-----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, LhcZ2tHXvOPXRT36G1cjrj39OvjcPYaf0NaDAjdkB7IL4OO32MIhEViXdE2Ojx7r X+mZCExBLrzouWyRJe3nAA== 0000072423-00-000021.txt : 20000517 0000072423-00-000021.hdr.sgml : 20000517 ACCESSION NUMBER: 0000072423-00-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000401 FILED AS OF DATE: 20000516 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-Q SEC ACT: SEC FILE NUMBER: 001-06112 FILM NUMBER: 637087 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-6112 NORTEK, INC. (Exact name of registrant as specified in its charter) Delaware 05-0314991 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 Kennedy Plaza, Providence, RI 02903-2360 (Address of principal executive offices) (Zip Code) (401) 751-1600 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of Common Stock outstanding as of April 28, 2000 was 10,823,649. The number of shares of Special Common Stock outstanding as of April 28, 2000 was 549,326. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands) April 1, Dec. 31, 2000 1999 ---- ---- (Unaudited) Assets Current Assets: Unrestricted Cash and cash equivalents $ 66,843 $ 80,893 Marketable securities available for sale 4,000 34,219 Restricted Cash, investments and marketable securities at cost, which approximates market 10,933 11,240 Accounts receivable, less allowances of $12,067 and $13,019 271,246 243,763 Inventories Raw materials 97,117 89,581 Work in process 20,323 20,844 Finished goods 133,889 102,253 ---------- ---------- 251,329 212,678 ---------- ---------- Prepaid expenses 18,274 11,864 Other current assets 12,724 16,787 Prepaid income taxes 66,500 66,824 ---------- ---------- Total current assets 701,849 678,268 ---------- ---------- Property and Equipment, at Cost: Land 17,043 16,270 Buildings and improvements 125,680 127,736 Machinery and equipment 353,541 348,445 ---------- ---------- 496,264 492,451 Less accumulated depreciation 171,513 163,834 ---------- ---------- Total property and equipment, net 324,751 328,617 ---------- ---------- Other Assets: Goodwill, less accumulated amortization of $60,952 and $56,942 584,152 589,532 Intangible assets, less accumulated amortization of $17,495 and $15,956 133,386 133,040 Deferred debt expense 21,240 22,068 Restricted investments and marketable securities 16,258 15,677 Other 43,233 42,482 ---------- ---------- 798,269 802,799 ---------- ---------- $1,824,869 $1,809,684 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Dollar amounts in thousands) April 1, Dec. 31, 2000 1999 --------- --------- (Unaudited) Liabilities and Stockholders' Investment Current Liabilities: Notes payable and other short-term obligations $ 9,116 $ 8,476 Current maturities of long-term debt 5,614 5,564 Accounts payable 193,323 149,772 Accrued expenses and taxes, net 159,643 189,964 ---------- ---------- Total current liabilities 367,696 353,776 ---------- ---------- Other Liabilities Deferred income taxes 73,703 73,499 Other 99,703 98,976 ---------- ---------- 173,406 172,475 ---------- ---------- Notes, Mortgage Notes and Obligations Payable, Less Current Maturities 1,022,138 1,023,616 Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares; 18,740,517 and 18,738,292 shares issued 18,740 18,738 Special common stock, $1 par value; authorized 5,000,000 shares; 839,711 and 840,436 shares issued 840 841 Additional paid-in capital 208,808 208,755 Retained earnings 147,266 143,266 Accumulated other comprehensive loss (13,027) (11,822) Less --treasury common stock at cost, 7,844,217 and 7,793,217 shares (98,931) (97,894) --treasury special common stock at cost, 290,067 and 290,054 shares (2,067) (2,067) ---------- ---------- Total stockholders' investment 261,629 259,817 ---------- ---------- $1,824,869 $1,809,684 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For The Three Months Ended April 1, April 3, 2000 1999 --------- ---------- (In thousands except per share amounts) (Unaudited) Net Sales $491,507 $406,700 -------- -------- Costs and Expenses: Cost of products sold 358,218 296,916 Selling, general and administrative expense 97,737 77,383 Amortization of goodwill and intangible assets 5,752 4,784 -------- -------- 461,707 379,083 -------- -------- Operating earnings 29,800 27,617 Interest expense (24,310) (23,966) Investment income 1,910 2,849 -------- -------- Earnings before provision for income taxes 7,400 6,500 Provision for income taxes 3,400 3,000 -------- -------- Net Earnings $ 4,000 $ 3,500 ======== ======== Net Earnings per share of common stock: Basic $ .35 $ .30 ======= ======= Diluted $ .35 $ .29 ======= ======= Weighted Average Number of Shares: Basic 11,484 11,747 ======== ======== Diluted 11,549 11,925 ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Months Ended April 1, April 3, 2000 1999 -------- -------- (Amounts in thousands) (Unaudited) Cash Flows from operating activities: Net earnings $ 4,000 $ 3,500 -------- -------- Adjustments to reconcile net earnings to cash: Depreciation and amortization expense 15,555 13,041 Non-cash interest expense 985 835 Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (28,675) (16,661) Inventories (39,456) (13,266) Prepaids and other current assets (3,926) (558) Accounts payable 44,622 12,992 Accrued expenses and taxes (30,392) (36,594) Long-term assets, liabilities and other, net (1,171) (1,282) --------- -------- Total adjustments to net earnings (42,458) (41,493) --------- -------- Net cash used in operating activities $(38,458) $(37,993) --------- -------- The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) For the Three Months Ended April 1, April 3, 2000 1999 -------- -------- (Amounts in thousands) (Unaudited) Cash Flows from investing activities: Capital expenditures $ (7,667) $(11,772) Net cash paid for businesses acquired --- (8,023) Purchase of investments and marketable securities (4,004) (54,311) Proceeds from the sale of investments and marketable securities 34,439 85,432 Change in restricted cash and investments (21) 5,743 Other, net 2,630 (3,893) -------- -------- Net cash provided by investing activities 25,377 13,176 -------- -------- Cash Flows from financing activities: Change in borrowings, net --- (2,972) Purchase of Nortek Common and Special Common Stock (1,029) (2,390) Other, net 60 111 -------- -------- Net cash used in financing activities (969) (5,251) Net decrease in unrestricted cash and cash equivalents (14,050) (30,068) Unrestricted cash and cash equivalents at the beginning of the period 80,893 87,876 Unrestricted cash and cash equivalents at the end of the period $ 66,843 $ 57,808 ======== ======== Interest paid $ 44,171 $ 43,842 ======== ======== Income taxes paid, net $ 1,762 $ 2,598 ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED APRIL 3, 1999
Addi- Accumulated Special tional Other Common Common Paid in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income(Loss) Income(Loss) (Dollar amounts in thousands) (Unaudited) Balance, December 31, 1998 $18,428 $855 $201,626 $93,966 $(85,669) $(11,596) --- Net earnings --- --- --- 3,500 --- --- $3,500 Other comprehensive income: Currency translation adjustment --- --- --- --- --- (1,208) (1,208) Unrealized decrease in the value of market- able securities --- --- --- --- --- 212 212 ------ Comprehensive income $2,504 ====== 6,282 shares of special common stock converted into 6,282 shares of common stock 6 (6) --- --- --- --- 10,865 shares of common stock issued upon exercise of stock options 11 --- 90 --- --- --- 89,508 shares of treasury stock acquired --- --- --- --- (2,390) --- 235,000 shares of common stock issued as partial consideration for an acquisition 235 --- 6,080 --- --- --- ------- ---- -------- ------- -------- -------- Balance, April 3, 1999 $18,680 $849 $207,796 $97,466 $(88,059) $(12,592) ======= ==== ======== ======= ======== ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED APRIL 1, 2000
Addi- Accumulated Special tional Other Common Common Paid in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Loss Income(Loss) (Dollar amounts in thousands) (Unaudited) Balance, December 31, 1999 $18,738 $841 $208,755 $143,266 $(99,961) $(11,822) $ --- Net earnings --- --- --- 4,000 --- --- 4,000 Other comprehensive income: Currency translation adjustment --- --- --- --- --- (1,160) (1,160) Unrealized increase in the value of market- able securities --- --- --- --- --- (45) (45) ------ Comprehensive income $2,795 ====== 725 shares of special common stock converted into 725 shares of common stock 1 (1) --- --- --- --- 1,500 shares of common stock issued upon exercise of stock options 1 --- 53 --- --- --- 51,013 shares of treasury stock acquired --- --- --- --- (1,037) --- ------- ---- -------- -------- --------- -------- Balance, April 1, 2000 $18,740 $840 $208,808 $147,266 $(100,998) $(13,027) ======= ==== ======== ======== ========= ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 2000 AND APRIL 3, 1999 (A) The unaudited condensed consolidated financial statements (the "Unaudited Financial Statements") presented have been prepared by Nortek, Inc. and include the accounts of Nortek, Inc., and all of its significant wholly owned subsidiaries (the "Company") after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. It is suggested that these Unaudited Financial Statements be read in conjunction with the financial statements and the notes included in the Company's latest Annual Report on Form 10-K as filed with the Securities and Exchange Commission. (B) 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. (C) 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 programs were announced on May 4, 2000, to purchase up to 1,000,000 shares of the Company's Common and Special Common Stock and on May 20, 1999, to purchase up to 500,000 shares of the Company's Common and Special Common Stock. Both programs allow for purchases in open market or negotiated transactions and are subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of May 4, 2000, all 500,000 shares of the Company's Common and Special Common Stock authorized by the May 20, 1999 program have been purchased for approximately $13,300,000 and such share purchases were accounted for as Treasury Stock. There have been no purchases under the May 4, 2000 program. At April 28, 2000, approximately $86,900,000 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 debt covenant related to such payments. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 2000 AND APRIL 3, 1999 (Continued) (D) Basic earnings per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each period. Special Common Stock is treated as the equivalent of Common Stock in determining earnings per share results. Diluted earnings per share amounts have been computed using the weighted average number of common and common equivalent shares and the dilutive potential common and special common shares outstanding during each period. A reconciliation between basic and diluted earnings per share from continuing operations is as follows: Three Months Ended April 1, April 3, 2000 1999 -------- -------- (In thousands except per share amounts) Net earnings $ 4,000 $ 3,500 Basic EPS: Basic common shares 11,484 11,747 ======= ======= Basic EPS $ .35 $ .30 ======= ======= Diluted EPS: Basic common shares 11,484 11,747 Plus: Impact of stock options 65 178 ------- ------- Diluted common shares 11,549 11,925 ======= ======= Diluted EPS $ .35 $ .29 ======= ======= (E) In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133 - Amendment of SFAS 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. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 2000 AND APRIL 3, 1999 (Continued) SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company may also implement SFAS 133 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. (F) The Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") 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. (G) The Company has three reportable segments: the Residential Building Products Segment; the Air Conditioning and Heating Products Segment; and the Windows, Doors and Siding Products 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 Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. The income statement impact of all purchase accounting adjustments, including goodwill and intangible assets amortization, is included in the operating earnings of the applicable segment. Intersegment net sales and eliminations were not material for any of the periods presented. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 2000 AND APRIL 3, 1999 (Continued) Summarized financial information for the Company's reportable segments is presented in the tables that follow for the three months ended April 1, 2000 and April 3, 1999: Three Months Ended April 1, April 3, 2000 1999 --------- -------- (Amounts in thousands) (Unaudited) Net Sales: Residential building products $171,962 $154,294 Air conditioning and heating products 127,646 116,434 Windows, doors and siding products 172,548 117,431 Other 19,351 18,541 -------- -------- Consolidated net sales $491,507 $406,700 ======== ======== Operating Earnings (Loss): Residential building products $ 25,066 $ 19,147 Air conditioning and heating products 12,654 11,715 Windows, doors and siding products (4,553) (219) Other, net (3,367) (3,026) -------- -------- Consolidated operating earnings 29,800 27,617 Unallocated: Interest expense (24,310) (23,966) Investment income 1,910 2,849 -------- -------- Earnings before provision for income taxes $ 7,400 $ 6,500 ======== ======== Depreciation and Amortization: Residential building products $ 5,559 $ 5,022 Air conditioning and heating products 2,997 2,585 Windows, doors and siding products 6,614 4,949 Other 385 485 -------- -------- Consolidated depreciation and amortization $ 15,555 $ 13,041 ======== ======== (H) In March 2000, one of the trusts related to the Company's supplemental retirement plans loaned funds to certain officers of the Company who have fully vested retirement benefits in such plans. At April 1, 2000, approximately $13,400,000 of notes receivable bearing interest at 6 3/4% and maturing 2015 related to this transaction are included in Other Assets in restricted investments and marketable securities in the accompanying unaudited consolidated balance sheet. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 1, 2000 AND APRIL 3, 1999 (Continued) (I) Subsequent to the NuTone, Inc. ("NuTone") acquisition on July 31, 1998, the Company has realized and expects to realize additional cost reductions ("NuTone Cost Reductions") as a result of integrating NuTone into the Company's operations. The Company's operating earnings for the three months ended April 1, 2000 include approximately $3,300,000 of net cost savings related to NuTone Cost Reductions which are net of approximately $700,000 of related costs and expenses. For the full year 1999, the Company's operating earnings included approximately $14,000,000 of net cost savings related to NuTone Cost Reductions which were net of approximately $3,400,000 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 annually. Future NuTone Cost Reductions are estimates and actual savings achieved could differ materially. (J) The Company has recorded liabilities in connection with acquisitions related to employee terminations and other exit costs associated with management's plans to eliminate certain activities of acquired entities. The Company has recorded liabilities of approximately $2,200,000 in the three months ended April 1, 2000, which principally relate to the termination of certain employees. As of April 1, 2000, plans for eliminating certain activities have been finalized for all significant acquisitions. Charges to these liabilities for employee termination costs include payroll, payroll taxes and insurance benefits related to severance arrangements and were approximately $450,000 for the three months ended April 1, 2000. 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 $60,000 for the three months ended April 1, 2000. At April 1, 2000, liabilities in connection with acquisitions related to employee terminations and other exit costs totaled approximately $4,500,000. In addition, for the three months ended April 1, 2000, the Company expensed in the accompanying consolidated statement of operations approximately $700,000 of costs related to the integration activities of NuTone into the Company's operations. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 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. 