forward-Looking Statements - -------------------------- This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this discussion and throughout this document, words, such as "intends," "plans," "estimates," "believes," "anticipates" and "expects" or similar expressions are intended to identify forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties, over which the Company has no control, that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and operating results to differ include the availability and cost of certain raw materials, (including, among others, steel, copper, packaging materials, plastics, resins, glass, wood and aluminum) and purchased components, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, foreign currency fluctuations, consumer spending levels, exposure to foreign economies, the rate of sales growth, price, and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this document, as well as the Company's periodic reports on Forms 10-K, 10-Q, 10-Q/A and 8-K, filed with the Securities and Exchange Commission ("SEC"). 42 NORTEK, INC. AND SUBSIDIARIES ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and qualitative disclosure about market risk required by this Item 7A is set forth in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in item 14(a) included elsewhere herein. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Election of Directors in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. See also Part I, Item 1, Business-General Considerations-Executive Officers of the Registrant. ITEM 11. EXECUTIVE COMPENSATION See Executive Compensation in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Security Ownership of Certain Beneficial Owners and Management in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Election of Directors in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Stockholders, incorporated herein by reference. 43 NORTEK, INC. AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules ----------------------------------- The following documents are filed as part of this report: 1. Financial Statements: Page No. Consolidated Statement of Operations for the three years ended December 31, 1999 46 Consolidated Balance Sheet as of December 31, 1999 and 1998 47 Consolidated Statement of Cash Flows for the three years ended December 31, 1999 49 Consolidated Statement of Stockholders' Investment for the three years ended December 31, 1999 51 Notes to Consolidated Financial Statements 54 Report of Independent Public Accountants 90 2. Financial Statement Schedules: Schedule I Condensed Financial Information of Registrant 91 Schedule II Valuation and Qualifying Accounts 92 3. The exhibits are listed in the Exhibit Index, which is incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. 44 NORTEK, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 9, 2000. NORTEK, INC. /s/ Richard L. Bready ------------------------- Richard L. Bready Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, as of March 9, 2000. /s/ Richard L. Bready /s/ J. Peter Lyons - ------------------------ ---------------------- Richard L. Bready, Chairman J. Peter Lyons, of the Board and President Director (principal executive officer) /s/ Richard J. Harris /s/ William I. Kelly - ------------------------ ---------------------- Richard J. Harris, Vice President William I. Kelly, and Treasurer (principal financial Director officer) and Director /s/ Almon C. Hall /s/ Phillip L. Cohen - ------------------------ ---------------------- Almon C. Hall, Vice President Phillip L. Cohen, and Controller (principal Director accounting officer) 45 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 1999 1998 1997 ------ ------ ------ (In thousands except per share amounts) Net Sales $1,992,820 $1,738,343 $1,134,129 ---------- ---------- ---------- Costs and Expenses: Cost of products sold 1,433,129 1,275,350 825,805 Selling, general and administrative expense 360,674 315,449 219,376 Amortization of goodwill and intangible assets 20,499 14,416 5,967 --------- ---------- ---------- 1,814,302 1,605,215 1,051,148 --------- ---------- ---------- Operating earnings 178,518 133,128 82,981 Gain on Businesses sold --- 4,000 --- Interest expense (96,490) (86,298) (50,210) Investment income 7,972 10,470 9,929 --------- ---------- ---------- Earnings from continuing operations before provision for income taxes 90,000 61,300 42,700 Provision for income taxes 40,700 27,300 16,300 --------- ---------- ---------- Earnings from continuing operations before extraordinary loss 49,300 34,000 26,400 Earnings (loss) from discontinued operations --- 1,200 (5,200) Extraordinary loss from debt retirements --- (200) --- --------- ------ --------- Net Earnings $ 49,300 $ 35,000 $ 21,200 ========= ========== ========== Earnings (loss) Per Share: Earnings from continuing operations: Basic $4.19 $3.11 $2.75 ===== ===== ===== Diluted $4.11 $3.06 $2.68 ===== ===== ===== Earnings (loss) from discontinued operations: Basic $ --- $ .11 $(.54) ===== ===== ===== Diluted $ --- $ .11 $(.53) ===== ===== ===== Extraordinary loss from debt retirements: Basic $ --- $(.02) $ --- ===== ===== ===== Diluted $ --- $(.02) $ --- ===== ===== ===== Net Earnings: Basic $4.19 $3.20 $2.21 ===== ===== ===== Diluted $4.11 $3.15 $2.15 ===== ===== ===== Weighted Average Number of Shares: Basic 11,763 10,923 9,605 ====== ====== ===== Diluted 11,982 11,113 9,855 ====== ====== =====
The accompanying notes are an integral part of these consolidated financial statements. 46 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, 1999 1998 ------ ------ (Amounts in thousands) ASSETS Current Assets: Unrestricted Cash and cash equivalents $ 80,893 $ 87,876 Marketable securities available for sale 34,219 121,757 Restricted Cash, investments and marketable securities at cost, which approximates market 11,240 13,818 Accounts receivable, less allowances of $13,019,000 and $10,657,000 243,763 205,359 Inventories Raw materials 89,581 69,247 Work in process 20,844 13,010 Finished goods 102,253 80,450 ---------- ---------- 212,678 162,707 Prepaid expenses 11,864 10,938 Other current assets 16,787 15,513 Prepaid income taxes 66,824 54,163 ---------- ---------- Total current assets 678,268 672,131 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST: Land 16,270 12,628 Buildings and improvements 127,736 102,455 Machinery and equipment 348,445 294,551 ---------- ---------- 492,451 409,634 Less accumulated depreciation 163,834 130,010 ---------- ---------- Total property and equipment, net 328,617 279,624 ---------- ---------- OTHER ASSETS: Goodwill, less accumulated amortization of $56,942,000 and $41,204,000 589,532 598,823 Intangible assets, less accumulated amorti- zation of $15,956,000 and $11,235,000 133,040 73,441 Deferred debt expense 22,068 24,845 Restricted investments and marketable securities 15,677 --- Other 42,482 41,129 ---------- ---------- 802,799 738,238 ---------- ---------- $1,809,684 $1,689,993 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 47 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATION BALANCE SHEET
December 31, 1999 1998 ------- ------- (Amounts in thousands) LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Notes payable and other short-term obligations 8,476 $ 10,962 Current maturities of long-term debt 5,564 6,776 Accounts payable 149,772 120,101 Accrued expenses and taxes, net 189,964 197,085 ---------- --------- Total current liabilities 353,776 334,924 ---------- --------- Other Liabilities: Deferred income taxes 73,499 26,040 Other 98,976 104,306 ---------- --------- 172,475 130,346 ---------- --------- NOTES, MORTGAGE NOTES AND OBLIGATIONS PAYABLE, LESS CURRENT MATURITIES 1,023,616 1,007,113 ---------- --------- Commitments and Contingencies (Note 8) STOCKHOLDERS' INVESTMENT: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares; 18,738,292 and 18,427,595 shares issued 18,738 18,428 Special common stock, $1 par value; authorized 5,000,000 shares; 840,436 and 854,935 shares issued 841 855 Additional paid-in capital 208,755 201,626 Retained earnings 143,266 93,966 Accumulated other comprehensive loss (11,822) (11,596) Less --treasury common stock at cost, 7,793,217 and 7,290,335 shares (97,894) (83,711) --treasury special common stock at cost, 290,054 and 286,009 shares (2,067) (1,958) Total stockholders' investment 259,817 217,610 ---------- ---------- $1,809,684 $1,689,993 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 48 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1999 1998 1997 ------ ------ ------ (Amounts in thousands) Cash Flows from operating activities: Net earnings from continuing operations $49,300 $34,000 $26,400 Earnings (loss) from discontinued operations --- 1,200 (5,200) Extraordinary loss from debt retirements --- (200) --- ------- ------- ------- Net earnings 49,300 35,000 21,200 ------- ------- ------- Adjustments to reconcile net earnings to cash: Depreciation and amortization expense 55,532 42,084 26,696 Non-cash interest expense, net 3,685 3,237 1,711 Gain on sale of Businesses sold --- (4,000) --- Loss on discontinued operations --- 3,800 2,500 Loss on debt retirement --- 300 --- Net gain on investments and marketable securities --- --- (200) Deferred federal income tax provision 17,100 15,100 4,000 Deferred federal income tax benefit on discontinued operations --- (3,200) (1,000) Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (7,899) (4,554) 10,259 Inventories (21,434) (979) 6,524 Prepaids and other current assets (2,072) 1,581 5,699 Net assets of discontinued operations --- (7,426) 4,934 Accounts payable 20,760 12,532 (16,359) Accrued expenses and taxes (12,399) 10,084 23,468 Long-term assets, liabilities and other, net (2,031) (2,374) (4,317) -------- ------- ------- Total adjustments to net earnings 51,242 66,185 63,915 -------- ------- ------- Net cash provided by operating activities 100,542 101,185 85,115 -------- -------- ------- Cash Flows from investing activities: Capital expenditures (42,013) (40,863) (22,464) Net cash paid for businesses acquired (125,788) (324,702) (407,419) Net cash received from Businesses sold or discontinued --- 111,738 --- Purchase of investments and marketable securities (89,741) (179,582) (283,918) Proceeds from the sale of investments and marketable securities 178,090 95,143 298,158 Change in restricted cash and investments (7,952) (7,463) (674) Other, net (4,368) (5,622) (7,064) ------- ------ ------ Net cash used in investing activities (91,772) (351,351) (423,381) ------- -------- --------
49 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the Years Ended December 31, 1999 1998 1997 ------ ------ ------ (Amounts in thousands) Cash Flows from financing activities: Sale of Notes, net --- 203,492 466,214 Sale of Nortek Common Stock --- 64,190 --- Payment of borrowings and purchase of Notes, net (1,713) (49,199) (33,354) Purchase of Nortek Common and Special Common Stock (14,524) (7,668) (10,177) Other, net 484 1,385 383 ------- ------- ------- Net cash (used in) provided by financing activities (15,753) 212,200 423,066 -------- ------- ------- Net (decrease) increase in unrestricted cash and cash equivalents (6,983) (37,966) 84,800 Unrestricted cash and cash equivalents at the beginning of the year 87,876 125,842 41,042 ------- ------- ------ Unrestricted cash and cash equivalents at the end of the year $80,893 $87,876 $125,842 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 50 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHOCKHOLDERS' 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): Currency translation adjustment --- --- --- --- --- (3,815) (3,815) Minimum pension liability --- --- --- --- --- 919 919 Unrealized appreciation in the value of marketable securities --- --- --- --- --- 781 781 ------- Comprehensive income $19,085 ======= 22,690 shares of special common stock converted into 22,690 shares of common stock 23 (23) --- --- --- --- 62,519 shares of common stock and 5,808 shares of special common stock issued upon exercise of stock options 62 6 317 --- --- --- 441,246 shares of treasury stock acquired --- --- --- --- (10,177) --- ------- ----- ------- ------- -------- ------- Balance, December 31, 1997 $16,051 $ 767 $135,345 $58,966 $(77,714) $(5,327) ======= ===== ======== ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 51 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHOCKHOLDERS' 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): Currency translation adjustment --- --- --- --- --- (1,436) (1,436) Minimum pension liabil- ity net of $2,914 tax benefit --- --- --- --- --- (4,898) (4,898) Unrealized appreciation in the value of marketable securities --- --- --- --- --- 65 65 ------- Comprehensive income $28,731 ======= Sale of 2,182,500 shares of common stock 2,183 --- 62,007 --- --- --- 13,343 shares of special common stock converted into 13,343 shares of common stock 13 (13) --- --- --- --- 180,958 shares of common stock and 100,991 shares of special common stock issued upon exercise of stock options 181 101 4,274 --- --- --- 258,543 shares of treasury stock aquired --- --- --- --- (7,955) --- ------- ----- -------- -------- --------- ---------- Balance, December 31, 1998 $18,428 $ 855 $201,626 $93,966 $(85,669) $(11,596) ======= ===== ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 52 NORTEK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHOCKHOLDERS' INVESTMENT FOR THE YEAR ENDED DECEMBER 31, 1999 (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, 1998 $18,428 $855 $201,626 $93,966 $(85,669) $(11,596) $ --- Net earnings --- --- --- 49,300 --- --- 49,300 Other comprehensive income (loss): Currency translation adjustment --- --- --- --- --- (1,891) (1,891) Minimum pension liabil- ity net of $976 tax provision --- --- --- --- --- 1,495 1,495 Unrealized appreciation in the value of marketable securities --- --- --- --- --- 170 170 ------- Comprehensive income $49,074 ======= 14,499 shares of special common stock converted into 14,499 shares of common stock 14 (14) --- --- --- --- 61,198 shares of common stock issued upon exer- cise of stock options 61 --- 1,049 --- --- --- 506,927 shares of treasury stock acquired --- --- --- --- (14,292) --- 235,000 shares of common stock issued as partial consideration for an acquisition 235 --- 6,080 --- --- --- ------- ----- -------- ------- -------- -------- Balance, December 31, 1999 $18,738 $841 $208,755 $143,266 $(99,961) $(11,822) ======= ===== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 53 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company is a diversified manufacturer of residential and commercial building products, operating within three principal segments: the Residential Building Products Segment; the Air Conditioning and Heating Products Segment; and the Windows, Doors and Siding Products Segment. Through these principal segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. Principles of Consolidation The consolidated financial statements include the accounts of Nortek, Inc. and all of its significant wholly-owned subsidiaries (the "Company" or "Nortek") after elimination of intercompany accounts and transactions. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the presentation at December 31, 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods. Actual results could vary from the amounts derived from such estimates and assumptions. Cash, Investments and Marketable Securities Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less which are readily convertible into cash. The Company has classified as restricted in the accompanying consolidated balance sheet certain investments and marketable securities that are not fully available for use in its operations. At December 31, 1999, approximately $26,917,000 (of which $11,240,000 is included in current assets) of cash, investments and marketable securities have been pledged as collateral for insurance, employee benefits and other requirements. 54 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents-- The carrying amount approximates fair value because of the short maturity of those instruments. Investments and Marketable Securities-- The fair value of investments and marketable securities are based on quoted market prices. At December 31, 1999, the fair value of investments and marketable securities approximated the amount on the Company's consolidated balance sheet. Long-Term Debt-- At December 31, 1999, the fair value of long-term indebtedness was approximately $19,700,000 lower than the amount on the Company's consolidated balance sheet, before original issue discount, based on market quotations (see Note 5). Inventories Inventories in the accompanying consolidated balance sheet are valued at the lower of cost or market. At December 31, 1999 and 1998, approximately $111,349,000 and $83,286,000 of total inventories, respectively, were valued on the last-in, first-out method (LIFO). Under the first-in, first-out method (FIFO) of accounting, such inventories would have been approximately $2,252,000 and $3,640,000 greater at December 31, 1999 and 1998, respectively. All other inventories were valued under the FIFO method. Sales Recognition The Company recognizes sales upon the shipment of its products net of applicable provisions for discounts and allowances. The Company also provides for its estimate of warranty and bad debts at the time of sale. The Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements on December 3, 1999. This SAB provides additional guidance on the accounting for revenue recognition including both broad conceptual discussions as well as certain industry-specific guidance. The Company is in the process of accumulating the information necessary to quantify the potential impact of this new guidance, if any. 55 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Translation The financial statements of subsidiaries outside the United States are generally measured using the local currency as the functional currency. The Company translates the assets and liabilities of its foreign subsidiaries at the exchange rates in effect at year-end. Net sales and expenses are translated using average exchange rates in effect during the year. