-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, t3koimaU9moI06uTLAq0fp9hmYx5KVFjZZ4LjB8wUFOMYpkR17RlAGPxLWxDMWIw k4He2M4xC97Gf/8tBy6mdw== 0000072423-94-000023.txt : 19941109 0000072423-94-000023.hdr.sgml : 19941109 ACCESSION NUMBER: 0000072423-94-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19941001 FILED AS OF DATE: 19941108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: 3444 IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06112 FILM NUMBER: 94558096 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 Page 31 of 31 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 October 1, 1994 ------------------------------ 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 November 4, 1994 was 12,008,613. The number of shares of Special Common Stock outstanding as of November 4, 1994 was 535,078. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar Amounts in Thousands) Oct. 1, Dec. 31, 1994 1993 ---- ---- (Unaudited) ASSETS Current Assets: Unrestricted-- Cash and investments at cost which approximates market $ 68,728 $ 34,006 Short-term investments held for redemption of debentures --- 22,600 Marketable securities available for sale 28,436 25,892 Restricted-- Cash and investments at cost which approximates market 9,337 6,687 Accounts receivable, less allowances of $4,804 and $4,198 111,071 84,843 Inventories: Raw materials 31,732 27,603 Work in process 10,920 9,227 Finished goods 51,444 45,183 ------- ------- 94,096 82,013 ------- ------- Current assets of business sold --- 23,736 Insurance claims receivable --- 14,500 Prepaid expenses and other current assets 9,342 7,541 U. S. Federal prepaid income taxes 21,800 17,000 ------- ------- Total Current Assets 342,810 318,818 ------- ------- Property and Equipment, at cost: Land 5,909 5,833 Buildings and improvements 52,849 52,309 Machinery and equipment 118,759 108,983 ------- ------- 177,517 167,125 Less--Accumulated depreciation 83,291 76,546 ------- ------- Total Property and Equipment, net 94,226 90,579 ------- ------- Other Assets: Goodwill, less accumulated amortiza- tion of $20,961 and $19,180 73,660 75,599 Non-current assets of business sold --- 11,987 Deferred debt expense 8,730 563 Other 11,791 11,663 ------- ------- 94,181 99,812 ------- ------- $531,217 $509,209 ======= ======= 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) Oct. 1, Dec. 31, 1994 1993 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' INVESTMENT - ---------------------------------------- Current Liabilities: Notes payable, current maturities of long-term debt and other short- term obligations $ 6,404 $ 14,957 7 1/2% Convertible Debentures 6,373 --- 11 1/2% Senior Subordinated Debentures, net --- 22,582 Accounts payable 60,850 46,923 Accrued expenses and taxes, net 93,199 91,422 Current liabilities of business sold --- 11,769 Insurance claims advances --- 13,239 ------- ------- Total Current Liabilities 166,826 200,892 ------- ------- Other Liabilities: Deferred income taxes 24,691 18,000 Other 6,714 8,100 ------- ------- 31,405 26,100 ------- ------ Notes, Mortgage Notes and Debentures Payable 218,857 169,664 ------- ------- Mortgage Notes Payable of business sold --- 8,546 ------- ------- Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common Stock, $1 par value; authorized 40,000,000 shares, 15,800,201 shares and 15,758,974 shares issued 15,800 15,759 Special Common Stock, $1 par value; authorized 5,000,000 shares, 810,092 and 849,575 shares issued 810 849 Additional paid-in capital 134,625 134,627 Accumulated deficit (3,834) (17,034) Cumulative translation, pension and other adjustments (5,221) (2,143) Less - treasury common stock at cost, 3,795,028 shares (26,371) (26,371) - treasury special common stock at cost, 271,574 shares (1,680) (1,680) ------- ------- Total Stockholders' Investment 114,129 104,007 ------- ------- $531,217 $509,209 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Three Months Ended ------------------ Oct. 1, Oct. 2, 1994 1993 ---- ---- (Unaudited) Net Sales $197,012 $202,030 ------- ------- Costs and Expenses: Cost of products sold 138,937 145,045 Selling, general and administrative expense 42,721 48,700 ------- ------- 181,658 193,745 ------- ------- Operating earnings 15,354 8,285 Interest expense (6,112) (6,513) Interest income 1,258 628 Net gain on marketable securities --- 900 Loss on business sold --- (20,300) ------- ------- Earnings (loss) before provision (credit) for income taxes 10,500 (17,000) Provision (credit) for income taxes 4,100 (4,100) ------- ------- Earnings (loss) before extraordinary loss 6,400 (12,900) Extraordinary loss from debt retirements (100) --- ------- ------- Net Earnings (Loss) $ 6,300 $(12,900) ======= ======= Net Earnings (Loss) Per Share: Earnings (Loss) Before Extraordinary Loss-- Primary $ .50 $ (1.03) ------- ------- Fully diluted $ .50 $ (1.03) ------- ------- Extraordinary Loss-- Primary $ (.01) $ --- ------- ------- Fully diluted $ (.01) $ --- ------- ------- Net Earnings(Loss)-- Primary $ .49 $ (1.03) ====== ======= Fully diluted $ .49 $ (1.03) ====== ======= Weighted Average Number of Shares: Primary 12,730 12,608 ====== ====== Fully diluted 13,059 13,336 ====== ====== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Nine Months Ended ------------------ Oct. 1, Oct. 2, 1994 1993 ---- ---- (Unaudited) Net Sales $559,754 $575,795 ------- ------- Costs and Expenses: Cost of products sold 394,283 414,600 Selling, general and administrative expense 127,062 139,844 ------- ------- 521,345 554,444 ------- ------- Operating earnings 38,409 21,351 Interest expense (20,198) (20,165) Interest income 3,789 2,464 Net gain on marketable securities --- 2,350 Loss on business sold --- (20,300) ------- ------- Earnings (Loss) before provision (credit) for income taxes 22,000 (14,300) Provision (credit) for income taxes 9,400 (1,500) ------- ------- Earnings (Loss) before extraordinary gain 12,600 (12,800) Extraordinary gain from debt retirements 200 --- ------- ------- Earnings (Loss) before the cumulative effect of accounting changes 12,800 (12,800) Cumulative effect of accounting changes 400 (2,100) ------- ------- Net Earnings (Loss) $ 13,200 $(14,900) ======= ======= Net Earnings (Loss) Per Share: Earnings (Loss) Before Extraordinary Gain-- Primary $ .99 $ (1.02) ------- ------- Fully diluted $ .98 $ (1.02) ------- ------- Extraordinary Gain-- Primary $ .02 $ --- ------- ------- Fully diluted $ .02 $ --- ------- ------- Cumulative Effect of Accounting Changes-- Primary $ .03 $ (.17) ------- ------- Fully diluted $ .03 $ (.17) ------ ------- Net Earnings (Loss)-- Primary $ 1.04 $ (1.19) ====== ======= Fully diluted $ 1.03 $ (1.19) ====== ======= Weighted Average Number of Shares: Primary 12,697 12,605 ====== ====== Fully diluted 13,212 13,332 ====== ====== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) For the Nine Months Ended ------------------ Oct. 1, Oct. 2, 1994 1993 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 13,200 $(14,900) ------ ------- Adjustments to reconcile net earnings (loss) to cash: Depreciation and amortization 14,060 16,566 Gain on marketable securities --- (2,350) Extraordinary gain from debt retirements (250) --- Cumulative effect of accounting changes (400) 3,100 Loss on business sold --- 20,300 Deferred federal income tax credit from continuing operations (3,200) (7,800) Deferred federal income tax provision on discontinued operations 2,200 --- Deferred federal income tax provision on extraordinary items 1,350 --- Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (26,228) (21,872) Prepaids and other current assets (3,436) 398 Inventories (12,083) (6,567) Accounts payable 13,831 3,202 Accrued expenses and taxes 11,550 3,985 Long-term assets, liabilities and other, net (5,917) 7,130 ------- ------- Total adjustments to net earnings (loss) (8,523) 16,092 ------- ------- Net Cash Provided by Operating Activities 4,677 1,192 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,640) (7,227) Purchase of investments and marketable securities (5,032) (90,502) Proceeds from sale of investments and marketable securities --- 133,000 Proceeds (payments) relating to businesses sold or discontinued, net 12,468 (2,420) Change in restricted cash and investments (2,475) 1,500 Other, net 410 (2,527) ------- ------- Net Cash Provided by (Used in) Investing Activities (8,269) 31,824 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of Notes, net 209,195 --- Purchase and redemption of debentures and notes payable (185,209) (1,104) Payment of borrowings (8,185) (3,683) Other, net (87) (1,341) ------- ------- Net Cash Provided by (Used in) Financing Activities 15,714 (6,128) ------- ------ Net increase in unrestricted cash and investments 12,122 26,888 Unrestricted cash and investments at the beginning of the period 56,606 23,467 ------- ------ Unrestricted cash and investments at the end of the period $ 68,728 $50,355 ======= ====== Interest paid $ 21,436 $13,254 ======= ====== Income taxes paid, net $ 4,530 $13,678 ======= ====== 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 October 1, 1994 and October 2, 1993 (Dollar Amounts in Thousands) Cumulative Translation, Addi- Retained Pension Special tional Earnings and Other Common Common Paid-in (Accumulat- Adjust- Treasury Stock Stock Capital ed Deficit) ments Stock ----- ----- ------- ----------- ------ ----- (Unaudited) Balance, July 3, 1993 $15,732 $870 $134,618 $ 1,766 $ --- $(28,051) 10,207 shares of special common stock converted into 10,207 shares of common stock 11 (11) --- --- --- --- Net loss --- --- --- (12,900) --- --- ------ --- ------- ------- ------ ------ Balance, October 2, 1993 $15,743 $859 $134,618 $(11,134) $ --- $(28,051) ====== === ======= ====== ====== ======= Balance, July 2, 1994 $15,788 $820 $134,627 $(10,134) $(5,390) $(28,051) 10,406 shares of special common stock converted into 10,406 shares of common stock 10 (10) --- --- --- --- 1,744 shares of common stock issued upon exercise of stock options 2 --- (2) --- --- --- Translation adjust- ment --- --- --- --- 430 --- Unrealized decline in marketable securities --- --- --- --- (261) --- Net earnings --- --- --- 6,300 --- --- ------ --- ------- ------ ------ ------- Balance, Oct. 1, 1994 $15,800 $810 $134,625 $(3,834) $(5,221) $(28,051) ====== === ======= ====== ====== ======= 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 Nine Months Ended October 1, 1994 and October 2, 1993 (Dollar Amounts in Thousands) Cumulative Translation, Addi- Retained Pension Special tional Earnings and Other Common Common Paid-in (Accumulat- Adjust- Treasury Stock Stock Capital ed Deficit) ments Stock ----- ----- ------- ----------- ------ ----- (Unaudited) Balance, December 31, 1992 $15,602 $990 $134,599 $ 3,766 $ --- $(28,051) 130,440 shares of special common stock converted into 130,440 shares of common stock 131 (131) --- --- --- --- 10,000 shares of common stock issued upon exercise of stock options 10 --- 19 --- --- --- Net loss --- --- --- (14,900) --- --- Balance, October 2, ------- ---- -------- --------- ------- -------- 1993 $15,743 $859 $134,618 $(11,134) $ --- $(28,051) ====== === ======= ======= ====== ======= Balance, December 31, 1993 $15,759 $849 $134,627 $(17,034) $(2,143) $(28,051) 39,483 shares of special common stock converted into 39,483 shares of common stock 39 (39) --- --- --- --- 1,744 shares of common stock issued upon exercise of stock options 2 --- (2) --- --- --- Translation adjustment --- --- --- --- (161) --- Cumulative effect of an accounting change (see Note E) --- --- --- --- (400) --- Unrealized decline in marketable securities --- --- --- --- (2,517) --- Net earnings --- --- --- 13,200 --- --- ------ --- ------- ------- ------ ------ Balance, October 1, 1994 $15,800 $810 $134,625 $ (3,834) $(5,221) $(28,051) ====== === ======= ====== ====== ======= 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 OCTOBER 1, 1994 AND OCTOBER 2, 1993 (A) The unaudited condensed consolidated financial statements presented ("Unaudited Financial Statements") have been prepared by Nortek, Inc. and subsidiaries (the "Company") without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the Unaudited Financial Statements for the prior periods have been reclassified to conform to the presentation at October 1, 1994. It is suggested that these Unaudited Financial Statements be read in conjunction with the financial statements and the notes included in the Company's latest Annual Report on Form 10-K. (B) Net sales and earnings before provision for income taxes in the first nine months and third quarter of 1993 includes approximately $83,200,000 and approximately $29,500,000 in net sales and approximately a $600,000 loss and approximately $300,000 of earnings, respectively, relating to the Company's former Dixieline Lumber Company subsidiary ("Dixieline"), which business was accounted for as a business held for sale since October 2, 1993 (see Note C below). Accordingly, Dixieline's operating results were no longer included in the Company's consolidated operating results subsequent to October 2, 1993. (C) On January 14, 1994, the Company redeemed $22,600,000 principal amount of its 11 1/2% Senior Subordinated Debentures due May 1994, which were called for redemption in December 1993. In February 1994, the Company sold in a public offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes") at a slight discount. A portion of the net proceeds from the sale of the 9 7/8% Notes was used to redeem, on March 24, 1994, approximately $153,000,000 of certain of the Company's outstanding principal amount of indebtedness, called for redemption on February 22, 1994, and to pay accrued interest. Interest expense, net of interest income, in the first nine months of 1994 was approximately $1,300,000 greater than it would have been had the debt redemption occurred on the same day as the financing. On March 31, 1994, the Company sold all the capital stock of its Dixieline subsidiary for approximately $18,800,000 in cash and $6,000,000 in preferred stock of the purchaser. In the third quarter of 1993, the Company provided a valuation reserve of approximately $20,300,000 ($1.19 per share, net of tax) to reduce the Company's net investment in Dixieline to estimated net realizable value. No additional loss in 1994 was incurred in connection with the sale. The following table presents the approximate unaudited pro forma operating results of the Company for the nine months and three months ended October 1, 1994 and October 2, 1993, and the year ended December 31, 1993, as adjusted for the pro forma effect of the sale of Dixieline, the NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 1, 1994 AND OCTOBER 2, 1993 (Continued) debt financing and the debt redemptions: Nine Months Ended Three Months Ended Year Ended Oct. 1, Oct. 2, Oct. 1, Oct. 2, December 1994 1993 1994 1993 31,1993 ---- ---- ---- ---- ------- (Amounts in Thousands Except Per Share Amounts) Net Sales $559,754 $492,590 $197,012 $172,478 $660,908 Earnings from Continuing Operations $ 13,500 $ 3,100 $ 6,400 $ 2,100 $ 3,500 Fully Diluted Earnings Per Share $ 1.05 $ .25 $ .50 $ .17 $ .28 In computing the pro forma earnings from continuing operations, interest expense on the indebtedness redeemed