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. (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 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. 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. These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the results of Webco, the Caradon Acquired Companies, Multiplex, Kroy and Xantech are included in the Company's consolidated results since the date of their acquisition. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) Results of Operations - --------------------- The tables that follow present the unaudited net sales and operating earnings for the Company's principal segments for the three months ended April 1, 2000 and April 3, 1999, and the dollar amount and percentage change of such results as compared to the prior comparable period. Change in Three Months Ended First Quarter 2000 April 1, April 3, as Compared to 1999 2000 1999 $ % ------ ------ --------- ------ (Dollar amounts in thousands) Net Sales: - ---------- Residential building products $171,962 $154,294 $17,668 11.5% Air conditioning and heating products 127,646 116,434 11,212 9.6 Windows, doors and siding products 172,548 117,431 55,117 46.9 Other 19,351 18,541 810 4.4 -------- -------- ------ $491,507 $406,700 $84,807 20.9% ======== ======== ======= Change in Three Months Ended First Quarter 2000 April 1, April 3, as Compared to 1999 2000 1999 $ % ------ ------ --------- ------ (Dollar amounts in thousands) Operating Earnings: - ------------------- Residential building products $25,066 $19,147 $5,919 30.9% Air conditioning and heating products 12,654 11,715 939 8.0 Windows, doors and siding products (4,553) (219) (4,334) (1,979.0) Other (3,367) (3,026) (341) (11.3) ------- ------ ------ $29,800 $27,617 $2,183 7.9% ======= ======= ====== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) The tables that follow set forth, for the periods presented, (a) certain unaudited consolidated operating results, (b) the change in the amount and the percentage change of such results as compared to the prior comparable period, (c) the percentage which such results bear to net sales, and (d) the change of such percentages as compared to the prior comparable period. The results of operations for the first quarter ended April 1, 2000 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year. Change in First Quarter Ended First Quarter 2000 April 1, April 3, as Compared to 1999 2000 1999 $ % -------- ------- -------- ------- (Dollar amounts in millions) Net sales $491.5 $406.7 $84.8 20.9% Cost of products sold 358.2 296.9 (61.3) (20.6) Selling, general and administrative expense 97.7 77.4 (20.3) (26.2) Amortization of goodwill and intangible assets 5.8 4.8 (1.0) (20.8) ------ ------ ------ ----- Operating earnings 29.8 27.6 2.2 8.0 Interest expense (24.3) (23.9) (0.4) (1.7) Investment income 1.9 2.8 (0.9) (32.1) ------ ------ ------ ----- Earnings before provision for income taxes 7.4 6.5 0.9 13.8 Provision for income taxes 3.4 3.0 (0.4) (13.3) ------ ------ ------ ----- Net earnings $ 4.0 $ 3.5 $ 0.5 14.3% ====== ====== ====== ===== Percentage of Net Sales Change in Percentage First Quarter Ended for the First April 1, April 3, Quarter 2000 as 2000 1999 as Compared to 1999 -------- ------- ------- Net sales 100.0% 100.0% ---% Cost of products sold 72.9 73.0 0.1 Selling, general and administrative expense 19.9 19.0 (0.9) Amortization of goodwill and intangible assets 1.2 1.2 --- ----- ----- ----- Operating earnings 6.0 6.8 (0.8) Interest expense (4.9) (5.9) 1.0 Investment income 0.4 0.7 (0.3) ----- ----- ------ Earnings before provision for income taxes 1.5 1.6 (0.1) Provision for income taxes 0.7 0.7 --- ----- ----- ----- Net earnings 0.8% 0.9% (0.1)% ===== ===== ===== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) Net sales increased approximately $84,800,000 or approximately 20.9% for the first quarter of 2000, as compared to 1999 (or increased approximately $86,700,000 or approximately 21.3% excluding the effect of changes in foreign exchange rates). Net sales increased for the three months ended April 1, 2000 as compared to the three months ended April 3, 1999 as a result of acquisitions and higher sales volume. Acquisitions contributed approximately $57,500,000 of the total increase in net sales. Net sales increased approximately $17,700,000 or approximately 11.5% (or approximately $19,700,000 excluding the effect of changes in foreign currency) in the first quarter of 2000 as compared to 1999 in the Residential Building Products Segment principally as a result of approximately $9,300,000 of sales from acquisitions and higher sales volume of kitchen range hoods and bath fans. Net sales increased approximately $11,200,000 or 9.6% in the Air Conditioning and Heating Products Segment. The increase 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 line with the softness in the manufactured housing industry. Also, the 1999 acquisition of Webco, Inc. contributed approximately $4,000,000 to the increase in net sales in the first quarter of 2000 in this Segment. It is anticipated that the weakness in the manufactured housing industry will continue throughout the balance of the year and is expected to continue to have an adverse effect on this Segment's sales as compared to 1999. 