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive loss included in stockholders' investment in the accompanying consolidated balance sheet. Transaction gains or losses are recorded in selling, general and administrative expense and have not been material during any of the years ending December 31, 1999, 1998 and 1997. Depreciation and Amortization Depreciation and amortization of property and equipment are provided on a straight-line basis over the estimated useful lives, which are generally as follows: Buildings and improvements 10-35 years Machinery and equipment, including leases 3-15 years Leasehold improvements term of lease Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized. Intangible Assets and Goodwill Intangible assets consist principally of patents, trademarks, copyrights and non-compete agreements and are amortized on a straight-line method over a weighted average estimated useful life of 22 years. Amortization of intangible assets charged to operations amounted to approximately $4,906,000, $2,026,000 and $648,000 for 1999, 1998 and 1997, respectively. The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. Goodwill is being amortized on a straight-line method over 40 years. Amortization of goodwill charged to operations amounted to approximately $15,593,000, $12,390,000 and $5,319,000 for 1999, 1998 and 1997, respectively. At each balance sheet date, in accordance with SFAS No. 121, "Accounting for Long Lived Assets and for Long 56 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Lived Assets to be Disposed of," the Company evaluates the realizability of "Long Lived Assets" which primarily consists of property, plant and equipment, intangible assets and goodwill based on expectations of non-discounted future cash flows for each subsidiary having a material amount of Long Lived Assets. If the sum of the expected non-discounted future cash flows is less than the carrying amount of all assets including Long Lived Assets, the Company would recognize an impairment loss. Based on its most recent analysis, the Company believes that no material impairment of Long Lived Assets exists at December 31, 1999. Earnings Per Share Basic earnings per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each year. Special Common Stock is treated as the equivalent of Common Stock in determining earnings per share results. Diluted earnings per share amounts have been computed using the weighted average number of common and common equivalent shares and the dilutive potential common and special common shares outstanding during each year. A reconciliation between basic and diluted earnings per share is as follows: For the years ended December 31, 1999 1998 1997 ------- ------- ------- (In thousands except per share amounts) Earnings from continuing $49,300 $34,000 $26,400 operations Basic EPS: Basic common shares 11,763 10,923 9,605 ====== ====== ===== Basic EPS $4.19 $3.11 $2.75 ===== ===== ===== Diluted EPS: Basic common shares 11,763 10,923 9,605 Plus: Impact of stock options (Note 6) 219 190 250 ------ ------ ----- Diluted common shares 11,982 11,113 9,855 ====== ====== ===== Diluted EPS $4.11 $3.06 $2.68 ====== ====== ===== 57 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Comprehensive Income (Loss) In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which requires the display of comprehensive income (loss) and its components in the financial statements. Comprehensive income (loss) includes net earnings and unrealized gains and losses from currency translation, marketable securities available for sale and minimum pension liability adjustments net of tax benefit. The components of the Company's comprehensive income (loss) and the effect on earnings, for the three years ended December 31, 1999, are detailed in the Company's accompanying Consolidated Statement of Stockholders' Investment. The balances of each classification within accumulated other comprehensive loss as of December 31, 1999, 1998 and 1997 are as follows:
Total Unrealized Minimum Accumulated Foreign Gains Pension Other Currency (Losses) on Liability Comprehensive Translation Securities Adjustment Loss ----------- ---------- ------------ ------------- (Amounts in thousands) Balance December 31, 1997 $(5,093) $(110) $ (124) $ (5,327) Current period change (1,436) 65 (4,898) (6,269) ------- ----- ------- -------- Balance December 31, 1998 (6,529) (45) (5,022) (11,596) Current period change (1,891) 170 1,495 (226) ------- ----- ------- -------- Balance December 31, 1999 $(8,420) $ 125 $(3,527) $(11,822) ======= ===== ======= ========
Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No. 133 - Amendment of FAS No. 133" (combined "SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. 58 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1999 and thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company is in the process of quantifying the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of or method of adoption of SFAS 133. 2. ACQUISITIONS AND BUSINESSES SOLD Acquisitions are accounted for as purchases and, accordingly, have been included in the Company's consolidated results of operations since the acquisition date. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisitions is obtained. On March 8, 1999, the Company acquired Webco, Inc. ("Webco"), a designer and manufacturer of custom air handling equipment for industrial, institutional and commercial customers. For the fiscal year ended October 31, 1998, Webco had net sales of approximately $13,900,000. On April 23, 1999, the Company completed the acquisition of three businesses from Caradon plc of the United Kingdom: Peachtree Doors and Windows, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired Companies"). Peachtree Doors and Windows is a national supplier of residential windows, entry doors and patio doors that target custom and high-end home markets. Thermal-Gard manufactures replacement windows, patio doors and sunrooms. CWD Windows and Doors is a provider of complete window and door systems for new homes in Western Canada. For the year ended December 31, 1998, the Caradon Acquired Companies had combined net sales of approximately $169,700,000. On May 28, 1999, the Company acquired Multiplex Technologies, Inc. ("Multiplex"), a manufacturer and designer of high-performance, multi-room video distribution equipment for home automation and home entertainment. Multiplex had net sales of approximately $10,000,000 for the year ended December 31, 1998. 59 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On September 9, 1999 the Company acquired Kroy Building Products, Inc., ("Kroy") a manufacturer of vinyl fencing, railing profiles and vinyl decking systems for residential and light commercial applications. Kroy had net sales of approximately $26,000,000 for the fiscal year ended June 30, 1999. On December 3, 1999, the Company acquired Xantech Corporation ("Xantech"), a designer and manufacturer of residential infrared remote control systems for extending control of VCR, cable, satellite and stereo systems to multiple rooms throughout an entire household. Xantech had net sales of approximately $13,000,000 for the fiscal year ended November 30, 1999. The 1999 acquisitions were funded through the use of unrestricted cash, cash equivalents, marketable securities, the issuance of notes payable to sellers and the issuance of 235,000 shares of Nortek Common Stock (see Note 6). On October 9, 1998, the Company acquired Napco, Inc. and an affiliate ("Napco"), for approximately $80,800,000 in cash and the assumption of approximately $10,200,000 of debt On July 31, 1998, the Company, through a wholly-owned subsidiary, purchased all of the issued and outstanding capital stock of NuTone, Inc. ("NuTone"), a wholly-owned subsidiary of Williams plc ("Williams") for an aggregate purchase price of approximately $242,500,000 in cash plus approximately $5,500,000 in expenses and fees. In connection with the acquisition, the Company assumed NuTone's operating liabilities (other than intercompany borrowings), including certain liabilities of NuTone concerning post retirement and other benefit obligations. The purchase price was funded through the use of the net proceeds from the sale of $210,000,000 principal amount of 8 7/8% Senior Notes due August 1, 2008 (the "8 7/8% Notes") at a slight discount, which occurred on July 31, 1998, together with approximately $44,800,000 of the cash proceeds received from the Common Stock Offering (See Notes 5 and 6). On August 26, 1997, the Company acquired Ply Gem Industries, Inc. ("Ply Gem") in a tender offer for a cash price of $19.50 per outstanding share of common stock. The aggregate purchase price of approximately $407,400,000 consisted of $322,700,000 of cash paid to purchase the common stock and to settle stock options of Ply Gem, $50,500,000 of cash paid to refinance existing indebtedness of Ply Gem (including the repurchase of $45,000,000 of accounts receivable under Ply Gem's securitization program), $23,500,000 of cash paid to certain officers of Ply Gem in connection with termination agreements and $10,700,000 of cash paid for expenses of the acquisition. Prior to accepting, for payment, the tendered shares of Ply Gem on August 26, 1997, the Company sold $310,000,000 principal amount of 9 1/8% Senior Notes due September, 2007 (the "9 1/8% Notes") 60 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) at a slight discount (see Note 5). The Company used a portion of these net proceeds, together with available cash, to purchase the shares of Ply Gem, fund an approximate $45,000,000 payment to terminate Ply Gem's existing accounts receivable securitization program and pay certain fees and expenses. The Company accounted for Ply Gem's subsidiary, Studley Products, Inc. ("Studley"), a vacuum bag manufacturer, as an operation held for sale since the date of the Ply Gem acquisition. Studley's net sales and operating losses excluded from the Company's consolidated results of operations from the acquisition date to December 31, 1997 and for the period from January 1, 1998 to the date of sale, May 8, 1998, were approximately $9,400,000 and $2,900,000, respectively, and $7,300,000 and $1,600,000, respectively. Studley's operating losses from the date of acquisition through the date of sale have been excluded from the consolidated continuing operations of the Company and include approximately $100,000 of allocated interest expense. These losses have been funded by the Company and have been accounted for as an adjustment to the net realizable value of Studley. The ultimate disposition of Studley resulted in a decrease in the Company's goodwill of approximately $1,000,000. Since the acquisition date, the Company has realized, and expects to continue to realize, cost savings as a result of the Ply Gem acquisition. These savings result from several actions, including: (i) the elimination of expenses associated with Ply Gem's New York headquarters; (ii) the consolidation into Nortek of certain of Ply Gem's corporate functions such as accounting, legal and risk management; and (iii) the identification and rationalization of under-performing product lines. Pro Forma earnings (see below) do not include estimated cost savings and operating efficiencies for the period from January 1, 1997 to the date of acquisition. The actual cost savings achieved since the acquisition of Ply Gem are reflected in the Company's historical consolidated operating results for the period from the acquisition date to December 31, 1997 and for the years ended December 31, 1998 and 1999. At the date of the NuTone acquisition, the Company achieved cost reductions directly attributable to the acquisition from the elimination of fees and charges paid by NuTone to Williams and related entities. The unaudited Pro Forma operating earnings have been increased for the years ended December 31, 1998 and 1997 by approximately $354,000 and $1,746,000, respectively. Subsequent to the NuTone acquisition, the Company has realized and expects to realize additional cost reductions ("NuTone Cost Reductions") as a result of integrating NuTone 61 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) into the Company's operations. Pro Forma earnings have not been increased for the NuTone Cost Reductions for the periods presented, except for NuTone Cost Reductions actually achieved since the date of acquisition. The Company's operating earnings for the year ended December 31, 1999, reflect approximately $14,000,000 (unaudited) of net cost savings related to NuTone Cost Reductions which are net of approximately $3,400,000 (unaudited) of related costs and expenses. The Company expects to realize future incremental net NuTone Cost Reductions in excess of 1999 levels of approximately $6,000,000 to $9,000,000 (unaudited), annually. Future NuTone Cost Reductions are estimates and actual savings achieved could differ materially (see Note 12). The following presents the approximate unaudited Pro Forma net sales, operating earnings, depreciation and amortization expense (other than amortization of deferred debt expense and debt discount), earnings from continuing operations and diluted earnings per share of the Company for all periods presented and gives pro forma effect to the acquisitions of NuTone and Ply Gem, the sale of the 8 7/8% Notes, the Common Stock Offering, the sale of the 9 1/8% Notes, the extension of credit under the Ply Gem credit facility to refinance certain existing indebtedness and the termination of Ply Gem's accounts receivable securitization program, the sale of 9 1/4% Senior Notes due 2007 (the "9 1/4% Notes"), the refinancing of certain subsidiary indebtedness, and reflects the estimated cost reductions directly attributable to the NuTone acquisition as described above as if such transactions and adjustments had occurred on January 1, 1997. The Pro Forma results below include the actual results of Ply Gem and NuTone since August 26, 1997 and July 31, 1998, respectively, in accordance with the purchase method of accounting for an acquisition. The following Pro Forma results do not give pro forma effect to the dispositions of businesses that occurred in 1998, the acquisition of Napco which occurred on October 9, 1998 or acquisitions in 1999. For the Years Ended December 31, ---------------------------------- 1998 1997 ----------- ------------ (In thousands except per share amounts) (Unaudited) Pro Forma Net sales.................................. $1,849,000 $1,849,100 Depreciation and amortization expense..... 47,400 47,000 Operating earnings......................... 142,500 104,500 Earnings from continuing operations....... 31,400 5,000 Diluted earnings per share from continuing operations.................... $ 2.63 $ .42 62 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In computing the pro forma earnings, earnings have been reduced by the net interest income on the aggregate cash portion of the purchase price of the acquisitions at the historical rate earned by the Company and interest expense on indebtedness incurred in connection with the acquisitions, and the refinancing and repayment of certain indebtedness of Ply Gem. Earnings have been reduced by amortization of goodwill and intangible assets and reflect net adjustments to depreciation expense as a result of an increase in the estimated fair market value of property and equipment and changes in depreciable lives. Interest expense on the subsidiary indebtedness refinanced with funds from the 9 1/4% Notes was excluded at an average interest rate consistent with the indebtedness outstanding which was refinanced, net of the tax effect. Interest expense was included on the 9 1/4% Notes, the 9 1/8 % Notes, and the 8 7/8 % Notes at the applicable coupon rate plus amortization of deferred debt expense and debt discount, net of tax effect. The pro forma information presented does not purport to be indicative of the results which would have been reported if these transactions had occurred on January 1, 1997, or which may be reported in the future. On December 30, 1998, the Company sold its M&S Systems LP ("M&S") subsidiary and Moore-O-Matic, Inc. ("MOM") for approximately $27,500,000 in cash and recorded a pre-tax gain of approximately $4,000,000 ($.12 per share, net of tax). For the years ended December 31, 1998 and 1997, combined net sales, operating earnings and earnings from continuing operations before provision for income taxes of M&S and MOM were approximately $42,100,000, $3,600,000 and $3,600,000, and $37,300,000, $3,400,000 and $3,400,000, respectively. During 1998, the Company made several dispositions of certain non-strategic assets acquired in connection with the 1997 acquisition of Ply Gem. As discussed above, on May 8, 1998, the Company sold Studley. On May 22, 1998, the Company sold Sagebrush Sales, Inc. ("Sagebrush") for approximately $9,100,000 in cash; on July 2, 1998, the Company sold Goldenberg Group, Inc. for approximately $11,100,000 including approximately $2,000,000 in notes; on July 31, 1998, the Company sold another Ply Gem business, Ply Gem Manufacturing; and on December 10, 1998, the Company sold Allied Plywood Corporation ("Allied") for approximately $16,500,000 in cash and approximately $7,000,000 in notes. The operating results of Sagebrush, Goldenberg, Ply Gem Manufacturing and Allied, are included in the Company's 1997 and 1998 consolidated results from the date of the Ply Gem acquisition, August 26, 1997, to the date of sale. For the full year ended December 31, 1997, the combined net sales, operating earnings and 63 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) earnings before provision for income taxes of these dispositions were approximately $221,600,000, $3,800,000 and $3,800,000, respectively. Combined net sales, operating earnings and earnings before provision for income taxes of these dispositions were approximately $144,200,000, $2,200,000 and $2,200,000, respectively, for the period from January 1, 1998 to the date of sale. The disposition of these four businesses did not result in any significant gains or losses. Approximately $27,700,000 of the proceeds from the sale of these four businesses was used to pay down debt. The remaining proceeds (including the proceeds from the sale of the plumbing products business, Studley, M&S and MOM) of approximately $84,000,000 were used for general corporate purposes (see Notes 9 and 10). 