during the period that such indebtedness was outstanding was excluded from operating results at an average interest rate of approximately 13.5% (including amortization of debt discount and deferred debt expense) for all periods presented, net of the tax effect. Interest expense was included on the Notes at a rate of approximately 9 7/8%, plus amortization of deferred debt expense and debt discount, for all periods presented, net of the tax effect. The net after-tax loss recorded in the third quarter of 1993 from the valuation reserve recorded to reduce the Company's net investment in Dixieline to net realizable value was also excluded. Investment income was assumed earned on the remaining cash proceeds from the debt financing at a rate of 3.5%. No investment income was assumed earned on the proceeds from the sale of Dixieline. (D) On October 24, 1994, the Company redeemed its remaining outstanding $6,373,000 principal amount of 7 1/2% Convertible Debentures due May 1, 2006 ("7 1/2% Debentures"), which were called for redemption in September 1994, plus paid accrued interest and a slight redemption premium. This call for redemption resulted in an extraordinary loss of approximately $100,000, net of income taxes of $100,000 ($.02 per share) in the third quarter of 1994. During the second quarter of 1994, the Company purchased in the open market approximately $5,121,000 principal amount of its 7- 1/2% Debentures. During the first quarter of 1994, the Company purchased, at a discount, in the open market approximately $4,000,000 principal amount of its 7 1/2% Debentures. These transactions resulted in an extraordinary loss of approximately $100,000, net of income taxes of $50,000 ($.01 per share) in the second quarter and an extraordinary gain of approximately $400,000, net of income taxes of $200,000 ($.03 per share) in the first quarter of 1994. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 1, 1994 AND OCTOBER 2, 1993 (Continued) (E) On January 1, 1994, the Company adopted the accounting requirements of Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities", and recorded as income the accumulated unrealized marketable security reserve recorded at December 31, 1993 of approximately $400,000 ($.03 per share) as the cumulative effect of an accounting change. Under the new accounting method, the Company will record unrealized gains or losses on such investment securities as adjustments to stockholders' investment. Previously, such gains or losses were recorded in the Company's statement of operations. At October 1, 1994, the reduction in the Company's stockholders' investment under the new accounting method for gross unrealized losses was approximately $2,917,000. At October 1, 1994, there were no gross unrealized gains on the Company's marketable securities. Prior periods have not been restated. The Company's marketable securities at October 1, 1994 consist of U. S. Government Treasury Notes due as follows: Fair Principal Market Due Amount Cost Value ------ ---- ----- (Amounts in Thousands) 1-5 years $16,000 $16,004 $14,952 5-10 years 15,000 15,349 13,484 ------ ------ ------ $31,000 $31,353 $28,436 ====== ====== ====== In the first nine months of 1994, there were no realized gains or losses on marketable securities. (F) In the first nine months and the third quarter ended October 1, 1994, the Company incurred net after-tax charges of approximately $4,500,000 and approximately $1,600,000, respectively, principally relating to expenses of certain cost reduction activities and manufacturing process improvements in each of the Company's operating groups, marketing expenses as a result of competitive conditions and expenses of certain litigation and other matters in dispute. Net after-tax charges of approximately $1,100,000 and approximately $100,000 in the first nine months and third quarter of 1993, respectively, were incurred in connection with cost reduction activities and manufacturing process improvements. The effect of these costs and expenses were partially offset in the second quarter of 1994 by approximately $1,900,000 of after-tax income resulting from the settlement of certain insurance claims and disputes. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 1, 1994 AND OCTOBER 2, 1993 (Continued) (G) On January 1, 1993, the Company adopted the accounting requirements of SFAS No. 106, "Employers' Accounting for Post- Retirement Benefits Other Than Pensions" and recorded, as a charge to operations, the accumulated post-retirement benefit obligation ("APBO") of approximately $3,100,000, before income tax credit of approximately $1,000,000 ($.17 per share, net of tax), as the cumulative effect of an accounting change. Previously, such health care and related benefits, for qualified active and retired beneficiaries, were charged to operating results in the period that such benefits were paid. (H) During 1992, a former subsidiary of the Company defaulted on certain principal and interest payments relating to obligations under which the Company was contingently liable. In March 1994, the Company paid approximately $1,594,000 of interest payments through that date on such obligations. In the third quarter of 1994, the Company purchased at a slight discount, approximately $6,635,000 principal amount of such obligations (consisting of substantially all of such obligations) from several holders. The Company did not record any losses in 1994 in connection with the settlement of these contingent obligations. (I) In the first quarter of 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes" as a change in accounting method. Under SFAS No. 109, deferred income tax assets or liabilities are computed based on the difference (temporary differences) between the financial statement and income tax bases of assets and liabilities, using the current marginal income tax rates in effect for the period in which the differences are expected to reverse. Deferred income tax provisions or credits are based on the changes in the asset and liability between periods. The effect of adopting this new accounting method in the first quarter of 1993 was not significant to the provision for income taxes as compared to the prior accounting method. The tax effect of temporary differences which gave rise to significant portions of deferred income tax assets and liabilities as of October 1, 1994 is as follows: (Amounts in Thousands) ---------- U.S. Federal Prepaid (Deferred) Income Tax Assets Arising From: Accounts receivable $ 1,640 Inventory (583) Insurance reserves 6,560 Other reserves, liabilities and assets, net 14,117 Other, net 66 ------ $21,800 ====== Deferred (Prepaid) Income Tax Liabilities Arising From: Property & equipment, net $11,898 Prepaid pension assets 1,518 Insurance reserves (587) Other reserves, liabilities and assets, net 3,758 Capital loss carryforward (6,217) Valuation allowances 14,390 ------ $24,760 ====== NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 1, 1994 AND OCTOBER 2, 1993 (Continued) At October 1, 1994, the Company has a capital loss carryforward of approximately $17,000,000 which expires in the year 1997. The Company has provided a valuation allowance equal to the tax effect of capital loss carryforwards and certain other deferred income tax assets, since realization of these deferred income tax assets cannot be reasonably assured. At October 1, 1994, the Company has approximately $6,400,000 of net U. S. Federal prepaid income tax assets which are expected to be realized through future operating earnings. The table below reconciles the provision for income taxes before extraordinary items