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. Net sales increased approximately $55,100,000 or 46.9%, in the Windows, Doors and Siding Product Segment principally as a result of 1999 acquisitions which contributed approximately $44,200,000 in the first quarter of 2000. The increase in net sales in this Segment in the first quarter of 2000 also resulted from increased sales prices and sales volume of vinyl siding and related products and accessories. Cost of products sold as a percentage of net sales decreased slightly from approximately 73.0% in 1999 to approximately 72.9% in 2000. This decrease in the percentage principally resulted from the effect of higher sales levels in the Residential Building Products and the Air Conditioning and Heating Products Segments without a proportionate increase in costs and reflects the effect of acquisitions in both segments which have a lower cost of products sold as a percentage of net sales than the overall group of businesses owned prior to the acquisitions. These factors were partially offset in the Windows, Doors and Siding Products Segment by the effect of acquisitions (which have a higher cost of products sold as a percentage of net sales than the overall group of businesses owned prior to the acquisitions) and higher vinyl resin cost, without a proportionate increase in sales prices. The rising cost of vinyl resin is expected to continue to adversely impact cost of sales percentages over the next several quarters. This situation, however, should be mitigated as cost reduction measures and additional price increases for this Segment's vinyl products are implemented. 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. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) Selling, general and administrative expense as a percentage of net sales increased from approximately 19.0% in the first quarter of 1999 to approximately 19.9% in the first quarter of 2000. The increase in the percentage is principally as a result of the effect of 1999 acquisitions which have a higher expense as a percentage of net sales than the overall group of businesses owned prior to the acquisitions. Excluding the effect of acquisitions, selling, general and administrative expense as a percentage of net sales decreased from approximately 19.0% in 1999 to approximately 18.8% in 2000, in part, reflecting expense reduction measures implemented, including lower expenses from the intergration of acquisitions. Amortization of goodwill and intangible assets, as a percentage of net sales, remained unchanged at approximately 1.2% of net sales in the first quarter of 1999 and 2000. Consolidated operating earnings increased approximately $2,200,000 from approximately $27,600,000 in the first quarter of 1999 to approximately $29,800,000 in 2000. Businesses acquired in 1999 decreased operating earnings by approximately $600,000 which consisted of an increase of approximately $400,000 in the Residential Building Products Segment, an increase of approximately $500,000 in the Air Conditioning and Heating Products Segment and a decrease of approximately $1,500,000 in the Windows, Doors and Siding Products Segment. The increase in operating earnings for the first quarter ended April 1, 2000 as compared to the first quarter ended April 3, 1999 includes approximately $3,300,000 of estimated synergies and cost reductions realized from the integration of NuTone into the Company's Residential Building Products Segment, net of approximately $700,000 of costs and expenses as compared to the first quarter of 1999. Consolidated operating earnings have been reduced by depreciation and amortization expense (other than amortization of deferred debt expense and debt discount) of approximately $15,600,000 and $13,000,000 for the first quarter ended April 1, 2000 and the first quarter ended April 3, 1999, respectively. Businesses acquired contributed approximately $1,800,000 of the increase in depreciation and amortization expense in the first quarter ended April 1, 2000, of which approximately $400,000 was in the Residential Building Products Segment, $100,000 was in the Air Conditioning and Heating Products Segment and $1,300,000 was in the Windows, Doors and Siding Products Segment. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) The increase in operating earnings was also due, in part, to increased sales volume without a proportionate increase in costs and expenses and NuTone Cost Reductions in the Residential Building Products Segment of approximately $5,500,000 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 $400,000 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 by lower operating earnings of air conditioning and heating products sold to the manufactured housing market as compared to the first quarter ended April 3, 1999 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 as compared to 1999. 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 the first quarter ended April 1, 2000 in the Windows, Doors and Siding Products Segment decreased approximately $2,800,000 excluding the contribution from acquisitions. This decrease was principally as a result of higher vinyl resin costs, partially offset by the effect of increased sales prices and lower costs and expenses of certain window products. The Company expects future operating earnings in this segment to be adversely affected by higher vinyl resin costs until further increases in sales prices to customers and cost reduction measures 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 6.2% and 4.0% of operating earnings (before corporate overhead) in the first quarter of 2000 and 1999, respectively. The increase in foreign operating earnings as a percentage of net sales is principally as a result of the increased foreign sales and operating earnings from acquisitions. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) Interest expense in the first quarter of 2000 increased approximately $400,000 or approximately 1.7% as compared to 1999, primarily as a result of increased debt acquired and issued in connection with 1999 acquisitions outstanding during the quarter ended April 1, 2000 as compared to the quarter ended April 3, 1999. Investment income in the first quarter of 2000 decreased approximately $900,000 or approximately 32.1% as compared to the first quarter of 1999, primarily due to lower average invested balances as a result of funds used for acquisitions in 1999. The provision for income taxes was approximately $3,400,000 for the first quarter of 2000, as compared to approximately $3,000,000 for 1999. 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) and the effect of foreign income tax on foreign source income. Liquidity and Capital Resources - ------------------------------- The Company is highly leveraged and expects to continue to be highly leveraged for the foreseeable future. At April 1, 2000, the Company had consolidated debt of approximately $1,036,868,000 consisting of (i) $14,730,000 of short-term borrowings and current maturities of long-term debt, (ii) $126,667,000 of notes, mortgage notes and other indebtedness, (iii) $209,331,000 of the 8 7/8% Senior Notes due 2008 ("8 7/8% Notes"), (iv) $307,946,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes"), (v) $174,204,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") and (vi) $203,990,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"). At April 1, 2000, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $70,843,000 as compared to approximately $115,112,000 at December 31, 1999 and the Company's debt to equity ratio remained unchanged at approximately 4.0:1 at April 1, 2000 and December 31, 1999. 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. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) The Company has evaluated and expects 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 1/8% Notes, the 9 1/4% Notes and the 9 7/8% Notes and a 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. The Company is in the process of integrating the recent acquisitions into its businesses, and it has and expects to achieve incremental synergies, cost savings and reductions during 2000, partially offset by certain costs and expenses. Plans for eliminating certain activities have been finalized for all significant acquisitions. The total future expenditures associated with exit costs related to the integration effort 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 such synergies and cost savings are not realized, the results of operations, cash flow and financial condition of the Company likely will be adversely affected. There can be no assurance that the Company will be able to successfully manage and integrate recent acquisitions. (See Notes I and J of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) Unrestricted cash and cash equivalents decreased from approximately $80,893,000 at December 31, 1999 to approximately $66,843,000 at April 1, 2000. Marketable securities available for sale decreased from approximately $34,219,000 at December 31, 1999 to approximately $4,000,000 at April 1, 2000. The Company's investment in marketable securities at April 1, 2000 consisted of commercial paper. At April 1, 2000, approximately $10,933,000 of the Company's cash and investments was pledged as collateral for insurance and other requirements and were classified as restricted in current assets in the Company's accompanying consolidated balance sheet. Capital expenditures were approximately $7,667,000 in the first quarter of 2000 compared to approximately $11,772,000 in the first quarter of 1999. Capital expenditures were approximately $42,000,000 for the year ended December 31, 1999 and are expected to range between approximately $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 programs were announced on May 4, 2000 to purchase up to 1,000,000 shares of the Company's Common and Special Common Stock and on May 20, 1999 to purchase up to 500,000 shares of the Company's Common and Special Common Stock. Both programs allow for purchases in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of May 4, 2000, all 500,000 shares of the Company's Common and Special Common Stock authorized by the May 20, 1999 program have been purchased for approximately $13,300,000 and such share purchases were accounted for as Treasury Stock. There have been no purchases under the May 4, 2000 program. At April 28, 2000, approximately $86,900,000 was available for the payment of cash dividends, stock payments or other restricted payments as defined under the terms of the Company's most restrictive indenture. (See Note C of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The Company's working capital increased slightly from approximately $324,492,000 at December 31, 1999 to approximately $334,153,000 at April 1, 2000 and its current ratio remained unchanged at 1.9:1 between December 31, 1999 and April 1, 2000. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) Accounts receivable increased approximately $27,483,000 or approximately 11.3%, between December 31, 1999 and April 1, 2000, while net sales increased approximately $2,968,000 or approximately 0.6% in the first quarter of 2000 as compared to the fourth quarter of 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 April 1, 2000 as compared to December 31, 1999. The Company has not experienced any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 2000. Inventories increased approximately $38,651,000 or approximately 18.2%, between December 31, 1999 and April 1, 2000. The increase in inventories is primarily a result of expanded distribution of HVAC residential site-built products by the Company's Air Conditioning and Heating Products Segment and planned increases within the Windows, Doors and Sidings Product Segment to meet anticipated higher demand within the second quarter of 2000. Accounts payable increased approximately $43,551,000 or approximately 29.1%, between December 31, 1999 and April 1, 2000. The increase in accounts payable is primarily the result of increased inventory levels as discussed above. Unrestricted cash and cash equivalents decreased approximately $14,050,000 from December 31, 1999 to April 1, 2000, principally as a result of the following: Condensed Consolidated Cash Flows(*) ------------- Operating Activities-- Cash flow from operations, net $ 20,540,000 Increase in accounts receivable, net (28,675,000) Increase in inventories (39,456,000) Increase in prepaids and other current assets (3,926,000) Increase in accounts payable 44,622,000 Decrease in accrued expenses and taxes (30,392,000) Investing Activities--- Proceeds from the sale of investments and marketable securities, net 30,435,000 Capital expenditures (7,667,000) Financing Activities--- Purchase of Nortek Common and Special Common Stock (1,029,000) Other, net 1,498,000 ------------- $(14,050,000) ============ (*) Prepared from the Company's Consolidated Statement of Cash Flows for the three months ended April 1, 2000. (See Nortek, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements 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 remained unchanged at approximately 4.0:1 at December 31, 1999 and April 1, 2000, primarily as a result of the increase in equity due to net earnings for the first quarter of 2000, offset by the effect of the purchase of Nortek Common and Special Common Stock and changes in currency translation. (See the Consolidated Statement of Stockholders' Investment included elsewhere herein.) 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. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) 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 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. There have been no significant changes in market risk from the December 31, 1999 disclosures included in the Company's Annual Report on Form 10-K. 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. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) 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. The Company manages its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. In addition, the Company has 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%. 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 the first quarter of 2000, 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. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. At April 1, 2000, 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. See the discussion elsewhere herein under Managements Discussion and Analysis of Financial Condition and Results of Operations, with respect to the recent increase in the cost of resin material in the Company's Windows, Doors and Siding Products Segment. The Company generally does not enter into derivative financial instruments to manage commodity-pricing exposure. At April 1, 2000, the Company did not have any outstanding commodity forward contracts. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) 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 May 15, 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 effects 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 May 15, 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 to 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 May 15, 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. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 1, 2000 AND THE FIRST QUARTER ENDED APRIL 3, 1999 (Continued) The Company's Year 2000 compliance budget did 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 did not require 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 May 15, 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 costs, (including, among others, steel, copper, packaging materials, plastics resins, glass, wood and aluminum) and purchased components, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, Y2K readiness, currency translation, consumer spending levels, operating in international economies, the rate of sales growth, price, and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this document, as well as the Company's periodic reports on Forms 10-K, 10-Q and 8-K, filed with the Securities and Exchange Commission ("SEC"). PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Second Amendment dated March 3, 2000 to Nortek Inc. Supplemental Executive Retirement Plan dated July 1, 1997 (filed herewith). 10.2 Amendment No. 1 effective February 3, 2000 to Nortek Inc. 1999 Equity and Cash Incentive Plan (filed herewith). 27 Financial Data Schedule (filed herewith). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the period. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTEK, INC. (Registrant) /s/ Almon C. Hall --------------------------- Almon C. Hall, Vice President and Controller and Chief Accounting Officer May 16, 2000 - ------------ (Date) EX-27 2