3. Cash Flows Interest paid was $92,592,000, $78,988,000 and $35,921,000 in 1999, 1998 and 1997, respectively. The fair value of the assets of the businesses acquired was $192,719,000 and $436,074,000 in 1999 and 1998, respectively. Liabilities assumed or created of businesses acquired was $60,616,000 and $111,372,000 in 1999 and 1998, respectively. In 1999, 235,000 shares of Nortek Common Stock were issued as partial consideration for an acquisition, resulting in a $6,315,000 increase in Stockholders' Investment. Cash paid for acquisitions was $125,788,000 and $324,702,000 in 1999 and 1998, respectively. Significant non-cash financing and investing activities excluded from the accompanying consolidated statement of cash flows include capitalized lease additions of approximately $445,000 in 1999 and $565,000 in 1998 and increases of approximately $170,000, $65,000 and $781,000 in the fair market value of marketable securities available for sale for 1999, 1998 and 1997, respectively. 64 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. INCOME TAXES The following is a summary of the components of earnings from continuing operations before provision for income taxes: For the Years Ended December 31, 1999 1998 1997 ------- -------- -------- (Amounts in thousands) Domestic........................ $77,000 $54,600 $37,000 Foreign ........................ 13,000 6,700 5,700 ------- ------- ------- $90,000 $61,300 $42,700 ======= ======= ======= The following is a summary of the provision for income taxes from continuing operations included in the accompanying consolidated statement of operations: For the Years Ended December 31, 1999 1998 1997 ------- -------- -------- (Amounts in thousands) Federal income taxes Current.................... $15,000 $ 6,900 $ 9,000 Deferred................... 17,100 15,100 4,000 ------- ------- ------- 32,100 22,000 13,000 Foreign......................... 5,800 2,000 1,000 State........................... 2,800 3,300 2,300 ------- ------- ------- $40,700 $27,300 $16,300 ======= ======= ======= Income tax payments, net of refunds, were approximately $25,500,000, $4,568,000 and $7,977,000 in 1999, 1998 and 1997, respectively. The current provision for 1998 does not reflect tax benefits of approximately $2,000,000 from the exercise of non-qualified stock options. These benefits have been recorded as an increase in additional paid-in capital. 65 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table that follows reconciles the federal statutory income tax rate of continuing operations to the effective tax rate of such earnings of approximately 45.2%, 44.5% and 38.2% in 1999, 1998 and 1997, respectively. For the Years Ended December 31, 1999 1998 1997 ------- -------- -------- (Amounts in thousands) Income tax provision from continuing operations at the federal statutory rate...... $31,500 $21,455 $14,945 Net change from statutory rate: Amortization not deductible for income tax purposes ........ 5,189 4,200 1,827 State income taxes, net of federal tax effect.............. 1,804 2,145 1,520 Change in tax reserves, net....... 807 (713) (1,540) Product development income tax credit from foreign operations. (118) (309) (264) Tax effect resulting from foreign activities.............. 917 807 (25) Effect of change in foreign tax law .......................... --- --- (766) Other, net........................ 601 (285) 603 ------- ------- ------- $40,700 $27,300 $16,300 ======= ======= ======= 66 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The tax effect of temporary differences which give rise to significant portions of deferred income tax assets and liabilities as of December 31, 1999 and December 31, 1998 are as follows: December 31, 1999 1998 -------- -------- (Amounts in thousands) Prepaid Income Tax Assets (classified current) Arising From: Accounts receivable...................... $ 2,270 $ 135 Inventory................................ 3,142 3,884 Insurance reserves....................... 12,384 11,698 Warranty accrual......................... 12,979 10,511 Net operating losses of Ply Gem.......... 6,125 --- Other reserves and assets, net........... 29,924 27,935 ------- -------- $66,824 $ 54,163 ======= ======== Deferred Income Tax Assets (Liabilities) (classified non-current) Arising From: Property and equipment, net.............. $(47,062) $(40,767) Intangible assets, net................... (29,273) (21,997) Capital loss carryforward................ 7,781 6,326 Net operating losses of Ply Gem.......... 1,325 21,457 Valuation allowances..................... (7,781) (6,326) Other reserves and assets, net........... 1,511 15,267 -------- -------- $(73,499) $(26,040) ======== ======== As a result of changes in the U.S. Federal income tax regulations in 1999, the Company will utilize approximately $40,000,000 of net operating losses in its 1999 federal tax return, which resulted in approximately $14,000,000 of lower than expected federal income tax payments for 1999. At December 31, 1999, the Company's wholly owned subsidiary, Ply Gem, has a net operating loss carry-forward of approximately $21,300,000 that expires in 2011 and is subject to certain limitations imposed by the Internal Revenue Code. Utilization of these losses is limited to approximately $17,500,000 per year. The Company has established valuation allowances related to certain capital losses. Of the total valuation allowance, approximately $2,200,000 will reduce goodwill if the tax benefit is ultimately realized. 67 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5.NOTES, MORTGAGE NOTES AND OBLIGATIONS PAYABLE Short-term bank obligations at December 31, 1999 and 1998 consist of the following: December 31, 1999 1998 -------- -------- (Amounts in thousands) Secured lines of credit and bank advances of the Company's European subsidiaries $6,834 $10,589 Secured line of credit of a Canadian subsidiary 1,642 --- Other obligations --- 373 ------ ------- Short-term bank obligations $8,476 $10,962 ====== ======= These short-term bank obligations are secured by approximately $32,100,000 of accounts receivable and inventory, and have an average weighted interest rate of approximately 4.7% at December 31, 1999. 68 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Notes, mortgage notes and obligations payable included in the accompanying consolidated balance sheet at December 31, 1999 and 1998 consist of the following: December 31, 1999 1998 -------- -------- (Amounts in thousands) 8 7/8% Senior Notes due 2008, net of unamortized original issue discount of $683,000 and $735,000 .................. $209,317 $ 209,265 9 1/4% Senior Notes due 2007, net of unamortized original issue discount of $816,000 and $892,000.......... 174,184 174,108 9 1/8% Senior Notes due 2007, net of unamortized original issue discount of $2,104,000 and $2,286,000...... 307,896 307,714 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"), net of unamortized original issue discount of $876,000 and $1,035,000........ 203,946 203,787 Ply Gem term loan............................ 77,965 78,440 Mortgage notes payable....................... 28,268 22,184 Other........................................ 27,604 18,391 ---------- ---------- $1,029,180 $1,013,889 Less amounts included in current liabilities 5,564 6,776 ---------- ---------- $1,023,616 $1,007,113 ========== ========== 69 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On July 31, 1998, the Company sold $210,000,000 of its 8 7/8% Notes at a discount of approximately $753,900, which is being amortized over the life of the issue. Net proceeds from the sale of the 8 7/8% Notes, after deducting underwriting commissions and expenses, amounted to approximately $203,492,000. The Company used a portion of these net proceeds, together with approximately $44,800,000 of the cash proceeds received from the Common Stock Offering, to purchase NuTone (See Notes 2 and 6). The indentures and other agreements governing the Company and its subsidiaries' indebtedness (including the indentures for the 8 7/8% Notes, the 9 1/8% Notes, the 9 1/4% Notes, (collectively, the "Senior Notes") the 9 7/8% Notes and the credit agreement covering the Ply Gem credit facility) contain restrictive financial and operating covenants including covenants that restrict, among other things, the payment of cash dividends, repurchase of the Company's capital stock and the making of certain other restricted payments, the incurrence of additional indebtedness, the making of certain investments, mergers, consolidations and sale of assets (all as defined in the indentures and other agreements). Upon certain asset sales (as defined in the indentures), the Company will be required to offer to purchase, at 100% principal amount plus accrued interest to the date of purchase, Senior Notes in a principal amount equal to any net cash proceeds (as defined in the indentures) that are not invested in properties and assets used primarily in the same or related business to those owned and operated by the Company at the issue date of the Senior Notes or at the date of such asset sale and such net cash proceeds were not applied to permanently reduce Senior Indebtedness (as defined in the indentures). At February 25, 2000 approximately $87,700,000 was available for the payment of cash dividends, stock payments or other restricted payments under the terms of the Company's most restrictive indenture governing the Senior and Senior Subordinated Notes. (See Note 6.) The Company's Ply Gem subsidiary has a credit facility with a syndicate of banks, which provides Ply Gem with a term loan and a letter of credit facility. Interest on borrowings is at varying rates based, at Ply Gem's option, on (a) the London Interbank Offered Rate (LIBOR) plus a spread or (b) the higher of (i) .5% above the federal funds rate or (ii) the bank's prime rate. Ply Gem pays a facility fee quarterly which fluctuates between .20% and .30% of the aggregate principal amount available under the facility. The average weighted interest rate on the credit facility for the year ended December 31, 1999 was 5.8% for the year 1999. The credit facility includes customary covenants, including covenants limiting Ply Gem's ability to pledge assets or incur liens on assets and maintain certain financial covenants. Borrowings under this credit facility are collateralized by the common stock, inventory and accounts receivable of Ply Gem's principal subsidiaries. 70 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During 1999, $35,000,000 of Ply Gem interest rate swap agreements expired. Another $40,000,000 of interest rate swaps, due to expire on December 3, 2003, were terminated and replaced with a $45,000,000 interest rate collar. This collar will terminate on August 27, 2002 (the "Termination Date"). The collar has a floor of 5.76% and a cap of 7.00%. To the extent that the one month US Dollar Libor rate is below the collar floor, payment is due from Ply Gem for the difference. To the extent the one month US Dollar Libor rate is above the collar cap, Ply Gem is entitled to receive the difference. The one month US Dollar Libor rate at December 31, 1999 was 5.8225%. Amounts received or paid as a result of the collar agreements increase or reduce interest expense. The fair market value of the asset related to the interest rate collar is approximately $300,000 at December 31, 1999. Mortgage notes payable of approximately $28,268,000 outstanding at December 31, 1999 include various mortgage notes and other related indebtedness payable in installments through 2014. These notes bear interest at rates ranging from 2% to 9.25%. Approximately, $26,217,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $61,092,000 at December 31, 1999. Other obligations of approximately $27,604,000 outstanding at December 31, 1999 include borrowings relating to equipment purchases, notes payable issued for acquisitions and other borrowings bearing interest at rates primarily ranging between 2.9% to 12% and maturing at various dates through 2017. Approximately $16,784,000 of such indebtedness is collateralized by property and equipment with an aggregate net book value of approximately $19,033,000 at December 31, 1999. 71 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table that follows is a summary of maturities of all of the Company's debt obligations, excluding unamortized debt discount, due after December 31, 2000: (Amounts in thousands) 2001.................... $ 9,815 2002.................... 82,396 2003.................... 3,676 2004.................... 212,248 Thereafter.............. 719,960 6. COMMON STOCK, SPECIAL COMMON STOCK, STOCK OPTIONS AND DEFERRED COMPENSATION In the first half of 1998 the Company sold 2,182,500 shares of its Common Stock in a public offering for approximately $64,190,000 in net cash proceeds (the "Common Stock Offering"), after deducting underwriting commission and offering expense, and credited $2,182,500 to Common Stock and $62,007,500 to additional paid in capital. A portion of the net proceeds were used to acquire NuTone (see Note 2). Each share of Special Common Stock has 10 votes on all matters submitted to a stockholder vote, except that the holders of Common Stock, voting separately as a class, have the right to elect 25% of the directors to be elected at a meeting, with the remaining 75% being elected by the combined vote of both classes. Shares of Special Common Stock are generally non-transferable, but are freely convertible on a share-for-share basis into shares of Common Stock. The Company has a shareholder rights plan which expires March 31, 2006. Each shareholder right entitles shareholders to buy 1/100 of a share of a new series of preference stock of Nortek at an exercise price of $72 per share, subject to adjustments for stock dividends, splits and similar events. The rights, that are not currently exercisable, are attached to each share of Common Stock and may be redeemed by the Directors at $.01 per share at any time. After a shareholder acquires beneficial ownership of 17% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and become exercisable entitling a rights holder to acquire additional shares of the Company's Common Stock having a market value equal to twice the amount of the exercise price of the right. In addition, after a person or group ("Acquiring Company") commences a tender offer or announces an intention to acquire 30% or more of the Company's Common Stock and Special Common Stock, the rights will trade separately and, under certain circumstances 72 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) will permit each rights holder to acquire common stock of the Acquiring Company, having a market value equal to twice the amount of the exercise price of the right. At December 31, 1999, a total of 2,506,516 shares of Common Stock were reserved as follows: Stock option plans...................... 1,666,080 Conversion of.Special Common Stock...... 840,436 --------- 2,506,516 ========= At December 31, 1999 1,662,333 shares of Special Common Stock were reserved for stock option plans. The Company has several Equity and Cash Incentive Plans which provide for the granting of options and other awards to certain officers, employees and non-employee directors of the Company. The Company has a cash incentive program for certain key employees under the 1999 Equity and Cash Incentive Plan based on the performance of the Company's stock price. No amounts have been paid under this cash incentive program. Options granted under the Equity and Cash Incentive Plans vest over periods ranging up to five years and expire ten years from the date of grant. At December 31, 1999, 164,467 additional options are available for grant under these plans. At December 31, 1999, 1998 and 1997, approximately 1,073,759, 652,702 and 709,762 respectively, of options to acquire shares of Common and Special Common stock were exercisable. 73 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table that follows summarizes the Common and Special Common Stock option transactions for the three years ended December 31, 1999: Weighted Average Number Option Price Exercise of Shares Per Share Price Options outstanding at December 31, 1996 628,800 $ 2.875 - $15.69 $10.93 Granted 435,600 19.50 - 27.00 22.98 Exercised (71,953) 2.875 - 15.69 6.66 Canceled (6,667) 22.69 22.69 -------- Options outstanding at December 31, 1997 985,780 $ 2.875 - $27.00 $16.48 Granted 382,300 22.938 - 31.875 23.23 Exercised (350,934) 2.875 - 22.690 10.63 Canceled (10,000) 22.690 22.69 -------- Options outstanding at December 31, 1998 1,007,146 $ 2.875 - $31.875 $21.03 Granted 584,300 24.75 - 33.063 28.22 Exercised (69,833) 2.875 - 22.938 13.63 Canceled (20,000) 20.750 - 30.375 25.05 ---------- Options outstanding at December 31, 1999 1,501,613 $ 8.75 - 33.063 $24.11 ========= 3,747 options have an exercise price of $8.75 and a weighted average remaining contractual life of 4 years. All of these options are exercisable. 