at the federal statutory income tax rate to the actual provision for income taxes : Three Nine Months Ended Months Ended ------------ ------------ Oct. 1, Oct. 2, Oct. 1, Oct. 2, 1994 1993 1994 1993 ---- ---- ---- ---- (Amounts in Thousands) Provision (credit) for income taxes at the federal statutory rate $3,662 $(5,780) $7,687 $(4,862) Net change from statutory rate: State taxes, net of federal tax effect 66 149 650 644 Non-deductible amortization for tax purposes 184 180 553 540 Other non-deductible items 91 75 273 326 Change in valuation reserve 132 1,934 123 2,251 Net loss on business sold --- (204) --- (204) Tax effect on foreign income 142 69 292 317 Other, net (177) (523) (178) (512) ----- ----- ----- ----- Provision (credit) for income taxes before extraordinary items $4,100 $(4,100) $9,400 $(1,500) ===== ===== ===== ===== The Company recorded a $1,000,000 income tax credit (principally deferred) in the first half of 1993 relating to the cumulative effect of an accounting change for certain post-retirement benefits. This actual income tax credit was approximately equal to the tax credit at the U. S. Federal statutory rate. (J) Earnings (loss) per share calculations presented in 1993 do not include the effect of convertible debentures (and the reduction in related interest expense) because the assumed conversion of debentures is anti-dilutive. (K) At October 1, 1994, the payment of cash dividends or stock payments was prohibited under the indenture governing the 7 1/2% Debentures, the most restrictive of the Company's indenture and loan agreements. (See Note D.) At October 25, 1994, approximately $25,600,000 was available for the payment of cash dividends or stock payments under the terms of the Company's Indenture governing the 9 7/8% Notes. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 1, 1994 AND OCTOBER 2, 1993 (Continued) (L) In the third quarter of 1993, the Company recorded a pre-tax loss of approximately $1,600,000 ($.08 per share, net of tax) as a result of the sale in October 1993 of certain real property and provided a pre-tax reserve of approximately $700,000 ($.04 per share, net of tax) in connection with the consolidation of certain of its manufacturing facilities. (M) The following table summarizes the unaudited activity of businesses sold or discontinued included in the accompanying unaudited condensed consolidated statement of cash flows: Nine Months Ended ------------------ Oct. 1, Oct. 2, 1994 1993 ---- ---- (Amounts in Thousands) Fair value of assets sold $34,439 $ --- Liabilities assumed by the purchaser (16,143) --- Net cash paid relating to businesses sold or discontinued (5,828) (2,420) ------ ------ Net cash proceeds (payments) relating to businesses sold or discontinued $12,468 $(2,420) ====== ====== Significant unaudited non-cash financing and investing activities excluded from the accompanying unaudited condensed consolidated statement of cash flows include transactions of approximately $2,517,000 of unrealized loss on investment in marketable securities in 1994. Depreciation and amortization included in the Company's unaudited condensed consolidated statement of cash flows for the nine months ended October 1, 1994 and October 2, 1993, includes approximately $1,100,000 and approximately $1,600,000, respectively, of amortization of deferred debt expense and debt discount, which is recorded as interest expense in the accompanying unaudited condensed consolidated statement of operations. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 The Company is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: the Residential Building Products Group; the Air Conditioning and Heating Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In March 1994, the Company sold its Retail Home Center Operations ("Dixieline") to increase the Company's focus on its other building products businesses. For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the results of operations attributable to Dixieline have been excluded from all data that are reported as being from ongoing operations, including net sales, cost of products sold, selling, general and administrative expense and segment earnings. Total consolidated operating results of the Company, however, include the operating results of Dixieline in the third quarter and first nine months of 1993. (See Note C of the Notes to Unaudited Condensed Consolidated Financial Statements.) Results of Operations The tables that follow set forth, for the periods presented, (a) certain consolidated operating results, (b) the amount and the percentage change of certain such results as compared to the prior comparable period, (c) the percentage which certain of such results bears to net sales and (d) the change of certain of such percentages (to net sales) as compared to the prior comparable period. The results of operations for the third quarter ended October 1, 1994 are not necessarily indicative of the results of operations to be expected for the full year. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 Change in the Third Quarter Ended Third Quarter of 1994 Oct. 1, Oct. 2, as Compared to 1993 1994 1993 $ % ---- ---- ----- ------ (Dollar amounts in millions) Net sales $197.0 $202.0 $(5.0) (2.5) Cost of products sold 138.9 145.0 6.1 4.2 Selling, general and administrative expense 42.8 48.7 5.9 12.1 Operating earnings 15.3 8.3 7.0 84.3 Interest expense (6.1) (6.5) .4 6.2 Interest income 1.3 .6 .7 116.7 Net gain on marketable securities --- .9 (.9) (100.0) Loss on business sold --- (20.3) 20.3 100.0 Earnings (loss) before provision (credit) for income taxes 10.5 (17.0) 27.5 * Provision (credit) for income taxes 4.1 (4.1) (8.2) * Earnings (loss) before extraordinary loss 6.4 (12.9) 19.3 * Extraordinary loss from debt retirements (.1) --- (.1) --- ---- --- ---- ----- Net earnings (loss) $ 6.3 $(12.9) $19.2 * ==== ==== ==== ===== *not meaningful NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) Change in Percentage of Net Sales Percentage Third Quarter Ended for the Third Oct. 1, Oct. 2, Quarter 1994 1994 1993 as compared to 1993 ---- ---- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 70.5 71.8 1.3 Selling, general and administrative expense 21.7 24.1 2.4 Operating earnings 7.8 4.1 3.7 Interest expense (3.1) (3.2) .1 Interest income .7 .3 .4 Net gain on marketable securities --- .4 (.4) Loss on business sold --- (10.0) 10.0 Earnings (loss) before provision (credit) for income taxes 5.4 (8.4) 13.8 Provision (credit) for income taxes 2.1 (2.0) (4.1) Earnings (loss) before extraordinary loss 3.3 (6.4) 9.7 Extraordinary loss from debt retirements (.1) --- (.1) ---- ---- ---- Net earnings (loss) 3.2 (6.4) 9.6 ==== ==== ==== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) The tables that follow set forth, for the periods presented, (a) certain consolidated operating results, (b) the amount and the percentage change of certain such results as compared to the prior comparable period, (c) the percentage which certain of such results bears to net sales, and (d) the change of certain of such percentages (to net sales) as compared to the prior comparable period. The results of operations for the nine months ended October 1, 1994 are not necessarily indicative of the results of operations to be expected for the full year. Change in the First Nine Months Ended Nine Months of 1994 Oct. 1, Oct. 2, as compared to 1993 1994 1993 $ % ---- ---- ----- ------ (Dollar amounts in millions) Net sales $559.8 $575.8 (16.0) (2.8) Cost of products sold 394.3 414.6 20.3 4.9 Selling, general and administrative expense 127.1 139.8 12.7 9.1 Operating earnings 