5 3-MOS DEC-31-1999 APR-01-2000 66,843 14,933 283,313 12,067 251,329 701,849 496,264 171,513 1,824,869 367,696 1,022,138 0 0 19,580 242,049 1,824,869 491,507 491,507 461,707 461,707 0 0 24,310 7,400 3,400 4,000 0 0 0 4,000 .35 .35
EX-10 3 Exhibit 10.1 SECOND AMENDMENT TO THE NORTEK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, Nortek, Inc. (the "Company") adopted the Nortek, Inc. Supplemental Executive Retirement Plan (the "Plan") effective January 1, 1996; and WHEREAS, the Plan provides that the Board may, from time to time, amend said Plan provided that such amendment does not reduce the accrued benefit of any participant. NOW, THEREFORE, effective as of the date of this Amendment, the Plan is hereby amended and revised to read as follows: 1. Section 2.2 is amended to read as follows: "2.2. "Average Compensation" means a Participant's average annual total compensation from all Employers during his three consecutive calendar years as an Employee in which such compensation was greatest. For this purpose, "Compensation" shall mean the Participant's taxable compensation as reported on Form W-2." 2. Section 6.1 is amended to read as follows: "6.1. Vesting and Commencement of Benefits. In the event of "Change of Control" a Participant shall, notwithstanding any other provision of the Plan, be fully vested in his retirement benefit and the Participant shall be paid, immediately after the Change of Control and regardless of age, a lump sum payment equal to the present value (computed using the actuarial assumptions stated in Schedule D) of the unreduced retirement benefit that would be payable to the Participant at Normal Retirement Age." 3. Sections 6.2 entitled "Qualified Termination" and 6.3 entitled "Reduced Payment in the Event of Excise Tax" are hereby deleted and Section 6.4 entitled "Reduced Payment in the Event of Increases in Basic Plan Benefit" is hereby designated as paragraph 6.2. 4. A new Section 6.3 entitled "Gross Up of Payment in Event of Excise Tax" is hereby added: "6.3 In the event that any payments made under this Plan (the "Payments") are subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Company shall pay to the Participant an additional amount ("Gross Up") such that the net amount retained by the Participant after deduction of any Excise Tax on the Payments and any Federal and State income taxes and Excise Tax upon the Gross Up shall be equal to the Payments. For purposes of determining the amount of the Gross Up, the Participant shall be deemed to pay Federal and State income taxes at the highest marginal rate of taxation in the calendar year in which the Payment is to be made. The determination of whether such Excise Tax is payable and the amount thereof shall be based upon the opinion of tax counsel selected by the Company. If such opinion is not finally accepted by the IRS upon audit, then appropriate adjustments shall be computed (without interest but with Gross Up, if applicable) by such tax counsel based upon the final amount of the Excise Tax so determined. The amount shall be paid by the appropriate party in one lump cash sum within 30 days of such computation. 5. Section 5.5 entitled "Other Benefits" is hereby amended to read as follows: "Section 5.5. Lump-Sum Payments and Other Benefits. Except as otherwise provided in Article VI, the benefit with respect to a Participant who ceases to be an Employee for any reason other than Retirement with the consent of the Company, Disability or death, may not commence prior to his Normal Retirement Date. However, at the time that a benefit would otherwise commence under this Article V, the Administrator, in its sole discretion, but only upon the written request of a Plan Participant or Spouse, may authorize the payment of benefits in the form of a single lump-sum payment equal to the then present value of the Participant's accrued benefit under the Plan as computed using the actuarial assumptions stated in Schedule D hereto." IN WITNESS WHEREOF, the Company has caused this Second Amendment to be executed this 3rd day of March, 2000. NORTEK, INC. By:/s/ Richard J. Harris EX-10 4 Exhibit 10.2 Amendment No. 1 to Nortek, Inc. 1999 Equity and Cash Incentive Plan Effective Date: February 3, 2000 1. The second paragraph of Section 4 of the Nortek, Inc. 1999 Equity and Cash Incentive Plan (the "1999 Plan") is hereby deleted and replaced with the following paragraph: "Subject to Section 8.6(a), the maximum number of shares of Stock as to which Options or Stock Appreciation Rights may be granted to any Participant in any one calendar year under the Plan is 300,000, which limitation shall be construed and applied consistently with the rules under Section 162(m) of the Code." 2. The last two sentences of Section 6.5(c) of the Nortek, Inc. 1999 Equity and Cash Incentive Plan are hereby deleted and replaced with the following sentences: "The maximum Exempt Award payable to any Participant in respect of all such Performance Goals for any year under the Plan shall not exceed $10,000,000. Payment of Exempt Awards based upon a Performance Goal for calendar years 2005 and thereafter is conditioned upon reapproval by Employer's shareholders no later than Employer's first meeting of shareholders in 2004." -----END PRIVACY-ENHANCED MESSAGE-----