173,849 options, all of which are exercisable, have an exercise price of $14.75 and a remaining contractual life of 6 years. 919,117 options, 709,847 of which are exercisable, have exercise prices between $19.50 and $27.00 with a weighted average exercise price of $23.43 and a remaining contractual life of 8 years. The remaining 404,900 options, 186,316 of which are exercisable, have exercise prices between $29.563 and $33.063, with a weighted average exercise price of $29.814 and a remaining contractual life of 9 years. The Company accounts for stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized since options are granted with exercise prices equal to the fair market value of the Common Stock at the date of grant. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's earnings from continuing operations and diluted earnings per share from continuing operations would have been approximately $44,800,000 and $3.74 for 1999, approximately $31,700,000 and $2.86 for 1998 and approximately $24,100,000 and $2.45 for 1997, respectively, and net earnings and 74 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) diluted net earnings per share would have been approximately $44,800,000 and $3.74 for 1999, approximately $32,700,000 and $2.95 for 1998 and approximately $19,000,000 and $1.92 for 1997, respectively. The weighted average grant date fair value of options granted was $11.60, $9.40 and $9.82 in 1999, 1998 and 1997, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used: 1999 1998 1997 ---- ---- ---- Risk-free interest rate Between Between Between 4.91% and 6.31% 4.50% and 5.66% 5.75% and 6.73% Expected life 5 years 5 years 5 years Expected volatility 36% 37% 37% Expected dividend yeild 0% 0% 0% The Company's Board of Directors has authorized a program to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of February 25, 2000, the Company had purchased approximately 377,300 shares of its Common and Special Common Stock for approximately $10,800,000 under this program and accounted for such share purchases as treasury stock. 7.PENSION, PROFIT SHARING AND OTHER POST RETIREMENT BENEFITS The Company and its subsidiaries have various pension, supplemental retirement plans for certain officers, profit sharing and other post retirement benefit plans requiring contributions to qualified trusts and union administered funds. During 1998, the Company assumed certain liabilities of NuTone concerning pension obligations and post retirement obligations that provide certain retirement, medical and life insurance benefits to eligible retired employees and certain active employees. Pension and profit sharing expense charged to operations aggregated approximately $12,400,000 in 1999, approximately $9,800,000 in 1998 and approximately $6,624,000 in 1997. The Company's policy is to fund currently the actuarially determined annual contribution of its various qualified defined benefit plans. 75 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table that follows provides a reconciliation of benefit obligations, plan assets and funded status of the plans in the Company's consolidated balance sheet at December 31, 1999 and 1998: Pension Benefits 1999 1998 ---- ---- (Amounts in thousands) Change in benefit obligation: Benefit obligation at October 1, $154,850 $ 56,884 Service cost 2,289 2,329 Interest cost 10,377 5,594 Amendments 755 851 Curtailment gains (8,976) --- Actuarial loss excluding assumption changes 13,482 4,828 Actuarial (gain) loss due to assumption changes (13,254) 7,593 Obligations from an acquisition --- 81,822 Benefits and expenses paid (9,848) (5,051) -------- -------- Benefit obligation at September 30, $149,675 $154,850 ======== ======== Change in plan assets: Fair value of plan assets at October 1, $114,336 $ 56,842 Actual return on plan assets 15,643 (2,980) Plan assets from an acquisition --- 63,118 Employer contribution 1,761 2,407 Benefits and expenses paid (9,848) (5,051) -------- -------- Fair value of plan assets at September 30, $121,892 $114,336 ======== ======== 76 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Pension Benefits 1999 1998 ---- ---- (Amounts in thousands) Funded status and statement of financial position: Fair value of plan assets at September 30, $121,892 $114,336 Benefit obligation at September 30, (149,675) (154,850) Funded status (27,783) (40,514) Amount contributed during fourth quarter 513 335 Unrecognized actuarial loss 5,467 15,896 Unrecognized prior service cost 7,163 7,224 -------- -------- Accrued benefit cost $(14,640) $(17,059) ======== ========= Amount recognized in the statement of financial position consists of: (a) Prepaid benefit cost $ 7,296 $ 6,130 (b) Accrued benefit liability (33,503) (38,111) (c) Intangible asset 6,021 6,907 (d) Accumulated other comprehensive loss 5,546 8,015 -------- -------- Accrued benefit cost $(14,640) $(17,059) ======== ========= The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $106,127,000, $97,972,000 and $67,220,000, respectively, as of December 31, 1999 and $109,588,000, $102,880,000 and $66,365,000, respectively, as of December 31, 1998. Plan assets include commingled funds, marketable securities, insurance contracts and cash and short-term investments. Also at December 31, 1999, the Company has recorded as long-term restricted investments and marketable securities in other assets, in the accompanying consolidated balance sheet, approximately $15,700,000 which has been contributed to a trust and is available to fund obligations included in the table above relating to supplemental retirement plans. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation are as follows: Years ended December 31, 1999 1998 1997 ---- ---- ---- Discount rate 7.50% 6.75% 7.50% Expected return on plan assets 8.50 8.50 8.50 Rate of compensation increase 5.00 4.50 5.00 77 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's net periodic benefit cost for its defined benefit plans for 1999, 1998, and 1997 consist of the following components: Years ended December 31, 1999 1998 1997 ---- ---- ---- (Amounts in thousands) Service cost $ 2,289 $2,329 $ 597 Interest cost 10,377 5,594 2,979 Expected return on plan assets (9,713) (5,135) (2,819) Amortization of prior service cost 816 217 636 Recognized actuarial loss 939 311 93 ------- ------ ------ Net periodic benefit cost $4,708 $3,316 $1,486 ====== ====== ====== The table that follows provides a reconciliation of the benefit obligations, plan assets and funded status of the Post Retirement Health Benefit Plan in the Company's consolidated balance sheet at December 31, 1999 and 1998: Non-pension Post Retirement Health Benefits 1999 1998 ---- ---- (Amounts in thousands) Change in benefit obligation: Benefit obligation at October 1, $29,561 $ --- Obligations from an acquisition --- 29,022 Service cost 226 155 Interest cost 1,189 800 Curtailment gain (13,344) --- Actuarial loss (gain) excluding assumption changes 734 (384) Actuarial loss due to assumption changes 199 --- Benefits and expenses paid (1,753) (32) Benefit obligation at September 30, $16,812 $29,561 Change in plan assets: Fair value of plan assets at October 1, $ --- $ --- Employer contribution 1,753 32 Benefits and expenses paid (1,753) (32) ------- ------- Fair value of plan assets at September 30, $ --- $ --- ======= ======= Funded status and statement of financial position: Fair value of plan assets at September 30, $ --- $ --- Benefit obligation at September 30, (16,812) (29,561) ------- -------- Funded status (16,812) (29,561) Amount contributed during fourth quarter 466 339 Unrecognized actuarial loss (gain) 548 (384) ------- -------- Accrued benefit cost $(15,798) $(29,606) ======== ======== 78 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's net periodic benefit cost for its Post Retirement Health Benefit Plan for 1999 and 1998 consists of the following components: Years ended December 31, 1999 1998 ---- ---- (Amounts in thousands) Service Cost $ 226 $155 Interest Cost 1,189 800 ------ ---- Net periodic post retirement health benefit cost $1,415 $955 ====== ==== For purposes of calculating the post retirement health benefit cost, a medical inflation rate of 8% was assumed for 1999. The rate was assumed to decrease gradually to an ultimate rate of 5% by 2005. Assumed health care cost trend rates have a significant effect on the amounts reported for the post retirement health benefit plan. A one-percentage-point change in assumed health care cost trend rate would have the following effect: Decrease Trend 1% Increase Trend 1% ----------------- ----------------- (Amounts in thousands) Effect on the total service and interest cost components $ (154) $ 188 Effect on the post retirement benefit obligation $(1,888) $2,256 8. COMMITMENTS AND CONTINGENCIES The Company provides accruals for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. 79 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 1999, the Company and its subsidiaries are obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations. Minimum annual rental expense aggregates approximately $90,924,000 at December 31, 1999. The obligations are payable as follows: 2000......................... $13,444,000 2001......................... 10,648,000 2002......................... 8,553,000 2003......................... 7,264,000 2004 ........................ 6,346,000 Thereafter................... 44,669,000 Certain of these lease agreements provide for increased payments based on changes in the consumer price index. Rental expense charged to operations in the accompanying consolidated statement of operations was approximately $14,800,000, $15,000,000 and $8,700,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Under certain of these lease agreements, the Company or its subsidiaries are also obligated to pay insurance and taxes. The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls. The Company has used various substances in its products and manufacturing operations which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers' compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. A subsidiary of the Company is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products. Many of the suits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other third party recoveries. The subsidiary continues to vigorously defend the remaining suits. Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products. 80 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The subsidiary has engaged in coverage litigation with certain insurers and has settled coverage claims with several of the insurers. The Company believes that the remaining coverage disputes will be resolved on a satisfactory basis and additional coverage will be available. In reaching this belief, the Company analyzed insurance coverage and the status of the coverage litigation, considered the history of settlements with primary and excess insurers and consulted with counsel. The Company has recorded liabilities of approximately $11,048,000 at December 31, 1999 for the estimated costs to resolve these outstanding matters. The Company has also recorded receivables at December 31, 1999 of approximately $9,803,000 for the estimated recoveries which are deemed probable of collection related to insurance litigation matters discussed above. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts provided, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 9. DISCONTINUED OPERATIONS In the fourth quarter of 1997, the Company adopted a plan of disposition for its plumbing products business which was sold on July 10, 1998 for approximately $33,700,000 in cash. The following is a summary of the results of discontinued operations for the two years ended December 31, 1998: Years Ended December 31, 1998 1997 ---- ---- (Amounts in thousands) Net sales $50,110 $104,467 ======= ======== Loss before income taxes $(3,800) $ (5,700) Income tax benefit 5,000 2,100 ------- -------- Earnings (loss) from discontinued operations 1,200 (3,600) Reserve for future operating expenses, net of income tax benefit of $900,000 --- (1,600) ------- -------- Earnings (loss) from discontinued operations $ 1,200 $ (5,200) ======= ======== 81 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Loss from discontinued operations before income taxes includes an allocation of corporate interest expense of approximately $1,000,000 and $1,900,000 in 1998 and 1997, respectively. Corporate interest was allocated to discontinued operations based on the ratio of net assets of the discontinued operation to the sum of the total consolidated net assets of the Company plus consolidated debt of the Company other than debt of the discontinued operation assumed by the buyer and debt that is directly attributed to other operations of the Company. The income tax benefit in 1998 includes approximately $800,000 recorded as a result of the realization of a portion of the tax capital loss arising from the sale of the plumbing products business. 10.OPERATING SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK The Company is a diversified manufacturer of residential and commercial building products, which is organized within three principal operating segments: the Residential Building Products Segment; the Air Conditioning and Heating Products Segment; and the Windows, Doors and Siding Products Segment. Individual subsidiary companies are included in each of the Company's three principal operating segments based on the similarity of products, production processes, customers and expected long-term financial performance to other subsidiary companies included in the particular operating segment. In the tables below, Other includes corporate related items, results of insignificant operations, intersegment eliminations and certain income and expense items not allocated to reportable segments. The operating results labeled Businesses Sold consist of entities sold during 1998. The Residential Building Products Segment manufactures and distributes built-in products primarily for the residential new construction, do-it-yourself (DIY) and professional remodeling and renovation markets. The principal products sold by the Segment include, kitchen range hoods, exhaust fans (such as bath fans and fan, heater and light combination units) indoor air quality products, bath cabinets, radio intercoms and central vacuum systems. The Air Conditioning and Heating Products Segment principally manufactures and sells heating, ventilating and air conditioning ("HVAC") systems for custom-designed commercial applications and for manufactured and site-built residential housing. The Windows, Doors and Siding Products Segment principally manufactures and distributes vinyl, wood and composite windows, vinyl, wood, steel and composite patio and entry doors, vinyl siding, soffit, skirting and accessories, aluminum trim coil, siding, columns and accessories, soffit, skirting, shutters, sun 82 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) rooms and vinyl fencing, railings and decking for use in the residential construction, DIY and professional renovation markets. The Windows, Doors and Siding Products Segment was purchased in connection with the acquisition of Ply Gem on August 26, 1997 and, accordingly, information presented below excludes results of operations for this Segment for periods prior to the acquisition date. The accounting policies of the segments are the same as those described in Note 1. Summary of Significant Accounting Policies. The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. Intersegment net sales are not material for any of the periods presented. Intersegment eliminations were not material for any of the periods presented. The income statement impact of all purchase accounting adjustments, including goodwill and intangible assets amortization, is reflected in the operating earnings of the applicable operating segment; however, the corresponding purchase accounting balance sheet adjustments related to goodwill and intangible assets are not allocated to the individual operating segments. Unallocated assets consist primarily of cash and cash equivalents, marketable securities, net assets of discontinued operations (in 1997), prepaid and deferred income taxes, goodwill, intangible assets, deferred debt expense and long term restricted investments and marketable securities. The tables that follow exclude the results of operations for the plumbing products business which was sold in 1998 and was accounted for as a discontinued operation. 