38.4 21.4 17.0 79.4 Interest expense (20.2) (20.2) --- --- Interest income 3.8 2.4 1.4 58.3 Net gain on marketable securities --- 2.4 (2.4) (100.0) Loss on business sold --- (20.3) 20.3 100.0 Earnings (loss) before provision (credit) for income taxes 22.0 (14.3) 36.3 * Provision (credit) for income taxes 9.4 (1.5) (10.9) * Earnings (loss) before extraordinary gain and the cumulative effect of accounting changes 12.6 (12.8) 25.4 * Extraordinary gain from debt retirements .2 --- .2 --- Cumulative effect of accounting changes .4 (2.1) 2.5 * ----- ----- ----- ----- Net earnings (loss) $ 13.2 $(14.9) $ 28.1 * ===== ===== ===== ===== *not meaningful NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) Percentage of Net Sales Change in Percentage Nine Months Ended for the First Nine Oct. 1, Oct. 2, Months of 1994 1994 1993 as compared to 1993 ---- ---- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 70.5 72.0 1.5 Selling, general and administrative expense 22.7 24.3 1.6 Operating earnings 6.8 3.7 3.1 Interest expense (3.6) (3.5) (.1) Interest income .7 .4 .3 Net gain on marketable securities --- .4 (.4) Loss on business sold --- (3.5) 3.5 Earnings (loss) before provision (credit) for income taxes 3.9 (2.5) 6.4 Provision (credit) for income taxes 1.7 (.3) (2.0) Earnings (loss) before extraordinary gain and the cumulative effect of accounting changes 2.2 (2.2) 4.4 Extraordinary gain from debt retirements .1 --- .1 Cumulative effect of accounting changes .1 (.4) .5 ---- ---- ---- Net earnings (loss) 2.4 (2.6) 5.0 ==== ==== ==== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) The following table presents the net sales for the Company's principal product groups for the third quarter and nine months ended October 1, 1994 as compared to the third quarter and nine months ended October 2, 1993 and the amount and the percentage change of such results as compared to the prior comparable period. The results of operations for the third quarter and first nine months of 1994 are not necessarily indicative of the results of operations to be expected for the full year. Third Quarter Ended --------------------------------------- Oct. 1, Oct. 2, Increase (Decrease) 1994 1993 $ % ---- ---- ----- ----- (000's omitted) Net Sales: Residential Building Products $ 67,832 $ 65,321 2,511 3.8 Air Conditioning and Heating Products 93,573 73,779 19,794 26.8 Plumbing Products 35,607 33,378 2,229 6.7 ------- ------- ------ ----- Net Sales from Ongoing Operations 197,012 172,478 24,534 14.2 Business Sold --- 29,552 (29,552) (100.0) ------- ------- ------- ----- Total $197,012 $202,030 $ (5,018) (2.5) ======= ======= ======= ====== Nine Months Ended ----------------------------------------- Oct. 1, Oct. 2, Increase (Decrease) 1994 1993 $ % ---- ---- ----- ----- (000's omitted) Net Sales: Residential Building Products $199,271 $191,625 7,646 4.0 Air Conditioning and Heating Products 258,082 204,002 54,080 26.5 Plumbing Products 102,401 96,963 5,438 5.6 ------- ------- ------ ----- Net Sales from Ongoing Operations 559,754 492,590 67,164 13.6 Business Sold --- 83,205 (83,205) (100.0) ------- ------- ------- ----- Total $559,754 $575,795 $(16,041) (2.8) ======= ======= ======= ====== Operating Results Net sales from ongoing operations increased approximately $24,534,000, or approximately 14.2%, and increased approximately $67,164,000, or approximately 13.6%, for the third quarter and first nine months of 1994, respectively, as compared to 1993. Total net sales decreased approximately $5,018,000, or approximately 2.5%, and decreased approximately $16,041,000, or approximately 2.8%, for the third quarter and first nine months of 1994, respectively, as compared to 1993, as a result of the effect of Dixieline, partially offset by the following factors. Net sales from ongoing operations increased principally as a result of increased sales volume of residential air conditioning and heating ("HVAC") products, increased shipments of new NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) and replacement HVAC products to manufactured housing customers and increased sales levels of commercial and industrial HVAC products by the Air Conditioning and Heating Products Group. Increased sales of the Plumbing Products Group is principally due to increased shipments of water efficient toilets, partially offset by decreased sales levels (approximately $1,700,000 and approximately $5,700,000 in the third quarter and first nine months of 1994, respectively) of bathroom fixtures as a result of the curtailment of certain product lines in the fourth quarter of 1993. Cost of products sold from ongoing operations as a percentage of net sales from ongoing operations decreased from approximately 71.4% in the third quarter of 1993 to approximately 70.5% in the third quarter of 1994 and decreased from approximately 71.5% in the first nine months of 1993 to approximately 70.5% in the first nine months of 1994. Cost of products sold as a percentage of total net sales decreased from approximately 71.8% in the third quarter of 1993 to approximately 70.5% in the third quarter of 1994, and decreased from approximately 72.0% in the first nine months of 1993 to approximately 70.5% in the first nine months of 1994 as a result of the factors described below and the effect of Dixieline which operated at higher cost levels than the Company's other product groups. The decreases in cost of products sold as a percentage of net sales from ongoing operations were primarily attributable to an increase in Plumbing Products Group net sales and increased sales of residential and commercial HVAC products in the Air Conditioning and Heating Products Group, all without a proportionate increase in costs. To a lesser extent, these decreases in the percentage were partially offset by slightly higher cost levels in the Residential Building Products Group, in part, due to increased competition and the impact of consolidating some manufacturing facilities. The overall improvement in cost levels is due, in part, to the Company's ongoing cost control efforts. Selling, general and administrative expense from ongoing operations as a percentage of net sales from ongoing operations decreased from approximately 24.1% in the third quarter of 1993 to approximately 21.7% in the third quarter of 1994 and decreased from approximately 24.1% in the first nine months of 1993 to approximately 22.7% in the first nine months of 1994. Total selling, general and administrative expense as a percentage of total net sales decreased from approximately 24.1% in the third quarter of 1993 to approximately 21.7% in the third quarter of 1994 and decreased from approximately 24.3% in the first nine months of 1993 to approximately 22.7% in the first nine months of 1994 as a result of the factors described below and the effect of Dixieline which operated at higher expense levels than the Company's other product groups. The decreases in selling, general and administrative expense from ongoing operations as a percentage of net sales from ongoing operations in the third quarter and first nine months of 1994 were principally due to lower non- segment expense, the effect of 1993 pre-tax losses of approximately $1,600,000 as a result of the sale in October 1993 of certain real property and $700,000 in connection with the consolidation of certain NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) manufacturing facilities by the Company's Building Products Group, and approximately $3,200,000 of income from the settlement of insurance claims and disputes (in the first nine months of 1994) combined with increased net sales from