83 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Summarized financial information for the Company's reportable segments is presented in the tables that follow for each of the three years in the period ended December 31, 1999. Years ended December 31, 1999 1998 1997 ---- ---- ---- (Amounts in thousands) Net Sales: Residential Building Products $ 637,815 $ 475,029 $ 381,750 Air Conditioning and Heating Products 540,575 465,164 419,368 Windows, Doors and Siding Products 738,398 536,781 189,027 Other 76,032 69,322 21,322 ---------- ---------- ---------- $1,992,820 1,546,296 1,011,467 Businesses sold --- 192,047 122,662 ---------- ---------- ---------- Consolidated net sales $1,992,820 $1,738,343 $1,134,129 ========== ========== ========== Operating Earnings (Loss): Residential Building Products $ 94,704 $ 53,674 $40,287 Air Conditioning and Heating Products 66,958 55,729 41,267 Windows, Doors and Siding Products 37,207 31,492 8,991 Other, net (20,351) (14,157) (14,428) -------- -------- ------- 178,518 126,738 76,117 Businesses sold --- 6,390 6,864 -------- -------- ------- Consolidated operating earnings 178,518 133,128 82,981 Unallocated: Gain on Businesses sold --- 4,000 --- Interest expense (96,490) (86,298) (50,210) Investment income 7,972 10,470 9,929 -------- ------- ------- Earnings from continuing operations before provision for income taxes $ 90,000 $61,300 $42,700 ======== ======= ======= 84 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1999 1998 1997 ---- ---- ---- (Amounts in thousands) Segment Assets: Residential Building Products $273,371 $252,533 $172,686 Air Conditioning and Heating Products 198,360 164,710 132,772 Windows, Doors and Siding Products 311,668 242,014 203,902 Other 31,639 17,029 27,546 ---------- ---------- ---------- 815,038 676,286 536,906 Businesses sold --- --- 86,205 ---------- ---------- ---------- Total segment assets 815,038 676,286 623,111 Unallocated: Cash, cash equivalents and marketable securities 126,352 223,451 168,178 Goodwill and intangible assets 722,572 672,264 386,984 Prepaid and deferred income taxes 66,824 54,163 56,822 Other assets 78,898 63,829 69,451 ---------- ---------- ---------- Consolidated assets $1,809,684 $1,689,993 $1,304,546 ========== ========== ========== Years ended December 31, 1999 1998 1997 ---- ---- ---- (Amounts in thousands) Depreciation and Amortization expense: Residential Building Products $20,584 $14,641 $10,980 Air Conditioning and Heating Products 10,625 8,920 8,412 Windows, Doors and Siding Products 22,677 15,614 5,414 Other 1,646 1,222 525 ------- ------- ------- 55,532 40,397 25,331 Businesses sold --- 1,687 1,365 ------- ------- ------- Consolidated depreciation and amortization expense $55,532 $42,084 $26,696 ======= ======= ======= Capital Expenditures: Residential Building Products $10,840 $ 8,638 $6,361 Air Conditioning and Heating Products 10,814 20,665 10,724 Windows, Doors and Siding Products 18,917 9,809 3,244 Other 1,442 536 314 ------- ------- ------- 42,013 39,648 20,643 Businesses sold --- 1,215 1,821 ------- ------- ------- Consolidated capital expenditures $42,013 $40,863 $22,464 ======= ======= ======= 85 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign net sales were approximately 9%, 8% and 11% of consolidated net sales for the years ended December 31, 1999, 1998 and 1997, respectively. Foreign Long Lived Assets were approximately 7%, 6% and 9% of consolidated Long Lived Assets for the years ended December 31, 1999, 1998 and 1997, respectively. Foreign net sales are attributed based on the location of the Company's subsidiary responsible for the sale. As required, Long Lived Assets exclude financial instruments and deferred income taxes. No single customer accounts for 10% or more of consolidated net sales. The Company operates internationally and is exposed to market risks from changes in foreign exchange rates. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographical regions. At December 31, 1999, the Company had no significant concentrations of credit risk. 11.NET GAIN (LOSS) ON MARKETABLE SECURITIES At December 31, 1999 the increase in the Company's stockholders' investment for gross unrealized gains was approximately $125,000. At December 31, 1998 and 1997 the reduction in the Company's stockholders' investment for gross unrealized losses was approximately $45,000 and $110,000 respectively. The Company has unrestricted marketable securities, of approximately $34,219,000 at December 31, 1999, consisting of certificates of deposit and bank issued money market instruments, all of which mature within one year. 86 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. ACCRUED EXPENSES AND TAXES, NET Accrued expenses and taxes, net, consist of the following at December 31, 1999 and 1998: December 31, 1999 1998 (Amounts in thousands) Insurance $ 31,021 $ 28,658 Employee compensation and benefits 47,004 48,094 Interest 29,213 29,231 Product warranty 19,423 13,962 Sales and marketing 21,617 19,435 Employee termination and other costs 2,865 2,666 Other, net 38,821 55,039 -------- -------- $189,964 $197,085 ======== ======== The Company has recorded liabilities, in connection with acquisitions, which occurred in 1997, 1998 and 1999 related to employee terminations and other exit costs associated with management's plans to eliminate certain activities of the acquired entities. Management's plans for eliminating certain Ply Gem activities were completed in 1998 and relate principally to the elimination of Ply Gem's corporate headquarters and the consolidation of certain duplicate Ply Gem corporate functions such as accounting, legal and risk management into the Company. The finalization of management's initial plans relative to the Ply Gem acquisition resulted in decreases of approximately $2,700,000 to the initial liabilities recorded in 1997. These decreases were identified within one year of the acquisition date and, accordingly, were recorded as adjustments to the purchase price allocation for the Ply Gem acquisition. The Company has recorded liabilities of approximately $5,200,000 and $1,900,000 in the years ended December 31, 1999 and 1998, respectively, for the 1998 and 1999 acquisitions, which principally related to termination of certain employees and closing certain facilities of acquired businesses. As of December 31, 1999, plans for eliminating certain activities have been finalized for all significant acquisitions with the exception of certain severence arrangements which the Company estimates will be approximately $1,000,000 and will be finalized in the first half of 2000. 87 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Charges to the liabilities for employee termination include payroll, payroll taxes and insurance benefits related to severance packages and were approximately $3,600,000, $5,300,000 and $1,700,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Charges to the liabilities for other exit costs relate principally to lease costs and other costs of closing facilities and legal and consulting fees that were incurred due to the implementation of the Company's exit strategies. Charges to the liabilities for other exit costs were approximately $1,400,000, $1,400,000 and $400,000 for the years ended December 31, 1999, 1998 and 1997, respectively. In addition, during 1999 the Company expensed in the accompanying consolidated statement of operations approximately $3,400,000 of costs related to the integration activities of NuTone into the Company's operations. 88 NORTEK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13.SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) The tables that follow summarize unaudited quarterly financial data for the years ended December 31, 1999 and December 31, 1998: For the Quarters Ended April 3 July 3 October 2 December 31 ---------- ---------- ---------- ----------- (In thousands except per share amounts) 1999 - ----- Net sales $406,700 $544,088 $553,493 $488,539 Gross profit 109,784 159,117 157,479 133,311 Earnings from continuing operations 3,500 19,800 20,600 5,400 Earnings per share from continuing operations: Basic .30 1.67 1.74 .46 Diluted .29 1.64 1.70 .46 Net earnings $ 3,500 $ 19,800 $ 20,600 $ 5,400 Net earnings per share: Basic .30 1.67 1.74 .46 Diluted .29 1.64 1.70 .46 For the Quarters Ended April 4 July 4 October 3 December 31 ---------- ---------- ---------- ----------- (In thousands except per share amounts) 1998 - ----- Net sales $392,468 $449,647 $458,193 $438,035 Gross profit 98,148 116,141 127,001 121,703 Earnings from continuing operations 1,300 8,500 13,300 10,900 Earnings per share from continuing operations: Basic .14 .79 1.13 .93 Diluted .13 .78 1.11 .92 Net earnings $ 1,300 $ 8,500 $ 13,800 $ 11,400 Net earnings per share: Basic .14 .79 1.17 .97 Diluted .13 .78 1.15 .96 89 Report of Independent Public Accountants To Nortek, Inc.: We have audited the accompanying consolidated balance sheets of Nortek, Inc. (a Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this form 10-K as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1999. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nortek, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP /s/ARTHUR ANDERSEN LLP Boston, Massachusetts, March 8, 2000 90 NORTEK, INC. (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEET December 31, 1999 1998 -------- -------- (Amounts in thousands) Assets Current Assets: Unrestricted Cash and investments at cost which approximates market $ 21,681 $ 60,238 Marketable securities at cost which approximates market 29,225 86,736 Restricted Cash and investments at cost which approximates market 8,303 10,801 Marketable securities at cost which approximates market 1,107 2,796 Notes and accounts receivable, net 2,674 3,435 Prepaid expenses and other current assets 491 197 Prepaid income taxes 5,700 6,200 ---------- ---------- Total Current Assets 69,181 170,403 ---------- ---------- Property and equipment, at cost 1,515 1,708 Less--accumulated depreciation 1,179 1,350 ---------- ---------- Total property and equipment, net 336 358 ---------- ---------- Investments and Other Assets: Net intercompany balance and investment in subsidiaries 1,083,695 955,987 Deferred debt expense, net 21,184 23,843 Restricted investments and marketable securities 15,236 --- Other 32,801 25,787 ---------- ---------- 1,152,916 1,005,617 ---------- ---------- $1,222,433 $1,176,378 ========== ========== The accompanying notes are an integral part of these financial statements. 91 NORTEK, INC. (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEET (Continued) December 31, 1999 1998 -------- -------- (Amounts in thousands) Liabilities and Stockholders' Investment Current Liabilities: Accounts payable $ 1,041 $ 1,340 Accrued expenses and taxes 34,830 45,319 ---------- ---------- Total current liabilities 35,871 46,659 ---------- ---------- Other Liabilities: Deferred income taxes 5,200 3,500 Other 17,414 13,735 ---------- ---------- 22,614 17,235 ---------- ---------- Senior notes 691,397 691,087 ---------- ---------- Senior subordinated notes 203,946 203,787 ---------- ---------- Other long-term debt 8,788 --- ---------- ---------- Commitments and Contingencies (Note 2) Stockholders' Investment: Preference stock, $1 per value; authorized 7,000,000 shares, none issued --- --- Common Stock, $1 par value; authorized 40,000,000 shares, 18,738,292 and 18,427,595 shares issued 18,738 18,428 Special common stock, $1 par value; authorized 5,000,000 shares, 840,436 and 854,935 shares issued 841 855 Additional paid-in capital 208,755 201,626 Retained earnings 143,266 93,966 Accumulated other comprehensive loss (11,822) (11,596) Less--treasury common stock at cost, 7,793,217 and 7,290,335 shares (97,894) (83,711) --treasury special common stock at cost, 290,054 and 286,009 shares (2,067) (1,958) ----------- ---------- Total Stockholders' Investment 259,817 217,610 ---------- ---------- $1,222,433 $1,176,378 ========== ========== The accompanying notes are an integral part of these financial statements. 92 NORTEK, INC. (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENT OF OPERATIONS For the Years Ended December 31, --------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands except per share amounts) Revenues: Charges and allocations to subsidiaries $ 73,307 $75,208 $34,498 Gain on sale of businesses --- 4,000 --- Investment income 5,441 8,777 9,273 Other income 508 556 518 -------- ------- ------- Total revenues 79,256 88,541 44,289 -------- ------- ------- Expenses: Selling, general and administrative expense 21,885 15,030 13,605 Interest expense 87,326 75,922 43,921 Other expense 1,149 679 784 -------- ------- ------- Total expenses 110,360 91,631 58,310 -------- ------- ------- Loss from continuing operations, before equity in subsidiaries' earnings (31,104) (3,090) (14,021) Equity in subsidiaries earnings before provision for income taxes 121,104 64,390 56,721 ------- ------- ------- Earnings from continuing operations before provision for income taxes 90,000 61,300 42,700 Provision for income taxes 40,700 27,300 16,300 -------- ------- ------- Earnings from continuing operations before extraordinary loss 49,300 34,000 26,400 Earnings (loss) from discontinued operations --- 1,200 (5,200) Extraordinary loss from debt retirements --- (200) --- -------- ------- ------- Net earnings $ 49,300 $35,000 $21,200 ======== ======= ======= Earnings (loss) per share: Earnings per share from continuing operations: Basic $4.19 $3.11 $ 2.75 Diluted $4.11 $3.06 $ 2.68 Earnings (loss) from discontinued operations: Basic $--- $ .11 $(0.54) Diluted $--- $ .11 $(0.53) Extraordinary loss from debt retirements: Basic $--- $(.02) $--- Diluted $--- $(.02) $--- Net earnings: Basic $4.19 $3.20 $ 2.21 Diluted $4.11 $3.15 $ 2.15 Weighted average number of shares: Basic 11,763 10,923 9,605 Diluted 11,982 11,113 9,855 The accompanying notes are an integral part of these financial statements. 93 NORTEK, INC. (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENT OF CASH FLOWS For the Years Ended December 31, -------------------------------- 1999 1998 1997 ---- ---- ---- (Amounts in thousands) Cash flows from operating activities: Earnings from continuing operations $49,300 $ 34,000 $ 26,400 Net earnings (loss) from discontinued operations --- 1,200 (5,200) Extraordinary loss from debt retirements --- (200) --- ------- ---------- -------- Net earnings 49,300 35,000 21,200 ------- -------- -------- Adjustments to reconcile net earnings to cash: Depreciation and amortization expense 446 117 139 Non-cash interest expense, net 3,253 2,856 1,421 Gain on sale of Businesses sold --- (4,000) --- Loss on discontinued operations --- 3,800 2,500 Loss on debt retirement --- 300 --- Equity in subsidiaries' earnings Before provision for income taxes (121,104) (64,390) (56,721) Charges and allocations to subsidiaries (73,307) (75,208) (34,498) Net transfers from subsidiaries, principally cash 112,916 97,905 57,034 Net gain on sale of investments and marketable securities --- --- (200) Deferred federal income tax provision 17,100 15,100 4,000 Deferred federal income tax benefit on discontinued operations --- (3,200) (1,000) Changes in certain assets and liabilities net of effects from acquisitions and dispositions: Notes and accounts receivable and other current assets (3,080) (2,672) (994) Other assets (1,844) (1,034) (2,877) Net assets of discontinued operations --- (7,426) 4,934 Accrued expenses and taxes (11,787) 13,558 4,491 Long-term liabilities 691 (1,243) 4,832 Other, net 317 948 277 -------- -------- -------- Total adjustments to net earnings (76,399) (24,589) (16,662) --------- -------- -------- Net cash (used in) provided by operating activities $(27,099) $ 10,411 $ 4,538 --------- -------- -------- 94 NORTEK, INC. (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENT OF CASH FLOWS (Continued) For the Years Ended December 31, -------------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from investing activities: Capital expenditures (135) (65) (70) Purchases of investments and marketable securities (84,596) (124,986) (283,918) Proceeds from the sale of investments and marketable securities 142,794 75,255 297,133 Proceeds either received directly or from subsidiaries relating to Businesses sold or discontinued --- 61,162 --- Cash contributed to subsidiaries for businesses acquired (44,737) (294,040) (407,419) Change in restricted cash, investments and marketable securities (8,115) (7,234) (828) Other, net (2,802) (56) (4,188) -------- -------- -------- Net cash provided by (used in) investing activities 2,409 (289,964) (399,290) -------- -------- -------- Cash flows from financing activities: Sale of Notes, net --- 203,492 466,214 Purchase of Notes --- (13,678) --- Sale of Nortek Common Stock --- 64,190 --- Purchase of Nortek Common and Special Common Stock (14,524) (7,668) (10,177) Other, net 657 1,811 385 -------- -------- -------- Net cash (used in) provided by financing activities (13,867) 248,147 456,422 -------- -------- -------- Net (decrease) increase in unrestricted cash and investments (38,557 (31,406) 61,670 Unrestricted cash and investments at the beginning of the year 60,238 91,644 29,974 -------- -------- -------- Unrestricted cash and investments at the end of the year $ 21,681 $ 60,238 $ 91,644 ======== ======== ======== Interest paid on indebtedness $ 83,947 $ 65,599 $ 29,581 ======== ======== ======== Net income taxes paid, including those paid by subsidiaries $ 25,500 $ 4,568 $ 7,977 ======== ======== ======== The accompanying notes are an integral part of these financial statements. 95 NORTEK, INC. (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. The accompanying condensed financial statements of Nortek, Inc. ("the Registrant") have been prepared in accordance with the reduced disclosure requirements permitted by form 10-K, Part IV, Item 14, Schedule I - Condensed Financial Information of the Registrant. The consolidated financial statements and related notes of Nortek, Inc. and Subsidiaries, are included elsewhere herein in this form 10-K (Part II, Item 8)and are incorporated herein by reference. Certain 1998 and 1997 amounts have been reclassified to conform to the 1999 presentation. 2. Descriptions of material contingencies, significant provisions of long-term debt obligations and commitments of the Registrant are included in Notes 5 and 8 of the Notes to the Nortek, Inc. and Subsidiaries Consolidated Financial Statements, which are incorporated herein by reference. The following is a summary of maturities of long-term debt of the Registrant's debt obligations, excluding unamortized discount, at December 31, 1999: (Amounts in thousands) 2000 $ --- 2001 5,000 2002 --- 2003 --- 2004 208,610 Thereafter 695,000 3. The Registrant's net investment in subsidiaries is net of the cumulative amount of intercompany cash transfers and other transactions. 4. Included in the Registrant's condensed statement of cash flows for the years ended December 31, 1999 and 1997 (in net transfers from subsidiaries, principally cash) are dividends (declared by subsidiaries' Board of Directors) from subsidiaries of $250,000,000 and $70,000,000, respectively.There were no dividends declared in 1998. 5. Certain of the Registrant's subsidiaries have entered into financing agreements which contain various restrictive covenants that place limitations on the amount of distributions and advances to the Registrant. At December 31, 1999, approximately $397,693,000 (of which approximately $300,555,000 is goodwill) of subsidiary net assets, principally Ply Gem and its subsidiaries, were restricted and approximately $94,477,000 principal amount of subsidiary indebtedness was outstanding under these financing agreements. 96 NORTEK, INC. AND SUBSIDIARIE 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, 1997: Allowance for doubtful accounts and sales allowances $ 3,656 $7,434 $2,303 $ 171 (c) $ (2,517)(a) $11,047 For the year ended December 31, 1998: Allowance for doubtful accounts and sales allowances $11,047 $2,172 $8,711 $(1,434)(b) $(10,138)(a) $10,657 $ 299 (c) For the year ended December 31, 1999: Allowance for doubtful accounts and sales allowances $10,657 $2,995 $2,911 $ 318 (c) $(3,862)(a) $13,019
(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). 3.4 Amendment to By-laws of Nortek, Inc. (Exhibit 3.1 to Form 8-K filed April 23, 1999, File No. 1-6112). 4.1 Second Amended and Restated Rights Agreement dated as of April 1, 1996 between the Company and State Street Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed April 2, 1996, File No. 1-6112). 4.2 Indenture dated as of February 14, 1994 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9 7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K filed March 25, 1994, File No. 1-6112). 4.3 Indenture dated as of March 17, 1997 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9.25% Series A and Series B Senior Notes due March 15, 2007 (Exhibit 4.2 to Registration Statement No. 333-25505 filed April 18, 1997). 4.4 Indenture dated as of August 26, 1997 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 9 1/8% Series A and Series B Senior Notes due September 1, 2007 (Exhibit 4.1 to Registration Statement No. 333-36711 filed September 30, 1997). 98 4.5 Indenture dated as of July 31, 1998 between the Company and State Street Bank and Trust Company, as Trustee, relating to the 8 7/8% Series A and Series B Senior Notes due August 1, 2008 (Exhibit 4.1 to Registration Statement No. 333-64731 filed September 30, 1998). **10.1 Employment Agreement between Richard L. Bready and the Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed March 31, 1986, File No. 1-6112). **10.2 Amendment dated as of March 3, 1988 to Employment Agreement between Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112). **10.3 Second Amendment dated as of November 1, 1990 to Employment Agreement between Richard L. Bready and the Company dated as of January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File No. 1-6112). **10.4 Employment Agreement between Richard L. Bready and the Company dated as of February 26, 1997 (Exhibit 10.3 to Form 10-Q filed May 12, 1997, File No. 1-6112). **10.5 Amendment No. 1 dated June 13, 1997 to Employment Agreement between Richard L. Bready and the Company dated as of February 26, 1997 (Exhibit 10.2 to Form 10-Q filed August 8, 1997, File No. 1-6112). **10.6 Amendment No. 2 dated June 30, 1998 to Employment Agreement between Richard L. Bready and the Company dated as of February 26, 1997 (Exhibit 10.1 to Form 10-Q/A filed December 1, 1998, File No. 1-6112). **10.7 Deferred Compensation Agreement dated March 7, 1983 between Richard L. Bready and the Company (Exhibit 10.4 to Registration Statement No. 33-69778 filed February 9, 1994). **10.8 Deferred Compensation Agreement dated March 7, 1983 between Almon C. Hall and the Company (Exhibit 10.5 to Registration Statement No. 33-69778 filed February 9, 1994). **10.9 Deferred Compensation Agreement dated March 7, 1983 between Richard J. Harris and the Company (Exhibit 10.6 to Registration Statement No. 33-69778 filed February 9, 1994). 99 **10.10 1984 Stock Option Plan, as amended through May 27, 1987 (Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15, 1988). **10.11 Change in Control Severance Benefit Plan for Key Employees adopted February 10, 1986, and form of agreement with employees (Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112). **10.12 Change in Control Severance Benefit Plan for Key Employees as Amended and Restated June 12, 1997, and form of agreement with employees (Exhibit 10.1 to Form 10-Q filed August 8, 1997, file No. 1-6112). **10.13 1987 Stock Option Plan (Exhibit 28.3 to Registration Statement No. 33-22527 filed June 15, 1988). **10.14 1997 Equity and Cash Incentive Plan (Exhibit 10.1 to Form 10-Q filed May 12, 1997, File No. 1-6112). **10.15 1997 Stock Option Plan for Directors (Exhibit 10.2 to Form 10-Q filed May 12, 1997, File No. 1-6112). **10.16 1998 Equity and Cash Incentive Plan (Exhibit 10.1 to Form 10-Q filed August 18, 1998, File No. 1-6112). **10.17 1999 Equity and Cash Incentive Plan (Exhibit 4.1 to Registration Statement No. 333-76345 filed May 28, 1999). **10.18 Nortek, Inc. Supplemental Executive Retirement Plan dated July 1, 1997 (Exhibit 10.3 to Form 10-Q filed August 8, 1997, File No. 1-6112). **10.19 First Amendment dated July 1, 1997 to Nortek, Inc. Supplemental Executive Retirement Plan dated July 1, 1997 (Exhibit 10.4 to Form 10-Q filed August 8, 1997, File No. 1-6112). **10.20 Form of Indemnification Agreement between the Company and its directors and certain officers (Appendix C to Proxy Statement dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File No. 1-6112). * **10.21 1999 Equity Performance Plan approved July 1, 1999. 100 10.22 Second Amended and Restated Credit Agreement, dated as of August 26, 1997 and restated as of December 30, 1998, among Ply Gem Industries, Inc., Fleet National Bank, as Agent, and the banks signatory thereto (Exhibit 10.19 to Form 10-K filed March 30, 1999, File No. 1-6112). *10.23 First Amendment dated as of April 22, 1999 to Second Amended & Restated Credit Agreement dated as of August 26, 1997 and restated as of December 30, 1998 among Ply Gem Industries, Inc., Fleet National Bank, as Agent, and the banks signatory thereto. *10.24 Second Amendment dated as of September 9, 1999 to Second Amended & Restated Credit Agreement dated as of August 26, 1997 and restated as of December 30, 1998, among Ply Gem Industries, Inc., Fleet National Bank, as Agent, and the banks signatory thereto. *21.1 List of subsidiaries. *23.1 Consent of Independent Public Accountants. *27.1 Financial Data Schedule. 101 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, 1999 the assets and operations of which are included in the Consolidated Financial Statements of Nortek, Inc., except subsidiaries that, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary: NAME OF SUBSIDIARY Jurisdiction Broan-NuTone Canada, Inc. Ontario, Canada Venmar Ventilation Inc. Quebec, Canada Aston Industries Inc. Quebec, Canada Innergy Tech Inc. Quebec, Canada Venmar CES, Inc. Saskatchewan, Canada Venmar Ventilation (H.D.H.) Inc. Quebec, Canada Broan-NuTone LLC Delaware Aubrey Manufacturing, Inc. Delaware NuTone Inc. Delaware Rangaire LP Delaware Jensen Industries, Inc. Delaware Linear Corporation California Linear H.K. Manufacturing, Limited Hong Kong Multiplex Technology, Inc. California We Monitor America Incorporated Colorado Xantech Corporation California Nordyne Inc. Delaware Commercial Environmental Systems Group, Inc. Delaware Governair Corporation Oklahoma Mammoth, Inc. Delaware Temtrol, Inc. Oklahoma Ventrol Air Handling Systems Inc. Quebec, Canada Webco, Inc. Missouri Nortek (UK) Limited United Kingdom Best S.p.A. Italy Best Deutschland GmbH Germany Best France S.A. France Elektromec S.p.A. Italy Ply Gem Industries, Inc. Delaware Great Lakes Window, Inc. Ohio Hoover Treated Wood Products, Inc. Delaware Kroy Building Products, Inc. Delaware Napco, Inc. Delaware Peachtree Doors and Windows, Inc. Tennessee Thermal-Gard, Inc. Pennsylvania Richwood Building Products, Inc. Delaware SNE Enterprises, Inc. Delaware Variform, Inc. Missouri 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 8, 2000, included in this Form 10-K, into the Company's previously filed Registration statements on Form S-8 (File Nos. 33-22527, 333-39293, 333-76345 and 333-79651). ARTHUR ANDERSEN LLP Boston, Massachusetts, March 8, 2000 EX-27 4
5 1000 YEAR DEC-31-1999 DEC-31-1999 80,893 45,459 256,782 13,019 212,678 678,268 492,451 163,834 1,809,684 353,776 1,023,616 0 0 19,579 240,238 1,809,684 1,992,820 1,992,820 1,433,129 1,433,129 0 000000 96,490 90,000 40,700 49,300 0 0 0 49,300 4.19 4.11
EX-10 5 Exhibit 10.21 NORTEK, INC. 1999 EQUITY PERFORMANCE PLAN ARTICLE I. INTRODUCTION 1.1 Authority for Plan. This 1999 Equity Performance Plan (the "Plan") is adopted pursuant to the 1999 Equity and Cash Incentive Plan (the "Basic Plan") of Nortek, Inc. (the "Corporation"), and is subject to all provisions of the Basic Plan, including without limitation Section 2 (administration), Section 5 (eligibility and participation), Section 6.5 (relating to Performance Awards and Performance Goals), Section 7 (events affecting outstanding awards), Section 8 (general provisions) and Section 9 (effect, amendment and termination). In the event of any inconsistency between this Plan and the Basic Plan, this Plan shall control, unless prohibited by the Basic Plan. 1.2 Defined Terms. Capitalized terms not defined herein shall have the meanings set forth in the Basic Plan. 1.3 Purpose of Plan. The purpose of the Plan is to reward certain employees of the Corporation for their contributions to the success of the Corporation and its subsidiaries as reflected in the value of the Corporation's common stock. 1.4 Authorization. The Plan was approved by the Committee on July 1, 1999 (the "Effective Date"). ARTICLE II. PARTICIPATION AND AWARDS 2.1 Participants. The employees set forth in the attached Schedule A will become participants in the Plan (the "Participants") on the Effective Date. Participants in the Plan are eligible for cash awards ("Performance Awards") based on the Performance Goal of increasing the Corporation's stock price, as set forth below. Each Participant will be allocated the percentage (the "Applicable Percentage of Participation") of any Aggregate Performance Award (as defined below) set forth next to each Participant's name on Schedule A. 2.2 Awards. In the event that the closing price of the Corporation's common stock on the New York Stock Exchange Composite Transactions (or on such other exchange as the Corporation's common stock may then be traded) equals or exceeds the Target Price set forth below for any 20 trading days (which need not be consecutive) within any 60 consecutive trading day-period, the Corporation shall distribute among the Participants, in accordance with their Applicable Percentages of Participation, an aggregate cash award (an "Aggregate Performance Award") within 30 days of the twentieth trading day of such 20 trading days. Each Aggregate Performance Award shall be equal to the amount calculated by the following formula: A = (TP-SP) * CS * AP where A = Aggregate Performance Award TP = Target Price, as set forth in the following table SP = Starting Price, which shall be the immediately preceding Target Price in the following table, or, in the case of the first Target Price, the relevant Starting Price shall be $28.00 CS = Common Shares, which shall be the number of shares of the Corporation's common stock and special common stock outstanding on the twentieth (20th) trading day of the 20 trading days in which the relevant Target Price is achieved AP = Aggregate Percentage set forth in the following table corresponding to the relevant Target Price 2 Performance Awards will be calculated based on the following Target Prices and Aggregate Percentages: Target Price Aggregate Percentage ------------ -------------------- $38 4% $45 5% $50 6% $55 6% $60 6% The Target Prices and Starting Prices shall be subject to equitable adjustment whenever there shall occur a stock split, combination, reclassification or other similar event involving the Corporation's common stock. Individual Performance Awards will be calculated by multiplying the Aggregate Performance Award by the Applicable Percentage of Participation for each Participant. 3 ARTICLE III. OTHER PROVISIONS 3.1 Change of Control. Upon the occurrence of a Change of Control (as defined in Section 7.2(b) of the Basic Plan), an Aggregate Performance Award shall be distributed among the Participants immediately upon such Change of Control equal to the sum of: (a) a cumulative amount determined by the formula set forth in Section 2.2 (substituting the definition of Common Shares below in place of the definition of Common Shares in Section 2.2) based on all Target Prices set forth in Section 2.2 (except for those Target Prices for which an Aggregate Performance Award has been paid pursuant to Section 2.2) which are lower than or equal to the Change of Control Price, as defined below, plus (b) an amount calculated by the following formula: C = X * A where C = additional Aggregate Performance Award to be paid pursuant to Section 3.1(b) hereof upon the occurrence of a Change of Control X = (CP-SP)/(TP-SP) A = (TP-SP) * CS * AP CP = Change of Control Price, which shall be equal to the final price obtained by the Corporation's shareholders upon the occurrence of a Change of Control or, in the event of a Change of Control as defined in Section 7.2(b)(5) of the Basic Plan, the average closing price of the Corporation's common stock on the New York Stock Exchange Composite Transactions (or on such other exchange as the Corporation's common stock may then be traded) for the 20 trading days immediately prior to (and including) the date of such a Change of Control 4 T = Target Price set forth in the table in Section 2.2 above that is the next Target Price for which an Aggregate Performance Award has not yet become payable pursuant to Section 2.2 or included in the calculation pursuant to Section 3.1(a) above SP = Starting Price, which shall be the highest Target Price for which an Aggregate Performance Award was payable pursuant to Section 2.2 or included in the calculation pursuant to Section 3.1(a) above, or, in the case of a Change of Control prior to the first Aggregate Performance Award under this Plan becoming payable where the Change of Control Price is less than $38.00, the relevant Starting Price shall be $28.00 CS = Common Shares, which shall be the number of shares of the Corporation's common stock and special common stock outstanding immediately prior to the occurrence of a Change of Control AP = Aggregate Percentage set forth in Section 2.2 above corresponding to the next Target Price for which an Aggregate Performance Award has not yet become payable provided, however, that no Aggregate Performance Award under Section 3.1(b) hereof shall be paid if the Change of Control Price does not exceed the last Target Price for which an Aggregate Performance Award was payable. The Trading Prices and Starting Prices shall be subject to equitable adjustment as set forth in Section 2.2. Individual Performance Awards under this Section 3.1 will be calculated by multiplying the Aggregate Performance Award calculated pursuant to this Section 3.1 by the Applicable Percentage of Participation for each Participant. 5 3.2 Termination of Service. If there is a Termination of Service (as defined in Section 7.1 of the Basic Plan) with respect to any Participant, such Participant shall cease to be a Participant under this Plan and no payment under this Plan shall be made to such Participant except for those payments due to such Participant as a result of either (a) there having been 20 trading days in which the closing price of the Corporation's common stock equals or exceeds a Target Price in accordance with Section 2.2 above prior to such Termination of Service or (2) the satisfaction of the Change of Control condition set forth in Section 3.1 above prior to such Termination of Service. In the event that there is a Termination of Service with respect to any Participant, such Participant's Applicable Percentage of Participation shall be immediately proportionately reallocated among the remaining Participants; provided, however, that if there is a Termination of Service with respect to Richard L. Bready, 60% of his Applicable Percentage of Participation on the Effective Date shall be forfeited to the Corporation, and the remainder of his Applicable Percentage of Participation as in effect at the time of the Termination of Service shall be proportionately reallocated among the remaining Participants. The sum of all Applicable Percentages of Participation, together with any percentage points forfeited to the Corporation pursuant to this Section 3.2, shall at all times equal 100%. 