ongoing operations in the third quarter and first nine months of 1994. The effect of the percentage increase in net sales in the Air Conditioning and Heating Products Group in excess of the percentage increases in net sales by the Company's other product groups was also a factor in the decreases in the percentage on ongoing net sales, since this group operates at lower expense levels than the total expense level of ongoing operations. These improvements in the percentage were offset by the effect of approximately $2,800,000 and approximately $7,600,000 in the third quarter and first nine months of 1994, respectively, of expenses relating to the implementation of certain cost reduction activities and manufacturing process improvements in each of the Company's operating groups, the cost of installing new systems, marketing expenses as a result of competitive conditions and expenses of certain litigation and other matters in dispute. Approximately $300,000 and $1,800,000 of expenses relating to certain cost reduction activities and manufacturing process improvements were incurred in the third quarter and first nine months of 1993, respectively. Segment earnings from ongoing operations were approximately $17,700,000 for the third quarter of 1994, as compared to approximately $11,800,000 for the third quarter of 1993, and approximately $46,900,000 for the first nine months of 1994 as compared to approximately $34,200,000 for the first nine months of 1993. Total segment earnings were approximately $17,700,000 for the third quarter of 1994, as compared to approximately $12,300,000 for the third quarter of 1993, and approximately $46,900,000 for the first nine months of 1994 as compared to approximately $33,900,000 for the first nine months of 1993 as a result of the effect of Dixieline and the following factors. The increase in segment earnings from ongoing operations principally was due to increased sales levels in the Air Conditioning and Heating Products and Plumbing Products Groups, without a proportionate increase in cost. Approximately $1,500,000 of the increase in segment earnings in the first nine months related to income from the settlement of insurance claims. The increase in segment earnings was partially offset by the effect of approximately $2,700,000 and approximately $6,500,000 in the third quarter and first nine months of 1994, respectively, of expenses incurred in connection with the implementation of certain cost reduction activities and manufacturing process improvements in each of the Company's operating groups, the cost of installing new systems, and marketing expenses as a result of competitive conditions in the Residential Building Products Group. Expenses incurred in connection with cost reduction activities and manufacturing process improvements in the third quarter and first nine months of 1993 were approximately $300,000 and approximately $1,800,000, respectively. Foreign segment earnings, consisting primarily of the results of operations of the Company's Canadian subsidiary which manufactures built-in ventilating products, declined to approximately 7.1% of NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) segment earnings from ongoing operations in the third quarter of 1994 from approximately 11.9% of such earnings in 1993, and declined to approximately 6.7% of segment earning from ongoing operations in the first nine months of 1994 from approximately 11.8% of such earnings in the first nine months of 1993. This decline was primarily due to an approximately 57.3% and approximately 44.9% increase in domestic segment earnings from ongoing operations in the third quarter and first nine months of 1994, respectively, as well as an approximately 11.8% and approximately 21.5% decrease in foreign segment earnings in the third quarter and first nine months of 1994, respectively. The decrease in foreign segment earnings was primarily the result of the continued weakness in the residential construction market in Canada. Operating earnings in the third quarter of 1994 increased approximately $7,000,000, or approximately 84.3%, as compared to the third quarter of 1993 and increased approximately $17,000,000, or approximately 79.4%, for the first nine months of 1994 as compared to 1993 primarily as a result of the factors discussed above and the effect of Dixieline's operating results. Operating earnings also include approximately $1,700,000 of non-segment income from the settlement in the first nine months of 1994 of insurance claims and disputes, partially offset by approximately $100,000 and approximately $1,100,000 of non-segment expense of certain litigation and other matters in dispute in the third quarter and first nine months of 1994, respectively. Dixieline's operating earnings included in the Company's consolidated operating results were approximately $400,000 in the third quarter of 1993 and was an operating loss of approximately $200,000 for the first nine months of 1993. Dixieline's operating results were no longer included in the Company's consolidated operating results in 1994. (See Note C of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) Interest expense decreased approximately $400,000, or approximately 6.2% in the third quarter of 1994, as compared to 1993 and remained approximately the same in the first nine months of 1994, as compared to 1993. In February 1994, the Company sold in a public offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes") and used the proceeds to redeem, on March 24, 1994 approximately $153,000,000 of certain of the Company's outstanding indebtedness. Interest expense (net of interest income) was approximately $1,300,000 greater in the first nine months of 1994 than it would have been had the debt redemption occurred on the same day as the financing. This increase was partially offset by the effect of the redemption of certain other outstanding indebtedness in January 1994. The decrease in interest expense in the third quarter was primarily due to the redemption and financing discussed above. (See Note C of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) Interest income increased approximately $700,000, or approximately 116.7%, and approximately $1,400,000, or approximately 58.3%, for the third quarter and first nine months of 1994, respectively, as compared NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) to the same periods in 1993. The increases were principally due to higher average invested balances of short-term investments, marketable securities and other investments (in part due to cash from the sale of the 9 7/8% Notes), principally offset by the effect of slightly lower yields earned on investment and marketable securities. The net gain on marketable securities was approximately $900,000 for the third quarter of 1993 and approximately $2,400,000 for the first nine months of 1993, a portion of which were unrealized gains recorded in the Company's Statement of Operations in 1993. Due to the adoption in 1994 by the Company of Statement of Financial Accounting Standards ("SFAS") No. 115, such unrealized gains and losses are now recorded as adjustments to stockholders' investment. (See Note E of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The provision for income taxes was approximately $4,100,000 for the third quarter of 1994, as compared to an income tax credit of approximately $4,100,000 for the third quarter of 1993 and was approximately $9,400,000 for the first nine months of 1994, as compared to an income tax credit of approximately $1,500,000 for the first nine months of 1993. The income tax rates principally