3.3 Annual Cap on Individual Performance Awards. The maximum Performance Award payable to any Participant, combined with any other Exempt Award (as defined in Section 6.5(c) of the Basic Plan) payable to such Participant, shall not in any year exceed $10,000,000. 3.4 Employment Rights, etc. The grant of Performance Awards under this Plan does not confer upon any person any right to continued retention by the Corporation or any subsidiary as an employee or otherwise, or affect in any way the right of the Corporation or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Performance Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Corporation to the Participant. 3.5 Termination of Plan. This Plan will terminate three years from the Effective Date, and no further Performance Awards shall become payable after such termination. Any Performance Awards that have become payable prior to such termination shall be paid in accordance with the terms of the Plan. 6 Schedule A Applicable Percentage Participant of Participation Richard L. Bready 50% Richard J. Harris 15% Almon C. Hall 15% Robert E.G. Ractliffe 15% Kevin W. Donnelly 5% 7 EX-10 6 Exhibit 10.23 FIRST AMENDMENT TO SECOND AMENDED & RESTATED CREDIT AGREMENT This First Amendment to Second Amended & Restated Credit Agreement is dated as of April 22, 1999 and is by and between Ply Gem Industries, Inc., a Delaware corporation (the "Company"), the Designated Subsidiaries party to the Credit Agreement (as defined below), the Banks party to the Credit Agreement (as defined below) and Fleet National Bank, as the Agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"). The parties hereto mutually agrees as follows: 1. Capitalized terms used herein and not expressly defined herein shall have the respective meanings assigned thereto in that certain Seconded Amended and Restated Credit Agreement dated as of August 26, 1997 and amended and restated as of December 30, 1998, among the Company, said Designated Subsidiaries, said Banks and the Agent (the "Credit Agreement"). 2. The Credit Agreement is hereby amended, effective as of the date hereof, in the following respects: (a) The definition of "Material Operating Subsidiaries" is deleted and replaced in its entirety by the following definition: ""Material Operating Subsidiaries" shall mean (a) each Designated Subsidiary; (b) any Subsidiary of the Company other than (i) Napco and its Subsidiaries, (ii) Peachtree and its Subsidiaries and (iii) Thermal-Gard and its Subsidiaries, which conducts business operations and is material to the operations of the business of the Company and its Subsidiaries taken as a whole; and (c) each Subsidiary of the Company which the Company designates as a Material Operating Subsidiary." (b) The following definitions are added to subsection 1.1 of the Loan Agreement each at the location in subsection 1.1 necessary to place such definition in alphabetical order with the existing definitions therein. (i) "Peachtree" shall mean Caradon Doors and Windows, Inc., a Tennessee corporation which is changing its name to Peachtree Doors and Windows Inc. on or about April 26, 1999. (ii) "Thermal-Gard" shall mean Caradon Thermal-Gard, Inc., a Pennsylvania corporation which is changing its name to Thermal-Gard, Inc. on or about April 26, 1999. (c) Subsection 6.7(e)(ii)A) is deleted and replaced in its entirety by the following language: ""(A)$50,000,000 in the aggregate during any fiscal year of the Company (plus, in the case of the 1999 fiscal year, the amount, if any, by which the Company's investment in Peachtree and Thermal-Gard exceeds $50,000,000)." (d) Section 9.2 of the Credit Agreement is amended by deleting the address for the Agent's counsel and replacing same with the following: "with a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, RI 02903 Attn: Malcolm Farmer III, Esquire Telephone: (401) 274-2000 Telecopy: (401) 277-9600" 3. The Credit Agreement, amended as set forth above, is hereby ratified, approved and confirmed and shall remain in full force and effect. 4. The Company and the Designated Subsidiaries represent and warrant that each of the representations and warranties in Section 3 of the Credit Agreement is accurate and complete as of the date hereof and that no Default or Event of Default exists under any of the Loan Documents. The Company and the Designated Subsidiaries represent and covenant that none of the Company and the Designated Subsidiaries has any claim, defense or setoff to any of its obligations under any of the Loan Documents. 5. On the date of this First Amendment to Second Amended and Restated Credit Agreement the Company shall pay to the Agent for the pro rata account of the Banks an amendment fee equal to .10% of the Commitment. 6. This First Amendment to Second Amended and Restated Credit Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York. 7. Section 9.14 of the Credit Agreement entitled "Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury" is by this reference fully incorporated herein. 8. This First Amendment to Second Amended and Restated Credit Agreement may be executed by one or more of the parties on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 2 9. A set of the copies of this First Amendment to Second Amended and Restated Credit Agreement signed by all of the parties shall be lodged with the Company and the Agent. IN WITNESS WHEREOF each of the parties hereto has caused this First Amendment to Second Amended and Restated Credit Agreement to be duly executed by its duly authorized officer as of the date first set forth above. BORROWER: PLY GEM INDUSTRIES, INC. By: ___________________ Title: DESIGNATED SUBSIDIARIES: SNE ENTERPRISES, INC. By: _________________________ Title: VARIFORM, INC. By:___________________________ Title: GREAT LAKES WINDOW, INC. By: ___________________________ Title: 3 AGENT: FLEET NATIONAL BANK, as Agent and as a Bank By: ________________________ Title: BANKS: BANK OF MONTREAL By: __________________________ Title: EUROPEAN AMERICAN BANK By: ________________________ Title: CITIZENS BANK OF RHODE ISLAND By: __________________________ Title: SOVEREIGN BANK By: ___________________________ Title ERSTE BANK By: ___________________________ Title: By: ___________________________ Title: 4 EX-10 7 Exhibit 10.24 SECOND AMENDMENT TO SECOND AMENDED & RESTATED CREDIT AGREEMENT This Second Amendment to Second Amended & Restated Credit Agreement is dated as of September 9, 1999 and is by and between Ply Gem Industries, Inc., a Delaware corporation (the "Company"), the Designated Subsidiaries party to the Credit Agreement (as defined below), the Banks party to the Credit Agreement (as defined below) and Fleet National Bank, as the Agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"). The parties hereto mutually agree as follows: 1. Capitalized terms used herein and not expressly defined herein shall have the respective meanings assigned thereto in that certain Second Amended and Restated Credit Agreement dated as of August 26, 1997, amended and restated as of December 30, 1998 and amended as of April 22, 1999, among the Company, said Designated Subsidiaries, said Banks and the Agent (the "Credit Agreement"). 2. The following recitals are accurate: WHEREAS, on or about the date of this Second Amendment to Second Amended and Restated Credit Agreement, KBP Acquisition Corp., Inc., a Delaware corporation ("KBP") and a wholly-owned subsidiary of the Company, is being merged into Kroy Building Products, Inc., a Delaware corporation ("Kroy") with the result that Kroy shall thereupon become a wholly-owned Subsidiary of the Company and the existing shareholders of Kroy shall receive the agreed upon cash consideration in accordance with the Agreement and Plan of Merger dated as of August 17, 1999 among the Company, KBP, Kroy & Specialty Materials and Chemicals II Limited Partnership, as Agent; and WHEREAS, Nortek has caused one of its affiliates to loan sufficient funds to KBP to provide the consideration to the shareholders of Kroy in accordance with the above-referenced Agreement and Plan of Merger, and WHEREAS, Kroy is the account party on the Existing Kroy L/C (as hereinafter defined); and WHEREAS, the Company has requested the Banks to amend the Credit Agreement to permit Fleet to issue a substitute letter of credit in replacement of the Existing Kroy L/C; and WHEREAS, such stand-by letter of credit will be used to refinance the Existing Kroy L/C (as hereinafter defined); and 1 WHEREAS, the Banks have agreed to amend the Credit Agreement and Fleet has agreed to issue the requested stand-by letter of credit for the account of the Company, in each case on the terms and conditions of the Credit Agreement, as amended by this Second Amendment to Second Amended and Restated Credit Agreement; 3. Subsection 1.1 of the Credit Agreement is hereby amended, effective as of the date hereof, in the following respects: (a) The definition of "Account Party" is deleted and replaced in its entirety by the following definition: ""Account Party" shall mean with respect to (i) each Company L/C, the Company or any Designated Subsidiary, as the case may be, in its capacity as the Person for the account of which such Company L/C is issued or deemed issued, (ii) the Napco L/C, the Company, and (iii) the Kroy L/C, the Company." (b) The definition of "Commitment" is deleted and replaced in its entirety by the following definition: ""Commitment" shall mean, as to any Bank, its obligation to make or maintain Company Loans pursuant to subsection 2.1 and participate in L/Cs in an aggregate amount not to exceed at any one time outstanding the amount set forth on Schedule I under the heading "Commitment", as such amount may be adjusted from time to time pursuant to subsection 2.6, 2.8 or 9.7; and, as to Fleet in its capacity as issuing bank, its obligation to issue and maintain Company L/Cs, the Napco L/C and the Kroy L/C in an aggregate amount not to exceed at any time outstanding the Company L/C Sublimit, the Napco Commitment and the Kroy Commitment, respectively, as such amounts may be reduced from time to time pursuant to subsection 2.6." (c) The definition of "Company L/C" is deleted and replaced in its entirety by the following definition: ""Company L/C" shall mean each Stand-by L/C and Trade L/C issued or deemed issued under this Agreement for the account of the Company or any Designated Subsidiary other than the Napco L/C or the Kroy L/C." (d) The definition of "Consolidated EBIT" is deleted and replaced in its entirety by the following definition: 2 ""Consolidated EBIT" shall mean, for any period, the sum of (a) Consolidated Net Income for such period, plus (b) all taxes based upon income deducted in calculating such Consolidated Net Income plus (c), to the extent deducted in calculating Consolidated Net Income, Consolidated Interest Expense and consolidated amortization of Debt Discount and of expenses incurred in connection with the incurrence of Indebtedness for such period, plus (d) all extraordinary losses and the unusual losses set forth in clauses (i) through (ix) below in each case to the extent deducted in calculating Consolidated Net Income, plus (e) the amount of the Nortek Administrative Fee and interest on Approved Nortek Loans accrued during such period, minus (f) all extraordinary gains and the unusual gains set forth in clauses (i) through (ix) below in each case to the extent included in calculating Consolidated Net Income: (i) gain or loss arising from the sale, abandonment or other disposition of any property or asset outside of the ordinary course of business or realized on the disposition of a segment of a business; (ii) gain or loss resulting from any extinguishments of debt; (iii) gain or loss resulting from a casualty, including but not limited to fire, earthquake or hurricane; (iv) loss resulting from write-off of intangible assets; (v) gain arising from the write-up in the book value of any asset; (vi) provisions for plant closings and realignment of operations or restructuring costs; (vii) cumulative effects of changes in accounting principles; (viii) losses from expropriation or condemnation; and (ix) gain or loss arising from a change from FIFO to LIFO inventory accounting, provided that for any portion of any period ending on or before October 9, 1998, such amounts shall be calculated on a pro forma basis giving effect to the Napco Acquisition as though the Napco Acquisition had occurred at the beginning of such period and for any period ending on or prior to the effective date of the Second Amendment, such amounts shall be calculated on a pro forma basis giving effect to the Kroy Acquisition as though the Kroy Acquisition had occurred at the beginning of such period." (e) The definition of "Consolidated EBITDA" is deleted and replaced in its entirety by the following definition: ""Consolidated EBITDA" shall mean, for any period, the sum of (a) Consolidated EBIT, plus (b) depreciation expense plus (c) amortization expense, in each case of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP for such period, provided that for any portion of any period ending on or before October 9, 1998, such amounts shall be calculated on a pro forma basis giving effect to the Napco Acquisition as though the Napco Acquisition had occurred at the beginning of such period and for any period ending on or prior to the effective date of the Second Amendment, such amount shall be calculated on a pro forma basis giving effect to the Kroy Acquisition as though the Kroy Acquisition had occurred at the beginning of such period." 3 (f) The definition of "Consolidated Interest Expense" is deleted and replaced in its entirety by the following definition: ""Consolidated Interest Expense" shall mean, for any period, (a) the aggregate amount of all interest charges paid or accrued during such period (including imputed interest on obligations consisting of Financing Leases and all amounts accrued or paid pursuant to Hedge Agreements but excluding amortization of Debt Discount and of expenses incurred in connection with the incurrence of Indebtedness) on Indebtedness of the Company and its consolidated Subsidiaries, minus (b) the sum of (i) interest income and (ii) all amounts received or receivable pursuant to Hedge Agreements, in each case of the Company and its Subsidiaries determined on a consolidated basis, provided that for any portion of any period ending on or before October 9, 1998, such amounts shall be calculated on a pro forma basis giving effect to the Napco Acquisition as though the Napco Acquisition had occurred at the beginning of such period and for any period ending on or prior to the effective date of the Second Amendment, such amount shall be calculated on a pro forma basis giving effect to the Kroy Acquisition as though the Kroy Acquisition had occurred at the beginning of such period." (g) The definition of "Consolidated Net Income" is deleted and replaced in its entirety by the following definition: ""Consolidated Net Income" shall mean, for any period, the amount which, in conformity with GAAP, would be set opposite the caption "net income" (or any like caption) on a consolidated statement of income of the Company and its consolidated Subsidiaries for such period; provided that for any portion of any period ending on or before October 9, 1998, such amounts shall be calculated on a pro forma basis giving effect to the Napco Acquisition as though the Napco Acquisition had occurred at the beginning of such period and for any period ending on or prior to the effective date of the Second Amendment, such amounts shall be calculated on a pro forma basis giving effect to the Kroy Acquisition as though the Kroy Acquisition had occurred at the beginning of such period; and provided, further, that neither the Nortek Administrative Fee nor interest on Approved Nortek Loans shall be deducted from the income of the Company and such Subsidiaries for the purpose of determining "net income"." 