differ from the United States federal statutory rate of 35% in 1994 and 34% in 1993, as a result of the effect of foreign income tax on foreign source income, a limited amount of state income tax benefits recorded, and nondeductible amortization expense (for tax purposes) in both periods. (See Note I of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The Company recorded an extraordinary loss of approximately $100,000 in the third quarter and an extraordinary gain of approximately $200,000 in the first nine months of 1994 resulting from the call for redemption and purchases in the open market of the Company's 7 1/2% Convertible debentures. (See Note D of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The cumulative effect of accounting changes resulted in earnings of approximately $400,000 in the first nine months of 1994 and a loss of approximately $2,100,000 in the first nine months of 1993 from the adoption of SFAS No. 115 and No. 106, respectively. (See Notes E and G of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) In the first nine months of 1994, the Company incurred increased marketing expenses, principally in its Residential Building Products Group, as a result of competitive conditions. There can be no assurance that such conditions will not continue in the future or what effect such conditions, if they persist, may have on future operations. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) Liquidity and Capital Resources The Company's primary sources of liquidity in 1994 have been funds provided by the sale of Notes (See Note C of the Notes to the Unaudited Condensed Consolidated Financial Statements) and proceeds from a business sold and, in 1994 and 1993, subsidiary operations, unrestricted investments and marketable securities. The Company's Canadian subsidiary, Broan Limited, has a $20,100,000 Canadian (approximately $15,000,000 U. S. at exchange rates prevailing at October 1, 1994) secured line of credit, of which approximately $5,300,000 Canadian (approximately $3,900,000 U. S. at exchange rates prevailing at November 4, 1994), in the aggregate, is available to the Company (the "Line of Credit") at November 4, 1994. The Line of Credit prohibits dividends or other distributions to the Company from Broan Limited in excess of $14,800,000 Canadian (approximately $11,000,000 U. S. at exchange rates prevailing at October 1, 1994). Borrowings under the Line of Credit are available for working capital and other general corporate purposes. The Line of Credit contains covenants requiring Broan Limited to maintain (i) a ratio of earnings before interest and taxes to interest of at least 2 to 1, (ii) a working capital ratio of at least 1.5 to 1 and (iii) a debt to equity ratio of no higher than 3 to 1. The Line of Credit also limits the annual amount of capital expenditures which Broan Limited may make to $1,000,000 Canadian (approximately $745,000 U. S. at exchange rates prevailing at October 1, 1994). Broan Limited pays a commitment fee of .25% per annum on the unutilized portion of the Line of Credit payable monthly on a pro rata basis, and the Line of Credit is subject to an annual review by the lender in April of each year. As of November 4, 1994, there were no outstanding borrowings under the Line of Credit. Unrestricted cash and investments were approximately $68,728,000 at October 1, 1994. On January 14, 1994, the Company redeemed $22,600,000 principal amount of its 11-1/2% Senior Subordinated Debentures due May 1994, which were called for redemption in December 1993. In February 1994, the Company sold in a public offering $218,500,000 of its 9-7/8% Senior Subordinated Notes due 2004 ("9-7/8% Notes") at a slight discount. A portion of the net proceeds from the sale of the 9-7/8% Notes were used to redeem, on March 24, 1994, approximately $153,000,000 of certain of the Company's outstanding principal amount of indebtedness and pay accrued interest. (See Note C of Notes to the Unaudited Condensed Consolidated Financial Statements.) In October 1994, the Company's 9 7/8% Notes were upgraded on an unsolicited basis by a major rating agency. The Company believes that cash flow from subsidiary operations, unrestricted cash and marketable securities and borrowings under the Line of Credit or under new credit facilities or arrangements which may be entered into will provide sufficient liquidity to meet the NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) Company's working capital, capital expenditure, debt service and other ongoing business needs through the next 12 months. The Company's investment in marketable securities at October 1, 1994 consisted primarily of investments in United States Treasury securities. (See Note E of Notes to Unaudited Condensed Consolidated Financial Statements.) At October 1, 1994, approximately $9,337,000 of the Company's cash and investments were pledged as collateral with insurance companies and were classified as restricted in current assets in the Company's accompanying unaudited condensed consolidated balance sheet. During 1992, a former subsidiary of the Company defaulted on certain principal and interest payments relating to obligations under which the Company was contingently liable. In March 1994, the Company paid approximately $1,594,000 of interest payments through that date on such obligations. In the third quarter of 1994, the Company purchased at a slight discount, approximately $6,635,000 principal amount of such obligations (consisting of substantially all of such obligations) from several holders. The Company did not record any losses in 1994 in connection with the settlement of these contingent obligations. (See Note H of Notes to Unaudited Condensed Consolidated Financial Statements.) In March 1994, the Company sold Dixieline for approximately $18,800,000 in cash and $6,000,000 of preferred stock of the purchaser. (See Note C of Notes to Unaudited Condensed Consolidated Financial Statements.) The Company's working capital and current ratio increased from approximately $117,926,000 and approximately 1.6:1, respectively, at December 31, 1993 to approximately $175,984,000 and approximately 2.1:1, respectively, at October 1, 1994, principally as a result of the remaining net cash proceeds from the debt financing in February 1994 and as described below. (See Note C of Notes to Unaudited Condensed Consolidated Financial Statements.) Accounts receivable increased approximately $26,228,000, or approximately 30.9%, between December 31, 1993 and October 1, 1994, while net sales from ongoing operations was approximately $28,694,000, or 17.0% greater in the third quarter of 1994 as compared to the fourth quarter of 1993. The increase in accounts receivable is principally as a result of increased net sales of new and replacement products from residential and manufactured housing customers by the Air Conditioning and Heating Products Group. 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. Significant net sales near the end of any period generally result in significant amounts of accounts receivable on the date of the balance sheet at the end of such period. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) In recent periods, the Company has not experienced any significant changes in credit terms, collection efforts, credit utilization or delinquency. Inventories increased approximately $12,083,000 or approximately 14.7%, between December 31, 1993 and October 1, 1994. Accounts payable increased approximately $13,927,000 or approximately 29.7% between December 31, 1993 and October 1, 1994. Unrestricted cash and investments increased approximately $12,122,000 (net of $22,600,000 which was used to retire certain indebtedness on January 14, 1994 - see Note C of Notes to Unaudited Condensed Consolidated Financial Statements) from December 31, 1993 to October 1, 1994, principally as a result of cash provided by (used in) the following: Condensed Consolidated Cash Flows ---------- Operating Activities-- Cash flow from operations, net $26,960,000 Increase in accounts receivable, net (26,228,000) Increase in inventories (12,083,000) Increase in trade accounts payable 13,831,000 Change in accrued expenses, taxes, prepaids, other assets, liabilities, and other, net 2,197,000 Investing Activities-- Net cash proceeds relating to businesses sold 12,468,000 Purchase of marketable securities (5,032,000) Capital expenditures (13,640,000) Change in restricted cash and investments (2,475,000) Financing Activities-- Increases in borrowings, net of payments, including purchase of debentures 15,801,000 All other, net 323,000 ---------- $12,122,000 ========== The Company's debt-to-equity ratio decreased from approximately 2.1:1 at December 31, 1993 to approximately 2.0:1 at October 1, 1994, primarily as a result of the effect of increased stockholders' investment as a result of net earnings in the first nine months of 1994, partially offset by a net increase in indebtedness of approximately $15,900,000. (See Note C of Notes to Unaudited Condensed Consolidated Financial Statements.) At October 1, 1994, the payment of cash dividends or stock payment was prohibited under the indenture governing the 7 1/2% Debentures, the most restrictive of the Company's indenture and loan agreements. (See Note D.) At October 25, 1994, approximately $25,600,000 was available for the payment of cash dividends or stock payments under the terms of the Company's Indenture governing the 9 7/8% Notes. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 1994 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1993 (Continued) The Company's St. Louis, Missouri plant, which is part of the Company's Air Conditioning and Heating Products Group and manufactures products for the residential site-built and manufactured housing markets, experienced damage as a result of the flooding of the Mississippi River in July 1993. The plant was closed for several weeks, but returned to full operation in late August 1993. In the second quarter of 1994, the Company settled its claims with its insurance carrier with respect to this matter and recorded approximately $1,500,000 of income. At October 1, 1994, the Company has approximately $6,400,000 of net U. S. Federal prepaid income tax assets which are expected to be realized through future operating earnings. (See Note I of Notes to the Unaudited Condensed Consolidated Financial Statements.) The Company believes that its growth will be generated largely by internal growth in each of its product groups, augmented by strategic acquisitions. The Company regularly reviews potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines, although there are no pending agreements or negotiations for any material acquisitions and the Company has made no material acquisitions since early 1988. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders held on September 15, 1994, the following directors were elected by the following votes: By the holders of Common Stock voting separately as a class. NAME FOR WITHHELD ---- --- -------- Class II (for a term expiring at the 1997 Annual Meeting) Barry Silverstein 10,219,772 356,510 By the holders of Common Stock and Special Common Stock voting together as a class. NAME FOR WITHHELD ---- --- -------- Class II (for a term expiring at the 1997 Annual Meeting) Richard L. Bready 14,366,980 444,922 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 11.1 Calculation of shares used in determining earnings per share (filed herewith). 27. Financial Data Schedule (filed herewith). (b) 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 November 8, 1994 - ------------------------- (Date) EX-11 2 EXHIBIT 11.1 (Page 1 of 2) NORTEK, INC. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE For the Three Months Ended -------------------------- Oct. 1, Oct 2, 1994 1993 ---- ---- Calculation of the number of shares to be used in computing primary earnings per share: Weighted average common and special common shares issued during the period 16,609,857 16,602,148 Less average common and special common shares held in the Treasury (4,066,602) (4,066,602) ---------- ---------- Weighted average number of common and special common shares outstanding during the period 12,543,255 12,535,546 Dilutive effect of stock options considered common stock equivalents computed under the treasury stock method using the average price during the period 187,141 72,206 ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 12,730,396 12,607,752 ========== ========== Calculation of the number of shares to be used in computing fully diluted earnings per share: Weighted average number of common and special common shares outstanding during the period 12,543,255 12,535,546 Dilutive effect of stock options considered common stock equivalents computed under the treasury stock method using the greater of the price at the end of the period or the average price during the period 220,518 79,813 Dilutive effect of assuming conversion of the Company's 7.5% Convertible Debentures 295,594 721,117 ---------- ---------- 13,059,367 13,336,476 ========== ========== Note: Earnings per share calculations for 1993 do not include the effect of convertible debentures (and the reduction in related expense), because the assumed conversion of debentures is anti-dilutive. EXHIBIT 11.1 (Page 2 of 2) NORTEK, INC. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE For the Nine Months Ended -------------------------- Oct. 1, Oct. 2, 1994 1993 ---- ---- Calculation of the number of shares to be used in computing primary earnings per share: Weighted average common and special common shares issued during the period 16,609,072 16,597,180 Less average common and special common shares held in the Treasury (4,066,602) (4,066,602) ---------- ---------- Weighted average number of common and special common shares outstanding during the period 12,542,470 12,530,578 Dilutive effect of stock options considered common stock equivalents computed under the treasury stock method using the average price during the period 154,498 73,969 ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 12,696,968 12,604,547 ========== ========== Calculation of the number of shares to be used in computing fully diluted earnings per share: Weighted average number of common and special common shares outstanding during the period 12,542,470 12,530,578 Dilutive effect of stock options considered common stock equivalents computed under the treasury stock method using the greater of the price at the end of the period or the average price during the period 168,606 79,813 Dilutive effect of assuming conversion of the Company's 7.5% Convertible Debentures 500,527 721,117 ---------- ---------- 13,211,603 13,331,508 ========== ========== Note: Earnings (loss) per share calculations for 1993 do not include the effect of convertible debentures (and the reduction in related expense), because the assumed conversion of debentures is anti-dilutive. EX-27 3
5 1000 9-MOS DEC-31-1994 OCT-01-1994 78,065 28,436 115,875 4,804 94,096 342,810 177,517 83,291 531,217 166,826 218,857 16,610 0 0 97,519 531,217 559,754 559,754 394,283 394,283 0 0 20,198 22,000 9,400 12,600 0 200 400 13,200 1.04 1.03
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