4 (h) The definition of "Consolidated Net Worth" is deleted and replaced in its entirety by the following definition: ""Consolidated Net Worth" shall mean, at a particular date (a) all amounts which would, in conformity with GAAP, be included under stockholders' equity on a consolidated balance sheet of the Company and its consolidated Subsidiaries at such date, plus (b) any unrealized losses to the extent reflected in the calculation of stockholders' equity, plus (c) all accrued and unpaid liabilities in respect of the Nortek Administrative Fee or any Approved Nortek Loans, minus (d) the sum of (i) any unrealized gains to the extent reflected in the calculation of shareholders' equity, and (ii) any investments made by the Company or any of its Subsidiaries in Nortek or any of its Subsidiaries (other than Subsidiaries consisting of the Company or any of its Subsidiaries). (i) The definition of "Facilities" is deleted and replaced in its entirety by the following definition: ""Facilities" shall mean the Company Facility, the Napco Facility and the Kroy Facility." (j) The definition of "L/Cs' is deleted and replaced in its entirety by the following definition: ""L/Cs" shall mean the Company L/C, the Napco L/C and the Kroy L/C." (k) The definition of "Material Operating Subsidiaries" is deleted and replaced in its entirety by the following definition: ""Material Operating Subsidiaries" shall mean (a) each Designated Subsidiary; (b)any Subsidiary of the Company other than (i) Napco and its Subsidiaries, (ii) Peachtree and its Subsidiaries, (iii) Thermal-Gard and its Subsidiaries and (iv) Kroy and its Subsidiaries, which conducts business operations and is material to the operations of the business of the Company and its Subsidiaries taken as a whole; and (c) each Subsidiary of the Company which the Company designates as a Material Operating Subsidiary." (l) The definition of "Specified Company L/C Obligations" is deleted and replaced in its entirety by the following definition: 5 ""Specified Company L/C Obligations" at any date shall mean the sum of (a) the aggregate undrawn amount of all letters of credit as to which the Company or any Subsidiary is an account party at such date excluding (i) the Fifth Third Letters of Credit, the First American Letter of Credit, the Napco L/C, and the Kroy L/C and (ii) any renewals, extensions and replacements of any of the Fifth Third Letters of Credit, the First American Letter of Credit, the Napco L/C or the Kroy L/C, plus (b) the amount of all Unpaid Drawings in respect of Company L/Cs." 4. The following definitions are added to subsection 1.1 of the Credit Agreement each at the location in subsection 1.1 necessary to place such definition in alphabetical order with the existing definitions therein. (a) ""Approved Company Loans" shall mean loans by the Company to any of its Subsidiaries which are subordinated to the Obligations on the following basis: such Subsidiary shall not make, and the Company shall not demand or receive, payment of any amount on account of such loan if such Subsidiary would be prohibited from making a distribution to the Company pursuant to Section 6.5 hereof." (b) ""Approved Nortek Loans" shall mean loans by Nortek or any of its Subsidiaries (other than the Company and its Subsidiaries) to the Company or any of its Subsidiaries which are subordinated to the Obligations on the following basis: the Company or such Subsidiary shall not make, and neither Nortek nor any of its Subsidiaries shall demand or receive, payment of any amount on account of such loan if and to the extent that the Company or such Subsidiary would be prohibited from making a distribution to Nortek pursuant to Section 6.5 hereof." (c) ""Available Kroy Commitment" shall mean, as to each Bank, at a particular time, an amount equal to the difference between (a) such Bank's Kroy Commitment at such time and (b) the aggregate unpaid principal amount at such time of such Bank's Commitment Percentage of Bank L/C Obligations to the extent arising solely from the issuance of the Kroy L/C." (d) ""Existing Kroy L/C" shall mean the stand-by letter of credit issued by Harris Trust and Savings Bank to Firstar Trust Company, as trustee under the Trust Indenture dated as of June 1, 1998 between the City of York, Nebraska and said trustee for the account of Kroy, in the amount of $5,653.699." 6 (d) ""Kroy" shall mean Kroy Building Products, Inc., a Delaware corporation. (e) ""Kroy Acquisition" shall mean the transaction described in the fourth "WHEREAS" clause in paragraph 2, above." (f) ""Kroy Commitment" shall mean, as to any Bank, that portion of its Commitment set forth on Schedule I under the heading "Kroy commitment" opposite such Bank's name, as such amount may be adjusted from time to time pursuant to subsection 2.6, 2.8 or 9.7." (g) ""Kroy Facility" shall mean, at any time, the aggregate amount of the Banks' Kroy Commitments." (h) ""Kroy L/C" shall mean a Stand-by L/C issued under this Agreement for the account of the Company in substitution for the Existing Kroy L/C." 5. Subsection 2.1(c)(i)(B) is hereby deleted and replaced in its entirety with the following language: "(B) L/Cs. Upon the execution and delivery by the Company or a Designated Subsidiary, as the case may be, to Fleet of an Application for a Company L/C, the Napco L/C or the Kroy L/C, and upon payment by the Company to Fleet of the standard charges and fees then customarily imposed by Fleet in connection with such Application (which have been supplied to the Company) for the sole account of Fleet, Fleet shall from time to time on any Business Day, subject to the terms and conditions of this Agreement and in reliance on the agreements of the other Banks set forth in subsection 2.19(c), in a timely manner in accordance with its standard operating procedures, issue Company L/Cs for the account of the Company or any Designated Subsidiary, in each case in an aggregate face amount up to the Available Company L/C Commitment as then in effect and issue the Napco L/C for the account of the Company in a face amount equal to the Available Napco Commitment as then in effect and issue the Kroy L/C for the account of the Company in a face amount equal to the Available Kroy Commitment then in effect, in each case with a term selected by the Company or such Designated Subsidiary, as the case may be, which shall not exceed one year plus renewals as provided therein, in the case of Stand-by L/Cs except that the Kroy L/C may expire on June 15, 2001 plus renewals as provided therein, and 180 days in the case of Trade L/Cs, and which shall expire in either case no later than 30 days prior to the Termination Date. The Agent shall notify each Bank of the issuance of an L/C hereunder, and Fleet will be deemed to have sold and transferred an undivided interest and participation in respect of each L/C issued by it and each Bank hereunder will be deemed to have purchased and received, without further action on the part of any party, an undivided interest and participation in such L/C, based on such Bank's Commitment Percentage of such L/C. The Company may only request the issuance of one Stand-by L/C under the Napco Facility or the Kroy L/C Facility." 7 6. Subsection 2.1(c)(D)(iii) is hereby deleted and replaced in its entirety with the following language: "(iii) If, notwithstanding the other provisions of this subsection 2.1(c), on the Termination Date there are outstanding any L/Cs which have not expired or been terminated with the consent of the Company, the applicable Account Party and the respective beneficiaries thereof, then this Agreement (including, without limitation, this subsection 2.1(c) and subsection 2.22) and the respective rights, obligations and covenants of the Company, the Designated Subsidiaries, Fleet and the Banks under this Agreement shall remain in full force and effect until the date on which the last of the L/Cs expires or is terminated with the consent of the Company, the applicable Account Party and the respective beneficiaries thereof and all payments made or to be made by Fleet under the L/Cs are paid or reimbursed in full by the Company or one or more of the Designated Subsidiaries, in the case of Company L/Cs, or by the Company, in the case of the Napco L/C or the Kroy L/C, except that Fleet's Commitment shall terminate on the Termination Date." 7. The next-to-last sentence of Section 2.2 is deleted and replaced in its entirety with the following language: "EachNote shall (a) be dated the date of its issuance, payable with respect to principal as set forth in subsection 2.9, and (c) bear interest on the unpaid principal amount thereof from time-to-time outstanding until payment in full of the principal amount thereof at the applicable interest rate per annum determined as provided in subsection 2.10." 8. Section 2.6 is hereby deleted and replaced in its entirety with the following language: "2.6 Termination or Reduction of Commitments.(a) Optional. The Company shall have the right, upon not less than three Business Days' notice to the Agent, to terminate the Company Commitments, the Napco Commitments or the Kroy Commitments or, from time to time, to reduce the amount of the Company Commitments, the Napco Commitments or the Kroy Commitments, provided that no such reduction or termination shall be permitted if, after giving effect thereto, and to any prepayments of the Company Loans and any payments or reimbursements in respect of Company L/Cs, the Napco L/C or the Kroy L/C, as the case may be, by the Company or any Designated Subsidiary made on the effective date of such reduction or termination, the then outstanding principal amount of the Company Loans and Bank L/C Obligations arising with respect to the Company L/Cs, the Napco L/C and/or the Kroy L/C, as the case may be, would exceed the amount of the Company Commitments, the Napco Commitments or the Kroy Commitments, respectively, then in effect. The aggregate amount of all reductions indicated on the same notice delivered under this subsection shall be in an amount of (i) $5,000,000 or a whole multiple of $1,000,000 in excess thereof or (ii) (in the case of a termination) the aggregate amount of the Company Commitment, the Napco Commitments and/or the Kroy Commitments, as the case may be, then in effect, and shall reduce permanently in accordance with the allocations set forth in such notice the amount of the Company Commitments, Napco Commitments and/or the Kroy Commitments then in effect. The Commitments once terminated or reduced may not be reinstated. 8 (b) Mandatory. After giving effect to the Company Loans made on or before the Second Closing Date and the issuance of the Napco L/C and the Kroy L/C, upon each repayment or prepayment of the Company Loans, upon each drawing under the Napco L/C or the Kroy L/C and payment by the Company of amounts due hereunder in respect of such drawing and upon the expiration or termination of such Napco L/C or Kroy L/C, the aggregate Company Commitments, or the Napco Commitments or the Kroy Commitments, as applicable, of the Banks shall be automatically and permanently reduced, on a pro rata basis, by an amount equal to the amount by which the aggregate Company Commitments, the Napco Commitments or the Kroy Commitments, respectively, immediately prior to such reduction exceed the aggregate unpaid principal amount or face amount, as the case may be, of the Company Loans and the Company L/C Sublimit and the remaining face amount, if any, of the Napco L/C and/or the Kroy L/C and the outstanding principal amount, if any, of any Unpaid Drawings in respect of the Napco L/C and/or the Kroy L/C immediately after giving effect to any such drawing and payment, expiration or termination, respectively. The Commitments once terminated or reduced may not be reinstated." 9. Subsection 2.22(f) is hereby deleted and replaced in its entirety with the following language: "(f) In the event that the credit rating of Fleet is downgraded to less than "A-" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. or any successor to the rating agency business thereof and such down-grading will cause the Company or any Designated Subsidiary to incur any additional expense or otherwise be adversely affected, the Company or any Designated Subsidiary may replace any L/C issued or deemed issued by Fleet with an L/C issued by any Bank or any other banks, in each case with a credit rating of "A-" or better, provided that any such letter of credit shall not be entitled to the benefits of this Agreement and, to the extent such letter of credit replaces a Company L/C shall constitute Specified Company L/C Obligations (to the extent provided in the definition thereof), with the effect of reducing the Available Company L/C Commitment (in accordance with the definition thereof), and, to the extent such letter of credit replaces the Napco L/C or the Kroy L/C, shall have the effect of terminating the Available Napco Commitment or the Available Kroy Commitment, as the case may be, in full." 10. Subsection 6.1(b) is hereby deleted and replaced in its entirety with the following language: "(b) (i) Indebtedness of the Company to any Subsidiary, and of any Subsidiary to the Company, any other subsidiary, so long as such Indebtedness remains subordinated to the Obligations under the Loan Documents on terms and conditions satisfactory to the Banks and (ii) Approved Company Loans." 9 11. Subsection 6.1(f) is hereby deleted and replaced in its entirety with the following language: "(f) (i) unsecured subordinated Indebtedness of the Company, provided that such Indebtedness is on such terms and pursuant to such documentation as the Required Banks shall approve, which approval shall not be unreasonably withheld and (ii) Approved Nortek Loans." 12. Subsection 6.7(e)(ii)(A) is deleted and replaced in its entirety by the following language: "(A) $50,000,000 in the aggregate during any fiscal year of the Company (plus, in the case of the 1999 fiscal year, the amount, if any, by which the Company's investment in Peachtree, Thermal-Gard and Kroy exceeds $50,000,000)." 13. Section 6.8 is amended by adding at the end thereof the following language: "(c) prepaying any Approved Nortek Loans if permitted to do so pursuant to the subordination provisions thereof." 14. Section 6.10 is amended by adding at the end of clause (a) after "...Subsidiaries..." the following language: "(exclusive of any Approved Nortek Loans)" 15. Section 6.11 is amended by adding to clause (b) immediately after ..."Interest Expense..." the following language: "(exclusive of interest on any Approved Nortek Loans)" 16. Section 9.14 of the Credit Agreement entitled "Governing Law; Consent to Jurisdiction; Waiver of Trial by Jury" is by this reference fully incorporated herein. 17. Schedule 1 to the Credit Agreement is deleted and replaced in its entirety with Schedule 1 to this Second Amendment. 18. Paragraph 4 of Exhibit D to the Credit Agreement is amended by changing the first line thereof to read: "As additional security for the payment of and performance of all our present and future ...". 19. The Credit Agreement, amended as set forth above, is hereby ratified, approved and confirmed and shall remain in full force and effect. 10 20. Effective on the date of this Second Amendment, the Notes outstanding prior to such date shall be surrendered by the holders thereof for cancellation and new Notes reflecting the increased maximum amount of the Obligations shall be concurrently executed and delivered by the Company and the Designated Subsidiaries to the Banks. 21. The Company and the Designated Subsidiaries represent and warrant that each of the representations and warranties in Section 3 of the Credit Agreement is accurate and complete as of the date hereof and that no Default or Event of Default exists under any of the Loan Documents. The Company and the Designated Subsidiaries represent and covenant that none of the Company and the Designated Subsidiaries has any claim, defense or setoff to any of its obligations under any of the Loan Documents. 22. On the date of this Second Amendment to Second Amended and Restated Credit Agreement the Company shall pay to the Agent for the pro rata account of the Banks an amendment fee equal to .065% of the Commitment. 23. This Second Amendment to Second Amended and Restated Credit Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York. 24. This Second Amendment to Second Amended and Restated Credit Agreement may be executed by one or more of the parties on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 25. A set of the copies of this Second Amendment to Second Amended and Restated Credit Agreement signed by all of the parties shall be lodged with the Company and the Agent. IN WITNESS WHEREOF each of the parties hereto has caused this Second Amendment to Second Amended and Restated Credit Agreement to be duly executed by its duly authorized officer as of the date first set forth above. BORROWER: PLY GEM INDUSTRIES, INC. By:_____________________ Title: DESIGNATED SUBSIDIARIES: 11 SNE ENTERPRISES, INC. By:______________________ Title: VARIFORM, INC. By:_______________________ Title: GREAT LAKES WINDOW, INC. By:________________________ Title: AGENT: FLEET NATIONAL BANK, as Agent and as a Bank By:________________________ Title: BANKS: BANK OF MONTREAL By:________________________ Title: 12 EUROPEAN AMERICAN BANK By:_______________________ Title: CITIZENS BANK OF RHODE IS By:______________________ Title: SOVEREIGN BANK By:_______________________ Title: ERSTE BANK By:_______________________ Titlr By:_______________________ Title: 13
SCHEDULE I COMMITMENTS AND APPLICABLE LENDING OFFICES Name of Initial Lender Commitment Company Kroy Napco Domestic Lending Office Eurodollar Lending Office Percentage Commintment Commitment Commitment and Address for Notices Fleet National Bank 30.992931 $28,274,302.67 $1,752,247.06 $1,619,908.42 56 East 42nd Street 56 East 42nd Street New York, NY 10017 New York, NY 10017 ATTN: Peter Hall ATTN: Peter Hall Fax: (212) 907-5614 Fax: (212) 907-5614 Bank of Montreal 28.752575 26,230,463.81 1,625,584.08 1,502,811.59 430 Park Avenue 430 Park Avenue 14th Floor 14th Floor New York, NY 10022 New York, NY 10022 ATTN: Jordan Fragiacomo ATTN: Jordan Fragiacomo Fax: (212) 605-1454 Fax: (212) 605-1454 Citizens Bank of RI 8.215022 7,494,418.75 464,452.62 429,374.74 One Citizens Plaza One Citizens Plaza Providence, RI 02903 Providence, RI 02903 ATTN: Michael DiSandro ATTN: Michael DiSandro Fax: (401) 455-5404 Fax: (401) 455-5404 Sovereign Bank 8.566908 7,815,438.10 484,347.19 447,766.81 10 Weybosset Street 10 Weybosset Street Suite 905 Suite 905 Providence, RI 02903 Providence, RI 02903 ATTN: Robert Leach ATTN: Robert Leach Fax: (401) 421-7537 Fax: (401) 421-7537 Erste Bank 8.092563 7,382,701.58 457,529.15 422,974.15 280 Park Avenue 280 Park Avenue West Office Building West Office Building 32nd Floor 32nd Floor New York, NY 10017 New York, NY 10017 ATTN: Rima Terradista ATTN: Rima Terradista Fax: (212) 984-5627 Fax: (212) 984-5627 European American Bank 15.379999 14,030,900.09 869,538.90 803,866.79 335 Madison Avenue 335 Madison Avenue 17th Floor 17th Floor New York, NY 10017 New York, NY 10017 ATTN: Kristen Burke ATTN: Kristen Burke Fax: (212) 503-2667 Fax: (212) 503-2667 TOTALS 100% $91,220,225.00 $5,653,699.00 $5,226,702.50
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